The Basics of Mortgage Lending and Mortgage Servicing

The following is not written as an extensive discussion about the roles of mortgage lenders or mortgage servicers. Rather it is written to provide a brief and very general overview of these two different and separate functions within the residential mortgage industry.

Quoting from the CFPB, “Your mortgage lender is the financial institution that loaned you the money. Your mortgage servicer handles the day-to-day tasks of managing your loan. Your loan servicer typically processes your loan payments, responds to borrower inquiries, keeps track of principal and interest paid, manages your escrow account, and may initiate foreclosure if you miss too many loan payments. Your servicer may or may not be the same company that gave you your loan.” In other words, the mortgage lender may also be the mortgage servicer.

How does the mortgage lender get paid? The mortgage lender may get paid with a combination of an origination fee and the spread between the interest rate paid for the funds it lends and the interest rate charged to the borrower for those funds. Or the mortgage lender may just get paid on the spread between the interest rate paid for the funds and the interest charged to the borrower for those funds.

How does the mortgage servicer get paid? Generally speaking, there are four streams of income for the servicing function.

First, the servicer gets a servicing fee.  The servicing fee is typically calculated as a percentage of the outstanding principal balance of the loans serviced. Generally speaking, it is interest on the principal which ranges between one-eighth (0.125) and one-half (0.50) percent and which is retained by the servicer.

Second, the servicer is entitled to keep the “float” on the mortgage payments received. To illustrate: the borrowers remit payments to the servicer on the first of the month, however the servicer is not be required to remit the funds to the lender/mortgagee until the end of the month.  The result is that the servicer gets use of the funds for the most of the year with the exception of the few days each month when the servicer must remit to the lender/mortgagee.

Third, the servicer retains any supplementary fees it collects. The promissory note of the mortgage specifies the amount and payment of late fees as well as any other fees or costs related to the collection of late fees.

Finally, the servicer earns revenue from the fees and interest generated by funding mortgage servicing advances.

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Financially Speaking™ James Spray, RMLO, CNE, FICO Pro | CO LMO 100008715 | NMLS 257365

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct for your situation. This information is not legal advice and is for guidance only. You may reproduce this information in whole and not in part, providing you give full attribution to James Spray.

6 comments on “The Basics of Mortgage Lending and Mortgage Servicing

  1. James Spray says:

    Accounting for Mortgage Servicing Rights is a concise white paper about the treatment of mortgage servicing
    rights for both financial statement and tax reporting purposes. Following is a link to the referenced white paper:


  2. James Spray says:

    Fannie Mae requires the changes to integrate with the Common Securitization Platform (CSP). CSP is a joint Fannie Mae-Freddie Mac initiative to develop a single mortgage-backed security issued by the government-sponsored enterprises (GSEs) to finance fixed-rate mortgage loans backed by one- to four-unit single-family properties.

    The changes will:

    February 2017
    Standardize data reporting.
    Enable daily reporting to address data issues faster.
    Eliminate pay-outs by servicers for over-collateralized pool amounts.
    Harmonize timing of the GSEs’ Single-Family single class monthly disclosures.
    Lower risk by distributing activity throughout the month.


  3. James Spray says:

    A glimpse into the profitability of the mortgage servicing business can be gleaned from this article in Distressed Servicing News: Freddie Mac MSR Changes Hands; Fannie Mae to Follow?


  4. James Spray says:

    Reforming the FHA’s Foreclosure and Conveyance Processes
    This is the third in a series of briefs from the Mortgage Servicing Collaborative (MSC), convened by the
    Housing Finance Policy Center at the Urban Institute. The briefs examine critical mortgage servicing
    issues and recommend policy changes that will improve outcomes.

    The first brief examined the role of servicing in the mortgage market, explained why servicing
    matters, and outlined reasons why mortgage servicing needs reform (Goodman, McCargo, et al. 2018).
    The second brief examined government loan modifications in a rising interest rate environment and
    offered recommendations to ensure continued availability of effective modifications even when
    interest rates rise (Goodman, Kaul, et al. 2018).

    This third brief focuses on reforming the Federal Housing Administration’s (FHA) foreclosure and
    conveyance processes. It explains the basic functioning of the FHA foreclosure and conveyance process,
    clarifies key underlying issues, and recommends solutions that create a simpler, more efficient
    foreclosure process, reduce losses for the FHA’s Mutual Mortgage Insurance Fund (MMI Fund), and
    improve outcomes for borrowers and neighborhoods.
    The brief explores the costs of servicing nonperforming FHA loans, including foreclosing and
    conveying properties to the US Department of Housing and Urban Development (HUD). Using
    proprietary data provided to the Urban Institute by 10 members of the MSC, we test the following two
    • Is the cost of servicing nonperforming FHA loans significantly greater than the cost of servicing
    government-sponsored enterprise (GSE) nonperforming loans? If so, by how much?
    • Do the FHA’s current foreclosure and conveyance processes create excess servicing costs?

    The Brief


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