Mortgage servicing rights involve a lender’s rights to continue to collect mortgage payments and furnish monthly statements and mortgage services to the borrower after the lender has sold the original mortgage.
Mortgage servicing rights are retained by a bank for a predetermined fee, which is included in the borrower’s monthly payment amount.
Servicing rights are considered to be income for the lender and are typically outlined in the mortgage documents as a percentage of the loan’s outstanding principal balance.
According to All Business, an individual would calculate the mortgage servicing rights by first determining what type of mortgage loan is in question. Take the appropriate percentage and multiply it by the original loan amount as follows:
0.25 percent of the principal balance on conventional, fixed-rate loans;
For example on a 30 year fixed principal loan base of $108,900 obtained at a 7% interest rate, the mortgage servicing rights would be calculated as $108,900 multiplied by 0.25, resulting in a total of $27,225.
0.44 percent of the principal balance for loans aged less than one year that are backed by the FHA, Veterans Administration or Farmers Home Association; mortgages that have an originating principal balance of $50,000 or less also fall into this category;
For example, an FHA backed loan of $150,000 would result in mortgage servicing rights of $66,000. This figure is determined by multiplying the principal balance of $150,000 by the 0.44 percentage figure.
0.375 percent for other residential mortgages secured on one to four-unit properties.
For example, a sub-prime loan of $200,000 taken out on a three-bedroom house would result in mortgage servicing rights of $75,000.
CPR refers to an annual expected rate of principal prepayment that applies to a conglomerate of mortgages and securities that are backed by mortgage loans, according to MortgageQnA.
The CPR is used to predict the percentage of mortgage loans within the conglomerate that is expected to be paid in full within the current year.
Determine the CPR by the SMM or Single Monthly Mortality.
According to All Business, the SMM is defined as the percentage of mortgage principal balances that have actually been prepaid in addition to the regularly scheduled principal amount that is part of the loan’s amortization schedule.
In other words, it is the amount of the originating loan’s balance that is prepaid ahead of schedule or before the loan matures since most mortgages allow for prepayment or pay off at any time without incurring a penalty.
For investors of mortgage-backed securities, the SMM is the “prepayment risk.”
Calculate the CPR by using the formula of 1-(1-SMM) to the 12th power. According to MortgageQnA, the CPR could be interpreted as 12 times SMM or the pool’s expected prepayment rate.
For example, if your conventional mortgage falls into a pool with an SMM of 25 percent, the CPR would be determined as follows: SMM or 25 percent times 12, which would yield a CPR of 3 percent.
Simply stated, if a conglomerate of mortgage loans is determined to have a CPR of six percent, then six percent of the remaining principal balances in the conglomerate can be expected to be repaid within the year of calculation.