What is mortgage deductible management?

The Mortgage Excess Service is a commission based on the percentage of monthly cash flow from securities backed by mortgages (MBS) that remains after the cash flow has been split into a coupon and principal payment for the MBS holder.

Key points to remember

  • Mortgage excess servicing is a commission paid to mortgage managers for servicing mortgage-backed securities (MBS).
  • Excess management is what remains after regular mortgage management fees have been deducted.
  • Mortgage over-management can result from bundling mortgages into an MBS, where each loan can have different originators or managers, each charging a different rate.

How mortgage deductible management works

The service charge is a percentage of each mortgage payment made by a borrower to a mortgage manager as compensation for maintaining a record of payments, collecting and remitting payments in escrow, forwarding principal and interest payments to the note holder. Service charges typically range from 0.25% to 0.5% of the outstanding mortgage balance each month. Excess mortgage servicing fees are generally paid to the repairman of the loan and can serve as a guarantee commission for the subscriber of the MBS.

For example, in a typical MBS transaction, if the interest rate on a mortgage is 8%, the MBS holder may receive 7.5%, the mortgage servicer receives 0.25% service charge and the MBS subscriber gets 0.15% This leaves the remaining 0.10% (8% – 7.5% – 0.25% – 0.15% = 0.10%) as excess maintenance.

Mortgage excess service for MBS is subject to prepayment and spread risk. When excess service is priced, it is valued based on an estimate of the duration of the annuity. This must be estimated since it is impossible to know with certainty when a mortgage borrower might refinance or otherwise pay off their mortgage. The value of excess service can change significantly when interest rates change, because changes in current interest rates relative to the interest rate on the mortgage determine the duration of the excess management annuity associated with this mortgage.

Where Mortgage Excess Service Comes From

Over-management of mortgages may result from the treatment of pooled mortgages by the author, then sold. If the buyer does not service the loan himself, he can enter into a service agreement, possibly with the originator or a third party. Under such an arrangement, the administrator will generally retain the right to receive a portion of the interest payments made by borrowers, with respect to all mortgages serviced.

A Mortgage Service Spread is the amount of interest retained by the Servicing Agent and is viewed in part by the Servicing Agent as a form of reasonable compensation for the services that have been rendered. If there is a portion of a mortgage service gap that exceeds what could be considered reasonable compensation for services rendered, this is called the excess service gap and would represent a continuing investment in the interest portion of an underlying mortgage pool.

The Internal Revenue Service (IRS) has previously ruled that the ownership of certain excess mortgage servicing margins would constitute a real estate asset and therefore excess servicing margin income would be treated as interest on bonds secured by property mortgages. real estate. This ruling was found to be applicable to real estate investment trusts for tax purposes.

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