What are Mortgage Servicing Rights?

Mortgage servicing is the act of accepting payments, maintaining escrow accounts, paying those escrow items (taxes and insurance), and facilitating other back-end processes as needed and available. (Such as filing notices of default, facilitating foreclosure, etc.)

The servicer collects their fees as a portion of the interest you pay on your note. They are able to do that due to the spread on the underlying mortgage backed security and your note rate. For example, right now  the 4.5% fannie mae 30 year is selling at 100.19. Which means your should be able to get a 4.5% rate right? However, published rates are closer to 5%. That spread is a way that the servicers collect their fees for the work they do.

Mortgages are typically sold/delivered to a servicer because the original mortgage company is in the business of originating mortgages (sales), and not servicing them (service). So the loan is originated by the broker/lender (in my case, Premier Mortgage), who then sells it to the servicer (Wells Fargo). Wells Fargo takes it the next step and bundles it with other loans and delivers them to Fannie Mae or Freddie Mac, who securitize them. In other words, create bonds from them and sell them on the secondary market.

So when you make your payment to Wells Fargo, they put your escrow portion in an escrow account, keep a portion for their servicing services, and pass the rest to the investor, who receives a portion as interest, and a portion as principal. Those final investors could be mutual funds, school endowments, pensions, foreign governments, etc. Right now that investor is even the Federal Reserve who has been buying mortgage backed securities to help keep rates low.