Recent Developments In Mortgage Servicing Rights

Recent changes to the regulatory treatment of mortgage servicing rights ("MSR"s) for financial institutions subject to Basel III, together with political and prosecutorial pressures, have resulted in a substantial increase in incentives for financial institutions to transfer their residential MSRs. While MSRs have traded frequently in the past, the following highlights some of the current issues related to the sale and financing of MSRs in the current environment.

What is an MSR?

The term "MSR" is commonly used by market participants to describe all or some of a party's contractual rights with respect to servicing or controlling the servicing of a pool of mortgage loans, including the entitlement to receive servicing compensation. In addition, there are specific regulatory and accounting uses (discussed below). MSRs, however, are usually contingent rights that may be lost entirely if the servicer is terminated. In addition, the ability to transfer MSRs may