The role of mortgage servicers

Mortgage servicers earn fees by collecting monthly payments from home owners. They also supervise the payment of real estate taxes and property insurance and provide workout services when a loan defaults.

In a case of a $100,000 subprime loan – with a 7.2 per cent interest rate – a servicer would buy the collection rights on the loan from the lender for about $700. Assuming the loan is interest-only, the servicer would collect a monthly payment from the borrower of $600 and keep $40, remitting the rest either to the lender or, in the case of loans backing securities, to a trustee, who distributes the money to bondholders. After expenses, the servicer would earn about $300 a year.

Provided the borrower does not pay off the loan for at least 28 months, the servicer would make money.

As part of a government-sponsored programme, servicers are also eligible to receive $1,500 for each mortgage modification.

Unlike a mortgage lender or an owner of a bond backed by mortgages, servicers can make money even when a home goes into foreclosure. For that reason, the National Consumer Law Center, in a report published last year, criticised servicers for having an economic interest to foreclose.