What Is Mortgage Servicing?

Mortgage servicing is a term used to describe the many activities involved in administering a mortgage. These activities include collecting regular payments from the borrower, maintaining escrow accounts, making tax and other payments, and keeping proper records of all transactions. Some lenders service their own mortgages, and others contract the work out to third parties, called service bureaus.

In most cases, when a mortgage is issued, the borrower must make periodic payments to the lender. These payments generally include interest and some amount of principal, to reduce the outstanding balance of the loan. Some mortgages are "interest only," with the principal repaid in a lump sum when the loan matures. There is very little mortgage servicing required on such loans.

Most mortgage lenders require that any property for which they’ve issued a mortgage be insured against loss. To ensure that the insurance coverage is kept current, lenders usually make the premium payments themselves, after collecting the annual premium amount in monthly installments from the borrowers. Likewise, since non-payment of real estate taxes could jeopardize the mortgage lender’s interest in a property, most lenders will make those payments for the properties on which they’ve issued mortgages. For all tax and insurance payments made by mortgage lenders, they’ll generally collect 1/12 of the annual amount due every month and segregate the funds in an escrow account, out of which the appropriate payments are made when necessary.

When amounts for real estate taxes and insurance premiums are included, the party that collects the mortgage payments assumes responsibility for making payments to the appropriate government or insurance company on a timely basis. Periodic statements are provided to the borrower of these payments and a year-end summary is also provided for tax purposes. In addition, whenever real estate taxes or insurance premium rates change, the lender or mortgage servicing bureau recalculates the amount of escrow necessary to meet all such obligations and alerts the borrower to any changes required in the monthly payment.

An unfortunate element of the housing bubble and collapse in the United States that started around 2007 was a phenomenon characterized as "predatory mortgage servicing." Some unscrupulous mortgage lenders or third-party service bureaus would do things like hold payments received from borrowers until after the deadline, to incur late fees. Other predatory servicing practices included over-calculating escrow payment amounts or even payments to principal and interest. Lenders involved in predatory mortgage servicing acted unscrupulously in other areas as well, such as securitizing mortgages fraudulently and engaging in predatory marketing, origination and lending practices.

The purchase of a house is considered to be the largest financial transaction most people usually will be involved in. For this reason, it's recommended that borrowers engage the service of an attorney when purchasing property or when refinancing a mortgage. In addition, they should carefully review all statements received from the lender or mortgage servicing bureau and reconcile them against their own records, making certain that the proper insurance coverage is in force and paid for, and that real estate taxes are up-to-date.