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transaction is in no way similar to the YSP (yield spread premium) or rebate that a broker can receive for "upselling" rate. SRP is typically a fixed value based on state and loan amount. YSP is the increase in price paid for a rate that is above PAR and whose variation is tied directly to the rate. YSP stays constant over a period of time (typically 6 months to a year). YSP varies constantly based on market price fluctuations. Brokers do not receive SRP because they are never the "owner" of the mortgage and thus do not have rights to the servicing. As stated a lending institution does not always receive SRP. If it choses to sell the mortgage, but service the loan (i.e. keep the servicing rights), a common practice with large lenders, then no SRP is realized. The
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of the future cash flows from the servicing fees the servicer will receive during the expected life of the mortgage loan being serviced. When a lender sells a mortgage to a servicer, the servicer will pay this price to the lender because the servicer will receive future income flows from the servicing fee they charge the investors. These fees and the price the servicer pays for this future income is not influenced at all by the fluctuations in the market rate of interest on the loans. The servicing release premium may be the same for two mortgages with the same characteristics, but originated at totally different interest rates. This premium (SRP) will be the same whether or not the lender offered the borrower a low rate of interest or a high rate of interest.
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risk of early payoff significantly increases as the difference between the current interest rate on a loan and prevailing rates increase (when the prevailing interest rate is lower than the current interest rate). Put simply, when a borrower's interest rate is higher than the prevailing interest rate, borrowers refinance their mortgages. That refinance ends the income stream from servicing on the original loan. Also, SRP does vary based upon the term of the loan and on the type of mortgage loan. SRP is really nothing more than the discounted present value of the servicing revenue over time. Loan term, interest rate, and loan type will dramatically affect SRP values. It is most certainly not a fixed value.
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It is not the case that SRP is not influenced by interest rates. Consider a simple example: a 30-year fixed mortgage originated at 6.5% has a certain servining value if the interest rate is around 6.5%, but a significantly LOWER value if the interest rate is below 5.75% or so. Why lower? Because the
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I have read the definition of service release premium on many internet sites and they all agree with the definition included in
Knowledge. However, this definition is totally wrong. The definition of a service release premium is the price a loan servicer is willing to pay for the discounted value
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dialogue is a biased and inaccurate description of SRP (service release premium). This enire article needs to be re-written. SRP represents the "servicing" value of a loan. A lender may sell a loan servicing released and receive an SRP or servicing retained and not receive an SRP. This
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Indented line This is not true. MSR is calculated based on the principal, since the principal left changes with the interest rate it does change with loans terms and resembles an interest only strip.
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Silly to say the bank can't know the
Service Release Premium, it will be in the bank's contract with the broker.
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dialogue should be removed an replaced with an accurate representation of service release premium.
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The following comments were originally posted in the article by an editor at
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http://www.kyhousing.org/uploadedfiles/Lender/Agreements/ATTACHMENTB2005.pdf
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MSR? Do you even know what is being discussed here?
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