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Servicing fee is a percentage of each mortgage payment made by a borrower to a mortgage servicer as compensation for keeping a record of payments, collecting and making escrow payments, passing principal and interest payments along to the note holder.
Every mortgage loan must be serviced. Servicing of a mortgage loan involves collecting monthly payments and forwarding proceeds to owners of the loan; sending payment notices to mortgagors; reminding mortgagors when payments are overdue; maintaining records of principal balances; initiating foreclosure proceedings if necessary; and furnishing tax information to borrowers when applicable.
The servicing fee is a portion of the mortgage rate. If the mortgage rate is 8.125% and the servicing fee is 50 basis points, then the investor receives interest of 7.625. The interest rate that the investor receives is said to be the net interest or net coupon. The servicing fee is commonly called the servicing spread. The dollar amount of the servicing fee declines over time as the mortgage amortizes.
The usual servicing fee for prime loans is 0.25% for fixed rate and 0.375% for ARMs; FHA/VA loans are 0.44%. What you get in subprime varies widely; generally the worse the credit quality, the more you have to pay the servicer because the more work the servicer will do.