Servicers (servicing companies) are normally compensated by receiving a percentage of the unpaid balance on the loans they service. The fee rate can be anywhere from one to forty-four
basis points depending on the size of the loan, whether it is secured by commercial or residential real estate, and the level of service required. Those services can include (but aren't limited to) statements, impounds, collections, tax reporting, and other requirements. Companies recognize servicing rights as distinct assets or liabilities when ownership of those rights is contractually separated from ownership of the underlying loan. The value recognized for servicing rights is based on the net present value of the expected cash flows received from servicing less the amount that would be required to adequately compensate a servicer (this incorporates an expected cost of servicing plus a
profit margin required by market participants). The value of servicing assets or liabilities is highly interest-rate sensitive due to the relationship between interest rates and expected
prepayments (i.e., loan refinancing). This is because when a loan is refinanced the servicing fees and other benefits of servicing cease, making the value of these assets extremely volatile. For this reason, companies that hold large amounts of servicing rights tend to hedge the value of those servicing rights using interest rate sensitive derivative instruments such as interest rate swaps and
swaptions. In order for these companies to exist, they need to utilize software. There are many loan servicing software companies and they tend to focus on a specific industry, such as
community development financial institution (CDFIs),
commercial loans,
residential loans, and multi-family loans. To provide these solutions vendors work with companies and design the systems around their complexities. Some of these systems can be thousands of programs and can be considered some of the most complex software systems ever built. == Companies involved==