Mortgage Servicing Right (MSR) — Initial Recognition and Subsequent Measurement

💡 Accountant's Note

The MSR represents the present value of future servicing fee income (0.25% × outstanding loan balance) less the cost to service (collections, escrow management, default servicing, investor reporting). A $485,000 loan with 0.25% servicing fee generates $1,212/year in fee income, declining as the loan amortizes or prepays. Using a discount rate of 10% and CPR (Constant Prepayment Rate) of 8%: MSR value ≈ 1.5% of loan balance = $7,275. Two measurement methods (chosen as accounting policy and consistently applied): (1) FAIR VALUE METHOD: MSR remeasured to fair value at each reporting date, changes through P&L. Volatile — when rates rise (prepayments slow → loans stay outstanding longer → more fee income → MSR value increases). When rates fall (refinancing boom → prepayments accelerate → loans pay off → MSR value collapses). (2) AMORTIZED COST / LOWER OF COST OR MARKET: MSR amortized over the estimated life, with impairment testing by stratum. Less volatile but can create impairment charges in refinancing booms.