How to Calculate Mortgage Servicing Rights & CPR

Mortgage servicing rights occur when a lender sells a loan to another party. Most loan purchasers are government sponsored enterprises such as Fannie Mae and Freddie Mac. These rights are always within a mortgage, but they don’t become separate until sale. Conditional payment rates or CPRs is a loan prepayment method that equals the percentage of a loan, or group of loans, that is assumed to be paid off every period. This can be for many types of loans, but is especially common with mortgages.

Obtain Information. There is a great deal of information required before one can make these calculations. The investor and type of loan must be known as these will help determine the servicing fee percentage. Personal information about the loan must be known, such as ancillary income. Also, a great deal of global information must be known, such as economic forecasts and the history of rates for similar loans in the past.

Perform calculations using the information. When calculating mortgage servicing right and CPRs, the formulas and calculations used are different depending on who is buying the loan, who is selling the loan, and the type of loan. There are other factors which influence the formulas, such as longterm economic outlook and history.

Make sure that any results are reasonable with regards to the marketplace. If your results don't match average marketplace values, you should double-check all information and redo any calculations.

Make sure that your results abide by any federal, state, or local laws. Finance, in particular mortgages, are heavily regulated. Even a calculation based on correct formulas and information may be inaccurate if it results in a violation of the law. The rates may have to be modified in order to comply.