What Is a Servicing Fee?

A servicing fee is the 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. Servicing fees generally range from and annual rate of 0.25% to 0.50% of the outstanding mortgage balance that is paid monthly.

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Why Mortgage Service Companies Exist

Although some banks keep their loans that they originate, many other banks sell the mortgages to service companies. The service company takes over the loan process and handles all the payments. Selling a mortgage allows the banks to initiate new loans since banks have limitations as to how much they can lend, which can be based on a number of factors, including how much in deposits the bank is holding. Also, a bank might make more profit initiating new mortgages than servicing existing ones.

Mortgage loans are bought and sold through the secondary mortgage market—many of which are sold to Fannie Mae or the Federal National Mortgage Association (FNMA). Fannie Mae packages multiple existing mortgage loans as investments, which are called mortgage-backed securities (MBS). Individuals can invest in an MBS and earn a rate of return based on the mortgage interest rates in the investment.

If your mortgage is sold, you'll have a new service provider, which will notify you of their address to send payments. According to the Consumer Financial Protection Bureau or CFPB, the new lender or service company that bought your mortgage must "notify you within 30 days of the effective date of transfer. The notice will disclose the name, address, and telephone number of the new owner."

Mortgage Servicer

A mortgage servicer is usually an outside company that helps with the processing of the loan, which can include making sure the loan is awarded to the borrower and that the borrower applies the loan to the intended purchase. Processing also includes tracking loan payments, sending reminder notices for missed payments, filing foreclosure documents in the event the loan is in default.

Default is when the payments haven't been paid for a length of time and are unlikely to be paid in the future. If a renegotiation of the terms of the loan can't be worked out, the home loan goes into foreclosure. Foreclosure is a process whereby the bank takes possession of the house and resells it to recoup any losses from the loan.

Mortgage lenders can also be the mortgage servicer. If the lender is set up to handle deposits, such as a bank or financing company, the company can also service the loan. A mortgage servicing company can come into play when a lender cannot hold deposits. Each state has its own laws and regulations as to how mortgage loans are serviced and the roles of banks and service companies.


If you want to know whether a mortgage servicing company is involved in your mortgage, the Consumer Financial Protection Bureau suggests checking the top of your statement or payment coupons for the return address of the company. If the address is not for the bank that originally gave you the loan, it's likely the loan is being processed by a service company. Also, visiting the MERS® Servicer Identification System website might be able to help identify the provider.

Mortgage Lender

The mortgage lender is the bank or credit union that most people interact with when applying for a mortgage. The mortgage representative at the local bank will educate the borrower about the various types of mortgages, the interest rates for each product as well as how much to spend for the downpayment.

The borrower will have to submit proof of income such as pay stubs and other financial information when applying for the loan. The lender will also perform a credit check, which is a review of the borrower's credit history, number of accounts open, amount of debt, and payment history. Any negative information on the credit report, such as late payments, will impact the odds of approval and the interest rate charged by the lender. Once approved, the local bank or lender will host the closing, which is when the paperwork is signed, and the mortgage is legally put on the books.

For the life of the mortgage loan, the borrower will owe the lender for the amount borrowed to buy the home, plus interest. Each of the monthly payments will go to paying down the mortgage whereby a portion of each payment will pay the interest owed on the loan. Another portion of the payment will go to paying the principal or original amount borrowed.

However, there are times when the lender hires another company to handle all the payment processing once the loan is booked—these companies are mortgage service companies.

How to Choose a Brokerage Account

When opening a brokerage account, don't settle for the first one you find. It's essential to ensure you choose the right one.

The first step to choosing the right brokerage account is to consider your needs.

Are you an active or passive investor? Are you looking to focus only on mutual funds, ETFs, stocks, bonds, other securities, or a combination of all the above? Do you mainly plan on making basic market orders, or do you want more advanced order types?


Some brokers focus on different types of investors. One might have features that appeal to buy-and-hold investors who mostly want to buy mutual funds and ETFs. Others will have features that appeal to frequent traders and people who are interested in things like options.

Once you've considered your needs, you can compare different brokers to see what they offer and how those services align with what you're looking for.

Are Brokerage Accounts Safe?

Yes, brokerage accounts are generally a safe place to keep your money. However, that doesn't mean that they're without risk.

The Securities Investor Protection Corporation (SIPC) is a nonprofit organization that provides coverage to investors in case their brokerage firm faces financial difficulties or goes bankrupt. The SIPC safeguards customers' assets, including cash and securities like stocks and bonds, held within a brokerage account at an SIPC-member firm.

The protection offered by SIPC is limited to $500,000 per customer per brokerage firm. This coverage includes up to $250,000 protection for cash within the account. It's important to note that SIPC protection does not cover investment losses because of market fluctuations or poor investment decisions. Instead, it focuses on protecting customers' assets in the event of a brokerage firm failure or misconduct. Most brokerage firms in the U.S. are members of SIPC, providing their customers with this added layer of protection for their investments.

Mostly trade in dollars

Margin Accounts

A margin account allows you to borrow money to start trading. The broker acts as a lender, and the borrowed funds allow for larger trades and more advanced trades, such as short-selling a stock. The investor pays interest on the loaned amount of money. The brokerage may demand an immediate deposit of funds from an investor if the value of their account drops below a specific level because of market changes.

Margin accounts can also be discount or full-service brokerage accounts. While a margin account offers you more flexibility, there is some risk involved. If you are new to investing, it's best to stick with a cash account at first.

Cash Brokerage Accounts

A cash brokerage account requires you to deposit cash to start trading. This account limits your options to the basics such as purchasing stock. For example, short selling a stock is not possible within cash accounts. Cash accounts can be either discount or full-service accounts.

Online Brokerage Accounts

Online brokerages are a good choice for investors who prefer to select their own investments and execute their own trades via a website or mobile app. However, many also offer research and analysis tools to help investors make informed decisions. Many charge commission on each transaction. Some charge no commissions.

Robinhood Markets Inc. (HOOD) is an online broker that offers commission-free trading on stocks, ETFs, and options. The firm generates its revenue from payment for order flow (PFOF), margin interest, income from cash holdings, and more.

PFOF is the compensation a brokerage receives for directing trades to a specific market maker. The amount paid is usually a fraction of a penny per share.

Other zero-commission brokers include Charles Schwab, Fidelity, E*Trade, and Vanguard.

Brokerage Accounts With a Regional Financial Advisor

Those investors who prefer a personal relationship and a choice of services may also want to work with a brokerage firm that's part of their community. They could consider a regional firm that falls between full-service and discount brokerage firms on the cost scale. Such companies include Raymond James Financial Inc. (RJF), Janney Montgomery Scott, and Edward Jones.

These brokerages act as broker-dealers and financial advisors. They can require a sizable minimum account size and cater to individuals with slightly higher net worth than other brokerages. Over time, though, their services tend to be less expensive than those of larger, full-size brokerages.

Types of Brokerage Accounts

Full-Service Brokerage Accounts

Investors seeking the expertise of a financial advisor can consider full-service brokerage firms such as Merrill, Morgan Stanley, Wells Fargo Advisors, and UBS, among others. Financial advisors are paid to help their clients develop investment plans, execute their transactions, monitor their investments and the markets, and more. Financial advisors work on either a nondiscretionary basis, where clients must approve transactions, or on a discretionary basis, where transactions don't require prior client approval.
Full-service brokerage accounts charge either commissions on trades or advisor fees. A commission account generates a fee anytime an investment is bought or sold, whether the recommendation came from the client or the advisor, and whether the trade is profitable.


Discount Brokerage Accounts

Investors who favor a do-it-yourself investment approach might consider a discount brokerage firm. These firms charge significantly lower fees than their full-service counterparts. However, discount brokerage firms, such as Charles Schwab (SCHW), Fidelity (FIS), and E*Trade (ETFC), offer fewer services in exchange for these lower fees. This may suit investors who are most concerned with keeping costs low and executing trades via easy-to-use online trading platforms.
For example, an investor who decides on a typical discount broker can expect to open a regular taxable brokerage account (or retirement account) with a $500 minimum required amount. Little or no commission is charged to buy or sell most stocks, options, or ETFs. Some discount brokers may charge fees for non-U.S. or thinly traded stocks, but this varies from broker to broker.
The purchase of Treasury bonds typically involves no commission (but bonds traded in the secondary market may). Many brokers, including Schwab, Fidelity, and E*TRADE, also offer a wide variety of mutual funds for no transaction cost.


Robo-Advisor Accounts

Robo-advisors are accounts where they, not the account holder, select the investments using algorithms without human participation. Moreover, those investments are usually restricted to mutual funds or ETFs. The cost can be around 0.25% to 0.50% of assets under management per year.
The minimum required to open an account can range from $0 to $500 to over $5,000. Robo-advisors might be right for people new to investing and experienced investors who prefer a hands-off approach to portfolio management.

Understanding Brokerage Accounts

There are several types of brokerage accounts and brokerage firms, giving investors the chance to choose the model that best suits their financial needs.

Some full-service brokers provide extensive investment advice and other services but charge high fees. On the other end of the compensation spectrum, most online brokers provide a secure interface through which relatively that offer financial planning and investment services driven by algorithms, not people. Typically, they are low cost and require low account opening minimum amounts.

Brokerage accounts may differ in terms of order execution speed, analytical tools, the scope of tradable assets, and the extent to which investors can trade on margin.

For any type of brokerage, the most basic account is a cash account. This allows you to buy investments using the money deposited in the account. However, you can't sell short, buy on margin, trade options, or take advantage of other more sophisticated products. To do so, you need a margin account.

With a margin account, you can borrow money from your brokerage for additional purchases. The securities in your account serve as collateral. The brokerage charges regular maintenance interest on this loan, and it may request additional money from you immediately if the securities in the account lose too much value. This request is known as a margin call. If you can't meet a margin call, your broker may sell your securities.

A brokerage account is an investment account held at a licensed brokerage firm. An investor deposits funds into their brokerage account, and the brokerage firm transacts orders for investments such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs) on their behalf.

The assets in investment accounts belong to the investors, who normally must report the income derived from the account on their taxes.

Are There Liquidation Levels for Non-Margin Accounts?

Brokers typically do not set a liquidation level for accounts that do not use margin. However, traders can use stop-loss orders to sell if a cryptocurrency or currency price falls to a specific point, which accomplishes something similar.

What Price is Used When a Trader's Position Is Liquidated?

If a liquidation level is reached and a trader's positions are closed, the trades will occur at the best available price when the positions close. If the market is volatile or prices fall quickly, the trades can take place at a lower-than-expected price, leading to larger losses than anticipated.

Are Liquidation Levels Only Used in the Forex Market?

Liquidation levels are most commonly used when trading in currencies, including on cryptocurrency exchanges. However, they are used for all accounts with margin, including those for securities trading.

Liquidation Level as Risk Management
The liquidation level helps manage risk and was developed to protect traders and dealers from significant losses beyond a preset limit. When a trader's account funding reaches the liquidation level, all positions the trader holds will automatically close at the best available rate. The levels that can trigger this action depend on the broker.

Trading in currencies and securities often calls for the use of leverage.

The initial upfront trading amount, known as the margin, is needed to access the foreign currency market.

If there's extreme market volatility, wide price swings can result in a rapid succession of margin calls and significant losses.

When a dealer handles trades for clients on their behalf, the dealer is taking on the risk of potential losses should the traders lose money. Another risk to the dealer is that the trader won't be able to repay the borrowed funds used to initiate their trades. The liquidation level protects the dealer and trader and assures dealers that they have mitigated their exposure to potential losses.

Understanding the Liquidation Level

The liquidation level is a predetermined point at which an automatic liquidation process begins. The broker may issue a margin call first, so the liquidation level isn't reached. This differs from the "liquidation margin," which is the value of everything in an account should it be closed. Here's how it works:

Margin requirement: When you open an account that uses leverage, you must maintain a certain amount of money. This margin serves as collateral for what's borrowed.

Maintenance margin: The broker sets a maintenance margin level, the minimum amount of equity (account balance plus or minus any unrealized gains or losses) that must be maintained in the account to keep the positions open.

Margin call: Before reaching the liquidation level, the broker may issue a margin call, alerting you that what's in your account is fast approaching the maintenance margin level. You must then deposit more funds or close some positions to avoid liquidation.

Liquidation level: If the market moves against your positions and the amount in your account falls below the maintenance margin required, you might reach the liquidation level. At this point, the broker won't need your permission to close some or all of your open positions to prevent further losses for both you and them.

What Is Margin Liquidation Level?

The level at which the liquidation margin is reached will vary between brokerages and may depend on the type of assets held in an account. More risky assets, for example, may have a more strict liquidation margin. Investment firms detail their requirements on their websites and brokerages often provide tools on their websites like Fidelity Investments Margin Calculator.

What Happens When Margin Is Liquidated?

If an investor receives a margin call but is unable to come up with the funds to satisfy it, the broker may be forced to sell the traders holding until the value of the margin call has been satisfied.

What Does Liquidation Mean?

Liquidation is defined as converting assets into cash, or liquid assets.

Example of a Liquidation Margin
Sarah is a margin trader who invested $10,000 in a single stock using 100% leverage. Assuming Sarah paid the required margin interest or the loan rate between broker and investor and used a 2:1 leverage. The stock increased in value, and she holds $20,000 worth of stock. Since the initial liquidation margin is only $10,000, $10,000 is what Sarah would receive if the account were closed.

Suppose that Sarah's stock performed poorly and fell 25%. Since Sarah was initially using 2:1 leverage, that means she lost 50% of her original investment. Sarah's account now has a liquidation margin of just $5,000, but she commands $15,000 worth of stock.

When the equity in a margin account falls below the brokerage requirements, most firms will issue a margin call. When this happens, action is required to increase the equity in an account by depositing cash or by selling securities. However, selling a position the following business day would create a margin liquidation violation.

A margin liquidation violation occurs when a margin account has been issued both a Federal Reserve and an exchange call and you delay selling securities instead of depositing cash to cover the calls.

Types of Liquidation Margins

If an investor or trader holds a long position, the liquidation margin is equal to what the investor or trader would retain if the position were closed. If a trader has a short position, the liquidation margin is equal to what the trader would owe to purchase the security.

Understanding Liquidation Margins
Margin trading is the practice of borrowing money from a broker to execute leveraged transactions, such as buying securities. Leveraged trading involves borrowing the securities themselves from the broker's inventory when engaging in short selling. The trader then sells those securities and seeks to repurchase them at a lower price in the future.

When using margin trading, an investor must ensure that the total value of the margin account does not drop below a certain level. The value of the account, based on market prices, is known as the liquidation margin.

Consider a scenario where a trader makes a series of leveraged stock purchases. If the purchases begin to generate losses, the liquidation margin of the account will decline. If the decline continues, it will eventually reach the point where the

A margin call effectively forces the trader to provide additional collateral for the account to reduce its risk level. Typically, this collateral consists of depositing more cash in the brokerage account, which becomes part of the liquidation margin, raising the margin level above the required threshold.

What Is Liquidation Margin?

Buying securities on margin allows a trader to acquire more shares than can be purchased on a cash-only basis. If the stock price goes up, earnings are often higher because an investor holds more shares. However, if the stock price falls, traders may lose more than their initial investment.

The liquidation margin is the value of all of the positions in a margin account, including cash deposits and the market value of its open long and short positions. If a trader allows their liquidation margin to become too low, they may be faced with margin calls from their brokers and the broker may liquidate those positions.

Opportunities Arising from a Sellout

Sellouts can sometimes present attractive buying opportunities. For instance, if a heavily shorted stock continues to rise, the short sellers of that stock will see steadily mounting losses to their short positions. If this situation persists long enough, many of those short sellers will likely face margin calls from their brokers.


This situation can lead to a so-called short squeeze. In this case, growing numbers of short sellers are forced to buy the shorted stock to cover their short positions. In these circumstances, opportunistic investors might profit from the sellout by buying the shorted stock prior to the short squeeze, since the forced buying from the short sellers might place additional upward pressure on the company’s stock price.

In the world of business, a sellout can also provide an opportunity to purchase assets “on sale,” or to take over a struggling firm entirely at rock-bottom prices. So-called vulture investors specifically look for such struggling firms and snatch them up when the sellout takes place.

Sellouts to Satisfy Margin Calls

Margin accounts allow investors to make leveraged trades, effectively amplifying the profit potential of a position. When taking long positions on margin, the investor or trader effectively borrows money from their broker and then uses that loan to purchase additional shares. When taking a short position, the shares themselves are borrowed from the broker and are sold short. The short seller then hopes to repurchase those shares in the future at a lower price, returning those shares to the broker and profiting from the difference.

To manage the risks associated with such loaned money, brokers carefully monitor the market value and collateral level of their clients’ margin accounts. If the level of collateral dips below their minimum threshold (known as the maintenance margin), the broker issues a margin call to the investor notifying them that if they do not post additional collateral to their account, the broker will forcefully liquidate their portfolio to generate the cash needed to satisfy the outstanding loan balance. This amount is set by regulation at a minimum of 25% of the account’s value, although a brokerage may require a higher amount.

If this liquidation occurs, then the resulting transactions would be a type of sellout, since they are being executed in a forced manner.

Understanding Sellouts

A sellout occurs when assets are forced to be sold. Sometimes, these situations occur because of personal events such as an unforeseen illness, a lawsuit, or a divorce. Firms may be forced to liquidate their assets in the event of a bankruptcy, sometimes at fire sale prices that are below current market value. The point at which a sellout will commence is sometimes known as the liquidation level. Note that the amount of assets sold often will be limited to the value needed to satisfy the short-term obligation that triggered it.

The point of a sellout is to quickly generate cash to satisfy short-term obligations that must be met. As a result, the one forced to sell may not always get the most favorable prices or terms.

In the financial markets, a common cause of sellouts are the margin calls associated with leveraged margin accounts.

What Is a Sellout?

In the context of finance and investing, the term “sellout” refers to a situation in which individuals or firms are forced to sell some or all of their assets to satisfy certain short-term obligations that cannot be met otherwise.

Sellouts can occur when an investor experiences substantial losses in a margin account. An example of a sellout would be a margin call, in which a broker forcefully liquidates a margin trader’s portfolio based on that trader’s failure to maintain adequate collateral.

Sellouts should not be confused with sell-offs, which involve a rapid decline in the prices of assets due to substantial selling pressure.

Regulations

Each country sets restrictions and regulates short-selling in its markets. In the U.S., short selling is regulated by the U.S. Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. Regulation SHO, implemented in 2005, is the primary rule governing short selling that mandates short sales can only be executed in a tick-up or zero-plus tick market, meaning the security price must be moving upward at the time of the short sale.

According to Regulation SHO, brokers must locate a party willing to lend the shorted shares, or they must have reasonable grounds to believe that the shares could be borrowed. This prevents naked short selling, where investors sell shares they have not borrowed.
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The SEC can impose temporary short-selling bans on specific stocks under certain conditions, such as extreme market volatility.
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In October 2023, the SEC added regulations requiring investors to report their short positions to the SEC and companies that lend shares for short selling to report this activity to FINRA.
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These new rules come after increased scrutiny of short selling, particularly following the GameStop (GME) meme stock saga in 2021, when retail investors drove up the stock price, causing losses for hedge funds that had shorted the company.