JW Bond Settles Into New Office

We have moved. March 13, 2006 was the first day in our new office. Everything did not go as smooth as we would have liked, but what move does? We have now been in our new office for over a week and are settling in quite nicely. Our new location is three times as large as the previous one. For those who do not know, our new contact information is as follows:

JW Bond Consultants, Inc.
6023A Kellers Church Road
Pipersville, PA 18947
P: (215) 766-1990 F: (215) 766-1225

The move was absolutely necessary due to the growth our company has experienced over the past 2 years. In two years, our staff has grown by 60%. Our increased volume is due to our exclusive bond programs and service we pride ourselves on. Some of the programs we offer save our clients thousands in premium every year. Our service is the fastest in the industry, we even offer online approvals for some classes of business.

Usually, the Surety Bond Blog is used to inform our clients on suretyship. We try to keep from making it a drawn out commercial for our agency. However, this post is an exception, as we are so pleased with our staff and the growth we have achieved in such a short period of time. You can rest assure, that this blog will continue to be used to educate the public on suretyship. I had to make one post about our success due to the pride we have in our service.

Bad Credit Surety Bond Programs

The surety bond industry has been through tremendous changes since the turn of the millennium. The “soft market” came to an end and bond agents throughout the country had a lot of work ahead of them. Agents were forced to find new markets for accounts that were dropped by their bonding companies. Unfortunately, this was easier said than done for many commercial bond accounts with credit issues. A principal with bad credit could not be bonded without extensive collateral requirements. Eventually, the supply and demand of our capitalist economy brought about Bad Credit Surety Bond Programs.

Standard Bond Programs vs. High Risk Bond Programs:
Traditional surety bond underwriting strives to have a 0% loss ratio. In other words, they only write bonds when there is slim to no chance of a claim. Bad Credit Surety Bond Programs are quite different than traditional surety and are underwritten more similar to insurance. Rather than attempting to underwrite with a 0% loss ratio, higher risk accounts are approved at a higher rate. The premiums actually have the claims built into them, as they are written for accounts in which claims are more likely.

Collateral Requirements:
Some Bad Credit Surety Bond Programs also require collateral. However, the bonding companies are trying to get away from the collateral requirement, as it creates unnecessary additional paperwork. To replace the collateral requirement, the bonding companies raise the premium even higher. At times this works to the advantage of the principal, other times it works against them. Programs with no collateral requirement need less money put up for the first year. However, programs that require collateral cost less in the end, as the collateral is returned within about 1 year of release of the bond.

Alternatives:
Many bond agencies will neglect to tell the principal that there are alternatives to surety bonds. At JW Bond Consultants, we believe in giving the client the best advice, even if it means we do not write their business. This ideology has brought those same clients back to us when a bond is in their best interests. Many obligees will accept an Irrevocable Letter of Credit (ILOC) rather than a bond. This is a better option for those that have liquid assets they can have tied up. This means a $50,000 bond can be replaced having a bank freeze $50,000 cash in exchange for an ILOC. Banks typically charge a 1% service fee for an ILOC, much cheaper than a high risk surety bond. Obviously, not everyone has enough liquid cash to obtain an ILOC and that is where the high risk program is better alternative. To decide what is best for you, simply compare the cost differences between the bond and the ILOC. If the additional cost for the bond is worth having increased liquidity then the bond is a better choice. If cost over time is more important to you than liquidity then an ILOC is a better choice. Just be sure to keep in mind that one can easily obtain 4% in a money market right now. Therefore, an ILOC really costs approximately 5% annually. Read “Saving Money Using Surety bonds” to learn how to compare the two in greater detail.

The Future of Bad Credit Bond Programs:
The original company to offer a high risk option, “Capitol Indemnity Corporation”, has been successfully running the program for over 3 years. Capitol’s success has inspired other bonding companies to offer high risk programs. In fact, the amount of bonding companies willing to write high risk commercial bonds is increasing every year. The costs between the competing companies are similar. However, as more sureties offer high risk bond programs, we may see lower rates in the years to come. While the number of bonding companies that write high risk applicants every year, they are still in the minority when it comes to the rest of the industry.

The end of the “soft market” left many looking to obtain surety bonding high and dry. Capitol Indemnity picked up many of the commercial bond accounts that would of had to otherwise post a letter of credit. High risk programs are more expensive, as losses are built into the premium. The high premium costs of high risk programs may drop in years to come as more bonding companies write this market segment. Often, there are alternatives to posting a surety bond, which many agents neglect to mention. High risk markets will remain available for as long as the bonding companies loss ratio is low enough for them to turn a profit.

Differences Between Mortgage Banker Bonds And Mortgage Broker Bonds

Mortgage broker bonds and mortgage banker bonds are generally classified under the same bond type by most bonding companies. There are several differences between the two, but even more commonalities.

The first thing we need to review is the operation differences between mortgage brokers and mortgage bankers. A broker is the middle man in a loan. They bring the principal and the bank that is loaning the funds together. A mortgage banker acts as both the mortgage broker and the bank. A mortgage banker actually lends the money for the loan to the principal. Now that we have a basic understanding of how each business type operates we can go into further detail on the differences and similarities of the bond types.

Bond Amounts:
The first difference that most notice between the two is the required bond amounts. Most states require larger bond amounts for mortgage bankers. In general, states require one and half to three times as much for bankers. This alone, makes the banker bonds more difficult to qualify for.

Bond Forms:
A bond form is the state required language for what the bond specifically guarantees. Most states have a different bond form for mortgage brokers and mortgage bankers. However, the language for any given state’s mortgage broker bond form is very similar to that same state’s mortgage banker bond form. For instance, both of Georgia’s bond forms are lacking common language called an aggregate clause. This makes it so both bonds are turned down by most bonding companies due to the bond language.

Claim Ratios:
Some make the argument that a banker is actually lending the money and therefore more risk is involved as appose to brokers. However, historical loss ratios show that brokers and bankers are very similar. There may be an increased risk for mortgage bankers, but it seems that it is offset by other hurdles that make it more difficult to start a banker business. Whatever the reasoning, the claim ratios are similar enough for most bonding companies to underwrite them in the same fashion.

After reviewing the differences and similarities between broker and banker bonds, one can see why it is debatable as to whether a bonding company should underwrite the bonds in the same fashion or as separate classes of business. We now know that the mortgage banker bond requirements are substantially higher than that of a mortgage broker. We also know that a state may have a bond form for each bond type, but the language is similar. The claim ratios are historically similar even though some associate a higher amount of risk involved for mortgage bankers. Whether you are applying for a mortgage broker bond or a mortgage banker bond, you need to make certain your agent knows what markets are currently best for these classes of businesses. If you are considering applying for either of these bonds soon, be sure to read our article “What Makes A Good Surety Bond Producer?“.

Mortgage Broker Bonds: Georgia

The Georgia mortgage broker bond is one of the most difficult to place mortgage broker bonds in the country. The bond size is a substantial size and the bond language is very much in the favor of the obligee. Most bonding companies keep away from this higher risk mortgage broker bond, but there are still markets that are willing to write the risk.

Current Market: For the most part, bonding companies shy away from the Georgia mortgage broker bond. However, there are still bonding companies willing to write this bond on a regular basis. Unfortunately, you can not expect to find any programs that will write this bond with minimal information. Any surety willing to write this guarantee will require a full submission, which consists of: general company information, personal financial statements on all owners, business financial statement, resumes on managing member(s), etc.

Bond Amount: The state of Georgia requires a $50,000 bond of their mortgage brokers and a $150,000 mortgage lender bond. A $50,000 bond is on the higher end of license bond average ranges. The size certainly isn’t large enough to scare an underwriter away from writing the bond. However, you can expect the underwriter to give a thorough examination of your application, possibly requiring cash verification or other additional information.

Bond Form: The Georgia state bond form lacks aggregate language, something most bonding companies require in order to write a bond in today’s market. An aggregate clause limits the total amount of claims to the amount of the bond. In other words, an aggregate clause makes it so claims can not exceed $50,000, whether it is one $50,000 claim or five $10,000 claims. The state of Georgia is not only lacking the aggregate clause, it is something they did on purpose. That means that there is no limit to the total amount of claims that can come arise from this bond. This fact is quite scary when we realize that the surety will ultimately hold the principal responsible for repayment of all claims.

Additional State Requirements: The Georgia Department of Banking and Finance regulates mortgage brokers in Georgia. The state requires applicants to pay a $250 investigation fee and a $500 Annual license fee. Georgia also requires CPA audited financial statements and a copy of income tax returns and a passport size picture of the applicant. The state also requires that the applicant have a net worth of $25,000. Two recent years experience or proof of education is required. Original duplicate fingerprints (fee of $30/set) must be provided and permission for pulling credit. Past criminal acts that have not been pardoned will result in the application declination. Mortgage brokers licensed out of state must have a physical location within the state. The location can not be a PO box and must employ at least one employee. If the broker’s home state is not Georgia, they may still obtain a Georgia license if their home state does not require a physical location in it.

Special Programs: Unfortunately, we do not know of any special bond programs for the Georgia mortgage broker bond. One must do a full submission in order to obtain an approval in this difficult to place state. You can apply at: http://www.jwsuretybonds.com/mortbroker.htm