Mortgage Broker & Mortgage Lender Bonds

Generally speaking, mortgage broker bonds are classified the same as mortgage banker bonds by most bonding companies. Although they share commonalities there are differences.
If you were to research this further, you would notice at first the operational differences between the two. When it comes to brokers, the broker brings together the bank loaning the funds with the principal involved. He/she is the middleman in the operation of the loan. On the other hand, there is the mortgage banker. The mortgage banker lends the money to the principal. He/she acts as the banker and the broker in the operation of the loan. As we go further in detail on bond types and their differences & similarities, you should have a better understanding now that you have a general understanding about mortgage broker and mortgage banker operations.

Mortgage Bond Amounts: With respect to qualification, banker bonds are more difficult. Some say this is the biggest difference between mortgage banker bonds and broker bonds. Banker bond amounts are much larger, varying between 1.5 and 3 times that of a mortgage bond, depending on state regulations.

Mortgage Bond Forms: A bond form is specifically what the bond guarantees required by the language by the state. Depending on theses state languages, each state has different forms for mortgage broker bonds and banker bonds. With that being said, mortgage broker bonds for one state’s language may be very similar to another state’s language for the same bond at any given time. In Georgia, for example, both of their bond forms are lacking common language called an aggregate clause. Due to this bond language, both mortgage banker and broker bonds are turned down by most bonding companies.

Claim Ratios: Since the banker is lending the money, some argue that they are more at risk compared to the broker bondsman. The loss ratios between the two are very similar according to recent studies. Even though their obstacles are different and vary, banker bonds and broker bonds are relatively the same risk factor. Mortgage bankers may have an increased risk but compared to the hurdles that the brokers must overcome, they seem to offset each other. Nonetheless, bonding companies underwrite both bonds in the same fashion because the claim ratios are comparatively similar.

The debate is, should the bonding company underwrite broker bonds the same as banker bonds or as separate classes of business. The differences and similarities of these bonds need to be reviewed to determine an answer. Although some consider banker bonds with higher risk than the brokers, the claim ratios are about the same. The bond forms could be a similar state language for bonds but may have a different form each banker and broker bonds. The bond amounts are significantly higher for mortgage banker bonds compared to mortgage broker bonds. This is why you need the expertise of your agents. Most good agents will make certain which markets are best whether you are applying for an mortgage banker bonds or a mortgage broker bond currently for each class of business. Read more in the article “What Makes A Good Surety Bond Producer?� if you are seriously considering applying for either bond.

The Difficulty of Union Wage & Welfare Bonds

One type of bond that has been particularly difficult to place over recent years is the Union Wage & Welfare Bond. Bonding companies are very apprehensive about writing such bonds and with good reason. What is a Wage & Welfare Bond? In this issue, we will explore these bonds, why they are so difficult to place, what they guarantee and why a principal would want a Wage & Welfare Bond. We will also disclose some helpful hints on obtaining said bonds.

A Wage & Welfare Bond is a guarantee.
Also known as a Union Wage Bond, this guarantees union fees so, in effect, it is a financial bond or guarantee. If union dues are missed over a certain period of time by the principal, they may be collected through a claim if a Wage & Welfare Bond was required by the union. With unions having their own separate dues and separate bond language, a separate Union Wage Bond is needed for each union requiring a bond.

Why are underwriters scared about writing this class of bond?
In essence, the turn of this new century brought about a major hit to the industry as a whole. While bonding companies were suffering from the soft market, a domino effect took place. Many bonding companies went out of business. Some of the survivors lost their license to bond and resulted to junk status. This left the remaining bonding companies to become ultra conservative when writing bonds. It seemed that the higher the loss ratio based on history, the less bonds were being issued. Particularly, unless you provided 100% collateral, most financial bonds were becoming extinct. One of the last financial guarantee bonds left written were Wage & Welfare Bonds. Now, higher rates are applied when writing wage & welfare bonds compared to other bond types.

Who Can Write Them?
When the soft market ended, placement of the wage & welfare bonds were becoming increasingly difficult however, these financial guarantee bonds were still being written. Agencies that specialized in this class of bonds were emerging as opposed to other commercial bonds and principals were finding these specialized agents. These agencies had the proper surety bond market that was needed to properly place the bond. A bond only agency received the business through brokers who could handle property and casualty bonds but not financial bonds types like these. Since the end of the soft market, financial guarantee bond types such as a wage & welfare bond has become harder to write. Due to their loss ratios, many financial guarantee bonds are no longer being placed. Still, wage & welfare bonds continue to be written. While this bond class is difficult to write now even more so than the past, be advised that specialized surety bond agencies are capable of underwriting. If you choose an agent not specialized in this class of bond you will run the risk of not being accepted and possibly at a higher premium.

Surety Bonds Can Save You Money

Surety Bonds Can Save You Money
There are numerous benefits of posting a surety bond versus a letter of credit. One huge benefit is making the most of your money through surety credit. At first glance it seems the surety bond is more expensive than an Irrevocable Letter of Credit. After reading this article, you will see that surety bonds are clearly the best choice. We will also discuss how a bond saves you money and how a bank makes money from these transactions. You will feel confident knowing that using surety credit is your better option in the long run.

How Letters of Credit Work:
An Irrevocable Letter of Credit or ILOC ensures that you are “good for� the amount this letter, addressed by the bank, and guarantees the holder for these certain funds. The obligee holds the letter of credit and in the event of a claim, the obligee can call on the funds held by the ILOC. The bank normally freezes assets for the amount of the letter of credit as a guarantee that the account holder actually has the cash, in case the claim is called. In simple terms, on a $50,000 ILOC, you cannot touch $50,000 of funds in your account to fully cover for the amount until the letter of credit is released.

How Do Surety Bonds Work For You?
A surety bond involves three parties. The bonding company, or surety, is the carrier of the bond. The obligee is the party requiring the bond of the principal (you). The principal is the party obtaining the bond. This three party agreement is a guarantee of performance. The principal, as opposed to the bank holding assets in an ILOC, uses the surety’s financial strength. Only in high risk situations, would a surety bond require collateral.

Absolute Costs Between Letters of Credit and Surety Bonds
Yes, there are premiums and service charges associated with surety bonds and some would argue that these costs are more expensive than a Letter of Credit. Naturally, this looks like a better choice however all things are not considered. Let’s take an ILOC for $100,000 as an example. Costs are $1,000 per year or 1% of the ILOC. A surety bond rate for the same amount is one to three percent or $1,000 – $3,000 per year in a standard market. The bond is equal to, or more expensive so far, correct? The bank now freezes $100,000 in order for you to “make goodâ€? in the event of a claim. The surety does not require any collateral in typical situations. If you were to choose a surety bond, you could invest the money in a money market account. If the money market account has dividend of 3% to 4%, you just made $3,000 to $4,000, not to mention the 1% cost of the ILOC.

Summary
As you can see, the surety bond is your better choice if you are qualified. The surety bond allows you to invest capital that the bank would not allow you to do. Your daily operations will run smoother with increased liquidity from surety bond placement. Although surety bonds seem more expensive at first glance, they are less expensive than an ILOC and allow you more liquidity to run your business with less worries.