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.
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.
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.
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?“.