Licensing Woes For New Mortgage Brokers?

Almost all states require mortgage brokers and bankers to post a surety bond with their state license. These mortgage broker and banker surety bonds have been one of the easiest bonds to procure in recent years. Unfortunately for mortgage brokers and lenders, it appears that all of that is about to change.

A little history…
Mortgage Broker BondingThe recent housing market boom brought about a boom in the mortgage industry. Many mortgage brokers and lenders decided to open their own shops. Most brokers and lenders quickly discovered a bond was required when applying for licensing from the states in which they chose to operate. Bonding companies backing mortgage brokers and lenders were liberally writing bonds for them due to the financial prosperity brought upon them from the large amount of home sales and refinanced loans. Both lenders and brokers had relatively low claim rates when compared to other bonded occupations. This allowed the surety market to offer more surety capacity and at a lower rate.

The change of tides…
The refinance market has long cooled and housing sales are desperately low in comparison to what fueled the mortgage industry no more than a year ago. The industry is now considered to be in a recession. Some of the largest mortgage lenders are currently declaring bankruptcy. Some analysts predict one-third of all mortgage brokers will be out of business by this time next year. Lenders and brokers alike are on hard times and the bonding companies know it.

A surety bond is a guarantee of performance; it is also a form of credit that the principal must repay to the surety in the event of a claim. Therefore, a bonding company is going to want to ensure the principal has the ability to repay the bonding company should a claim arise. Dwindling equity and liquidity within broker and lender business financial statements due to year end losses are making it so many within the mortgage industry do not qualify for the same amount of surety credit as they did in the past.

The surety bond industry reaction…
Mortgage Broker Industry RecessionAs stated above, many brokers and lenders no longer qualify for the aggregate amount of surety bonding they did at the peak of the boom, which is to be expected, as that is how surety underwriting works. However, some of the sureties that were once the most eager to bond brokers and lenders are changing their overall underwriting guidelines for these lines of business. As of recent, our agency has seen a drastic difference in underwriting methods for top carriers like The Hartford Financial Services Group, Inc. and Liberty Mutual Insurance Company. The Hartford in particular was previously known for writing mortgage brokers and lenders very freely at low rates. Now they are no longer willing to consider start-up mortgage broker businesses. A brokerage must be in business for a minimum of two years for them to consider writing a bond. These changes are significant, as limiting surety capacity will force those in the mortgage industry to be very careful about what states they choose to operate in, as they will likely not qualify for all the bond backing needed to operate legally. More importantly, if other carriers in the industry follow The Hartford’s path, start-up mortgage brokers would have to produce letters of credit rather than a bond; a much costlier alternative. This will allow for only start-ups with deep pockets to get licensed and bonded properly.

The silver lining…
There is no doubt, The Hartford is a big player in the surety industry, especially when it comes to mortgage brokers and lenders. The surety industry is relatively small and a large broker/banker guarantor like The Hartford will have impact when they drastically change their underwriting policies. However, like all industries the laws of capitalism apply to the world of suretyship. This means, if The Hartford no longer wants to bond start-ups, another surety will. Of coarse this means that demand may increase, which would in-turn result in higher rates, especially for those that were use to The Hartford’s low premiums.

Conclusion:
For the time being brokers and lenders may be shocked that obtaining surety backing is not as easy as it once was. However, once their financial statements become healthier they will all see their aggregate bond limitations expand. Bonding companies guarantee the performance of the companies, so it is only natural that they panic a bit as the mortgage industry gets shaken up. In time, as the mortgage industry settles, the surety industry backing them well begin to back them more freely again.