Mortgage Banker Bonds: An Increased Risk?

Bonding companies underwrite classes of business different from one another. They classify bond types differently as well. For instance, some bonding companies underwrite mortgage broker bonds and mortgage banker bonds as the same type of bond. Other bonding companies underwrite mortgage banker bonds with more caution, as the banker is directly lending funds.

Most states require a larger bond amount for mortgage bankers than they do for mortgage brokers. The state governments recognize that there is a higher amount of financial risk. An increased bond amount is a good way to help protect the public from fraud. Bonding companies that classify mortgage bankers and brokers as the same type of bond believe that the additional bond amount is the only additional risk incurred. For example, they would treat a $100,000 mortgage banker bond requirement the same as the New Jersey $100,000 mortgage broker (provided both bond forms are acceptable to the surety). Other bonding companies put mortgage banker bonds in a class of their own, with separate rate filings and more conservative requirements of the principal.

Does a mortgage banker bond come with a higher risk of a claim? The short answer is yes. However, the historical loss ratios of many bonding companies show otherwise. Mortgage brokers have little risk associated with the operations of their business. They are the middle man and are making a commission on a loan, not lending the money out of their own pocket. A mortgage banker is lending their assets to finance the loan. In fact, the bulk of the assets on many mortgage bankers balance sheets is comprised of receivables from loans. One would think that a lender would incur more risk and thus trigger more claims. For whatever reason, that is typically not the case.

There are numerous reasons why the claim ratio of mortgage lenders and mortgage brokers are similar. For one, it is more difficult to start a mortgage lending company, as a greater amount of assets are required. Many states also have stricter requirements for mortgage bankers with more invasive background checks. The ease of starting a mortgage broker business over a banker business creates a higher risk of fraud and the claims associated with them. As stated, there is no single reason. However, I feel the ease of start up levels the playing field when it comes to claims associated with the two business types.

At the end of the day, there is no right or wrong answer. Bonding companies underwrite each class of business using requirements which they decide on. The rates are also their decision and are based on what they believe is the perceived risk with each class of business. One could argue that mortgage brokers and mortgage bankers have similar loss ratios and therefore the same amount of risk is involved. One could also argue that bonding companies have grown too hungry when it comes to writing mortgage broker bonds and should rethink how they look at this low risk bond class. Either way, mortgage bankers are just going to have to accept the free market and the decisions of the sureties participating in it.