In the past two years, many things have changed in operations of the underwriting departments of Surety Companies nationwide. To start, the criterion had been minimal and the premiums were low prior to 2006. In addition, many Mortgage Brokers have filed Bankruptcy in the past two years leaving the Surety Companies on the hook to pay any outstanding claims. Hence, these have impacted a change in the underwriting process and higher premiums for bonds.
There are many factors that a Surety company will take into consideration to come up with a premium for a Mortgage Broker Bond. One of the important factors that the Surety Companies are now scrutinizing is personal credit of the owners of the company. Typically, any owner of a company applying for a bond and showing over 5% interest in ownership must be listed on the agreements for a bond. A company applying for a bond is only as strong as its weakest link. The basis of the premium will end up being based on the owner with the worst credit. This means if all owners of the company have great credit and one owner is having credit issues the basis for the premium will be the ownerâ€™s reports with the credit issues.
Another aspect that the Surety Companies are looking at is the liquid assets of each owner of the company. They want to make sure that in case there is a claim against a bond that the company or owner of the company can cover the claim up to the specified amount of the bond. Additionally, as the net worth of a mortgage companies goes down, it will become harder for them to qualify to obtain or renew their surety bonds they have in place. Also, litigation against mortgage brokers and lenders has made it more difficult to get approval for a surety bond. This is also the reason that most Surety Companies require a spousal indemnification (signature of responsibility) from the spouses of each owner. This will prevent a company owner from transferring all of his or her assets to their spouse and closing up shop. This demonstrates accountability on the part of the small business owner.
Unfortunately, one of the last criterions that a Surety Company is concerned with is the experience that a broker may have in the Mortgage Industry. While it is somewhat important to the Surety, the industry as a whole has shifted to operate as a higher risk industry. Start-up companies are being especially hard-hit by the new underwriting climate, since many of the surety bond companies refuse to underwrite surety bonds to new companies.