Insurance agents serving the mortgage broker marketplace see some signs of improvement but they aren’t yet jumping for joy.
The mortgage brokers error and omissions (E&O) market became severely strained when the 2008 economic crisis hit. Capacity shrunk dramatically, rates went up, and business from mortgage brokers dwindled as brokers consolidated or went out of business completely.
Insurance agents and brokers selling E&O for this industry are cautious but encouraged by some signs of an upswing.
“We are still seeing submissions and people are still buying coverage,” says Cathy Milazzo, broker and underwriter for Sullivan Wholesale Insurance Inc.’s in-house miscellaneous E&O program with Lloyd’s. “There is a lot of good business out there, and a lot of good accounts.” Sullivan Wholesale is based in San Diego, Calif.
Agents and brokers say they are also beginning to see new entrants getting into the real estate market and some of the established players broadening their risk appetite again.
“I do expect some more [insurance] companies to come into this field in the next few years,” says David J. Jackson, area vice president for Mortgage Insurance Agency, a division of Arthur J. Gallagher Risk Management Services Inc., in Crystal Lake, Ill. “There hasn’t been subprime or alt A type loans for the last two to three years and underwriting a mortgage has gotten a lot tougher, so new carriers are looking at this as a new area that might be worth getting into because claims might not be as bad as they were the last few years.”
Mike Smith, president of Axis Insurance Agency in Franklin Lakes, N.J, agrees.
“I think the carriers are starting again to get back into the market,” he says. “They all did a mass exodus three years ago but slowly but surely we are seeing markets come back into play.”
Milazzo says higher rates and tighter underwriting are just par for the course in the mortgage brokers market now.
“Most of the markets have increased their rates for this class of business, especially in California, which is considered a high-risk state and certain counties are considered judicial hell holes, which impacts ratings and pricing,” says Milazzo. “But oddly enough there are markets that are saying, ‘we have learned our lesson, let’s move forward, let’s write business.’”
Agents just are not sure if this trend will continue.
They say they are keeping an eye on the news for the latest developments such as AIG suing Bank of America, banks seeking liability shields against future mortgages, and settlement talks against improper mortgage practices.
“Those of us in the market see it coming as a second wave [of claims] if you will,” says Smith. “We haven’t seen much of an uptick in claims [so far] but we don’t know if those claims will stay at the top level or if they will make their way down to the mortgage broker level. We have all talked about it and wouldn’t be surprised to see an uptick in claims, but we haven’t seen them yet.”
Sue Schrum, president of BIS Insurance Group in Lebanon, Tenn., concentrates on smaller mortgage brokerages. She says this class is still very much in limbo.
“I thought that there was a light at the end of the tunnel there for a while and that mortgage business was going to pick up,” she says. “But it all depends on the economy. If it picks up and funding sources are there, mortgage business will pick up.”
She says the uncertain claims future makes continuity with an insurer essential to mortgage brokers getting the coverage they need at a better price.
“Right now for mortgage brokers to move coverage from place to place is not a good thing because of the history going on the last five years,” says Schrum. “If you are in with a market, your best bet is to give them something rather than move from place to place, especially if you have had a claim. All policies are claims-made and continuity means a lot.”
Continuity is also important when it comes to mortgage broker insurers lasting in this class, says Schrum.
“Some [insurers] are flashes in the pan or are here for a while then out because they underwrite to a loss. You have to be smart if you want to be here for a long time and you can’t underwrite for a loss,” she says. “There needs to be a tradition or some period of time [in the business] for underwriters to loosen up their belts because they did take a blood bath. There are no standard markets that I know of that want to write mortgage brokers E&O.”
What’s Next for Mortgage Brokers?
Jackson says the future of the mortgage broker industry is as uncertain as the insurance industry’s attitude towards it.
Mortgage brokers face the possibility stricter banking regulations and laws directed at them and how they are paid. Jackson expects more mortgage broker business will be taken over by mortgage bankers, who work with warehouse lenders to get a warehouse line of credit established, and then sell the loan off to an investor.
“Mortgage bankers are doing much better. They are the way of the future for this industry,” he says. “The bulk of the claims activity for the mortgage industry was from mortgage brokers. A lot of have gone out of business – the mortgage broker field has been decimated.”
Jackson says he doesn’t think that mortgage brokers will go away completely, but that mortgage bankers are now better capitalized and utilizing better technology, which will make them more attractive, especially to carriers looking at insuring this class.
Mortgage Insurance Agency was acquired by Arthur J. Gallagher in June of this year and is now developing a fraud product through Lloyd’s of London that gives up to $100,000 in coverage.
AJG and Mortgage Insurance Agency are also starting a mortgage division within Gallagher they expect to call Gallagher Mortgage Banking Solutions.
When it comes to working with class right now, Smith says agents need to know the difference between mortgage brokers and bankers and what a repurchase agreement is, because that is a not a covered E&O claim. Failing to do so just creates more problems for an already troubled segment.
“Agents need to make sure that the insured understands the risks,” he says. “You see claims when they haven’t fully explained the coverage to the insured. If you get a class of business that carriers are running from, it is important to understand what the coverage is.”