Definition
Underwriter
An underwriter is a professional who assesses and assumes the risk associated with issuing loans, insurance policies, and securities. In mortgage lending, the underwriter evaluates loan applications to determine whether to approve or deny them based on a thorough assessment of the property and the applicant’s financial standing. In the securities market, an underwriter is the broker that sells the issue and, unless sold on a “best efforts” basis, agrees to purchase the shares not bought by the public.
Examples
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Mortgage Lending:
- A property developer applies for a mortgage loan to finance a new residential project. An underwriter carefully reviews the loan submission package, which includes the borrower’s credit history, income, assets, and the property appraisal report. If the underwriter concludes that the borrower meets the lending qualifications, the loan is approved.
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Insurance:
- An individual applies for a life insurance policy. The underwriter considers factors such as the applicant’s age, health history, occupation, and lifestyle choices (e.g., smoking). Based on this assessment, the underwriter decides the terms, premium, or even whether to issue the policy.
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Securities Underwriting:
- A corporation is planning to issue new shares to the public. An investment bank acts as the underwriter, conducting due diligence to evaluate the potential risks and set the initial price of the shares. The underwriter buys these shares from the corporation and sells them to institutional investors and the public, assuming the risk if any remain unsold.
Frequently Asked Questions (FAQs)
Q1: What qualifications are required to become an underwriter?
A1: Typically, underwriters need a bachelor’s degree in finance, business, economics, or a related field. Additional certifications such as the Chartered Property Casualty Underwriter (CPCU) or Associate in Commercial Underwriting (ACU) can also be advantageous.
Q2: How do underwriters determine loan eligibility?
A2: Underwriters assess loan eligibility based on factors like the applicant’s credit score, debt-to-income ratio, employment history, income, assets, and the value and condition of the property being purchased.
Q3: What is the difference between an “automatic” and a “manual” underwriting process?
A3: Automatic underwriting is done using automated systems that quickly analyze applications based on preset criteria, while manual underwriting involves individual assessment by a human underwriter, especially for complex or borderline cases.
Q4: What risks do securities underwriters evaluate?
A4: Securities underwriters evaluate risks such as market volatility, the financial health and performance history of the issuing company, economic conditions, regulatory environment, and demand forecasting for the issued securities.
Q5: Can underwriting affect approval time for loans and insurance?
A5: Yes, the underwriting process can significantly affect approval times; thorough assessments may lead to delays, while automated processes can expedite approvals, provided all criteria are met.
Related Terms
Risk Assessment
Risk assessment involves identifying, analyzing, and evaluating potential risks to minimize their impact on project outcomes and financial health.
Credit Score
A credit score is a numerical expression representing an individual’s creditworthiness, based on their credit history.
Debt-to-Income Ratio (DTI)
The debt-to-income ratio measures the proportion of an individual’s monthly income that goes toward paying debts.
Mortgage Approval
Mortgage approval is the process wherein lenders evaluate a borrower’s application to decide whether to lend money for property purchases.
Due Diligence
Due diligence refers to the comprehensive evaluation of a business, investment, or individual to confirm all facts and assess risk.
Online Resources
- Investopedia - Underwriting
- Mortgage Bankers Association (MBA)
- National Association of Insurance Commissioners (NAIC)
- Financial Industry Regulatory Authority (FINRA)
- Securities and Exchange Commission (SEC)
References
- Fabozzi, F. J., & Peterson, P. P. (2003). “Financial Management & Analysis.” Wiley.
- Gibson, R. (2008). “Real Estate Principles & Practices.” South-Western Educational Pub.
- Olson Grant, V. (2018). “Risk Management in Finance: Six sigma and other next-generation techniques.” Wiley.
Suggested Books for Further Studies
- “The Real Estate Wholesaling Bible: The Fastest, Easiest Way to Get Started in Real Estate Investing” by Than Merrill
- “Principles of Risk Management and Insurance” by George E. Rejda and Michael McNamara
- “Financial Risk Management: Applications in Market, Credit, Asset and Liability Management and Firmwide Risk” by John C. Hull
