Underwriting fees are monies collected by underwriters for performing underwriting services. Underwriters work in a variety of markets including investments, mortgages, and insurance. In each situation, the underwriter’s job varies slightly, yet each collects underwriting fees in exchange for their underwriting services.
Key Takeaways
- An underwriter is a financial firm that assumes risks, such as loans, insurance, or investments, in exchange for a fee.
- An underwriting fee is a payment that a firm receives for taking on risks.
- With securities underwriting, a firm earns a fee as compensation for underwriting a public offering or placing an issue in the market.
- In addition to securities, underwriters are commonly used in the mortgage and insurance industries.
How Underwriting Fees Work
In capital markets, underwriting fees are collected by underwriters who administer the issuing and distributing of certain financial instruments. When a company issues stock, bonds, or other publicly traded securities, it hires an underwriter.
The issuing company and the underwriter work closely together to determine the price of an offering. After determining the offer structure, underwriters assemble a group of investment banks and brokerage firms that commit to selling a certain percentage of the offering. After an underwriting agreement is struck, the underwriter bears the risk of being unable to sell the underlying securities and incurs the cost of holding them until they can be sold. Once the underwriter ensures the sale of all shares in the offering, it closes the offering by purchasing all the shares from the company (if the offering is a guaranteed offering), and the issuer receives the proceeds minus the underwriting fees, usually 3.5 to 7 percent of the amount of capital being raised.
Underwriters or underwriter syndicates earn underwriting fees by negotiating and managing the offering, assuming the risk of buying the securities (if nobody else will), and managing the sale of the shares.
Underwriting Fees for Mortgage Underwriters
A mortgage underwriter earns underwriting fees by evaluating and verifying mortgage loan applications and either approving or denying the loan.
An underwriting fee for the service of evaluating the loan application for approval is a nonrecurring fee or finance charge that the lender may charge in lieu of an origination fee, or in addition to it. Origination fees pay for various costs associated with obtaining a loan and could include administrative services, such as loan processing and mortgage broker fees. Other loan fees can include an appraisal, a credit report, flood certification, and a tax service fee. When charged apart from origination, underwriting costs vary between $400 and $900, depending on the lender and loan type.
Underwriting Fees for Insurance Underwriters
Insurance underwriters collect underwriting fees for identifying and calculating a policyholder’s risk of loss and writing policies to cover these risks. An insurance underwriter’s role involves protecting the company’s book of business from risks they feel will result in a loss and issuing insurance policies at a premium appropriate for the risk exposure.
Related Terms: capital markets, financial instruments, fee or finance charge, origination fee.
