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What is 'Underwriter'

An underwriter is any entity that evaluates and assumes another entity's risk for a fee, such as a commission, premium, spread or interest. Underwriters operate in many aspects of the financial world, including the mortgage industry, insurance industry, equity markets, and common types of debt securities.

BREAKING DOWN 'Underwriter'

Underwriters can play a variety of specific roles, depending on the context of a financial situation. Generally, they are considered to be the risk experts of the financial world. Organizations rely on them to determine if a business risk is worth taking. They can also contribute to sales-type activities, as they do in the initial public offering (IPO) process and in the reselling of debt securities.

Mortgage Underwriters

The most common type of underwriter is a mortgage loan underwriter. Mortgage loans are approved based on a combination of an applicant's income, credit history, debt ratios and overall savings. Mortgage loan underwriters ensure that a loan applicant meets all of these requirements, and they subsequently approve or deny a loan. Underwriters also review the property's appraisal to ensure that it's accurate and that the home is roughly worth the purchase price and loan amount.

Mortgage loan underwriters have final approval for all mortgage loans. Loans that aren't approved can go through an appeal process, but the decision requires overwhelming evidence to be overturned.

Insurance Underwriters

Insurance underwriters, much like mortgage underwriters, review applications for coverage and accept or reject an applicant based on risk analysis. Insurance brokers and other entities submit insurance applications on behalf of clients, and insurance underwriters review the application and decide whether or not to offer insurance coverage. Additionally, insurance underwriters advise on risk management issues, determine available coverage for specific individuals, and review existing clients for continued coverage analysis.

Equity Underwriters

In equity markets, underwriters administer the public issuance and distribution of securities (in the form of common or preferred stock) from a corporation or other issuing body. Perhaps the most prominent role of an equity underwriter is in the IPO process. An IPO is the process of selling shares of a previously private company on a public stock exchange for the first time. IPO underwriters are financial specialists, who work closely with the issuing body to determine the initial offering price of the securities, buys them from the issuer, and sells them to investors via the underwriter's distribution network.

IPO underwriters are normally investment banks that have IPO specialists on staff. These investment banks work with a company to ensure that all regulatory requirements are satisfied. Next, the underwriter contacts a large network of investment organizations, such as mutual funds and insurance companies, to gauge investment interest. The amount of interest received by these large institutional investors helps the underwriter set the IPO price of the company's stock. The underwriter also guarantees a specific number of shares will be sold at that initial price and will purchase any surplus.

Debt Security Underwriters

Underwriters purchase debt securities, such as government bonds, corporate bonds, certificates of deposit (CD), municipal bonds or preferred stock, from the issuing body (usually a company or government agency) in order to resell them for a profit. This profit is known as the "underwriting spread." An underwriter may resell debt securities either directly to the marketplace or to dealers, who will sell them to other buyers. When the issuance of a debt security requires more than one underwriter, the resulting group of underwriters is known as an underwriter syndicate.



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