In the financial world, the term "underwriting fee" can refer to two different things. The first is a fee associated with originating a mortgage. The second is a fee linked to an initial public offering of a security. The fee in question is usually clear from the context of the discussion.
With mortgages, whenever a mortgage is developed, a key part of the process is the underwriting. A staff member known as an underwriter evaluates the borrower to determine how much he or she can afford, and how much risk the borrower presents. Underwriters perform credit checks and use other tools when they conduct a risk assessment. In exchange for these services, they are compensated with an underwriting fee which is collected at closing.
When people make an offer on a piece of real estate, the estimated closing costs must be disclosed. If money is being borrowed to finance the purchase, these will include the underwriting fee along with a number of other fees associated with the mortgage. The underwriting fee is usually a flat fee, and buyers should be aware that it can vary, depending on the lender.
Other fees which can be associated with a mortgage include the processing fee, which reflects the costs associated with collecting and collating information, and the origination fee, a percentage of the loan charged by the lender for issuing the loan. Borrowers may also pay points at closing to lower their interest rate.
In the case of securities, underwriters are the people who arrange to sell new securities offerings to the public. The company which wishes to sell stocks or bonds contacts an underwriter and arranges to sell the securities at a discounted price. The underwriters sell the securities at full price. The difference between the discounted and full price, known as the underwriting spread, represents the profit for the underwriter and may be referred to as an underwriting fee.
The riskier a new security offering is, the higher the underwriting fee is likely to be. Companies which act as underwriters expect compensation for taking on major risks. A hotly anticipated issue which presents low risk, on the other hand, will be associated with a relatively low underwriting fee. The underwriting process allows companies that wish to issue securities to avoid dealing directly with the process of selling and maintaining securities, and the underwriter can use this as leverage to negotiate a favorable fee.