What is a key function of mortgage default insurance?

The primary function of mortgage default insurance is to transfer risk from the mortgage lender to the mortgage insurer. This type of insurance is designed to protect lenders in the event that a borrower defaults on their mortgage payments. When lenders provide mortgages to high-risk borrowers (such as those with a low down payment), mortgage default insurance mitigates the financial impact on lenders by allowing them to recover a portion of their losses if the borrower fails to repay the loan.

This risk transfer mechanism is essential in promoting access to credit, as it enables lenders to offer loans to a broader range of borrowers—especially first-time homebuyers who may not have significant savings for a large down payment. By providing this insurance, lenders can feel more secure in their loan decisions, ultimately contributing to a more stable housing market.