What is a primary effect of mortgage default insurance on lenders?

The primary effect of mortgage default insurance on lenders is that it decreases their lending risks. When lenders issue mortgages, they face the possibility that borrowers may default on their loans, particularly in the case of high-risk situations or for borrowers with lower credit scores. Mortgage default insurance protects lenders against this risk by providing them with compensation in the event of a borrower's default.

This assurance allows lenders to offer loans with lower down payment requirements, making homeownership more accessible to a broader range of borrowers. As a result, lenders can confidently lend more capital, knowing that their financial exposure is mitigated through this insurance. Since the risk of loss is reduced, lenders can also maintain more flexible lending criteria without increasing their overall risk exposure.

The other options, while related to the mortgage process, do not clearly capture the fundamental role that mortgage default insurance plays in reducing lenders' risks.