What is designed to provide protection for lenders in case the borrower defaults on payments?

Mortgage default insurance is specifically designed to protect lenders in the event that a borrower defaults on their mortgage payments. When a borrower fails to keep up with the agreed payments, this insurance ensures that the lender can recover some or all of the outstanding amount, thus minimizing their risk. This type of insurance is often required for high-ratio mortgages, where the borrower has a smaller down payment, as it provides additional security to the lender.

The function of mortgage default insurance directly correlates with the lender's need to safeguard their investment in a property, making it an essential component of the mortgage lending system, especially for loans that arise from higher risks associated with lower down payments. Other types of insurance mentioned serve different purposes and do not provide this specific protection for lenders. For example, title insurance protects against issues with property ownership, homeowner's insurance covers damage to the property itself, and errors and omissions insurance protects professionals in their line of work, but none of these respond to the lender's needs in the case of borrower default.