Essent Guaranty Inc., the upstart mortgage insurer, is trying to win business by promising lenders it won't comb through loan files for technicalities so it can deny claims.
The Radnor, Pa., company, which began writing insurance last year, said Tuesday that it had added a "Clarity of Coverage" rider to its policies. The rider reduces the likelihood that a claim will be denied simply because of something like a missing document, an underwriting error or a misrepresentation that had nothing to do with why the loan went bad, Essent said.
In recent years several of the incumbent private mortgage insurers have fought intensely with lenders, sometimes in court, over the carriers' attempts to rescind policies on soured loans.
"We heard from lenders that they were experiencing situations where the loan had been rescinded, but they had not made a material mistake," said Adolfo Marzol, Essent's vice chairman.
With a clean balance sheet and the advantage of not having legacy problems from the mortgage meltdown, Essent is in an enviable position in comparison to other private mortgage insurance companies.
It also has $600 million in backing from a group of investors that includes Goldman Sachs Group Inc., JPMorgan Chase & Co., and RenaissanceRe Ventures Ltd. It bought its operations in Winston-Salem, N.C., from Triad Guaranty, a mortgage insurer that is in runoff mode.
Marzol said that his company was not going to be a stickler for fine-grain details when a loan that had been performing for a substantial period of time went bad.
For example, if a borrower had been current with her mortgage payments for three years before defaulting, he said Essent would not try to deny coverage simply because her debt-to-income ratio turned out to be two percentage points higher than the lender had represented it to be.
Rhonda Orin, a lawyer from the Washington firm of Andersen Kill & Olick, who represents lenders, said she welcomed Essent's commitment to process claims fairly.
However, she said that it is too soon to assess whether the Clarity of Coverage endorsement will work.
"If they really intend to not create traps for the lenders with immaterial errors, it is a good thing, but the issue is always going to be in the execution," Orin said. "With a lot of policy language, you have to see how it is going to be applied. A comma in a different place is going to lead to a different outcome."
One potential problem with the Clarity of Coverage endorsement, according to Orin, is the way that it is written.
"I don't think that the language is especially clear," she said. "They have a great goal and they have a great title for the endorsement. Let's hope that it is applied in practice so that it achieves clarity of coverage."