United Guaranty gets Freddie approval on underwriting changes
Freddie Mac approved a mortgage insurance underwriting initiative designed by AIG subsidiary United Guaranty that seeks to curtail rescissions and home loan repurchases.
The tool, dubbed CoverEdge, is the byproduct of United Guaranty's mission to prevent fraud and underwriting mishaps that contributed to the confusion in the wake of the housing market meltdown. The company hopes to diligently stop fraud and the risk of loan repurchases and rescissions.
United Guaranty took the same stance when it chose to partake in HARP 2.0 last year, while remaining careful not to expose the firm to risks associated with fraudulently underwritten loans.
Freddie's approval of the CoverEdge product makes it easier for United Guaranty to move forward with a launch of the product to lenders nationwide.
Greensboro, N.C.-based United Guaranty said Fannie Mae already approved the product, which extends the approval process that the mortgage insurer and lenders go through when underwriting loans it will insure.
CoverEdge adds a comprehensive credit and loan documentation analysis to the underwriting process after the loan closes to insure other lines of credit or debt risks do not emerge.
John Gaines, senior vice president of risk management for United Guaranty, said mortgage insurers do not know about fraud or risks associated with multiple lines of credit after closing until a mortgage claim is actually filed with the insurer years down the road.
United Guaranty CEO R. Eric Martinez told HousingWire before the product was created, the cycle of insuring loans allowed some underwriting risks to remain dormant or undetected until the claims were filed because there was no post-closing review.
That means problems on appraisals, multiple lines of credit and other risks did not emerge until a default claim years later. With CoverEdge, the loan closes, and United Guaranty gets 90 days to review the loan for other risks. Gaines said the review doesn't necessarily end the deal, it just allows the insurer to detect the risk early on, so it can be corrected.
"We still issue our certificate to the lender at the time of close," he said. "Through the post-closing review, we are letting the lender know (about existing risks) today as opposed to surprising them three to five years down the road. If we are able to point out a defect in the loan, the customer has many options to remedy the loan."
Martinez recognizes that the post-review process contrasts with the traditional model that many insurers are still using today.
"This is going counter-stream to what is going on in the industry," said Martinez. "We are trying to be the responsible mortgage insurer by doing a double-check."
He said a large part of the industry still relies on the reps-and-warranties model, which essentially stipulates contract or pooling-and-servicing agreements insure risk by forcing a party to repurchase misrepresented loans.
Martinez said United Guaranty wants to step away from that process and become more intensive in its post-close reviews.
As far as losing lenders who do not consent to the post-close review, Martinez suggested the goal is to establish an edge in the market by being extra careful.
"We don't want to do business with lenders who don't care about the quality of the loans they produce," he said. "Our sale is a little bit different, it is being sold to the CFO and the chief risk officer."