Liquidations Of Subprime Mortgage Insurers
When giving subprime mortgages, lenders often insure the loans with subprime mortgage insurers to protect themselves in case the borrowers default. This is exactly what happened in the initial stages of subprime mortgage crisis. The lenders started making claims. |
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Initially when the number of claims was low, subprime mortgage insurers were fulfilling those claims. However, as the number of claims increased, the insurers realized that they did not have sufficient funds kept aside to meet their financial obligations. In addition, many subprime mortgage insurers were also responsible for insuring mortgage backed securities. So, when the subprime crisis started, they started receiving claims even for these. As a result many liquidations of subprime mortgage insurers took place. Some of the biggest names in subprime mortgage insurance ended up filing for bankruptcy.
Some insurers also denied their clients coverage when borrowers started defaulting. They alleged that the lenders' loan application was faulty because the property appraisals were not done properly, the borrowers had falsely stated their income and liabilities, and the loan applications were incomplete. However, when cases like this happened, the lenders have taken the matter to court and often recovery was judged. Therefore, this also hit many subprime mortgage insurers negatively where they had to shell out money.
Insurers resorted to canceling payments on some loans they had underwritten because they were suffering from losses not just due to default in paying back the mortgage, but also because they had kept aside funds amounting to billions of dollars for future defaults. This meant that they did not have sufficient capital flow to take care of current business matters. With claims being made and not having sufficient funds for operational costs, many subprime mortgage insurers filed for bankruptcy and started the liquidation process.
As of now, the mortgage insurance industry is still reeling under the shock of the number of liquidations of subprime mortgage insurers, and it will be some time before this industry can get back on its feet.
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