According to Reuters, the service will include an independent verification of borrowers' credit scores and other financial data.
"This would be a second set of eyes and ears on the loans to ensure everything is 100% correct," United Guaranty's chief executive, Eric Martinez, told Reuters.
"One of the biggest problems we have today in the mortgage community is, we don't know if a loan is good or bad until it goes to claim or goes delinquent," he said. "This is designed to stop the bad loans from entering the system in the first place."
Fannie Mae has agreed to purchase loans that have been vetted by the CoverEdge program, while Freddie Mac is reviewing the product, United Guaranty said. Their approval is key to widespread use of CoverEdge, since banks sell most of their loans to the mortgage-finance companies.
Real Estate Mortgage Network, a lender based in River Edge, New Jersey, has agreed to test the program in a pilot period through March before a national roll-out in the spring.
Banks and mortgage brokers already perform such reviews when underwriting loans, but their practices became sloppy during the mortgage-lending boom. The resulting paperwork errors, missing documents and, in some cases, alleged fraud, have created an industry-wide battle among banks, bondholders, insurers and government agencies over who should foot the bill.
U.S. banks including Bank of America Corp, JPMorgan Chase & Co, Wells Fargo & Co and Citigroup Inc have spent $35.5 billion since mid-2010 on repurchasing mortgage-backed securities (MBS) from investors who said loans breached representations and warranties in contracts, according to Inside Mortgage Finance.
United Guaranty became the biggest underwriter of new mortgage insurance last quarter. It now has a 25 percent share of the market, according to Guy Cecala, CEO and publisher of Inside Mortgage Finance.
While its performance has improved, the business still reported a $66 million pre-tax loss for the first nine months of 2011, with $3 billion in reserves for future claims.
Rescissions and denials of claim have been "a huge issue" for lenders, Cecala said, which could make CoverEdge attractive to banks. But the key challenge will be keeping prices down for borrowers, especially if United Guaranty's competitors do not adopt similar documentation services.
"I think there will be demand for it in the market," said Cecala. "But is it a game changer that will lift United Guaranty way over its competitors? No."