Mortgage underwriter United Guaranty Corp, a subsidiary of AIG (NYSE:AIG), plans to launch a new product next month that will independently review and store loan paperwork for a fee. The product, CoverEdge, aims to prevent improper loans from being made in the first place. United Guaranty has also signed a pilot agreement with Real Estate Mortgage Network, (REMN), a national mortgage lender headquartered in River Edge, New Jersey, to incorporate CoverEdge into its operations.  AIG is one of the largest insurance companies in the U.S. along with MetLife (NYSE:MET), Hartford Financial (NYSE:HIG), and Prudential Financial (NYSE:PRU).
According to United Guaranty’s CEO, one of the biggest issues that mortgage underwriters face is that it can be difficult to tell if a loan is improper or missing documentation until it is already delinquent.
During the housing bubble, many reviews carried out by banks and mortgage brokers while originating loans were careless, resulting in missing documents errors and even alleged fraud. As a result there has been an ongoing argument regarding who should be responsible for the losses. Banks such as Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C) have had to repurchase more than $30 billion of mortgage-backed securities from investors who claimed that contracts were breached and portfolio quality was misrepresented. 
United Guaranty’s CoverEdge aims to solve this problem by independently reviewing the loan documentation, with items such as credit scores and borrower income getting increased scrutiny. The company will also keep the documents on file in case issues do come up in the future.  Fannie Mae has approved the program and Freddie Mac is currently reviewing it. This could spark widespread use of the product, which could result in a substantial growth opportunity for AIG.
We have a $20 price estimate for AIG’s stock, about 15% below the current market price.Notes:
- United Guaranty and REMN Announce Pilot Agreement for New CoverEdgeSM Product, Press Release, AIG, Jan 3, 2012 [↩]
- AIG’s UGC business to launch loan-document product, Reuters, Dec 30, 2012 [↩] [↩]