Private mortgage insurers have been hit hard by the skyrocketing number of foreclosures over the past two years, but the market was spared the worst of the subprime crisis because many lenders concocted gimmicky loan deals to circumvent mandates to buy coverage, experts in the field say.

“The mortgage insurance industry is doing exactly what it was intended to do,” according to Rick Gillespie, senior vice president of corporate communications at mortgage insurer Radian.

“Obviously, the companies that comprise the mortgage insurance industry are experiencing the same housing and credit challenges as everyone,” he said, noting there have been about $15 billion in claims over the last couple of years. “But the claims have been paid. Each company is dealing with it a little bit differently from a capitalization and liquidity standpoint.”

Mr. Gillespie noted that government-sponsored enterprise chartered firms–including the Federal National Mortgage Association (better known as Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac)–mandate that mortgage insurance be purchased on loans where the down payment is less than 20 percent.

Currently, mortgage insurance is used on about 20 percent of all loans originated, according to Mr. Gillespie, who said it pays costs associated with defaulted loans, including interest charges during the delinquency period, home maintenance and legal fees.

Jeffrey Lubar, a representative for the Mortgage Insurance Companies of America trade association, explained that mortgage insurance covers a portion of a loan amount–typically 20-to-40 percent, depending on what an underwriter requires.

However, both Mr. Gillespie and Mr. Lubar noted that many of the subprime loans coming back to haunt lenders today were designed to avoid mandates to buy private mortgage insurance in cases where the borrower could not afford a 20 percent down payment. These include “piggyback” loans, or 80-10-10 loans, where borrowers pay 10 percent down and get a loan for 80 percent of the total price of the home. They then get a second loan for the remaining 10 percent.

“They were primarily intended as a workaround to mortgage insurance, and it didn't work out all that well,” said Mr. Gillespie, who noted that such loans are not really being written anymore.

“The short answer is that most of the loans that had trouble were not insured loans,” Mr. Lubar said. “They were part of those 'piggyback' structures that people used to circumvent mortgage insurance.”

However, Mr. Gillespie added that “obviously the mortgage insurance companies have paid increased claims over the past couple of years, but those [piggyback loans] are claims that haven't hit the rest of the industry.”

For the insured loans, Mr. Lubar said, “claims continue to be paid as they come due when there are foreclosures.”

The current environment has led to some tighter terms for mortgage insurers and a hardening of the market. Mr. Gillespie said that 95 percent of new loans written by Radian are prime, with a small amount considered subprime. That was not the case at Radian, or elsewhere in the industry, two years ago, he noted.

He added that Radian has adequate claims-paying capacity and has also recently announced a capital plan where the company has shifted funds from its financial guaranty business to its mortgage insurance business. The company has been able to transfer nearly $1 billion in statutory surplus and a total of $3 billion in claims-paying resources, he noted.

“When all is said and done, the pro forma risk-to-capital ratio for Radian Guaranty, the mortgage insurance company, is 10.3 to 1–which is very attractive,” said Mr. Gillespie.

The company, he added, is looking at alternatives to make sure it not only can pay claims but continue to write new business as well.