The industry has moved to defend lenders’ mortgage insurance (LMI) following criticism of the product.

The ABC’s 7.30 program reported major LMI insurers QBE and Genworth have started bankruptcy proceedings against “dozens” of struggling homeowners in the past decade.

Homebuyers without a 20% deposit are required to pay for LMI, but rather than give them protection it is designed to protect the lender. It comes into effect if the homeowner cannot make repayments and sale of repossessed property does not cover the outstanding debt.

The ABC says insurers then sometimes seek recovery from dispossessed homeowners through the courts.

Consumer Action Law Centre CEO Gerard Brody told insuranceNEWS.com.au there is confusion in the community about what LMI is and how it operates.

He believes it is unfair for insurers to chase down individuals to recover losses.

“Insurers should take the risk,” he said. “It’s not fair to put that onto someone who has already lost their house. Legislation should be put in place to remove the right of insurers to go after the shortfall.”

He warns the problem will increase if there is a correction in the housing market.

However, the Insurance Council of Australia (ICA) believes LMI works well and there are other products available that protect the consumer.

“LMI provides greater access to home ownership, particularly for low-income, low-equity or higher-risk borrowers who might otherwise have difficulty obtaining a home loan,” spokesman Campbell Fuller told insuranceNEWS.com.au.

“In those rare situations where a home is sold for less than the amount still outstanding on the loan, ICA does not think it unreasonable that borrowers should be required to cover the loss, as they would with any other debt.”

QBE says LMI contributes to the stability and strength of the property market, and gives consumers access to loans even when they do not have an “adequate” deposit.

“Over the past few years we have been working with lenders and mortgage brokers to help improve borrowers’ understanding of the product,” Phil White, the CEO of QBE LMI, told insuranceNEWS.com.au.

“In 2011, following a recommendation from Treasury, we worked with the industry to develop the fact sheet that is now available on ICA’s Understand Insurance website.”

Genworth declined to comment, referring instead to ICA’s statement.