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In theory I guess it protects against the costs of dealing with defaults or having people walk away from underwater mortgages. But on the other hand, all of that stuff could be insured against.
Thats exactly what PMI (Private mortgage insurance) covers. However if the insurance company doesn't think you're a good risk, then you might not be able to get that either. I have never looked at what criteria they use to grant or deny PMI. I've also never known anyone personally denied PMI.