Ready to gamble that your home value will tumble more?
Filed under: Insurance, Real Estate
Queasy-stomached home owners who can't bear to watch the equity in their homes continue to dwindle have an option: Equity protection policies. These policies, will, for a fee that generally ranges from 1% to 3% of your home's equity, guarantee against further losses when it comes time to sell. Most of the policies work like this: At the time the contract is purchased, the company takes a snapshot of the average home price in the customer's ZIP code. If, at the time of sale the ZIP Code property value has declined, the company would make up the difference -- in most cases, less a 10% "deductible."
Each of the three companies that offer the policies have different rules and exclusions, so it is wise to compare.
The equity protection agreement isn't considered an insurance product and is not covered by insurance regulations in most states. In fact, the policies are more closely likened to a put option, which protects a stockholder against the price of the stock dropping -- meaning you are betting that a stock, or in this case, your home price, will drop.
The third equity protection product just hit the market, offered by Working Equity Inc., a San Francisco-based company. It works like this, according to Finance Magazine: "Homeowners who purchase Equity Protection will receive a payment if their local housing market index declines when they sell their home. ... Working Equity uses independent data to determine the local housing index at the zip code level. After a fixed waiting period expires, if the homeowner sells their home and the local housing index has declined, Working Equity will pay the homeowner an Equity Protection payment equal to their home value multiplied by the percentage decline in their local housing index."
Here's my question: Since insurance companies prey on our fears and calculate the odds that our fears are unfounded, here is a program that is preying on the fears of home owners that the housing market's precipitous fall isn't over. So wouldn't common wisdom say if this is a smart business, the writers of these policies must think the market bottomed out and they stand to make money? I'm just saying ....
Reader Comments (Page 1 of 1)
11-18-2009 @ 8:06AM
Evets said...
To your final question: It is probably less about believing that the market has bottomed out and more about coming up with a way to sell the fearful a product and hopefully (for the companies that write these policies) enjoy a huge injection of cash. After all, where it's true that there are national trends, just as with unemployment figures, the strength or weakness of housing markets is subject to regional factors often neighborhood to neighborhood in some markets.
Even seeing the writers' offerings as an optimistic view that we have bottomed out can only do so much to affect the market. Jobs and peoples' ability to stay employed, stay in their homes or lose them plays a bigger role. What the writers of these policies are actually banking on is that the market has bottomed out enough to where they can stay within a certain percentage of loss they have to pay out, and the life blood of any insurance: that they sell enough to a diverse enough group that for every payout now there are "X" number that are fine and the company continues to collect premiums; more buying in than the company has to pay out.
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11-18-2009 @ 9:11AM
jim said...
It's a sure bet, with the CROOKS who got us in this MESS now running the country!! The LIB DEMS, especially ole dodd the countrywide prostitute, barney the hag who was making his boy friend at fannie mae rich by giving mortgages to those who had NO way of ever paying them back, along with barry the Socialist Imposter and all of their LIB DEM CRONIES!! Only half of the foreclosures have even hit the market so far, to get the LIB DEM SOCIALISTS TOTAL GOVERNMENT CONTROL health care bill through!! IMPEACH NOW, before he and his LIB DEM CRONIES do any more damage to the country!!!
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11-18-2009 @ 12:09PM
charles said...
If thats the case how come property taxes haven't gone down?
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