Real Estate

Down payment insurance seeks to ease housing bubble fears

Home prices are heating up this spring, and buyers are skittish, still fearful that prices could cool just as easily.

After the worst housing crisis in history, can you blame them? That concern is precisely what one company is betting on. Dallas-based ValueInsured is offering a first-of-its kind product. Called +Plus, it's a down payment protection plan — insurance for your home equity.

"Our product gives today's homebuyers control, gives them flexibility in how they consume the real estate they want to own," said Joseph Melendez, CEO of ValueInsured.

"Do you want someone's life savings to be at risk if they have to move through no fault of their own?"

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This is not mortgage insurance, which protects lenders. This is insurance on the skin you put in the housing game.

Here's how it works: Say you put 10 percent down on a $200,000 home. Your down payment is $20,000. You pay ValueInsured a one-time premium of about $1,200. You are now insured for seven years. Three years in, your job transfers you, and you have to sell, but the value of your home has dropped. ValueInsured pays you the amount of home equity lost, up to the full $20,000 down payment.

The product, +Plus, allows you to insure up to 20 percent of your home's value at the time of purchase to a maximum insured amount of $200,000. That could be 10 percent on a $2 million home. The term is seven years, and the home must be owner-occupied, so no rental properties. The premium varies depending on the amount insured and on the state of residence.

Now comes the catch: Even if you sell your home at a loss, you might not be able to recoup all of your lost equity, or even any of it. That's because ValueInsured measures your home value according to a government index, and the index measures by state, not by house.

When a claim is submitted, ValueInsured will pay an amount equal to the lesser of the actual loss in sales price, loss in the state home price index as measured by the Federal Housing Finance Agency or the insured down payment. Home prices vary not just by state, but street to street. If your neighborhood's values drop more than the state's measured home price value, you would get less money back.

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Despite that, Melendez said he believes the insurance will sell.

"People are telling us that if they have access to this product, they're more likely to buy a home," he said.

The product is backed by Everest Re Group, a property and casualty reinsurance and insurance company, and the policies are issued by Houston International Insurance Group, a specialty insurer. The first +Plus insurance will be offered by Amalgamated bank, which is based in New York, but ValueInsured plans to roll it out with other lenders in coming months.

Working people shouldn't have to worry about losing the financial control and flexibility that comes with renting when they make the decision to buy.
Keith Mestrich
CEO, Amalgamated Bank

"Working people shouldn't have to worry about losing the financial control and flexibility that comes with renting when they make the decision to buy," said Keith Mestrich, president and CEO of Amalgamated Bank. "If they need to sell their home, they may be able to do that even if their local housing values are lower than when they purchased."

It was just over six years ago, in December 2009, that the underwater crisis peaked. Twenty-six percent of homes with a mortgage, 12 million, were in a negative equity position, according to CoreLogic. Millions of those homes went into foreclosure, but some homeowners chose to stick it out — keep paying the mortgage and live in the home. Today, about 4 million properties are still underwater, and millions more borrowers don't have enough equity to afford the costs involved with selling and moving.

These numbers make a strong case for the insurance, but these numbers are also historically rare. Home values, in general, rise over time. Problems in local economies can spark a downturn in prices, but this century saw the first national drop in prices.

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"If you're in an area that has historically volatile home prices, maybe it's a good idea, but remember, for 75 years we went through a housing market where most people did fine," said Barry Zigas, a private consultant and director of housing at the Consumer Federation of America.

The vast majority of borrowers today are paying principal on their loans, adding monthly to their home's equity. If borrowers want to protect themselves further, they could just pay down their mortgages more.

"You can be your own insurer," Zigas said.

CORRECTION: Barry Zigas is currently the director of housing at the Consumer Federation of America.