Home Value Insurance May Be Too Late as Housing Nears Bottom
Kathleen Kelly, 47, might be able to sell her Visalia, California, house today if she had bought insurance against falling home prices when she purchased the place four years ago.
The policies, designed to reimburse homeowners who suffer a loss on a sale due to declining local prices, hit the market in September. That’s about five years too late for U.S. homeowners who bought at or near the peak in 2006, as prices have dropped about 31 percent since then. It doesn’t cover the fall prices have already taken.
“It’s a fear factor sale,” Kelly, a bank branch manager, said in a telephone interview. “From the insurance industry’s standpoint, now would be the best time because home prices have nowhere to go but up. But from the buyer’s point of view, I don’t think you’d use it.”
U.S. home prices are unlikely to take another big drop, which may be why companies are selling these contracts now, said Stan Humphries, chief economist for Zillow Inc., which tracks home values.
“I think they’re calculating we’re closer to the bottom than the top,” said Humphries, who expects prices to fall about 5 percent before leveling off in 2012 or later.
The insurance is designed to protect homebuyers concerned they may be forced to sell for a loss in the event of a job transfer, income loss or family change, said Scott Ryles, chief executive officer of Home Value Insurance Co.
“Most people don’t sell their house because prices have gone up or they think they’re going to go down,” he said in a telephone interview. “Most people sell their home because they need to move.”
Licensed in Ohio
Home Value Insurance was licensed in September by the Ohio Department of Insurance to sell its policies to homeowners in that state. The insurance, which costs about $20 a month per $100,000 in value, pays out only if the insured home sells for a loss and if local prices, as measured by S&P/Case-Shiller home- price indexes, have declined.
EquityLock Solutions LLC, another provider, has sold more than 250 contracts since it started offering them in May, said T.J. Agresti, chief executive officer of the Denver-based company. EquityLock contracts, which are not insurance policies, may pay if local home prices, as measured by Federal Housing Finance Agency price indexes, fall in value, even if the owner sells for a profit.
The home-value contracts could help provide a price floor by restoring buyer confidence, even in the hardest-hit markets, said Agresti.
Investment or Home?
“If enough people do that in a market like Las Vegas, then the natural side effect is market stabilization,” he said in a telephone interview.
The high cost of the premiums and the untested nature of the contracts make them a bad choice for most consumers, said Bob Hunter, director of insurance for the Consumer Federation of America, a Washington-based consumer-advocacy group.
“Is your house an investment, or is it a home?” said Hunter, a former insurance commissioner of Texas. “In the long run, the market will be all right.”
Prospective buyers should be sure they understand the contracts’ structures and exclusions, said Scott Simmonds, an insurance consultant based in Saco, Maine.
Home Value Insurance won’t pay if an insured home has declined in value due to a natural disaster, physical damage to the home, or has been sold under eminent domain or in a foreclosure, according to terms reviewed by Bloomberg News.
The policies generally last up to 10 years and have deductibles for the first two years. In the event of a claim, they’ll pay the lowest of the home’s price decline, the percentage decline of the local home-price index multiplied by the home’s value, or 25 percent of the home’s value. The company may raise the monthly premiums by as much as 5 percent each year.
EquityLock’s contracts may last for 15 years and won’t pay out during the first two years. They’ll pay a maximum of 20 percent, based on the underlying index value.
EquityLock isn’t an insurance company. It purchases insurance to cover its own financial risk through a so-called captive insurer licensed in Washington. Captive insurance companies are more loosely regulated than conventional insurance companies that sell policies to the public, Hunter said.
“It’s a much more risky situation,” Hunter said. If the company failed, contract holders wouldn’t be covered by an insurance guaranty fund. “If you have a bank account, you have the FDIC; if you have an insurance company, you have the guaranty fund; here you’ve got nothing,” he said.
EquityLock’s outside insurer is “actuarially defined, regulatory approved and supervised,” Ted Rusinoff, EquityLock’s president, said in an e-mail. “That level of oversight is exactly why all of our contract holders feel comfortable that our ability to pay a market downturn payment is secure.”
The potential U.S. market for the insurance policies is $25 billion a year, said Chi-Hua Chien, a partner at venture capital firm Kleiner Perkins Caufield & Byers, which was an early backer of Silicon Valley startups such as Google Inc. (GOOG) Home Value Insurance may claim about 1 percent of the market over the next five years, for projected revenue of about $250 million a year, Chien said.
Kleiner Perkins, other venture-capital firms and university endowments have together invested more than $10 million in Home Value Insurance, said Chien, who declined to disclose an exact amount because the company is closely held.
“Home equity represents the majority of the average American’s net worth,” Chien said in a telephone interview from his office in Menlo Park, California. “In my mind, it’s a compelling, if not mind-blowing, value proposition.”
Kelly bought her home for $479,000 with a 20 percent down payment in 2007, when she needed room for her ailing parents, husband and four children. Her parents have since died, the marriage ended in divorce and she’d like a smaller place with lower utility bills, even after Bank of America Corp. (BAC) agreed to a loan modification that cut her mortgage payments by 38 percent to $1,435 a month.
“I did all the right things and it didn’t make a difference,” she said. The home, which has two mortgages totaling $380,000, is worth about $300,000 now, Kelly said.
Products that hedge against home-value gyrations aren’t a new idea. MacroMarkets LLC in 2009 issued two exchange-traded trusts that allowed investors to bet on the direction of the Case-Shiller 10-city index. The funds liquidated in January 2010 because they never gathered more than $50 million in assets, said Terry Loebs, managing director at MacroMarkets.
Grant Davis, president of GDI Insurance in Turlock, California, said he has lined up six California homebuilders who want to offer home-equity insurance policies to prospective buyers. The trouble has been finding an insurance company to back the plan, he said.
“It has to be a highly rated company,” Davis said in a telephone interview. “That’s what we’ve been pursuing and that’s the hard part.”
Home Value Insurance is not rated by any credit analysts because the company is new and is closely held, Ryles said. The firm had to demonstrate financial strength and capital to the satisfaction of Ohio’s insurance regulators, including the ability to back all claims in the event of another plunge in real-estate values, in order to become licensed, he said. Licenses in other states are pending, according to Ryles.
As of July, the most recent month for which data is available, home values in 20 U.S. cities were down 31 percent from their July 2006 peak, according to the Case-Shiller index of repeat sales. The drops ranged from 59 percent in Las Vegas to 7.5 percent in Dallas.
In 2005, EquityLock CEO Agresti, an attorney, was suspended from practicing law by a Colorado judge for one year and one day after exercising “unauthorized dominion and control” over a client’s funds, according to court documents. Agresti “did not scheme to defraud his client,” the order said.
Agresti said an office manager he employed misappropriated about $187,000 from his law firm from 2002 to 2003, including client funds.
Consumers should be wary of new insurance products in general, since it often takes time for policies’ loopholes to become apparent and for companies to work out appropriate pricing, Hunter said.
“It’s like Texas hold ‘em,” Hunter said. “Except you don’t see any of the cards.”