Equity Protection is Designed to Ease the Risk of Negative Home Price Declines
Home equity protection typically is available by an agreement that makes a payment to a homeowner if a home price index in particular goes down in value during a certain time period after purchasing the equity protection. The protection can be acquired for a brand new or existing homeowners with a desire to protect the equity in their home from a declining market in the future.
This equity protection is designed to ease the risk of negative home price declines in the future. Home equity protection is typically offered by sellers as an inducement to buy their home.
Real estate brokers, Realtors, title companies and
mortgage brokers have all began to adopt using home equity protection to smooth the progress of an underlying home acquisition. Parties involved in the home transaction typically share in the protection cost, however,
most often the seller will take a portion of their sale proceeds as payment for this protection at close of escrow. The housing industry seems to be responsive while the protection can be acquired nationwide.
The phrase first penetrate the mainstream during 2002 as several Yale University scholars worked concurrently with a Syracuse, NY program, which was work out with the intention of raising home ownership levels in neighborhoods that were on the edge of giving way which were blemished by constantly declining home prices. This non-profit program in Syracuse, named Home HeadQuarters, which was sponsored by a Syracuse Neighborhood Initiative, allowed a homeowner to protect their home's value with a one-time 1.5% fee of the value of the home. In many situations, the local organization would front this fee for the existing owner if they in turn would agree to stay in the home 3 years. Similar types of programs were created in other towns to promote home ownership in certain areas that were thought to be at a risk of declining home values because of increased conversions to rentals and other factors.
In December of 2008 at the zenith of the home crisis Ben Bernake, Federal Reserve Chairman made a suggestion that what needed in the real estate industry for it to recover was some sort of guard to restore consumer confidence. In his response to a question by a reporter about the reason the government does have such a guarantee his reply was that the private segment was better suited to provide any home price protection solutions. This protection that Mr. Bernanke discussed for is now obtainable.
Typical prices run from 1% to 3% of the value of the home while the national average is 1.7%.
Required waiting periods in a majority of the equity programs to halt any homeowner with a home price protection contract from gaming the home equity system.
A few programs call for lockout periods for as long as 15 years, and is most often considered way too long as it's rare for a house to go down in value during any 15-year historical period of time in the U. S.
The protection typically covers sales to unrelated buyers including short sales although does not cover foreclosures. Also many Home Price Protection coverage programs have a dollar limit on the claim amount that will be paid, typically ranging from 10% through 20%.
A protection contract typically offers a hedge to a homeowner against home prices declining. The contract provider will most often have a large reserve and typically hedge their risk by use of housing futures from places like the CME Chicago Board of Trade or other realty short sale tactics to help mitigate any losses. Some providers use reinsurance from carriers which are A rated to afford more durable protection for secondary risks.
Losses are typically measured using a nationally acknowledged house price index like the Office of Federal Housing Enterprise Oversight (OFHEO), S&P Case-Shiller index or First American Core Logic .
The majority of home equity protection coverage's are in no way insurance and have no insurable interest requirement from the person paying for the protection, although some providers do have an insurance adaptation of this protection.
Oct 26, 2011
Real Estate Finance