It's no fun watching your home's value fall by 30% or more, especially with prices still falling.
But a growing number of companies like EquityLock Financial and The Lighthouse Group are selling insurance plans promising a hedge against a decline in the value of your home.
So how do home equity protection plans work?
Essentially, such plans are contracts that remunerate the insurance holder if a given national housing price index (usually the Office of Federal Housing Enterprise Oversight’s housing index)) falls in value.
The home equity protection plan started back in 2002 with a Syracuse, N.Y. non-profit initiative to hike home ownership levels in the community. The Syracuse Neighborhood Initiative, through its Home Headquarters program, allowed homeowners to pony up a one-time fee of 1.5% of the home’s value to buy “protection insurance” against their house losing value. The program didn’t actually link with insurance companies – the U.S. Department of Housing & Urban Development and Freddie Mac seeded its money. In most cases, homeowners who took the SNI up on its offer could not collect, via a “lockout” period of one-to-three three years (meaning the homeowner cannot make a claim within the lockout time period).Here’s an example of such plans work (from The Lighthouse Group, a New York-City-based home equity protection insurance provider). “Jane purchases a house for $150,000 in Denver, Colo. in February 2007. The housing market had just begun to show signs of strain, so Jane demanded that the seller of the house provide a home equity protection contract to protect her largest investment (which cost the seller just 1.1% of the home's value, $1,651). By February 2008, the housing market was crumbling across the nation and in Denver prices were off 5.8% -- Jane's house was now worth just $141,300, an $8,700 loss in just one year! However, because of her Home Equity Protection, Jane received a payment for $8,700 to make her whole.”