Home Equity Protection Plans, Explained


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.”

Another example from Lighthouse: “Jim purchased a $200,000 house in Atlanta in January 2007, but did not want to worry about the home losing value, especially if his company transferred him to New York within the next 12 months, which was a strong possibility. He purchased home equity protection for about $152 per month, and sure enough, was transferred to New York City exactly 12 months later. His house had dropped in value by about 5%, or $10,000, and the housing market was extremely weak. Jim received a check for $10,000.”

Not a bad deal and “Jim” wouldn’t even be locked in to his contract.
That’s because homeowners can cancel their contracts at any time, a plus if housing prices finally start going back up again. Companies that provide home equity protection plans often offer lower rates in periods where housing prices have stabilized or risen in value. You don’t even need to own a home to get home equity protection – a scenario that could draw speculators into the market, betting on home declines in high-risk areas like Las Vegas or Florida.

Homeowner protection plans have their appeal – especially if you think home prices will continue to decline (already prices have fallen, on average, by 32.2%, according to the S&P/Case-Schiller U.S. National Home Price Index.).



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