Home equity protection

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Home price protection generally comes in the form of an agreement that pays the homeowner if a particular home price index declines in value over a period of time after the protection is purchased. The protection is for a new or existing homeowner that wishes to protect the value of their home from future market declines.

The protection afforded is designed to alleviate the risk of future negative real estate price movement. Home price protection is often offered by the seller as an incentive to purchase the home. Realtors, real estate brokers, mortgage brokers and title companies are all beginning to adopt the use of home price protection to facilitate the underlying home purchase. The parties to the home transaction often share in the cost of the protection but generally the home seller will use a portion of the home proceeds to pay for the protection at closing. The housing market seems to be responding and the protection is available nationwide.

Scholarly research

In 1999, Robert J. Shiller and Alan N. Weiss published an overview of the idea. Two similar programs had been tried in Illinois by municipalities: a 1978 Oak Park plan, which had never had a claim as of 1999, and a broader program covering the city of Chicago passed by voter referendum in 1987 and implemented in 1990.[1]

Another program was initiated 2002 as several scholars at Yale University[2] worked in conjunction with a program in Syracuse, NY, which was developed with the intent of increasing home ownership in neighborhoods on the verge of collapse that were marred by ever declining home prices.[3] The Syracuse non-profit program, called Home Headquarters, was sponsored by the Syracuse Neighborhood Initiative, and a homeowner could protect the value of their home for a one-time fee of 1.5% of the home's value. In many cases, a local organization would pay the fee for the homeowner if they agreed to live in the home for 3 years. Similar programs were developed in other municipalities to encourage home ownership in specific areas that were considered to be at risk of losing home value due to increased rental conversions and other factors.

On December 4, 2008 at the height of the real estate crisis Federal Reserve Chairman Ben Bernanke suggested that what the real estate market needed to recover was a hedge to restore confidence. In response to a reporters question about why the government does not provide such a guarantee he responded that the private sector was best suited to providing the solution of home price protection.[4] The protection that Mr. Bernanke called for is now available.

Current prices range from 1–3% of the home value with the national average being 1.7%.

Waiting periods are required in many of the programs to prevent the owner of the home price protection agreement from gaming the system. Some programs require lockout periods of as many as 15 years, which is generally considered too long as it is a rare case for a home to lose value over any historical 15-year period in the United States (in most cities).

The protection generally covers all sales to unrelated parties including short sales but will not cover foreclosures. Most home price protection programs also have a limit on the amount of the claim that can be made generally ranging from 10% to 20%.

Hedging

Any protection contract is essentially providing a hedge to the owner against declining home prices. The provider (protection seller) of the contract will generally have a significant reserve in place and will also hedge their risk using housing futures from the CBOE Chicago Board Options Exchange & CME Chicago Board of Trade and other real estate short strategies to help mitigate losses. Some providers utilize reinsurance from A rated carriers to provide more durable secondary risk protection.

Payouts

Losses are generally measured by a nationally recognized house price index such as Office of Federal Housing Enterprise Oversight (OFHEO), Radar Logic, First American Core Logic, or the S&P Case-Shiller index.

Differences from Insurance

Most home equity protection products are not insurance and do not require an insurable interest from the buyer of protection, however some providers offer an insurance version of the product.

Swaps

There are some similarities with swaps, particularly total return swap and credit default swaps.

See also

References

  1. ↑ Shiller RJ, Weiss AN. (1999). Home equity insurance. The Journal of Real Estate Finance and Economics. Free full-text.
  2. ↑ Lua error in package.lua at line 80: module 'strict' not found.
  3. ↑ Lua error in package.lua at line 80: module 'strict' not found.
  4. ↑ Lua error in package.lua at line 80: module 'strict' not found.
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