Insurance for Falling Home Prices
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The myth that homes values always increase was thoroughly debunked over the past few years as the real estate boom went bust and we fell into recession.
This “new risk” has led to opportunity for one company. Enter Home Value Insurance Co.
HVIC, now officially an insurance company, has developed a product that seeks to insure homeowners against the seemingly never-ending drop in real estate values nationwide.
Who is Home Value Insurance Co.?
And where was this company in 2008…when we needed them most? Answer: They didn’t exist.
For the record, they originally launched their product in 2009. Actually, if this product were being sold in 2008, they’d likely be out of business by now after suffering huge losses!
Home Value Insurance Co. is a California based company, with offices in Ohio, the first state to approve their product, and Austin, TX, where their marketing headquarters is located.
They expect to receive state approval in an additional 15-20 states and roll out the product by the end of 2012.
Back when they first opened their doors, they weren’t offering the same product. It wasn’t actually an “insurance” product, but rather a “financial guarantee” product.
An “insurance” product is heavily REGULATED and GUARANTEED by each State Department of Insurance in every state the product is sold. “Financial guarantee,” or “value warranty” products, are not regulated and/or guaranteed.
It may help to remember the NON-REGULATED mortgage products that led to the subsequent real estate boom and bust.
Notice that the insurance industry has remained financially stable throughout the Great Recession. No government agency was keeping an eye on those products and we know how that turned out!
Well, AIG lost money on its “lending” arm through credit default swaps. The unit requested to pay off some of its debt by using “insurance money” and was told “no” due to regulations.
How Does Home Value Insurance Work?
The product is designed to indemnify a homeowner who loses money as a result of selling their home for a lower price than what the home is appraised at when the policy is issued.
Simply put, if you buy a home and insure it with this product, then sell it for a loss, you are financially reimbursed according to the details of the policy.
Here are the basics of the Home Value Insurance Company program:
• The home must be an owner-occupied, primary residence
• New purchases or currently owned homes are acceptable
• Homes purchased within 12 months of the policy effective date are valued at the home’s purchase price
• Foreclosures and short sales are not acceptable – and may not be necessary with this type of product!
• The home’s “present” value is calculated electronically through an automatic evaluation model at the time the policy is being issued
• Maximum home values of $500,000 are acceptable (higher value homes must be evaluated by the insurer)
• You are locked into the “present” home value for 10 years
• You are covered up to a maximum decline of 25% of your home’s “present” value
• A deductible applies if the home is sold within the first two years of the policy being issued
Let’s see an example:
John Q. Public buys a home for $200,000 on January 1, 2011. John loses his job and must relocate to a different state three years later. The real estate market dips in John’s zip code and he must sell his home for $180,000 (a $20,000 loss in value).
If John had purchased a Home Value Insurance policy, the insurer would pay out the $20,000 loss.
Sounds like a great deal, but it’s not for everyone and there are some things to consider before purchasing this type of policy.
Well, maybe. The pay out on any insurance claim is based on either the sale price of the home or the Case Shiller Index…whichever is higher.
This means that if your particular home decreased in value, but your entire neighborhood stayed put or increased in value, you would get the lesser of the two differences in value.
For example, if you had a “fire-sale” and sold your home at a rock bottom price simply to “move” it quicker, you may not recoup your entire loss…assuming your entire neighborhood didn’t actually drop that much in value.
Using the same example above; your $20,000 loss (a 10% “loss”) may only yield a $10,000 claim pay out if it was determined that the neighborhood, in general, only lost 5% in value at the time the home was sold.
This is not a hazard insurance policy. In other words, it doesn’t cover you against anything a normal homeowner’s insurance policy would. It is solely designed to protect you against a loss in home value as a result of falling prices…not a fire or hail storm.
Additionally, many believe the worst of the home price declines are behind us, so this type of product may not be as worthwhile as it once could have been.
We at TTAI always recommend doing your research, asking a lot of questions before a purchase and reading the entire policy language. This sort of due diligence will protect your wallet.
This type of policy is no different. In fact, since it is a new product, you will likely not have any previous experience or knowledge to draw upon when evaluating the coverage.
Therefore, you need to ask MORE questions.