New type of insurance can protect your investment if home’s value plummets

Mark Henricks

Ohio homeowners can buy insurance to protect them against declines in the value of their homes, in what’s likely the first example of such insurance in the country. For a monthly premium of $35 to $45 on a typical Ohio home, a homeowner can obtain get a policy that will help cover the loss if home prices in their area decline and the house sells for less than the insured value.

“If it was around five years ago, people would probably never have thought to get it,” says Alan Hoffmann, an independent insurance agent in Westerville, Ohio, who has begun offering the coverage. “But they wouldn’t regret having it now.”

The policies from Home Value Protection Inc. of San Francisco let homeowners lock in current values for up to 10 years. If the owner sells the home for less than the “protected” home value and the local housing market has declined since the policy was purchased, the policy generally will pay the difference between the insured value and the sale price.

Ohio homeowners now can buy insurance to protect the value of their homes, but one expert cautions against purchasing a policy right now.

There are limitations:

• Policies will cover a maximum decline of 25 percent of the home’s insured value. The covered loss may be less than the actual loss if home values in your ZIP code have declined by a smaller percentage.

• The insured value of the home cannot exceed $500,000 without being specially underwritten. The insured value is based on the purchase price if the home was purchased within the past year. If the home was purchased more than a year ago, the insured value is an estimate of the current home value. The company uses the Case-Shiller Home Price Index to track housing market performance at the ZIP code level.

• There’s a 10 percent deductible in the first year, which the company says is used to discourage speculators flipping properties. “We underwrite primary homeowners,” says Eric Hutchinson, executive vice president of Home Value Protection. “This is not a product for investors.” Home Value Protection also applies an initial deductible that declines later on. The first year, the deductible is 10 percent. It’s 5 percent in the second year and zero after that.

• The insured value is good for 10 years. If home prices appreciate during the policy’s lifetime, a homeowner can purchase a new policy with a higher insured value. Monthly premiums typically are $20 to $25 per $100,000 of insured valued. This means that on a typical $150,000 Ohio home, the monthly premium would be about $45.

Home Value Protection says insurance premiums won’t increase by more than 5 percent a year. If they did not increase at all, the typical Ohio homeowner would pay a total of $5,400 over 10 years to insure against a possible loss of $37,500.

Marketing partners for the policies are likely to include homebuilders, real estate agents and mortgage companies. The primary markets, however, are individual buyers and owners of existing homes. Home Value Protection is selling these people reassurance that if they have to sell when the market is down, their losses will be limited, Hutchinson says.

Ohio home values are down about 18 percent from the 2006 peak, according to the company. The company cited continuing uncertainty in the housing market as a reason for homeowners to protect against further declines.

The protection doesn’t replace existing home insurance. A loss caused by fire, for instance, wouldn’t be covered.

Homebuyers who buy the coverage might be exposed to uncovered losses if they overpay for their home. “If it was worth $200,000 and they bought it for $300,000 and then sold it for $200,000, their loss is not going to go along with the decline in the index,” Hutchinson says.

Wait a minute

Robert Hunter, director of insurance at the Consumer Federation of America, a consumer advocacy group, advises homeowners to wait a few years to monitor the coverage’s track record before purchasing one of these policies. Hunter says insurers usually are overly cautious about unproven products, building in exclusions to avoid paying claims and setting premiums high to avoid excessive losses.

He points to Home Value Protection’s first-year deductible as an example. “You’re not going to get anything for the first year,” Hunter says, “and you’re paying premiums.”

Hunter also notes that the product’s arrival after widespread declines in the housing market already have occurred could make it less attractive for many homeowners. “Obviously, you could have more (market) deterioration, particularly in specific areas,” he says. “But before you go into this, you have to think about whether there’s any likelihood of further deterioration.”

For now, Hunter would not recommend buying this insurance, although his opinion may change.

“Generally with new products, you have all these issues of loopholes and overpricing,” Hunter says. “It’s not a good idea be the first one to buy. You want the bugs to be worked out.”

New product is regulated

The Home Value Protection policy differs from previous equity protection products because it is a regulated insurance product. This means, Hutchinson says, that it’s subject to regulatory requirements, including minimum capital reserves, as other insurance products are.

Hoffmann, the insurance agent, says: “We liked the fact that this was going to be regulated by the (Ohio) Department of Insurance. And we liked that it was only going to be sold by insurance agents, which means it will be more professional.”

While Home Value Protection is the first such product in the country, Hutchinson says he expects competition. His company will expand to additional states before long. Ohio was chosen to launch the insurance in part because it has a high percentage of home ownership.