Down payment insurance a potential boon to homebuilders
Down payment insurance has the potential to address a serious objection of frightened buyers in the wake of the housing bust.
Homebuilders rely on high-pressure sales tactics to close every potential buyer that walks in a model center. They have a quick answer to every possible buyer objection, and they are second only to used car salesmen for creating false urgency to close deals.
Since the housing bust, new home sales faltered, and homebuilders responded by offering incentives ranging from tricked-out interiors to interest-rate buy downs. But ever since the bust, homebuilder salespeople were unable to overcome buyer’s fears about losing their down payments in another crash, particularly since builders sell at nosebleed prices.
A new program may solve the problem of buyers fearing the loss of their down payment: down payment insurance.
I doubt these insurance policies will be widespread in resales because the up-front cost is too high, but builders who are accustomed to incentive pricing will find this cost manageable, particularly if it’s passed on as another cost of construction.
Is this good or bad? As always, the devil is in the details.
Homebuyers may soon be able to buy insurance to protect their down payments in the event they sell their home at a loss.
Much like title insurance protects the lender, this product promises to reimburse homebuyers for their full down payment should they want to sell their new home for any reason between two and seven years after they buy and end up suffering a loss on the sale.
Notice the brief window where this insurance is collectible. The two-year initial waiting period is necessary to allow wage-induced home price appreciation to lift values above the initial purchase price. If the buyer overpaid two years previously, in all likelihood prices rose enough to bail out their previous bad decision. The seven year limit is needed to relieve the insurer of the obligation to hold capital reserves on claims. Together they provide a brief window, but since most buyers only stay in a property for seven years, it may have some benefit to them.
Dallas-based ValueInsured says it will begin offering the new product, which it named +Plus, in January of next year.
“When the down payment is protected, the modern American homebuyer experiences more control, confidence and flexibility, even in a volatile real estate market,” Joseph Melendez, founder and CEO of ValueInsured, said in the announcement.
The company said it has worked with specialty insurer Houston International Insurance Group and reinsurer Everest Re in developing +Plus.
The maximum down payment that can be protected is $200,000. There is no deductible and there is no minimum.
Those are good terms favorable to most buyers.
The policyholder will be paid if the value of the house goes down and the owner ends up selling at a loss. The claimant gets less than the original down payment if either the sale price or the home value (as measured by the Home Price Index published by the Federal Housing Finance Agency) fell only modestly but the claimant gets a full refund of the down payment if the sale price and the HPI fell by at least 20 percent.
There’s the gotcha.
The FHFA home price index is far less volatile than other measures of the market. It’s entirely possible that a claimant might endure a 20% loss on their individual property while the FHFA home price index only declines 2%. This index was picked intentionally because it’s lack of volatility. The Case-Shiller would have been a better and far more accurate measure of home prices, but it would expose the insurer to greater losses, so the FHFA index was selected instead.
The premium is based on the amount of the down payment and the location of the home. For example, ValueInsured says that for the average $200,000 home with 10 percent ($20,000) down payment, the cost would be about $1,000. This cost can be paid for through a lender credit and included in the homebuyer’s mortgage payment for “less than a lunch a month,” according to Cleve Bellar, chief marketing officer for ValueInsured.
+Plus policyholders cannot file a claim during the first two years after purchasing the policy or after seven years. The product was created for people who expect to live in their home for a long time but find their plans change.
“We found that most people that stay in a home after seven years will stay for much longer and given other variable like the average tenure at a job (less than three years), many will opt to move in under seven years. We also wanted to avoid flippers that can impact premiums. For these reasons, two-to-seven years was a sweet spot that made +Plus affordable and fit the need for a majority of Americans,” Bellar said.
The home must be owner-occupied during the entire coverage period.
If the buyer must move to take a job, they must sell their home and close the deal before they move in order to qualify. Very often the timing doesn’t work out that way, and people leave their old house empty for a few months while they sell it. Apparently, that negates this insurance. It clearly forbids renting to reduce the cost burden on the owner.
Bellar said ValueInsured is currently reaching out to real estate agents, mortgage lenders and others in the homebuying process to develop its sales and distribution strategy.
For resales this product has limited appeal because only the most fearful buyers will use it. If buyers really believed house prices would go down, they would wait and pay less later. Most buyers won’t want to pay the cost, and most sellers won’t want to offer it as an incentive.
My advice to them is to focus on marketing to homebuilders. They are the ones most likely to use this product in their sales pitch, and if they can pass the cost onto the buyer without their realizing it, all the better.