Dennis Norman
I can remember a time, not that long ago, where about the last thing people were concerned about was the value of their home going down. After all, for decades, our homes proved to be safe investments….no, we weren’t going to see their values shoot up 50 percent in one month like some hot tech stocks of the past, but nor were we going to see them drop by the same amount in a month. Nationally home values increased about 5 percent a year, year after year. That was until around the end of 2007 when we all learned just how volatile home prices can be.
Today, even with prices severely discounted from their peak a few years ago, buyers are still cautious about buying a home for fear that the drop in prices we have witnessed isn’t over.
If this is you, then I have the answer. Well, at least an option. The other day I ran across a company, appropriately named “Equity Protection” that offers homeowners protection, I guess “insurance” if you will, against your home going down in value.
According to the company’s website equity protection is available for a home you presently own or a home you are buying. In order to obtain an estimate of the cost of this coverage I completed the form on the website for a $400,000 home in the St. Louis, MO area, being purchased in December 2009 and came up with a cost for coverage for $166.67/month or a flat $4,000.00 for lifetime coverage. At first blush, paying 1% of the purchase price to insure against a lost on my investment seems pretty attractive.
Naturally I had questions so I emailed the company with questions. I received a response from Mitch Stevens, the Head of Sales and Business Development for Equity Protection. My questions as well as his answers are below.
Me: Mitch, who stands behind the equity protection so that homeowners (particularly those paying a lump sum up front) will know that there is going to be someone there to compensate several years down the road if values decline?
<span style=”color: #000000;”>Mitch: Working Equity, Inc. is the company behind the product. On our website on the Frequently Asked Questions tab, we do provide a specific answer to this question. We stand behind the product and set aside a substantial reserve for every product sold. These reserves are managed by BofA/Merrill Lynch and are invested in conservative instruments in order to ensure that the funds are available when needed for Equity Protection Payments. We maintain sufficient reserves to satisfy 100% of expected future Equity Protection Payments. We use a rigorous methodology to determine our reserving requirements accounting for expected housing price trends, mobility, geography, and overall company exposure in each of our operating markets. Reinsurance provides an additional backstop.</span>
Me: How long has your company been in business and how long has it been offering this equity protection service? Does your company offer any other services?
<span style=”color: #000000;”>Mitch: We are a new company, just coming to market now. Equity Protection is our flagship product and our immediate focus.</span>
Me: Can you please give me some stats on this service, such as; the number of subscribers, how many people have collected a payout, etc?
<span style=”color: #000000;”>Mitch: We consider this information confidential and proprietary and as such, don’t provide these details</span>
Me: In reviewing the site I followed the process for the most part but want to make sure I understand it correctly. If someone purchased a house a year ago for, say $450,000 and you are presently showing a value of $425,000 and they purchase your equity protection today, I understand there is a 24 month waiting period but if, 24 months from today, they sell their home for $420,000 is that considered a $5,000 loss or a $30,000 loss? In other words is the “base value” based upon original purchase price or value at time of equity protection purchase?
<span style=”color: #000000;”>Mitch: Our product is tied to the local market index for the homeowner’s zip code. When an existing homeowner enrolls in Equity Protection, we calculate their enrollment value by taking their original purchase price and purchase date and roll that forward to today’s date using our index data. That process establishes the enrollment value. So in your example, that would be the $425,000. At the enrollment point, we also tie the enrolled amount to the local zip code index. To keep the math simple, let’s say that index value is 100 in this example. If the consumer sells his home after the waiting period and the local market index has declined, then we pay him an Equity Protection Payment that is calculated by taking the enrolled value times the percentage drop in the index. So, to complete your example, if two years have passed and the consumer sold his home and the index for that homeowner’s location declined 10% to 90, then we would owe this homeowner $42,500 for this example. The actual sales price the consumer receives for his home is not part of the calculation- if he sells for a gain, he would get to keep that in addition to any Equity Protection payment if the index went down, and if he sells for a loss, then hopefully the Equity Protection Payment is covering all or a good portion of that loss. Our home price index data is provided by First American Core Logic.</span>
Me: If someone opts for the monthly coverage is there any sort of guarantee that they will be offered that coverage for as long as they pay? Are the monthly payments fixed or subject to change?
<span style=”color: #000000;”>Mitch: Monthly payments are fixed. As long as the customer is paying, he is covered. The waiting period still applies. </span>
Me: I assume you have some protections built in to assure that when a seller does sell that they make a good faith effort and aren’t say, selling it cheap to a relative, just to generate a loss and collect?
<span style=”color: #000000;”>Mitch: Yes, you are correct. The sale needs to be an arms’ length transaction. </span>
So there you have it. Remember, I have no personal experience with this company, and it is a new company, but I find the service they offer interesting and I do feel comfortable with the answers to to questions that Mitch gave. However, I would suggest that you do your own research and due diligence prior to moving forward with this company or any other company offering you equity protection.
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