Down payment insurance for homeowners purchasing single family residences (SFRs) is scheduled for public release by ValueInsured in January 2016. The insurance program, called +Plus, reimburses a homeowner’s initial down payment if they later sell the home at a loss.
Homeowners may use cash to purchase the down payment insurance with a one-time premium at closing with no deductible. Premiums are calculated based on:
- the amount of the down payment; and
- the location of the home.
The down payment insurance policy only activates on the owner’s sale of the SFR when:
- at least two and not more than seven years have passed since the property was purchased;
- the owner has occupied the property for the entire duration of ownership;
- the property is sold to an arm’s length purchaser (no leasebacks);
- the sale is not a trustee’s foreclosure sale;
- the sale price for the home is lower than the original purchase price; and
- the Federal Housing Finance Agency (FHFA) Home Price Index (HPI) reflects lower statewide prices at the time of the home’s resale than at the date of purchase.
The HPI indicates the average changes in price for SFRs which have been resold or refinanced. Thus, to meet ValueInsured’s requirements, a homeowner’s loss needs to result from a drop in the average statewide market, not just the diminished value of their individual home.
Low-tier homes are far more volatile than the statewide average. Thus, it is far more likely an owner of a low-tier property will suffer a loss greater than any corresponding HPI drop over the same period. Also, most homebuyers will not even consider a resale of their home within seven years, as this is the minimum amount of time needed to recover transactional expense and allow for amortization to work its magic.
If the homeowner does sell the home at a loss, the reimbursement is calculated as the lesser of:
- the down payment;
- the seller’s lost equity in the property; or
- the purchase price multiplied by the reduction in the state’s HPI as a percentage from the time of the home’s purchase to the time of its resale.
Full down payment reimbursement is only given if the sale price and HPI both fall by at least the same percentage of the homeowner’s down payment of the purchase price. However, housing recessions are often local matters, not statewide.
Is it worth it?
The logic here seems sound, right? Even better, sellers may be willing to pay the premium to insure the buyer’s down payment if they can sell their home more quickly (and hopefully at a better price). For risk-averse homebuyers, the buyer’s agent might suggest shifting this non-recurring cost to the seller when discussing a purchase and preparing an offer.
But how much does the market have to tank before a homeowner recoups the premium paid to cover a potential loss? The more interesting question is how much value the home needs to lose on a sale before the insurance parachute kicks in.
ValueInsured’s program requires a significant drop in home prices statewide, not just locally as is often the case, for the homeowner to receive full reimbursement of their down payment. The likelihood of that in the next decade is remote – home prices since 2012 and throughout 2015 have steadily risen, though they may flatten or slip in 2017 as fixed rate mortgage (FRM) rates move upward. However, a significant statewide drop is highly improbable.
Even if home prices do decline, as they are expected to do 12-18 months after the Federal Reserve (the Fed) finally raises interest rates, they likely won’t fall enough to cause “significant” losses for homeowners who decide to sell. Home prices haven’t dropped at a 20% rate since the market crash in 2008, and they have not risen enough since then to drop 20% from present levels without a global economic meltdown (a distantly remote possibility). At most, homeowners may suffer minor losses in the resale of their homes – losses which will result in partial payouts from ValueInsured, if the HPI also dropped statewide.
Homeowners who make a larger down payment may enjoy at least minor relief from a partial refund. However, homeowners who make only minimal down payments may not find the cost of the insurance worth the purchase. A small down payment is merely the cost of a bet that home prices will rise in the future, and down payment insurance is a further bet that if lost, the down payment will be recovered.
ValueInsured expects the cost of insurance to be around $1,000, depending on the individual homeowner’s circumstances. Homeowners making down payments less than 20% need to pay the standard mortgage insurance premium (MIP) or private mortgage insurance (PMI) to cover the lender if the homeowner defaults on a high loan-to-value (LTV) mortgage and is unable to recover above the 80% mark. Unless the homeowner truly believes their home’s value will drop far enough to constitute a total reimbursement of their down payment – in which case the investment is unsound to begin with – ValueInsured coverage is just another expense on a purchase transaction.
Down payment insurance, round 2
This isn’t the first time down payment insurance has been on the table. Federal down payment insurance promised coverage for homeowners’ down payments for up to three years, after which the federal government kept the insurance premium as revenue. This federal coverage was intended to inspire consumer confidence in such a way that improved home sales volume – to no avail, as the proposed insurance coverage never reached fruition.
+Plus promises similar conditions for down payment insurance.
If the homebuyer chooses to let the lender cover the premium for the down payment insurance at closing, the lender may in turn charge the homeowner a higher interest rate on their mortgage to cover the risk of advancing more funds than the maximum loan amount. Rental properties are forsaken, and the costs of mortgage insurance on a small down payment and other transaction costs are not included in the +Plus reimbursements.
Such aspects aren’t likely to inspire much consumer confidence this time around, either. In any case, it seems ValueInsured is ready to absorb the majority of insurance premiums after refunding minimal rations to its consumers – likely a good bet on our forward-looking housing market.
Source: “ValueInsured’s +Plus program insures homebuyers’ down payments,” from Inman