Irvine Housing Blog

You are accurate that it is a completely objective protection against getting caught in downward market trends. It is because of this that the premium is offered within reason; as a subjective or indvidualy policied home would be to susceptable to personal responsability of the homeowner. i.e. homeowner loves the color purple, paints the home purple now the home is worth less.

What is most important is that there is an option for a homeowner to not lose their hard earned equity due to market conditions deteriorating around them.

With an average one time premium of 1.5% (.75% in some markets) of the homes value and protection for 10-15 years…you couldnt ask for better security and peace of mind. Homeowners issurance cost this amount every year for a fire you have a likeliness of 1 and 500,000 to have.

I am a homeowner as well as a company representative and proudly bring this product to market as an antidote for homeowners to protect themselves and their financial future against messes like the current housing economy represents.

I think your strong opinion greatly over-shadows mav?s.  Is the average 1.5% fee EquityLock collects in the form of a lien on the property or paid out of pocket at closing?  How does one cancel EquityLock?s services, or lien if one exists?  Does EquityLock become a defacto co-owner with the real owner?  Does EquityLock place conditions on the sale of a property that the real owner must adhere to?

Here?s another strong opinion; there is no such thing as altruism in the real world of housing.  This ?product? is only going to be available if this company can profit from it, most probably paid by the homeowners but conceivably another government bailout recipient as mav pointed out.  There are enough people with their hands in the homeowner?s pocket as it is.  But hey, there is a buyer out there for just about everything.

Of course another solution to the issue of catastrophic home losses would be for the government to get out of the housing manipulation business and impose responsible lending practices which would lead to responsible housing market valuations and negate the market for yet another unnecessary tier of home ownership overhead.  I think I will wait for housing to correct on basic fundamentals, you needent wait to see my homeowner application coming though anytime soon either.

I am sure this subject will be in the mainstream news before long?

I’m not angry I just understand the business model, maybe better than you.  People who purchase this type of product will look at it as an option, and will look to cash out that option in the event that home prices fall further than your model predicts.  In that event your company will be bankrupt and will not be able to pay out the benefit.

David,

That business model might work if House Price declines were similar to a fire.  A fire is a random and typically one time event.  Just because a house in your city burns down doesn’t mean your house will burn down.  The problem is that house prices in a region will move down in unison.  One house in a neighborhood does not decrease in price, the entire neighborhood does.  You can take it to the extreme scenario (the one we are currently witnessing) where home prices decline nationally.

The other humorous thing here, is that your customers are in essence betting on your bankruptcy.  They are betting that the future value of 1.5% is less than the potential equity loss.  You are self selecting customers who think there is a high probability that the option will be worth more than the 1.5%.  This isn’t even a take the money and pray business model…. it’s a take the money and run business model….  for reference please see the one quadrillion dollar credit default swap market…. I’m sure someone at AIG can clue you in…

IR, if this company is legit and really wants to be able to pay out the option value of the benefit they will need to be very savvy investing the 1.5%.  The good news is there are plenty of sophisticated hedge fund managers, pension fund managers, and investment bankers recently made available to help them with their investment strategy…. it better be a good one!

I am guessing that the insurance company is expecting to hedge their risk with Case Shiller futures in the short term.  Unfortunately, the longest exercise dates are not 10-15 years into the future.

There is a place for this kind of insurance.  Since the banks already have a high chance of getting stuck with the house is there is a large price decline that lasts, they should be the ones selling this insurance.  For example, for anyone with at least 20% down, the bank could charge a moderate premium where the insurance will cover any losses greater than 20%.  They would either have to watch a CS-type index for the area (giving the borrower a basis risk), or have to administer individual losses.  The thing is, they already would have to administer most of those losses anyhow, in a short sale or foreclosure situation.  They just would have gotten more money for doing so. 

I am not opposed to this sort of thing from banks.  In practice, they might find themselves undercharging in rising markets.  The same beliefs about prices going up forever might infect the pricing of gap insurance for homes.  Most causes of large financial loss to individuals are insurable, and covering market drops in home prices is a big risk.  Of course, nothing prevents the same kinds of problems that happen with homeowners’, auto or workers comp insurance: carrier insolvency, fine print exclusions, predatory pricing, unfair claims handling, and especially for home price coverage redlining.  I have no idea what the right premium for home price guarantees for Detroit should be.  However, I’m sure the number is huge. 

Home price insurance also will have some hazards not seen with other insurance.  If we back up to just before the insurance under discussion was offered, selling for less than you owed triggered credit problems.  With insurance, it won’t.  That means the homeowner has more of a pure option to sell when things are at their absolute worst.  Why would they want to do that?  They could sell the home they bought for $500k at $300k and purchase the one across the street for $300k.  Unlike doing that in 2008, there would be no credit implications.

I tried to price the value of a hit to one’s FICO score a few months ago.  I was surprised at the massive spread in what it was worth depending on: the person’s current credit rating; how much outstanding credit they had with universal default provisions; whether they intended to buy a house soon; and especially whether their career demanded a good credit rating.  I concluded that for some people a good credit rating was worth about $120k more than a pretty bad one.  However, with planning, someone could buy a car, get credit cards without universal default provisions, make any job move they were considering, and then default.  If they paid close attention, they could have a decent credit rating again soon. 

The people whose credit rating didn’t matter much to them, especially those who already had bad credit, would just give the house back.

I have been thinking about how an insurance company could hedge this bet, and the only thing I can think of is buying a long-term option on a future’s contract. If you bought a 5 or 10 year option on a put, you could insulate yourself against a loss. As long as you are charging the customer more than the cost of this option, you could make money.

Of course, the entire business model relies on customers not being able to or savvy enough to seek out and buy these options themselves.

Thats all right - we were all too stupid to understand credit default swaps. Luckily the masters of the universe told us it all made sense if you could see the fine print and use your magic decoder ring. You did use a lot of really long words though and I hope that bullshit dispersion… err make that flatulent ruminant end product dispersion works out for you. Also thank you for pointing out that but for Irvine Renters communist rantings that nice bubble would still be going strong and we could all refinance our Helocs. So sad to see a giant economy humbled by a single voice in the wilderness.

And you just told us everything we need to know about you and your product.

Good day,

I saw that one too. He is either very lucky or totally brilliant. He might be both.

Outsider—I saw that ad this morning by Wells Fargo.  We agree on the ad’s content.  I was infuriated enough by it to go to Wells Fargo’s site in order to send to email them about this further waste of tax-payer dollars.  I am not a Wells Fargo customer so I was unable to do so.  If anyone knows a contact point at Wells Fargo to send a comment to, I’d love to have it.

The content of my email would be something along the lines that I would have a hard time considering a change to Wells Fargo when they pay for such self-serving ads, etc.

-sorry about the typo/editing error- it should read “... in order to email them…”