Don't Fear The Pink Slip 'Payment Protection Plans' Target Job-Loss Worries Payment protection plans that promise to cover homebuyers' mortgage payments for a time if they lose their jobs are becoming an increasingly popular marketing tool for mortgage lenders, homebuilders and Realtors. But consumer advocates question the value of such "single event" insurance policies, and warn that a payment protection plan shouldn't be the deciding factor in whether or not to move forward with a home purchase. Some correspondent lenders were offering the payment protection plans even before unemployment surged. Now major builders and some Realtors are getting in on the act, too. The California Association of Realtors announced on April 2 that it would apply $1 million its members had donated to a charitable fund earmarked for affordable housing, and use it instead to buy unemployment insurance policies for about 3,000 first-time homebuyers. The Association will prepay the insurance policies for one year. For about $330 per homebuyer, the policies CAR is buying will provide monthly payments of up to $1,500 for as long as six months in the event that homebuyers lose their jobs. A Pittsburgh, Pa.-based real estate broker, Howard Hanna, on March 27 announced it was offering homebuyers who agree to use the company's affiliated lender, Howard Hanna Mortgage Services, the same policy -also at no charge, the company says. "I think there's going to be a mad rush to these," said Mark Steele, president of Howard Hanna Mortgage. "It's one of these things that just gives extra comfort to people making an offer on a property today." In Florida, real estate broker Keller Williams South Florida Region is offering sellers, lenders and agents the ability to purchase a package of homeowner education and loan protections that includes insurance against a layoff for homebuyers. Keller Williams South Florida's "SAFE HOME" program is a "private label" version of the Homeowner Education
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and Loan Protection (HELP) program offered by a nonprofit, the Rainy Day Foundation. The HELP and the SAFE HOME programs provide payments of either $1,800 or $2,500 a month for a maximum of six months, depending on the level of coverage desired. The programs also offer optional homebuyer counseling, and access to a "Rainy Day" emergency fund to help cover unexpected financial emergencies. For now, the HELP and SAFE HOME programs are available only in conjunction with FHA, VA and USDA loan guarantee programs. But the Rainy Day Foundation says it's enrolled about 10,000 homebuyers in the HELP program, mostly through mortgage lenders and homebuilders. "Last month, we (enrolled) just over 1,300 (borrowers), and this month we'll be up close to 2,000," said Todd Ludlow, a senior vice president wih the Rainy Day Foundation. In the past, Ludlow said, the Rainy Day Foundation's main clients were correspondent lenders -- originators who provide short-term funding and sell the mortgages they originate to other lenders. In marketing the HELP program to lenders, the Rainy Day Foundation promises it can help them reduce early payment defaults and manage their Neighborhood Watch statistics -- the early warning system employed by the Department of Housing and Urban Development to track problem lenders. In recent weeks, the Rainy Day Foundation has been enrolling builders and real estate companies on a daily basis, Ludlow said, "writing new contracts and developing new relationships with organization around the country." In its marketing pitch to builders, the Rainy Day Foundation calls the program a "unique marketing opportunity" that "increases home sales." The "perceived value of HELP services to homebuyer far exceeds actual cost" -- about $550 on average, the company says. Lennar Corp. is one builder that's offering a version of the Rainy Day
Foundation's HELP program, with coverage up to $2,500 a month offered in Las Vegas, Austin, Texas and California markets like Orange County, San Diego, and the San Francisco Bay Area. Toll Brothers Inc. and The Ryland Group Inc. are among other major builders offering payment protection plans. Even mortgage insurer Genworth Financial -- which, like most private mortgage insurers, mostly sells policies that protect lenders, not borrowers -- is providing borrowers with some protection against unemployment. Genworth spokesman Terry Souers said the company has been purchasing coverage that provides six months of payments of up to $2,000 when offered by participating lenders "at no cost to the insured." "If that helps them stay in their homes, we're happy. Clearly it's great when we don't have to pay a claim," Souers said. He said Genworth has seen steadily increasing lender interest in the product, with twice as many of the loans the company insures having job-loss coverage this year than last year. Like similar programs offered by automakers and credit-card companies, mortgage payment protection programs are intended to address consumers' fears about taking on debt at a time when the economy is in a tailspin and unemployment is spiking. Interest rates are near historic lows, and home prices in many markets have returned to more affordable levels. But it's difficult for some consumers to commit to a major purchase with the threat of unemployment hanging over their heads. "There hasn't been a better time in the last 50 years to purchase a home, based on interest rates and affordability," Ludlow said. "Builders who participate in this program are going to bring buyers into their subdivision that would otherwise be sitting at home watching TV, thinking it's too risky to buy a house or they can't afford to buy a house. If they've got a job, we need to get buyers off of their couches to
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purchase a home." Ludlow, who also owns a Boise, Idaho-based mortgage brokerage firm, Capital Mortgage, believes would-be homebuyers who stay on the fence may someday regret it, because government stimulus spending and the Federal Reserve's monetary policies will eventually spur inflation. Purchasing a home now is an excellent hedge against inflation, he said. Greg Cook, a spokesman for Keller Williams South Florida, agreed. "I'm not an economist, but my personal opinion is that in the next couple years, interest rates will be significantly higher because the Fed will have to do something to check inflation," Cook said. "That was our position in offering (the SAFE HOME program). The brokers and agents don't make any money offering it -- it helps the homebuyers."
Skeptics Weigh In
But consumer groups are questioning how much protection the policies really provide, and whether they are worth their cost. In cases where the cost of the policies are passed along to consumers -- whether directly or indirectly -- borrowers might be better off keeping that money in their pockets, they say. "Are we sure the premium isn't somehow being built into the price of homes? Because if it is, it's a waste," said Douglas Heller, executive director of the Santa Monica, Calif.-based advocacy group Consumer Watchdog. "There is almost no premium low enough to make these products worthwhile." If the policies turn out to be a bad deal for homebuyers, real estate professionals risk tarnishing their reputations by helping insurers sell them, Heller said. "I understand the potential value being offered, but there are a couple of things to be careful of -- not only for consumers, but for Realtors." In general, Heller and other consumer advocates say, payment protection See DON'T FEAR, Page 16
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