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 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 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. …CONTINUED
"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 plans aren’t a good value compared to more traditional forms of insurance, such as property, casualty and life.
"These are historically lousy insurance products — you pay too much, and you get too little" in terms of claims paid out to policyholders relative to premiums, Heller said. Staffers at the Consumer Federation of America and Consumers Union, the publisher of Consumer Reports, have expressed similar reservations about payment protection plans.
As is the case with any insurance policy, there are many ways for insurers to wriggle out of paying claims, Heller said.
Read the fine print of the payment protection plan being provided by the California Association of Realtors, for example, and you’ll notice that homebuyers aren’t eligible to claim benefits until a six-month "vesting" period has run its course.
The policies CAR is providing aren’t available to the self-employed, and won’t pay claims to anyone forced to go on leave because of an accident, sickness, disability, pregnancy or childbirth.
But perhaps the biggest problem with payment protection plans is that even when they do pay out as promised, the protection they provide may not be enough to keep a homebuyer out of default or foreclosure, Heller said.
The coverage provided by the policies CAR is purchasing — up to $1,500 a month for six months — will provide at most $9,000 in total coverage.
At the end of the day, six months of protection, in this economy, is not enough," Heller said. "If you don’t think you can afford to buy a house today, this isn’t a reason to buy one tomorrow."
An obscure section of California’s insurance code may also make it illegal to offer such insurance at no charge to homebuyers, Heller said.
Section 777.1 of the California Insurance Code states, in part, that insurers may not offer any kind of insurance "as an inducement to the purchase or rental" of any property "without any separate charge to the insured for such insurance."
A spokeswoman for the California Department of Insurance said regulators are researching whether the code applies to payment protection plans offered by lenders, builders and Realtors in California.
"It’s a different way of saying, ‘Don’t worry about your income,’ " Heller said. "If you’re buying a house your income level matters. Lenders and Realtors should not try to induce people into buying more than they can."
Steve Goddard, president of the California Association of Realtors, said the payment protection plan offered by the group is intended to provide peace of mind, not serve as an inducement to buyers to stretch beyond their resources.
"We certainly don’t promote anybody buying a house that can’t afford it," Goddard said. "Our intention is to offer peace of mind to first-time homebuyers."
Some critics say that when payment protection plans are offered by builders or lenders, homebuyers may actually end up paying for them because the premiums will be rolled into the purchase price or recouped through higher loan fees.
But Goddard, a broker-manager for RE/MAX Marquee Partners in Manhattan Beach, Calif., said that’s not an issue with the payment protection policies offered by CAR. That’s because the group plans to prepay the premiums itself, drawing $1 million from CAR’s Housing Affordability Fund, a nonprofit 501(c)(3) charity founded in 2002 to address skyrocketing housing costs.
According to a recent newsletter, the Housing Affordability Fund had provided $1.82 million in funding for affordable housing projects, creating 1,495 "housing opportunities" through the end of 2008.
Goddard said that tapping the fund to buy payment protection policies will not take away from CAR’s efforts to provide affordable housing.
"This is extra money," Goddard said. "We have more money in the fund right now than we have projects to do."
According to the fund’s most recent tax return, it had $3.16 million in investments on hand at the end of 2007, after making $280,500 in grants and racking up $124,644 in expenses during the year. The expenses included $94,388 in management fees paid to CAR.
Underwriters
The payment protection program offered by CAR and Howard Hanna is underwritten by Fortegra Financial, which does business as Life of the South and offers payment protection products to clients in the banking, credit card and automotive industries.
Neither Fortegra Financial nor the underwriter of the payment protection plan offered by the Rainy Day Foundation, Virginia Surety, responded to requests for comment. Virginia Surety is the U.S. property and casualty insurance arm of The Warranty Group Inc., which claims to be the world’s largest provider of warranties and service contracts for manufacturers and retailers.
Two companies that market payment protection plans underwritten by Fortegra and Virginia Surety — cynoSure Financial Inc. and Producers Financial Network Inc. — were also unresponsive to requests for comment. …CONTINUED
Executives with the Rainy Day Foundation emphasized that their Homeowner Education and Loan Protection (HELP) program provides more than payment protection insurance.
Rick Del Sontro, chief executive officer of the Rainy Day Foundation, said he’s been frustrated that media accounts about the HELP program have focused on its payment protection provisions, when the program also provides homebuyer counseling and an emergency fund that borrowers can apply to for help when they run into unexpected financial difficulties.
"I understand what consumer advocacy groups are saying — that unemployment insurance policies (alone) are maybe not great policies," Del Sontro said. "That’s why we’ve put together a comprehensive program … and marry the job-loss insurance with (optional counseling and) the Rainy Day emergency fund."
Del Sontro said the Rainy Day Foundation was started to address claims that FHA-backed loans relying on seller-funded down-payment assistance programs funded by homebuilders were more likely to end up in default and foreclosure.
When the Department of Housing and Urban Development’s attempts to end the programs were delayed by legal challenges, Congress passed legislation banning FHA from accepting seller-funded down-payment assistance on FHA-backed loans (see story).
Rainy Day’s roots
Originally registered with the IRS as the Home Downpayment Gift Foundation, the Rainy Day Foundation has a five-year history of working with FHA borrowers, providing counseling, education, and financial support during the first two years of homeownership, Del Sontro said.
Borrowers relying on FHA loan guarantee programs are "generally not well prepared for homeownership," Del Sontro said. They often have little savings, and aren’t required to have any reserves to be approved for an FHA-guaranteed loan, he said.
In May 2006, the Rainy Day Foundation launched a seller-funded "Punctual Payment Program," which the company said was designed to ease borrowers into homeownership by providing them reimbursements covering the majority of their monthly mortgage payments for several months. The reimbursements — more than $12 million, according to the company’s Web site — were funded by seller concessions.
Some loan originators saw the Punctual Payment Program as a tool that could help borrowers repay family or friends who loaned them the money needed to cover FHA’s minimum down-payment requirements. Although the Rainy Day Foundation maintained that the Punctual Payment Program was not a substitute for seller-funded down-payment assistance programs, it was unable to obtain a written opinion from HUD concerning the program’s permissibility, Ludlow said.
"We have someone we can send (lenders to) to talk to at HUD, but we can’t get a letter," Ludlow said, which kept the Punctual Payment Program from realizing its full potential.
But the Punctual Payment Program also provided — for a $499 fee — all of the benefits now offered through the HELP program: counseling, a payment protection policy, and access to the "Rainy Day" emergency fund. As with seller-funded down-payment assistance programs, the fee could be paid by the borrower or the seller.
"Three years ago, if you asked builders to pay an extra $500 for the program to enroll a buyer (in counseling and payment protection program), they would have laughed," Ludlow said. "Today, the builders are taking the steps they need to sell the homes."
Asked whether builders might simply incorporate the cost of providing the HELP program into a home’s sale price, Ludlow said the same could be said of marketing expenses like advertising.
"In a sense, this is an advertising feature for the builder — the fact that the builder is participating in the program is going to provide additional exposure," Ludlow said.
Like similar programs offered by automakers, the programs have generated considerable media attention, at the national and local level.
That attention could translate into additional sales. But the payment protection programs might eventually generate a backlash against those marketing them the policies don’t fulfill their promises, Consumer Watchdog’s Heller warns.
"As a consumer, if it’s free it’s at worse a non-benefit," Heller said. "If you have a lousy insurance program for a year for free, you may not know it’s lousy" because many won’t investigate the terms as carefully as they would if they were paying for it.
Realtors and others using payment protection plans as marketing tools "may unwittingly be validating a lousy policy," he said.
"This may be a great marketing avenue for these companies to sell products that aren’t needed," Heller said. "The brilliance of the financial industry is to confuse people and scare people into buying things they don’t want, don’t need, or can’t afford. The housing bust is kind of the pinnacle of that."
The Rainy Day Foundation’s payment protection program is offered through cynoSure Financial and underwritten by Virginia Surety. It provides one or two years of payment protection, with up to six months of payouts that max out at either $1,800 or $2,500 a month, depending on the level of coverage desired. Builders pay an average of $550 to enroll borrowers in the HELP program, Del Sontro said.
SAFE HOME, the "private label" version of the Rainy Day Foundation’s HELP program offered by Keller Williams South Florida, allows home sellers, lenders and real estate agents to pay $550 to purchase counseling and up to six months of payments at $1,800 a month. The cost for that level of coverage is $500 without counseling. Keller Williams’ SAFE HOME program provides up to six months of payments at $2,500 a month for $650, or $600 without counseling.
"It’s important to understand, this is not Keller Williams or Rainy Day Foundation selling insurance," Keller Williams spokesman Cook said. "They are enrolled in insurance, but they also get the benefit of (optional) counseling and the Rainy Day emergency fund."
Del Sontro said the Rainy Day emergency fund provided more than $4 million in grant assistance to troubled borrowers last year, a number he expects will "easily double" this year.
The money is available to help borrowers enrolled in the HELP and SAFE HOME programs cope with one-time events such as a death in the family, a medical expense, or even an unexpected car repair bill.
"The reality is the fund is the more important piece of the program — as important as the job-loss protection is important, the real meat of it is the Rainy Day fund," Cook said.
As to the adequacy of the six months of payments provided by Virginia Surety’s payment protection policy, Del Sontro said he believes the average number of months claimants receive payments has risen from about three months to five. But six months is "still pretty adequate," he said. "I know of only one or two people who have used all six months of benefits."
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