Insurance Against Drops In Home Prices?

By Michael Ha

NU Online News Service, Dec. 13, 2:36 p.m. EST?Home-equity insurance?protecting against declines in home prices?could be the next big product in the property-casualty sector, according to a firm developing the first such coverage.[@@]

Macro Securities Research, in Morristown, N.J., a financial research firm, is currently working with the Chicago Mercantile Exchange, the largest futures exchange in the United States, to create futures contracts tied to U.S. housing prices?the first of their kind in the country?which big investors could purchase to hedge against the potential of housing prices falling in the future.

Essentially, these big investors could purchase such futures contracts as a bet that the housing prices in certain geographic areas will be lower at a certain time in the future when contracts expire.

If the housing price remains steady or goes up, the contract would be worthless, but if the price goes down, the buyer would make money from the transaction.

The p-c insurers could be the big investors for such housing-price futures contracts and use these financial devices to hedge their own risk when offering home-equity insurance to homeowners, according to Macro Securities Research. Such home-equity insurance would protect average homeowners from future declines in their home prices.

According to an executive from Macro Securities, there is a great need for home-equity insurance in the United States, but the coverage is not yet available nationwide.

"Most people know that home prices have had unprecedented growth over the last seven years, and it just can't continue," said Macro Securities Chief Operations Officer Sam Masucci. He is developing the home-price futures contracts with company co-founder and Yale University economics professor Robert Shiller.

Mr. Masucci observed that since the majority of people's net worth is tied to their house?and because of the fact that homeowners tap into home-equity lines of credit and use it for everything from college education to home improvements?their finances would be significantly hurt by any decline in their home prices.

Mr. Shiller went so far as to suggest that home-equity insurance can even be likened to the advent of fire insurance 200 years ago, when it first emerged to address the unmet need of U.S. homeowners.

"Nowadays, everybody has a greater risk of their largest asset, their home, going down in value than their home burning down. Still, everybody buys fire insurance but there is no insurance available to protect against falling housing prices," Mr. Masucci said.

For example, if someone paid $250,000 for a house five years ago, Mr. Masucci explained, there is a good chance the house has doubled in value. But the homeowner could be hurt if home prices begin to turn down. So, he said, the homeowner could benefit by hedging that risk, and one way to do it would be for insurance companies to offer home-equity insurance, Mr. Masucci said.

"The futures market is very similar to the insurance market," Mr. Masucci said. "Once we launch our product, then insurance companies could purchase futures contracts and start providing home-equity insurance to homeowners."

So just like someone buying fire insurance, Mr. Masucci explained, a homeowner could buy a home-equity insurance plan. If home prices reflected in one of the housing indexes went down in value, then that person would be paid money. And insurance companies could get rid of their own risk of paying such claims by buying these futures contracts for housing prices.

As for setting premium rates for home-equity insurance, Mr. Masucci pointed to a pilot program set up in Syracuse, N.Y., where one percent of a home's value was charged once as premium for a five-year contract that would have paid declines in the home's value.

Macro Securities has already been approached by a number of insurance companies for preliminary discussions, with those insurers potentially designing home-equity insurance products using Macro Securities' futures contracts as a hedge, Mr. Masucci said. Mr. Masucci declined to disclose which insurers his company has spoken with so far.

However, not everyone in the insurance industry is convinced that home-equity insurance could be the next hot product.

Robert Hartwig, chief economist at the Insurance Information Institute, told National Underwriter that insurance companies are not likely to offer such insurance any time soon. "First of all, the product is distinct from homeowners insurance. It's more of a derivative type of product, and insurers don't traditionally get involved in speculative risks," Mr. Hartwig said. Beyond that, he added, if this were to be offered by insurers, it would take a long time to gain all the requisite regulatory approval.

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Insurance Against Drops In Home Prices?

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