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 inhome prices?could be the next big product in the property-casualtysector, according to a firm developing the first suchcoverage.[@@]

Macro Securities Research, in Morristown, N.J., a financialresearch firm, is currently working with the Chicago MercantileExchange, the largest futures exchange in the United States, tocreate futures contracts tied to U.S. housing prices?the first oftheir kind in the country?which big investors could purchase tohedge against the potential of housing prices falling in thefuture.

Essentially, these big investors could purchase such futurescontracts as a bet that the housing prices in certain geographicareas will be lower at a certain time in the future when contractsexpire.

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

The p-c insurers could be the big investors for suchhousing-price futures contracts and use these financial devices tohedge their own risk when offering home-equity insurance tohomeowners, according to Macro Securities Research. Suchhome-equity insurance would protect average homeowners from futuredeclines in their home prices.

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

"Most people know that home prices have had unprecedented growthover the last seven years, and it just can't continue," said MacroSecurities Chief Operations Officer Sam Masucci. He is developingthe home-price futures contracts with company co-founder and YaleUniversity economics professor Robert Shiller.

Mr. Masucci observed that since the majority of people's networth is tied to their house?and because of the fact thathomeowners tap into home-equity lines of credit and use it foreverything from college education to home improvements?theirfinances would be significantly hurt by any decline in their homeprices.

Mr. Shiller went so far as to suggest that home-equity insurancecan 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 insuranceavailable to protect against falling housing prices," Mr. Masuccisaid.

For example, if someone paid $250,000 for a house five yearsago, Mr. Masucci explained, there is a good chance the house hasdoubled in value. But the homeowner could be hurt if home pricesbegin to turn down. So, he said, the homeowner could benefit byhedging that risk, and one way to do it would be for insurancecompanies 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 insurancecompanies could purchase futures contracts and start providinghome-equity insurance to homeowners."

So just like someone buying fire insurance, Mr. Masucciexplained, a homeowner could buy a home-equity insurance plan. Ifhome prices reflected in one of the housing indexes went down invalue, then that person would be paid money. And insurancecompanies could get rid of their own risk of paying such claims bybuying 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., whereone percent of a home's value was charged once as premium for afive-year contract that would have paid declines in the home'svalue.

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

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

Robert Hartwig, chief economist at the Insurance InformationInstitute, told National Underwriter that insurance companies arenot likely to offer such insurance any time soon. "First of all,the product is distinct from homeowners insurance. It's more of aderivative type of product, and insurers don't traditionally getinvolved in speculative risks," Mr. Hartwig said. Beyond that, headded, if this were to be offered by insurers, it would take a longtime to gain all the requisite regulatory approval.