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Home equity protection generally comes in the form of a contract that pays the buyer of protection if a particular home price index declines in value. The buyer of protection is typically a homeowner that wishes to protect the value of their home[1], but many home equity protection programs allow speculators to purchase contracts in areas where they believe that home prices will decline so that they can benefit from home price declines.

The term first entered the mainstream in 2002 as several scholars at Yale University [2] worked in conjunction with a program in Syracuse, NY, which was developed with the intent of increasing home ownership in neighborhoods on the verge of collapse that were marred by ever declining home prices.[3] The Syracuse non-profit program, called Home HeadQuarters, was sponsored by the Syracuse Neighborhood Initiative, and a homeowner could protect the value of their home for a one-time fee of 1.5% of the home's value. In many cases, a local organization would pay the fee for the homeowner if they agreed to live in the home for 3 years. Similar programs were developed in other municipalities to encourage home ownership in specific areas that were considered to be at risk of losing home value due to increased rental conversions and other factors.

Product prices are often determined using risk based criteria and some providers of Equity Protection even offer real time online quotes.[4]

Waiting periods are required in many of the programs to prevent the owner of the home equity protection from gaming the system. Reasonable waiting periods range from 1 – 3 years. Some programs require lockout periods of as many as 15 years, which is generally considered too long as it is a rare case for a home to lose value over any historical 15 year period in the United States (in most cities).

Contents

Hedging

Any protection contract is essentially providing a hedge to the owner against declining home prices. The provider (protection seller) of the contract will generally have a significant reserve in place and will also hedge their risk using housing futures from the CME Chicago Board of Trade and other real estate short strategies to help mitigate losses. Some providers utilize reinsurance from A rated carriers to provide more durable secondary risk protection.

Payouts

Losses are generally measured by a nationally recognized house price index such as Office of Federal Housing Enterprise Oversight (OFHEO), First American Core Logic, or the S&P Case-Shiller index.

Differences from Insurance

Most home equity protection products are not insurance and do not require an insurable interest from the buyer of protection, however some providers offer an insurance version of the product.

Swaps

There are some similarities with swaps, particularly total return swap and credit default swaps.

See also

References

External links

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