Hard Times Boost Mortgage Unemployment Insurance

Home buyers are a nervous lot these days--and who can blame them?

Property values have been falling while unemployment rates have been rising. In fact, in June California had an unemployment rate of 9.5%--higher than the national rate--and the San Fernando Valley has been hit hard with defense-industry layoffs.

Insurance companies, lenders and real estate agents are stepping into the fray and offering policies that cover a homeowner’s mortgage payments in the event of a layoff. These policies aren’t altogether new creations, but the lackluster economy is making them increasingly popular.

“Real estate sales have been sluggish, and we believe the cause is a lack of consumer confidence,” said Rick Merrill, president and chief operating officer at Prudential California Realty.

About 9,000 of the company’s residential sales listings are being offered with the bonus of a guaranteed mortgage-payment plan that protects buyers who lose their jobs within a year of buying their home. Buyers have to pay a onetime fee of $20 for coverage of up to $5,000 a month, while Prudential picks up the tab for most of the insurance premiums.

“We’re doing it as a benefit to the seller and the buyer,” Merrill said. “We believe so much in the California economy that we’re willing to guarantee it.”

Self-employed buyers don’t qualify for the Prudential program, and neither do homes valued at more than $1.25 million. Buyers can purchase coverage for up to 18 months for an additional premium of $360 to $1,125. The policies are offered through RLI Insurance Co., a carrier that started out insuring contact lenses.

Ann Readshaw hopes the new program helps in the sale of her four-bedroom ranch home on Eilat Street in Woodland Hills.

“The market makes you feel so powerless,” Readshaw said. “Whether or not the insurance program is effective, it shows someone is doing something. It might get buyers off the fence.”

Prudential is one of several companies experimenting with unemployment coverage. Select Century 21 Real Estate Corp. franchises unveiled a similar plan July 1. Newspaper ads boast “a house that will shelter you from wind, rain and unemployment.”

Most mortgage-unemployment insurance policies have plenty of exceptions that limit their coverage. Another issue is cost. Private mortgage insurance that benefits lenders in case of a borrower’s default usually costs about 1% of the loan the first year and 0.5% thereafter. Unemployment coverage for borrowers can add between 3% and 5% to a mortgage payment.

Cal Fed Insurance Agency Inc. has been marketing unemployment mortgage insurance for more than two years to 180,000 California Federal Bank borrowers. The response from borrowers, said Gemsy Kennedy, vice president of sales and marketing, has been great--perhaps too great.

There have been so many claims and payouts that Cal Fed’s carrier has had to downscale to program. The coverage currently being offered is limited to $2,500 per month for six months.

“It’s a difficult product to offer,” conceded Marilynn Oliver, president of Countrywide Agency Inc. in Pasadena. Countrywide did an experimental direct-mail program with its borrowers, offering a combination of death, disability and unemployment benefits through American Bankers Insurance Group of Miami.

“It bombed,” Oliver said, but Countrywide is still exploring new possibilities for offering unemployment coverage.

Coast Federal is also starting to offer unemployment mortgage coverage.

“People have been asking for it for years,” said William J. Moody, president of subsidiary Coast Fed Services in Granada Hills.

Coast Fed is offering borrowers the option to insure themselves for up to six months of unemployment. The downside is that Coast offers a maximum coverage of only $1,500 a month.

“It doesn’t cover everybody,” Moody said, “but it’s better than nothing.”

Unlike some lenders, which offer this insurance by direct mail after buyers have moved into their new homes, Coast Fed tells borrowers about the insurance as the loan is being made.

Will borrowers feel obligated to take the insurance? No, Moody said.

“Most people are too sophisticated to be intimidated.”

“We’re getting ‘oohs’ and ‘ahs’ from realtors, but so far we’ve had just one application out of 200 loans,” said Bill Wagner Jr., president of Prime Financial Services, a Santa Barbara-based mortgage loan wholesaler with offices in Ventura.

Only about three of Prime’s lenders offer borrowers the mortgage unemployment insurance. But, Wagner said, it’s too early to tell just how popular the program will be. As long as buyers are worried about their jobs, Wagner said, he expects interest in insurance to keep growing.

“We’re still experimenting with the coverage; it’s been a process of fine-tuning,” said Richard T. Harris, president of Morgard Inc., a Pennsylvania-based mortgage unemployment carrier. Morgard rolled out its latest program last fall and now works with 38 banks and mortgage companies nationwide.

“If you qualify for state unemployment insurance, you’ll probably qualify for our coverage,” Harris said. The advantage of getting this insurance through a lender is that the policy can continue as long as the mortgage, he said. In contrast, the program offered by Prudential has a limited life.

“It’s kind of a gimmick to get people to buy homes, but long-term, the protection isn’t there,” Harris said.

Whatever form mortgage unemployment insurance takes in the future, “the market is vast,” Harris said.

“We think it’s going to be the single largest growth area in the insurance industry over the next five years.”