Plenty of strange things happened after the latest housing boom and subsequent bust, but this is perhaps one of the most interesting byproducts.
An insurance company named AmTrust Financial has come up with an innovative insurance policy known as “Underwater Mortgage Protection,” or UMP for short.
Put simply, it protects you financially if your home goes down in value and you need to sell at a loss.
Over the past several years, scores of homeowners have been forced to sell short or simply walk way because their mortgage balance exceeded the depleted value of their home.
A UMP policy is designed to cover the shortfall a homeowner in this position might encounter when selling after a significant home price decline.
How Underwater Mortgage Protection Works
Assuming you need to sell your home when underwater on the mortgage, you’ll complete a claim form.
AmTrust will then assist in the sale of your home by “guiding the listing and the closing of the home sale to maximize the price and minimize the marketing time in a down market.”
This entails having an “asset management specialist” obtain a market value for your home and determine a listing price with a real estate agent.
For the record, they also use an AVM to obtain the appraised value of your property when you originally take out a policy.
If for some reason your home doesn’t sell within a short period of time, the company could offload the property via auction as well.
Once the property is sold, a check will be written on your behalf that covers the full payoff of your loan, along with customary seller closing costs and transfer taxes.
At that point you can walk away as if the sale were standard, without any damage to your credit score that might otherwise be assessed when going the short sale or foreclosure route.
AmTrust provides a few common scenarios that would lead a homeowner to sell when underwater, including divorce, relocation, and unemployment. The UMP policy would mitigate any losses related to selling under these circumstances.
Just like other forms of insurance, the premium cost is based on the corresponding risk. For homeowners with higher LTV ratios and larger loan amounts, the premium will likely be higher.
It’s unclear what all the underwriting parameters are, but it’s possible that it could be more expensive in areas where home price fluctuation is more common.
- The property must be your primary residence (and owner-occupied for the entire policy term)
- It must be owned by the insured as of the policy date
- You must hold a fully-amortized mortgage from an institutional lender
- You cannot be underwater on the mortgage
- You can only have one policy in force
- It must be in an eligible state
It’s currently available in the following states:
- North Carolina
From that list, I’d say Arizona homeowners would benefit most, given the tremendous price swings that have occurred there over the past several decades.
The policy term is 12 months and guaranteed to be renewable for an unlimited number of additional periods until you pay off your mortgage, refinance, modify your loan, or release the mortgage in some other way.
Does Underwater Mortgage Insurance Make Any Sense?
Insurance always seems like a raw deal because it only protects you if something goes terribly wrong.
The same is kind of true with UMP. If your home doesn’t lose a lot of value, and you don’t need to sell when it does, you’ll simply pay premiums for nothing more than peace of mind.
And this type of coverage probably only makes sense for those who put very little down on their homes, seeing that these will be the first people to slip into an underwater position.
Unfortunately, these same individuals tend not to have much left over to pay for extraneous costs like underwater mortgage insurance.
If a homeowner suspects they overpaid for a home or bought near the top, and doesn’t want to be trapped if home prices plummet, paying a small premium for price protection could make sense.
But then you have to question why you’re buying a home to begin with. If you can’t absorb a price decline, or thinks prices are inflated, maybe you shouldn’t go through with the purchase.
These policies may also be limited in how much they pay out in the event of a claim. And we all know home prices fell a lot more than 10-20% in a lot of areas of the country during the most recent crisis.
So you could still be left hung out to dry.