EquityLock Financial Allows Homeowners to Hedge Their Home Equity

Homeowners across the nation have had to watch helplessly as home values have declined sharply since 2006. House prices have already fallen 15 percent from their peak levels …

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Homeowners across the nation have had to watch helplessly as home values have declined sharply since 2006. House prices have already fallen 15 percent from their peak levels in 2006, according to the Associated Press, and could fall so much as to match or exceed the 30 percent drop in home prices seen during the Great Depression.

For most people, the house in which they live is their biggest asset, and to see its value drop is unnerving. For homeowners who fear the implications of falling home values, looking into the Home Price Protection program offered by EquityLock Financial could be worthwhile.

"EquityLock Home Price Protection is a contract that protects a real estate purchaser against the loss of equity if there are market downturns," according to the company’s website. "Each Home Price Protection contract refers to a relevant House Price Index (an aggregate of local housing prices). Under the contract, EquityLock Financial pays the owner upon resale of the property to the extent that the House Price Index has decreased."

EquityLock’s fee is usually 1 to 2 percent of the value of a home, depending on the home’s location. For a $300,000 house, for example, the fee would be somewhere between $3,000 and $6,000. The contracts last for a maximum of 15 years and are not nullified if homeowners refinance their mortgages.

If a person purchased a home for $300,000 and a Home Price Protection contract for $4,500 with the local housing index at 100 in 2008 and sold the home in 2011, there are several ways the scenario could pan out.

The first is that if the local housing index rose to 105, but the sale price of the house was $350,000, the contract would then terminate with no value.

EquityLock’s website offered no direct explanation of what happens in the event that the local housing index rises but the homeowner sells their home at a loss, though the website did state that "contracts do not pay homeowners on the basis of a home’s resale price"—they pay homeowners on the basis of the local housing index. So homeowners who sell at a loss in an area that saw its index increase are probably out of luck.

The third and fourth scenarios, though, result in EquityLock making payments to homeowners.

If the local housing index fell from 100 to 90, and the person sold the house for $290,000, then EquityLock would pay $30,000. Because the local index fell 10 percent, the payout to the client is 10 percent of the original purchase price of the house.

Finally, if the local housing index fell from 100 to 90, but the person sold the home for $350,000, EquityLock would also pay the client $30,000. EquityLock’s clients receive payment if the local housing index has fallen when they sell their home, even if they do not sell at a loss.

According to EquityLock’s website, the company retains enough reserves from contract sale revenues to pay all projected losses, even if the index of every local housing market declines.

Further, "unlike a bank or insurance company, there’s no regulator keeping track of EquityLock Financial’s ability to sustain losses or pay claims to contract holders," according to Inman News.

Nationwide housing prices have fallen 15 percent since 2006, which would necessitate EquityLock having a significant amount of cash on hand, according to their stated practices, but no regulator is monitoring how much the company actually has in reserves. Investors should consider whether the greater risk is in suffering from the effects of falling home prices, or in signing a contract with a company that has not had its ability to pay claims to clients verified by a third party.

"EquityLock Financial is not offering price protection contracts in the top 35 percent riskiest markets," according to Inman News. "The company looks at markets at the metropolitan statistical area (MSA) level, so while some markets in states like California, Florida, Arizona and Nevada won’t be eligible, others may qualify."

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