Insuring Against Underwater Mortgages

During the 2008 financial meltdown, many homeowners went “underwater”. They were unable to keep up payments on their mortgage and could not sell their home for enough to cover amount due on the mortgage.

To avoid going underwater in the future, homeowners and mortgage holders should have a way to protect the selling price of a home. This could be done with an insurance policy, just as a home is protected against fire, flood, earthquake and tornado.

The policy is bought to cover a specified selling price during a designated time period, typically a few years. This is called a Selling Price Guarantee (SPG) policy.

When a claim is presented against an SPG policy, the insurance company is given a limited time to sell the home. After that time limit has expired, the company must buy the house for the insured price. While the SPG claim is being processed, the homeowner is not allowed to sell the property; the insurance company (or its designated agent) has an exclusive real estate listing. When the sale closes, the homeowner gets the insured selling price, less costs and commissions. If the sale price exceeds the insured amount, the insurance company keeps the extra.

Anyone taking out a mortgage would be required to also take out an SPG policy, covering a designated selling price agreeable to both the homeowner and the mortgage company.

The initial SPG would probably be issued for something like 2 years. When this time expires, the mortgage holder will usually require the homeowner to buy another SPG, covering a selling price reduced by how much of the mortgage has been paid off. When that second SPG expires, the homeowner may either pay off the mortgage or buy yet another SPG. This process continues until either the mortgage is paid off or the home is sold.

In principle, a homeowner could buy a single SPG for the entire duration of the mortgage, specifying the whole selling price, but the premiums for this option would probably be too expensive in practice.

Requiring an SPG might act as a restraint on selling mortgages to unqualified people, or to those who will fail to keep up the payments of an adjustable rate mortgage.

The added expense of the required SPG policy might hold down home selling prices.

If no insurance company is willing to sell an SPG covering a proposed property sale, perhaps the deal is not a good one and should not go through in the first place.

Perhaps everyone would benefit if SPGs had to be sold by real estate companies and mortgage-issuing banks.