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Dave Spart

Negative Equity Insurance

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Does anyone know if any of the trusted UK retail insurers offer this product along side say contents insurance or buildings insurance?

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Yes, there is such a thing as negative equity insurance.

It's called a deposit.

Not quite what I'm getting at.

Suppose you're a young FTB having just graduated. You live in a country that has enjoyed economic growth for the last 20 years say. On the day of completion your country experiences some economic shock and house prices collapse. Through no fault of your own your property's value is a fraction of the outstanding mortgage debt. You lose your job. You can't keep up your payments. The bank repossesses your house and you are left to pay the negative equity.

However being in possession of a negative equity insurance policy your insurer pays out, relieving you of a lifetime of financial misery.

I'm not aware that such a retail insurance product exists. Why would that be?

Financial organisations have made no end of using derivatives for hedging purposes, so how come there's no such protection for consumers?

If banks were compelled by law to protect consumers with negative equity insurance would they be forced to take greater caution in their lending? Might it reduce the risk of a future property bust?

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I'm not aware that such a retail insurance product exists. Why would that be?

Because you can insure against a risk, but not a certainty.

Given the cyclical nature of the housing market, pretty much every property is likely to be in NE at some point during a typical 25 year period from purchase to having paid off the mortgage. The only way such an insurance product would be viable would be for it to be so expensive that you'd be better off just saving the money.

IMO insurance is only any use when it's a legal requirement (e.g. motor or employers' liability insurance), against a risk that's quite likely to happen but is a relatively low cost when it does (e.g. home contents insurance) or against a risk that's very unlikely to happen but will incur a sky-high cost if it does (e.g. travel insurance that includes full medical cover for a trip to the US). Insurance against something that's more likely than not to happen AND which is expensive to deal with when it does is probably either not available or not worth it.

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Given the cyclical nature of the housing market, pretty much every property is likely to be in NE at some point during a typical 25 year period.

That's true but as the example I gave above alluded to, the concept for negative equity insurance I have in mind is an insurance that pays out only when an insured's home is repossessed and the insured is left with a bill for the negative equity. Perhaps it should be called Repossession Negative Equity (RNE) insurance.

Repossession, like death, accident, sickness or unemployment is something the vast majority of people fight tooth and nail to avoid. Repossession is entirely contrary to the purpose of taking out a mortgage. Being left with a bill for the negative equity after such catastrophic upheaval is just rubbing salt in the wound.

Why do you think RNE insurance is so glaringly absent from the retail market? To me this has always been another conspicious sizeable elephant in the room.

If insurance companies offered it, on an annual renewable basis say, their premium rates would inherently have to reflect the risk of a property crash. As the property market boomed premiums would rise to cover the risk. This would be seen as a warning signal from Britain's biggest household names.

During the boom, most HPCers were lone voices in the wind. No-one wanted to hear our caution and no-one would give our warnings sufficient credibility. The result is now global recession. However if the insurance industry manifested our fears of a property crash in the form of insurance premiums, each and every homeowners, speculators, BTLers would soon sober up. As the risk of a crash increased, so too would insurance premiums - very quickly.

It is possible some bright actuary somewhere has already thought this concept up. If so, has the insurance industry never brought it to market for fear of upsetting some even more powerful interests?

Why then don't banks offer it through their bancassurance operations? They already offer payment protection on loans so why not offer RNE insurance? I think many HPCers already know the answer.

To me RNE insurance is both a natural brake on excessive HPI and offers buyers protection from a life of financial misery following a great personal tragedy.

This issue is conspicuous by the absence of any discusssion of it in the mainstream media.

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That's true but as the example I gave above alluded to, the concept for negative equity insurance I have in mind is an insurance that pays out only when an insured's home is repossessed and the insured is left with a bill for the negative equity. Perhaps it should be called Repossession Negative Equity (RNE) insurance.

Repossession, like death, accident, sickness or unemployment is something the vast majority of people fight tooth and nail to avoid. Repossession is entirely contrary to the purpose of taking out a mortgage. Being left with a bill for the negative equity after such catastrophic upheaval is just rubbing salt in the wound...

I'm not sure why this wouldn't encourage bad behaviour... for example taking out a much larger mortgage than was wise, or deliberately behaving more riskily.

If you are trying to remove the impact on the individual you could shift to a system where the lender takes the risk (I think that is how it is in the US)... but you have to realise that it would probably make it lenders require much higher deposits.

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I'm not sure why this wouldn't encourage bad behaviour... for example taking out a much larger mortgage than was wise, or deliberately behaving more riskily.

If people knew it was extremely expensive to get RNE cover, it would confirm to them a crash was looming. Sensible people would refrain from further investment in property. Existing owners might see it as sell signal because the peak was approaching.

If you are trying to remove the impact on the individual you could shift to a system where the lender takes the risk (I think that is how it is in the US)... but you have to realise that it would probably make it lenders require much higher deposits.

In my proposal the individual is protected by paying annual insurance premiums rather than a higher one-off deposit.

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If people knew it was extremely expensive to get RNE cover, it would confirm to them a crash was looming. Sensible people would refrain from further investment in property. Existing owners might see it as sell signal because the peak was approaching.

In my proposal the individual is protected by paying annual insurance premiums rather than a higher one-off deposit.

Basically this insurance would cost more than a deposit per year and increase up to the rate of a deposit in times of an impending HPC, say 25% of the property value per annum.

Thats the only way it could be viable. Of course the Insurance company would simply go bankrupt as the claims come in as there would be no future income stream and all previous payments would have been paid out as bonus's.

The concept is ridiculous. As said, negative equity insurance already exists in the form of a deposit.

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Basically this insurance would cost more than a deposit per year and increase up to the rate of a deposit in times of an impending HPC, say 25% of the property value per annum.

Thats the only way it could be viable. Of course the Insurance company would simply go bankrupt as the claims come in as there would be no future income stream and all previous payments would have been paid out as bonus's.

The concept is ridiculous. As said, negative equity insurance already exists in the form of a deposit.

Before the last crash happened no-deposit mortgages were practically non-existent. Anyone applying for a mortgage had to put down a deposit.

When the crash happened, huge numbers were repossessed and then ordered to pay the outstanding negative equity often over a very long period of time.

That's what I call ridiculous.

A deposit is not an insurance for the buyer against negative equity - its an insurance for the bank.

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A mate of mine works for a start-up who have been trying to get an insurance product through the FSA. He told me the FSA have said they don't want to have this for customers because people will find it all too complicated. Looks like the FSA are riding to the rescue again :blink:

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Isn't this what the Higher Lending Charge is, albeit used to insure the lender rather than the borrower?

The HLC protects the lender - the loving individuals who insure the lender still comes after the borrower to get their money back. This new one protected the person I think.

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To me, negative equity is not an insurable risk, unlike say a fire, as you cannot mitigate the risk by asking a group of people to put in a little bit of money and then pay out to the unfortunate when it happens (as falling house prices would effect all concerned).

If you think prices will fall, you could look to place a spread bet on one of the mainstream house price indices falling - not exactly insurance, more of a hedge against falling prices. But, if house prices went up (or at least the index you were betting against did) - you'd lose your money.

If you are REALLY sure house prices are going to drop, you could 'leverage' your bet (i.e. use borrowed money to make the bet), but if the index does then rise you are double fcuked as you lose the bet and your money, but you still owe the money you borrowed (see Royal Bank of Scotland et al - except you won't get a taxpayer bail out).

Anyone offering negative equity 'insurance' would essentially be doing the same thing, and charging an extra fee, and presumably you would still bear the downside risk (read the small print).

Edit: numerous spelling mistakes!

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If you pay enough money somebody will insure for it, there's no reason why it's impossible to get NE insurance.

Edit: missed the post already saying this

Basically this insurance would cost more than a deposit per year and increase up to the rate of a deposit in times of an impending HPC, say 25% of the property value per annum.

Thats the only way it could be viable. Of course the Insurance company would simply go bankrupt as the claims come in as there would be no future income stream and all previous payments would have been paid out as bonus's.

The concept is ridiculous. As said, negative equity insurance already exists in the form of a deposit.

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