Builders offer buyers a protection plan

Home builders are offering it to new buyers, and some of the country’s largest banks and mortgage lenders think it’s a win-win idea for shaky economic times: Insurance programs that make borrowers’ mortgage payments for up to six months if they lose their jobs during an initial one- to two-year coverage period.

Better yet, the bank, builder or other sponsor of the plan typically provides it “free” — no direct, out-of-pocket cost to the consumer — as part of its marketing package. Most programs come with specific dollar ceilings on coverage, often ranging from $2,000 to $2,500 a month. Some limit the amount they’ll pay to principal and interest only. Others cover principal, interest, property taxes and hazard insurance up to a specific amount.

Though there are no hard statistics on the number of such plans now in the marketplace, Teri Cooper, executive vice president of Mortgage Payment Protection of Heathrow, Fla., one of the largest providers of “involuntary unemployment” policies, estimates that as many as 200,000 buyers currently are covered by her firm’s “Mortgage Guardian” programs alone.

Bank of America, which operates a “borrower protection plan” that it funds itself, says it already has covered thousands of new mortgages — limited to those with initial principal balances under $500,000. According to Terry Francisco, a spokesperson for the bank, the plan has covered $110 million in monthly payments for unemployed borrowers during the past two years. During 2010, the bank provided 156,000 purchasers with its protection program; as of last December, mortgages covered by the plan totaled $36 billion in loan balances.

In the Seattle-Puget Sound market, Quadrant Homes, a subsidiary of Weyerhaeuser Real Estate, recently began offering a 24-month, $2,000 to $2,500 insurance plan as a way to reassure buyers that they’d be able to withstand an unexpected job loss.

With unemployment figures scarily high, said Ken Krivanec, Quadrant’s president, “we wanted to give our buyers a little of the confidence they might need” to move ahead with a purchase.

Even though virtually all involuntary unemployment programs charge borrowers nothing for the coverage directly, there’s often plenty of fine print that limits payouts under certain circumstances. Here’s a quick look at some of the features that buyers and borrowers should focus on when they’re offered free job-loss mortgage insurance.

— Obviously nothing is truly “free.” The lender or builder typically is paying a wholesale insurance premium to obtain the coverage, and rolls that into the deal somewhere. In the case of Mortgage Guardian’s programs, premiums range from $200 to $300 and more per policy, depending on the expected volume of insurance, the length of the coverage, and the size of the insured monthly payment.

— “Free” turns into not-free or maybe not even available. For virtually all programs, once the initial period of coverage is up, homeowners are expected to either pay premiums on their own or look elsewhere for insurance. Bank of America’s plan, for instance, is free for the first year, but after that, extended coverage is available at the rate of 7.5 percent of the monthly principal and interest due, according to Francisco. In Quadrant’s program, “coverage ends 24 months after the closing date and cannot be extended by the buyer or Quadrant Homes.”

— Not all unemployment events are equal. Under most plans, you need to be eligible under state law for unemployment benefits, and you need to successfully apply for them. Also, the layoff or plant closing or other event cannot have been known to you in advance of the mortgage closing. Firings and dismissals for cause are not covered.

— Not all employment is equal, either. For example, if you are self-employed, or a temporary or seasonal worker, you probably won’t be eligible for benefits.

— Once you’ve gone to closing and the insurance policy clock begins ticking, there’s a 60-day “vesting” period in the Mortgage Guardian program. Then insurance payments can’t flow until 30 days after the actual unemployment begins.

Another key fact to keep in mind about job loss insurance for mortgages: It is generally not available direct to the consumer. Cooper of Mortgage Payment Protection of says her firm works only through participating lenders, builders, mortgage insurers and some state housing agencies that can create the volume of business needed to make the insurance risk-pooling feasible.

Bottom line: If you understand the limitations, and read the fine print, job loss coverage can be a “why not?” proposition. The builder or lender offering it is paying premiums at rates unavailable to individual consumers, and the coverage — if you qualify — is for real if you suddenly find yourself without employment.

Ken Harney is a real estate columnist with the Washington Post.