Do homeowners need underwater insurance?

For an average monthly premium of $40 to $50, consumers get gap insurance on the value of their home. They must have at least 10 percent equity when they apply for UMP and cannot refinance during the coverage period. If they decide to sell and the house is not worth the mortgage amount, UMP helps sell the property through its own agents and pays the lender the difference. Unlike private mortgage insurance, it protects the consumer rather than the lender.

“The homeowner essentially gets to walk away without the potential negative repercussions of what the old choices were that homeowners had,” Kayton said. Those choices consisted of staying in the house, or turning to a short sale or foreclosure.

Critics of UMP say it may be taking advantage of homeowners’ fears.

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“Consumers who have an extra $40 or $50 per month can ‘self-insure’ against house price declines by paying down their mortgage principal faster,” said Barry Zigas, director of housing for the Consumer Federation of America. “This generates further equity and is an investment, not an expense for insurance that may never be recouped.”

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The coverage is not designed for high-end homes, Kayton said, adding that $400,000 would be the highest-priced residence AmTrust would insure in most markets.

While UMP is pricey, it may be a price some are willing to pay given everything homeowners have been through in the past five years. Unfortunately it will not help any of the 11 million borrowers still underwater.

By CNBC’s Diana Olick. Follow her on Twitter @Diana_Olick.


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