Insurance Against Property Value Decline
A local agency or association, such as a city or county department of housing and community development or a nonprofit neighborhood association, creates a fund to offer home equity protection. The insurance takes effect after some waiting period, typically two to five years, after which homeowners covered by the product are partially or fully reimbursed for losses if they incur them upon the sale of their home. The benchmark for determining losses can be the actual decline in the value of the home or the extent to which median home prices in the targeted area have declined over the period of ownership relative to the city as a whole or to price movements in a broader regional area. The insurance fund can be financed with a tax on all properties in a neighborhood or local district, with insurance premiums or fees charged directly to the home buyer, or both. At a minimum, home buyers pay a fee to opt into the program to cover the operating costs for determining the extent of any losses.
There have only been a few home equity protection programs launched by municipalities around the country, so experience is limited. The strategy has been used in neighborhoods where there is concern that properties values may decline due to a lack of confidence among prospective purchasers due to neighborhood stigma, changes in the local economy, or other potentially self-fulfilling causes. The offer of equity protection signals to buyers that the neighborhood or city is a less risky investment. The program can enhance price stability for both new homebuyers and existing homeowners who, because they are therefore less likely to lose equity, may be more likely to maintain and/or make improvements to their homes.
This strategy may be more of a neighborhood confidence-building measure than a sustainable financial product. Efforts by private firms to market home equity insurance products nationwide have been unsuccessful to date, perhaps because insurance premiums have been quite high (e.g., $50-$60 per month for the duration of the insurance coverage). Localities that are working to promote investment in a particular location may nevertheless find the strategy useful for stabilizing property values, particularly when used in combination with other community stabilization or economic revitalization strategies.
For example, Syracuse’s Home Equity Protection program, which operated from 2002-2006, was one element of the Syracuse Neighborhood Initiative’s $81 million investment in housing and neighborhood development in more than a dozen neighborhoods and other targeted areas in the city. Other elements included neighborhood planning and development, resident capacity building, home improvement loans, mini-grants, purchase and rehab grants, new construction, substantial rehab, and demolition.
Eligibility is generally limited to a specific geographic area. Participating homeowners pay a fee to be covered by the protection, or the fee could be waived/paid by a local fund financed using local taxes or some other source. In the programs implemented to date, homeowners have generally not been eligible for coverage against loss protection until a given period of time has passed, perhaps to encourage new owners to stay in their neighborhoods, or because the early years of a program are those with the highest probability of losses. In Oak Park, Illinois, the waiting period was five years; in Syracuse, it was three years.
Home equity protection programs can be challenging to design and require a well-capitalized (and perhaps subsidized) fund prepared to pay claims in the event of housing price declines. Identifying a source of capital for the fund can be challenging. The home equity program in Syracuse, New York, used a grant from the U.S. Department of Housing and Urban Development to seed the insurance fund; programs that operate in Chicago rely on taxes on single-family residential properties (those with 1-6 units).
Home prices reflect local real estate market conditions and amenities as well as factors related to the broader economy. The recession that started in 2008 demonstrated that there is economy-wide risk to house prices, meaning that house prices can fall across much of the nation. A key design consideration for home equity protection programs is whether the insurance will cover risk associated with both a nationwide home price decline (which would almost certainly require subsidies) and a local home price decline – or only risk related to local neighborhood decline. Programs operated to date generally have provided protection only against the latter. Coverage that includes macroeconomic conditions, such as a nationwide recession, would be much more costly to insure. One way to provide protection against just the neighborhood component of risk would be to cover losses only to the extent that they result from house price declines that exceed some benchmark, such as the change in regional or national home prices.
Home equity protection programs are complex financial products, and a publicly-funded program may have a significant administrative burden that may strain localities with limited capacity. Smaller localities or localities with limited capacity should look for potential regional or state partnerships to manage this type of program, and also increase the potential to access federal sources for subsidy. Home equity protection programs that no longer operate, such as those in Syracuse and Oak Park, Illinois, seem to have ceased operations because house prices generally increased in the years following their establishment. With the threat of house price declines apparently passed, home buyers’ interest diminished and program administrators’ attention turned elsewhere.
An equity insurance program created in 1988 is still in operation in three Home Equity districts in Chicago. The home equity program is financed with taxes on 1-6 unit residential properties, using a special service tax district, rather than insurance premiums. Voters in a proposed home equity district must approve the creation of the district. Home buyers pay a $150 registration fee to cover the cost of an initial appraisal, and must wait five years before making a claim on the fund. After the waiting period, if, after a good-faith effort, the home sells for less than the initial appraised value, the fund pays 100 percent of the difference. Three home equity districts were eventually established, one on the Northwest side of the city and two on the Southwest side.
Originally, a key motivation for establishing the program was to prevent a decline in land values related to tactics of unscrupulous realtors. Realtors encouraged white flight at depressed prices by stoking fears of further house price declines and then sold the properties to minority buyers at inflated prices. Although causality has not been established with a well-designed evaluation, observers credit the program with success in stabilizing property values and encouraging residents to stay in neighborhoods rather than flee to suburbs, and attribute this success more to the existence of the program than to actual payouts. Over the first 14 years of operation (from 1989 to 2003), the three home equity districts had paid out about 20 claims.
Syracuse, New York
The Home Equity Protection program operated in parts of Syracuse from 2002-2006. The program was intended to halt a pattern of urban decline by signaling to potential buyers and existing homeowners that any stigma attached to the neighborhoods was unfounded, and that buyers could invest with confidence. Home Headquarters, Inc., a NeighborWorks organization, operated the program in partnership with the Syracuse Neighborhood Initiative; academic and financial partners; and others. A HUD grant funded the program’s initial capital reserve; thereafter, participants were charged a one-time premium of 1.5 percent of the appraised value of the home for the insurance coverage. Payouts were tied to the change in a local housing price index based on actual sales in the ZIP code. If, upon resale, local home prices had declined, participants received a payout regardless of the actual sale price. For example, if house prices in the ZIP code declined 10 percent in the five years between enrollment in the program and sale, the participant was paid 10 percent of the covered value of the house. Observers reported that the Home Equity Protection program effectively functioned more as a marketing tool than an insurance program. Few policies were sold, but the program’s existence helped to instill confidence in buyers.
Oak Park, Illinois
A “local equity assurance program” operated for several years in Oak Park, a suburb of Chicago, beginning in 1978 as a strategy to facilitate an orderly process of racial integration, at a time when racial steering by real estate brokers, white flight, and other factors sometimes led to neighborhood decline. Participating homeowners paid a small up-front fee, obtained an appraisal, and upon selling their home, could be reimbursed for 80 percent of the loss incurred if the home sold for less than the original appraised value. Prices in the area generally rose during the following decades, and at last report, no claims had been made against the program, which is no longer offered.
Home equity protection programs have also operated in the Patterson Park community of Baltimore, Ferguson and Florissant, Missouri, and Aurora, Illinois.
- The Detroit Housing Market: Challenges and Innovations for a Path Forward, Urban Institute (2017) – This research report examines three elements of Detroit’s housing market: demand, supply, and credit access. It recommends home equity protection as a strategy to guard against falling property values and negative equity. The report describes home equity protection programs previously in use in Syracuse, New York and Oak Park, Illinois.
- Stopping the Freefall: Stabilizing Minnesota’s Housing Market (2009) – This policy proposal describes a potential pilot Minnesota Home Values Guarantee Program, intended to stabilize housing prices by protecting buyers’ down payments for five years. The program is modeled on the Land Values Guarantee Program, developed by the Farm Credit Bank of St. Paul in 1987. That program was implemented in response to the farm financial crisis that occurred when declining values of farmland led to a wave of foreclosures and voluntary conveyances, and effectively put a floor under farmland values in the Midwest by insuring buyers’ equity against loss from declining land values for five years. The program, which reduced risk for both buyers and mortgage lenders, is credited with preventing thousands of foreclosures and improving the success of loan restructuring efforts.
- Standing Tall in Chicago Neighborhoods: The Story of the Campaign by Southwest and Northwest Side Communities for a Guaranteed Home Equity Assurance Program, Institute for Community Empowerment (2004) – This report describes the history of equity insurance programs still in operation in Chicago’s three Home Equity districts. Inspired by Oak Park, Illinois, over a decade of effort went into establishing the guaranteed home equity program, primarily because state legislation was required to authorize the creation of home equity districts. The first home equity districts were established in 1989.
- Northwest Home Equity Assurance Program – This website contains guidelines and procedures for the home equity protection program.
- Home HeadQuarters – Website of the NeighborWorks organization that operated the Syracuse Neighborhood Initiative, including the Home Equity Protection program, in Syracuse, New York.
- Home Equity Insurance (1999) – Academic paper describing conceptual issues and program design choices related to home equity insurance. Citation: Shiller, Robert J., and Allan N. Weiss. “Home equity insurance.” The Journal of Real Estate Finance and Economics 19, no. 1 (1999): 21-47.