New York Times
By BOB TEDESCHI
Would you be willing to give away 1 percent of your home’s value if it meant not having to worry about losing more?
That is the essence of a product introduced this month by Working Equity Inc., a San Francisco company recently started by former financial services executives.
Industry analysts and financial consultants suggest that the product could be useful to homeowners but should be approached with caution.
With the product, Equity Protection, a homeowner is charged a one-time fee of 1 percent to 2.5 percent of a home’s value, which is determined by the company. (The fee can be paid in monthly increments.)
Homeowners in quickly declining real estate markets, like Phoenix, will pay on the higher end of that range. In most ZIP codes in Manhattan, the charge is 1.5 percent.
Homeowners are essentially guaranteed that when they sell their home, they will not lose money because of a market downturn, even if the sale price falls below the home’s value at the start of the contract.
When a customer buys a contract at equityprotection.com, the company takes a snapshot of the average home price in a customer’s ZIP code, as tracked by First American CoreLogic of Santa Ana, Calif., a consulting firm that compiles a local housing index.
Take, for instance, a $500,000 co-op apartment in Midtown Manhattan. If, after two years, the average property value in that homeowner’s ZIP code, as measured by the index, has declined by 10 percent, and the homeowner sells the property for 10 percent less than its value at the start of the Equity Protection contract, Working Equity would reimburse that amount, or $50,000, to the homeowner.
Taking into account the 1.5 percent, or $7,500, fee at the start of the contract, the homeowner keeps $42,500 of a possible $50,000 loss.
But the coverage doesn’t end here. Even if the homeowners sell the property for 5 percent less than what it was worth at the start of the contract, Working Equity still promises to pay them the 10 percent, because that was the average loss in value in the homeowners’ ZIP code.
There are exceptions. Owners can’t collect on the contract in the first two years. Craig Schmeizer, the chief executive, says the holding period is meant to deter speculators from buying contracts in rapidly declining markets. The property must also be the primary residence.
Working Equity’s executive group includes former senior executives from American Express and Washington Mutual, among other financial companies. Mr. Schmeizer said that to ensure that customers can collect their claims, the company maintains a reserve account and is in the process of backing the product with reinsurance.
The Equity Protection contract is not considered an insurance product, however, which means it is not covered by insurance regulations in most states.
Craig Focardi, an analyst with the Tower Group in Needham, Mass., likened the product to a put option, which protects a stockholder against lower stock prices, and as such should be considered by only financially sophisticated consumers.
“But I would look at it more closely if I was definitely planning to move in a few years,” Mr. Focardi said. “There’s a very strong scenario that says home prices will decline another 10 or 15 percent, and in that scenario, if you pay 1 percent for this and you sell your home in the next two or three years, it could be a good investment.”
Jonathan M. Satovsky, the chief executive of Satovsky Asset Management in Manhattan, said the new product was “definitely worth looking into, but you really have to think through the ‘what if’ scenarios.”
He said homeowners should be cognizant of their area’s housing prices and confer with real estate agents. “It could work out better for some people,” he said, “or it could work out a lot worse.”