American home buyers and refinancers are about to be offered atype of mortgage they've never encountered before: A loan that comeswith its own built-in unemployment insurance fund.
Borrowers who take out one of the new financing packages areguaranteed up to six months' worth of their full monthly mortgagepayments - principal, interest, taxes and other escrow items - shouldthey become "involuntarily unemployed" anytime during the first threeyears of the loan term. After three years, they can renew thecoverage. Payments flow directly from the insurance company to thelender, and the unemployed borrower is never recorded as having beenlate or in default.
The program - dubbed "Mortgage Guard" by the insurance companiesthat designed it - is intended to be an option to virtually any typeof home loan. Home builders, for instance, can offer it as an extraattraction at no direct cost to consumers. An individual home sellercould offer it through a lender.
Mortgage lenders are likely to customize and integrate it intotheir own loan menus. One mortgage banker active in over 30 states,for example, plans to introduce it before year's end as the "BreatheEasy" mortgage, with an eighth of a percentage point higher rate onthe typical loan. The program is expected to be available in moststates in the first half of 2000.
Why launch a concept like this in the midst of the strongesteconomy and lowest unemployment rate in decades? The sponsors of theplan, Cincinnati-based Great American Insurance Cos. and MortgagePayment Protection Inc. of Altamonte Springs, Fla., answer this way:Sure the national economy is hot, but mortgage defaults andforeclosures remain a market-by-market problem for lenders. Asignificant percentage of early defaults in home mortgages occur"because of corporate downsizings, mergers and acquisitions, suddenclosures of plants and offices," says Teri Cooper of Mortgage PaymentProtection.
The corporate consolidations of the late 1990s often hit likelightning, throwing hundreds of people out of jobs. "It can bedevastating to homeowners faced with monthly mortgage bills," saysCooper.
As with any insurance, you've got to read the fine print carefullyto see what the new unemployment protection covers - and doesn't. Theinsurance pays for up to six months of mortgage bills if you: Workfor a salary or wages at least 30 hours a week, and have been doingso for at least three months before applying for coverage. Have noknowledge of "any impending involuntary unemployment at the time ofloan closing." If your company has already warned you about upcominglayoffs, you won't qualify for loan payment insurance.
You won't qualify, either, if you're self-employed, work for arelative or own 25 percent or more of the company that employs you.Nor do you qualify if you quit, go on strike, retire or lose your jobbecause of a disability or "criminal conduct."
If you lose your job, you have to "file and qualify for stateunemployment compensation." Payments flow only to your lender onceyou've been out of a job for 31 consecutive days.
The typical cost will be anywhere from an eighth of a percentagepoint to a quarter of a percentage point added onto the note rate.
But is the coverage you get really worth even that size of amonthly add-on? Scott Maxwell, a senior vice president forresidential mortgages for Atlanta-based SunTrust Bank, says borrowers"have to ask themselves: Is there any chance whatsoever that I'mgoing to lose my job" in the next several years? "If the answer isno, don't get it. But if the answer is maybe, then the peace of mindthe insurance gives you might be worth it" compared to losing yourhouse or messing up your credit record. Maxwell plans to test-marketthe insurance on new home buyers beginning next month. WashingtonPost Writers Group
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