An Irish financial services company has today launched an insurance product which might help residential property buyers have peace of mind about future falls in the value of their purchase. IFG has called its product the Home Price Protection Plan, it’s open to every buyer and seller and places the risk of price falls almost exclusively with the seller. There is a dedicated website for the product here. Here’s how it works with illustrative figures:
(1) The seller has a property for sale for €200,000. The property can be an apartment or house, new or second hand. The seller can be a developer, an owner occupier or investor.
(2) The buyer pays €200,000 for the property and the purchase price can be cash or a mortgage from any bank.
(3) The seller agrees with the buyer that he will refund to the buyer any decline up to 20% of the value of the property over an agreed period of time of between 1-4 years.
(4) The seller agrees to place the agreed decline sum in trust with a third party, the maximum in this case €40,000.
(5) After the agreed period of time, the trustee compares the CSO monthly index with the index value at the time of purchase. If there has been a decline, then the trustee refunds the relevant amount to the buyer. Eg if the agreement was to cover one year only, at the end of the year, the price of apartments in Dublin has fallen 8% the trustee refunds the buyer €16,000.
(6) The trustee is paid out of interest earned on the retained sum subject to a maximum of 0.9% of the purchase price. So the trustee places the €40,000 on deposit at 4% per annum and keeps €1,600 after year one.
(7) The seller shoulders practically all the risk. However the buyer pays €200,000 and pays mortgage interest on 100% of what is borrowed, so the buyer potentially incurs unnecessary mortgage interest over the period of the insurance. Also if the decline is more than the maximum then the buyer bears the additional decline over 20%.
I must say that the product looks like a clever innovation though there will be niggles. The CSO publishes figures at a very high level, so there is only one index for apartments inDublin. And withinDublin, agents will tell you there are several micro-markets, but that is ignored by this product. If the buyer overpays then that is too bad, it is only the change in prices that is recorded by the CSO index. So if the buyer pays €200,000 for a property only worth €150,000 then that difference will not be refunded; but that is the way the market works now anyway. It is not clear what happens if the buyer re-sells during the insurance period but presumably the insurance is stopped and there is a reckoning of the CSO index on the date of sale. It is the buyer who benefits from the interest on the retainer less IFG’s costs (capped at 0.9% or €1,800 in this case).
The product doesn’t appear to be advertised on IFG’s website at present, it is being launched today Thursday so presumably it will be there shortly. NAMA has announced its own negative equity protection product but has yet to confirm details though it is understood the product is to be launched imminently. Charlie Weston writing in today’s Irish Independent says “it is understood that the idea for a negative equity protector was first suggested by IFG to executives in NAMA.”
NAMA Wine Lake 
We really do need a proper housing database. Also, as a FTB couple sitting on the sideline waiting to purchase we’re very reluctant to go near anything to do with NAMA – the lack of transparency sets off alarm bells.
Back in the bad old day’s This was a requirement.
http://www.cml.org.uk/cml/consumers/guides/indemnity
What’s a credit default swap again.
First, think of insurance. In an insurance policy, you essentially make a bet with the insurance company that something will happen to your car, say, in the next year. If you win, the insurance company pays out. If you lose, they keep the money.
Now a CDS is in essence the same thing, with the added extra that you must hand over the car (bond) if anything happens. Or at least that’s the theory. In theory, the asset is supposed to be worth something even in the event of a crash. But like a car in a three truck collision, a lot of these assets are complete and utter writeoffs.
Thing is, like a man taking out a policy on his car with the intention of crashing it, a lot of the CDS buyers knew full well that their assets were steaming piles. In some cases, so did the CDS insurer. Both parties could ultimately rely on a) a government bailout for the companies involved and in particular b) massive profits in the short term before any payouts hand to happen.
Colour me cynical, but I’m not very optimistic about this product. Particularly after the like of the Home Payments receivership recently.
Utter nonsense. Put all warehoused stock on the market then let the market set the price… NAMA is promoting a ponzi scheme supporting prices at an artificial level. This is smoke and mirrors property prices are failing at 12-13% PA
IMF tells NAMA to sell 25% of its stock by Q4 2013. NAMA sell the portfolio of property outside or Ireland. Why because if property prices in Ireland fall further the banks have to raise more capital as their risk weighted assets are further impaired due to a decrease in LTV…
Keep away from these schemes its remind me of the IT company that tried to sell insurance for IT projects after the DOT Bomb in Ireland… it didn’t work either
Assuming the seller hasn’t a mortgage to repay and is not using the funds to trade up or can do a deal with his lender 80% now with the possibility of some or all of the balance if the value does not fall below 200k by the agreed time. Looks like a product designed to off-load select developer properties and maybe underwater buy-to-lets. Owner occupiers, unless they are daft, shouldn’t touch this one with a barge pole – they sell and remain exposed to declining values