A bright idea from GE: Mortgage job-loss protection for existing homeowners
WASHINGTON — What happens to your house if your worst financial nightmare comes true and you suddenly lose your job?
Who makes your mortgage payments when you have no paycheck for months on end?
Do you have enough savings to cover the mortgage for six months or more?
Two years of intensive consumer polling and focus-group research by some of the largest players in the American mortgage and insurance industries have documented deep-seated fears among homeowners about financial meltdowns triggered by unexpected job loss.
Many families save little or nothing. They are stretched to the limit just paying for the mortgage, cars, credit cards, food and educations. If the main breadwinner lost his or her job, the house would be in jeopardy within a handful of months.
How to deal with that eventuality — and keep people in their homes even when they have no money coming in? One answer is about to come from General Electric: a plan that functions as an unemployment insurance policy attached to your mortgage.
How it works
GE later this month is expected to unveil a new "job-loss mortgage protection" plan that makes home loan payments of up to $5,000 a month for as long as nine months of involuntary unemployment.
Though better known for appliances and light bulbs, GE is no stranger to the home mortgage arena. Its GE Mortgage Insurance Corp. is the third-largest private mortgage insurance underwriter in the country. The company also owns GE Casualty Insurance, which is expected to run the new mortgage protection program through major lenders who service millions of home loans.
Other insurance and mortgage firms already are tackling the job-loss issue in different ways. Mortgage Payment Protection Inc. of Altamonte Springs, Fla., provides up to six months worth of payments for new home buyers and refinancers. Its coverage is available through a nationwide network of home builders, real estate agents, mortgage brokers and bankers.
Mortgage investor Fannie Mae's "payment power" plan, described in this column last week, seeks to deal with short-term job loss by allowing homeowners to skip up to two monthly payments a year.
The forthcoming GE program will take still another approach: It will be marketed solely to people who are already in their homes and make their monthly payments on time.
For an add-on of $25 to $45 to the regular payment on a $100,000 mortgage, GE will pay either 50 percent or 100 percent of the monthly mortgage bill for up to six months in the event of involuntary unemployment. For slightly higher premiums, the insurance will cover up to nine monthly payments.
The payments will be made to the homeowner's mortgage servicer, who will report the unemployed borrower as "on time" to the national credit bureaus. The coverage is for principal, interest, taxes, insurance and other escrowed items. Consumers can cancel coverage at any time.
The fine print
Like all insurance, GE's plan comes with fine-print restrictions — some of which may be turnoffs. For instance, after you sign up for the coverage, there is a 180-day vesting period during which time the policy won't pay your loan even if you are laid off. Lewis Fain, the GE Casualty senior vice president in charge of the mortgage program, says that feature is designed to weed out applicants "who know in advance that they're going to lose their jobs." The plan refunds all premiums collected during the 180-day vesting period if the insured borrower becomes unemployed.
Another important set of restrictions: Self-employed borrowers and retirees aren't eligible for coverage. Nor are people who lose their jobs because they are fired for malfeasance or criminal activity. You can't be insured unless you are employed at least 30 hours a week, are not a temporary or seasonal worker, and are between the ages of 18 and 65. Payments begin to flow only when the insured homeowner sends in proof of unemployment by virtue of having applied and been approved for state unemployment benefits.
Will all these hoops and snares scare away some potential sign-ups? Probably. Then there is the cost-vs.-benefits issue: For $45 extra per month — $540 a year — your full mortgage payments on a $100,000 loan are guaranteed for up to six months.
If your 30-year loan is at 7 percent, that's a potential payment of just under $4,000 in principal and interest, plus additional amounts for insurance and property taxes. Then add on top of that the costs of losing your house and much of your home equity to foreclosure, and the potential payoff equation becomes clearer.
Ultimately the key question is: Am I at risk of becoming unemployed for an extended period in the next year or two? And if so, do I really need a financial backstop to allow me to hold on to the house without a paycheck?
Kenneth Harney's e-mail address is email@example.com