Its Silicon Valley venture capital backers saw it as a game-changer for real estate, and envisioned themselves picking off $250 million a year out of a potential $25 billion market: insurance policies that would protect the nation’s homeowners from one of their deepest fears — further losses in their equity.
Known as “Home Value Protection,” the plan was featured on CNBC, FOX Business and publicized in news articles across the country.
As recently as June 20, Scott Ryles, chairman and CEO of the company that developed it, San Francisco-based Home Value Insurance Co., told journalists at the National Association of Real Estate Editors’ annual conference in Denver that despite continuing home value declines in many local markets, his policyholders “have financial protection and peace of mind knowing they are insured against a housing market that continues to prove difficult to predict.”
First introduced in Ohio last fall — followed by Oklahoma, Georgia, Indiana and expected to be available nationwide pending state insurance licensing approvals — the plan looked like another winner for Kleiner Perkins Caufield & Byers, the legendary venture capital firm. Based in Menlo Park, Calif., KPCB was an early investor in Google, Amazon, Intuit, Genentech and dozens of other high-flying startups.
But earlier this month, the home value protection bandwagon suddenly stopped rolling. Independent insurance agents in the states where policies were being offered received emails, followed by form letters, that shocked them. They should not write any additional equity insurance, agents said they were instructed, because the home value protection plan was being suspended. The company would service policies already underwritten, but no new policies would be accepted.
Larry Brown, president of the Overman Insurance Agency in Cleveland, Okla., said he tried to contact Home Value executives by phone to get an explanation for the abrupt cessation, “but I couldn’t get through” to anyone.
Neither could I. Despite numerous emails and phone messages last week seeking comments or a statement from the company, no one responded. I tried getting information from one of Kleiner Perkins’ two members of Home Value’s board of directors, Randy Komisar, but an assistant said there would be no comment.
So we don’t really have answers on key questions: Why did this once ambitious, seemingly well-funded company stop offering equity protection to homeowners? How many policyholders did it insure from last fall through June? After a period of “suspension,” are there plans to bring it back?
Bill Duckworth, CEO of Fennell & Associates, an independent insurance agency in Oklahoma City, says if they do restart underwriting, he’s not sure he’ll offer the product. “The credibility is pretty much evaporated” in the wake of the sudden shutdown, he told me in a telephone interview.
Though the stone wall of silence prevents obtaining the company’s analysis, the timing of the equity insurance venture — and the limitations of the coverage itself — may offer some clues as to what went wrong.
At first glance, introducing an equity insurance plan toward the end of the worst real estate down cycle since the Great Depression seemed brilliant: Roughly $6 trillion in equity was lost by American homeowners between 2006 and 2011, according to Federal Reserve data. Owners in many states have seen declines in values ranging from 20 to 30 percent or more.
Although the national housing market appears to have stabilized and is heading toward recovery, the fact remains that clusters of foreclosures and short sales in many local areas are exerting downward pressure on pricing. There’s still fear of further losses in many neighborhoods — maybe enough to convince lots of people to sign up for some equity protection.
But could the timing for home value insurance have been just a couple of years too late? Agents who signed up to offer policies told me that many consumers and Realtors asked them point blank: “Great idea, but why do we need it now, when we can see the market is turning positive? We needed this back in 2006.”
According to insurance agents, the structure of the coverage itself also turned off some potential buyers. Policies came with mandatory deductibles — 10 percent of the “protected value” during the first 12 months of coverage, and 5 percent during the second 12 months. In effect, if you had to sell your house at a loss within the first two years, the big deductible would limit your equity protection payout significantly.
Another objection raised by consumers: The policies were tied to movements in the Standard & Poor’s/Case-Shiller Home Price Index. If the index for your local area rose but your house happened to sell at a loss, you couldn’t make a claim.
Some people didn’t like the premium schedules either, which averaged $25 a month to “protect” $100,000 in home value, $50 a month for $200,000 of value and $75 a month for $300,000. But your actual payouts were always limited by the percentage decline in the Case-Shiller index from the start of your policy.
For instance, if you bought insurance for $200,000 of protected home value at $50 a month, and your house sold for a 10 percent loss and the Case-Shiller index declined by the same amount, you could qualify for a $20,000 insurance payment — provided, of course, that your deductible didn’t eat that up.
“It was a tough row to hoe,” said Ty Daniel of Daniel Insurance Agency in West Carrollton, Ohio. Many potential clients just didn’t like paying monthly premiums for something they had doubts about — a long-term continuation of housing price deflation — combined with the limitations on what they could expect to receive if they had to sell in the next couple of years.
Despite the obstacles, however, Home Value Insurance apparently sold a bunch of policies. In an interview last month with Dow Jones Newswires, Ryles was quoted as saying the firm had written coverage on $50 million in protected home values, but had not yet paid a claim.
Could it be that $50 million in insurance was not a big enough number to hit the benchmarks set by the venture capital backers? Or was consumer resistance to the composition and timing of the insurance package itself what brought it down?
Since nobody is talking at the moment, we can only guess.
Ken Harney writes an award-winning, nationally syndicated column, “The Nation’s Housing,” and is the author of two books on real estate and mortgage finance.
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