A company that offers price protection contracts to home buyers is offering real estate brokers and agents a 10 percent commission to sell their product, or about $300 on the sale of a median price home.

EquityLock Financial Inc. charges 1.5 percent to 2 percent of a home’s sale price to provide 15-year contracts that provide a hedge against falling home prices. The company’s referral program for Realtors and other real estate professionals pays 10 percent commissions.

Because the price protection contracts are purchased outside of the closing process, they are not subject to the Real Estate Settlement Procedures Act, said Omar Pedraza, the company’s director for new markets.

The contracts may be purchased by existing homeowners or buyers, or offered by sellers as an incentive. Pedraza sees the price protection contracts as a good marketing tool for developers and builders who need to unload excess inventory.
"The easy market is the developer looking to differentiate their product from other developers, and who wants to accelerate sales," Pedraza said. "That’s easiest for agents, because they are selling in bulk."

The price protection contracts — which are not available in the riskiest housing markets — pay homeowners if they sell their home after purchasing a contract and prices in their market have fallen.

The payments are tied to a home-price index compiled by the Office of Federal Housing Enterprise Oversight (OFHEO) and are made regardless of whether the customer sells their home at a gain or a loss.

When a home is purchased for $300,000 with an EquityLock contract, for example, and local market prices decline by 5 percent and the property is sold again, the contract would pay the homeowner $15,000 — regardless of the home’s sale price.

Because OFHEO’s home-price index relies on data from Fannie Mae and Freddie Mac, some experts think it may understate price declines in some markets, because many sales and refinancings involving jumbo loans are excluded. Pedraza said the OFHEO index has the advantage of being comprehensive and freely available to the public.

"There is a potential risk that the index will not follow a homeowner’s experience with their own home," Pedraza said. But the price protection contracts, he said, are "a hedge product, versus an insurance product."

Unlike a bank or insurance company, there’s no regulator keeping track of EquityLock Financial’s ability to sustain losses or pay claims to contract holders.

But Pedraza said the Salt Lake City, Utah-based company’s conservative loss assumptions mean that it will maintain reserves more than double expected payouts.

EquityLock Financial is not offering price protection contracts in the top 35 percent riskiest markets, he said. The company looks at markets at the metropolitan statistical area (MSA) level, so while some markets in states like California, Florida, Arizona and Nevada won’t be eligible, others may qualify.


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