First Down-Payment Gifts, Now Insurance

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Increased competition and concerns about credit quality are leading down-payment gift providers to offer insurance that guarantees continued mortgage payments if borrowers lose their jobs.

Nehemiah Corp. of America, a company based in Sacramento, announced Monday that its standard down-payment gift program now includes a year's worth of payment protection.

Down payment gifts, especially those that do not come from members of a borrower's family, still give lenders pause. They fear that borrowers who feel they have no stake in their loans are more prone to default.

But executives at the nonprofits that provide the gifts say the added security from payment protection appeals to consumers and their creditors.

The gifting industry faces some new challenges. Delinquency rates among Federal Housing Administration borrowers, the biggest users of the gifts, far exceed those on nongovernment loans. And the field of nonprofit gift providers has grown crowded, and low-down-payment product innovations are reducing the need for gifts.

Last year Congress approved $200 million of annual federal down-payment gifts; Rep. Patrick Tiberi, R-Ohio, has introduced legislation that would authorize the FHA to insure zero-down mortgages.

Offering payment protection - which, unlike FHA or private mortgage insurance, protects the borrower, not the lender - is one of the ways the gifting nonprofits are trying to stay relevant.

Scott Syphax, the chief executive of Nehemiah said in a January interview that the "maturation" of the gifting industry has led it to pursue other activities, such as financing inner-city and rural real estate development.

David Ahrens, the vice president of sales and marketing at Neighborhood Gold, another gifting nonprofit, said, "We think that it's important not only to help get people into homes, but also to help keep them there."

Each month about two-thirds of the roughly 3,300 homebuyers who receive gifts from his nonprofit take the protection, he said.

The insurance was more of a competitive advantage when Neighborhood Gold, a marketer for the Provo, Utah, nonprofit Buyer's Fund Inc., started offering it in mid-2001 than it is now, Mr. Ahrens said. "I think we initially had done it to help differentiate ourselves."

But as the growth of the gifting industry and of high loan-to-value products led to fiercer competition for lenders' and borrowers' attention, other down-payment providers embraced payment insurance.

Observers say eliminating the FHA down-payment requirement, as Rep. Tiberi proposed, would reduce the impetus for gifting and further squeeze the nonprofits' fees (usually paid by the home seller).

"Nonprofit or for-profit, if you don't make money, you need to close your doors," said Rick Del Sontro, CEO of the Home Downpayment Gift Foundation in Washington.

Nehemiah's fee for a gift with payment protection is about $110 higher than for one without. Mimi Thomasmall, a product development manager with Nehemiah, said Mortgage Payment Protection Inc., a third-party administrator, will broker the policies, which are issued by AON Corp.'s Virginia Surety Co. Inc.

A borrower who suffers an "involuntary" job loss within the first year of the loan can get up to six monthly payments of $1,500 to cover the loan's principal, interest, taxes, and insurance payments. In the next month Nehemiah expects to expand the coverage period to two years.

Mortgage payment protection is different from credit life insurance, which automatically repays a mortgage if the borrower dies. Credit life has a reputation for sometimes being predatory; critics say it can be poorly disclosed or explained and sold with a single premium financed into the loan.

Payment protection can cover unforeseen events like unemployment, disability, and accidental death, and, unlike life insurance, it is not underwritten on the basis of a customer's characteristics. Down-payment providers usually wrap a year of premiums into their fees, but some offer monthly premium plans to the homebuyer.

Last year the Homeownership Alliance of Nonprofit Downpayment Assistance Providers commissioned a study of nearly 615,000 loans involving down-payment assistance originated over four years. The study found that down-payment gifts from nonprofits led to fewer delinquencies than gifts from federal or for-profit programs - but more than gifts from family members.

That finding may help explain why the insurer generally requires an initial "vesting" period before a payment protection policy takes effect. "You don't want someone buying a home knowing that they're losing their job," Mr. Del Sontro said.

For the past two years his nonprofit has covered borrowers under a blanket policy from Virginia Surety. The vesting period lasts two months. After that the borrower can get up to six monthly payments of up to $1,800. The coverage period is two years.

With membership in the foundation's educational program - and a $150 annual fee - consumers can insure themselves against job loss even without down payment assistance, he said.

A Bank of America Corp. spokeswoman said it began offering payment protection in mid-2001, when it was phasing out credit life insurance. Now about 20% to 30% of the new consumer loans for which payment protection is available, including home, credit card, and auto loans, include the coverage, she said.

The "Borrowers Protection Plan" can be used to protect against job loss, disability, or accidental death for up to 10 years. About six months ago B of A started offering coverage for six months of payments as well as for 12.

On average, customers who get the coverage pay about $50 a month, or about 7% of principal and interest payments, the spokeswoman said. B of A continues to "tweak" the pricing of the insurance and is "looking at covering other types of life events," she said.

In 2002 General Electric Corp.'s GE Casualty Insurance began offering coverage for all or half of a monthly mortgage bill in the event of job loss. The policies can cover up to either six or nine months. A spokesman would not discuss this business ahead of a planned spinoff of GE's insurance operations.

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