The appeal of debt cancellation or payment protection plans for home loans may have more to do with consumers' fears of financially devastating events than with their actual vulnerability, according to a study sponsored by plan administrator Assurant Solutions.
Consumer demand for the programs, which may or may not be traditional insurance, would be driven most directly by their level of anxiety about potential job loss, disability, hospitalization or death, the study found. The plans cover payments or erase debts in these or other circumstances.
Surprisingly, the survey found very little correlation between how many payments borrowers felt they could make in such a situation and their interest in the protection, said W. Michael Balsley, the Assurant Inc. unit's director of mortgage debt business development.
Revised guidance from the Office of the Comptroller of the Currency, which took effect in 2003, made it easier for banks to offer such protection with loans, but Bank of America Corp. has apparently been the only sizable banking company offering it.
But Mr. Balsley, who recently rejoined Assurant from B of A, said bankers' interest is swelling.
"I can tell you it is the subject of discussion at each of the large mortgage originators," most of which have discussed the protection with Assurant, he said.
Assurant Solutions, of Atlanta, presented the findings Wednesday at an American Bankers Insurance Association meeting in Phoenix. It plans to issue a press release on the study today.
For the study, Opinion Research Corp. of Princeton, N.J., talked to about 1,900 borrowers who bought homes, refinanced debt, or took out a home equity loan or line in the past year.
It found that borrower worries and a predisposition for insurance-type products would trump loan type, the reason for borrowing, and savings in driving demand for the protection, Assurant said.
Consumers generally are willing to pay no more than $25 a month for such protection on credit cards, Mr. Balsley said, but the study found the limit does not apply to mortgages. "You can throw that number out" with home loans.
Some borrowers were willing to pay as much as 15% of their monthly mortgage payment, he said. And demand for the product is fairly inelastic - changes in price do not affect demand much, up to a certain point.
Two thirds said they worry about unexpected events, and most of them feared more than one type of event. The other third, the "live-every-day-for-the-moment people," probably would never want the protection, Mr. Balsley said.
About 38% of the survey participants identified job loss as their top concern, while about 15% said they expect they or their spouses would face unemployment within the next three years. Only 5% worry at all about divorce leading to prolonged financial difficulty.
Even with changing economic conditions, a series of early 2002 surveys by Genworth Financial Inc. (at the time a General Electric Co. unit) also showed that nearly a third of individuals - not only mortgage borrowers - worried about job loss.
The Richmond, Va., company later stopped selling the protection on a stand-alone basis, but last year it began buying policies for some mortgage insurance customers. Lewis Fain, the global marketing officer for its mortgage insurance business, said this summer that the decision to drop the stand-alone protection stemmed partially from consumers' price concerns.
Genworth felt that adverse selection was taking place, Mr. Fain said; because it had to charge so much to make the coverage profitable, it was sold mostly to those who sensed imminent job losses.
In the past two years mortgage insurers, nonprofit down-payment providers, and others have shown a growing interest in offering the protection for home loans - often as a free perk. Card issuers have offered this protection, for a fee, since the early 1990s. It is common for mortgages in some countries, particularly the United Kingdom.
Mr. Balsley speculated that more U.S. lenders would adopt the protection first for home equity - where use is already increasing - but he said that for first mortgages it is also "absolutely like water pushing on the dam."
Why did it take until now for the interest to develop? "If you had gone back two years ago, it wasn't on the radar at all, because they were swamped with refis."
