John E. Marthinsen
Volume 23
Issue 1
PUBLISHED
Fall 2016
Abstract
Residential homes are the largest, most leveraged assets in most U.S. families’ portfolios. Home equity protection (HEP) contracts offer opportunities to safeguard these real estate interests. In the United States, each state decides if a HEP contract is financial guarantee insurance (FGI) and, therefore, regulated by the state laws and insurance commission rules, or non-insurance financial protection (NIFP), which may escape state and federal regulations. Because HEP contracts have the potential to provide substantial benefits to homeowners, their regulation should be designed to protect state residents and encourage the development of safe alternatives. This article explains HEP contracts, their development, and why states should treat those that require material interests as FGI. Particular focus is put on: (1) the advantages and disadvantages of HEP contracts that are linked to home price indices, (2) why linking these contracts to price indices should not disqualify them as FGI, and (3) how HEP companies engage in regulatory arbitrage by linking their policies to home price indices and claiming NIFP status.