With the national unemployment rate at its highest in five years, homeowners, mortgage lenders and home builders are lining up in droves for a red-hot financial tool: Insurance coverage that provides up to six months of mortgage payments in the event of involuntary unemployment.

Over 8,000 new policies were written by the prime sponsor of the plan -- Mortgage Payment Protection, Inc. (MPPI) -- during December alone. Most of them were provided to consumers by participating mortgage lenders and home builders in 48 states and the District of Columbia, according to the Altamonte Springs, Florida-based insurance company.

In 2002, the plan is expected to be extended to real estate brokerage firms as well. For an enrollment fee of $200, a Realtor could provide home purchasers "peace of mind" insurance covering monthly mortgage payments up to $2,500 for as long as six months during a one year period. The actual cost of individual premiums to participating lenders, builders and Realtors is less than the retail enrollment fee typically charged consumers, and is set on the basis of volume. Some lenders, such as Shelter Mortgage Corp. of Bellevue, Wash., provide the coverage to borrowers at no direct cost.

A typical scenario might work like this: A Realtor offers the mortgage-payment insurance coverage as an added-benefit incentive to all new buyers who request it and qualify. A buyer with a $2,000 per month mortgage, who gets laid off a few months after the home purchase, would qualify for as much as $12,000 in monthly assistance during the following six months. If the homeowner located a job before the six months was up, the assistance payments would cease. If the homeowner subsequently was laid off from the second job later in the year, the remaining portion of the six month aggregate coverage would then kick in.

Although MPPI has offered the program for over a year, interest in it surged in the wake of the September 11 terror attacks, the onset of the recession, and widespread layoffs in key industries during the last quarter of 2001. Last month alone, 233,000 Americans lost their jobs to layoffs, according to federal data, and the unemployment rate soared to 5.8 percent.

Although most commonly offered as an add-on benefit by mortgage lenders, major homebuilders such as Centex, Beazer, Ryland and K-B Homes have signed onto the plan, according to Teri Cooper, Mortgage Payment Protection's national business development director. Participating lenders include Wells Fargo Mortgage, Washington Mutual, Prism Mortgage, First Horizon Mortgage and Shelter Mortgage, among others. The program is not available at all lending branches nor at all subdivisions. No coverage is available in Hawaii or Alaska.

There are several key elements to the program:

• Borrowers or buyers receive no protection whatsoever when their unemployment is attributable to "mandatory or voluntary retirement", resignations, dismissals for "willful misconduct" or criminal activities.

• Borrowers or buyers are not eligible if they have already received a layoff notice or termination. Homebuyers who are aware of the possibility of layoffs -- Cooper cites the example of airline personnel last Fall -- are eligible unless they are officially informed that their own jobs have been cut.

• Coverage starts one month after unemployment.

• Payments cover insurance and taxes as well as mortgage principal and interest.

• Those who are self-employed cannot be covered.

As the numbers of policies being written has soared, so has the number of homeowners submitting claims to MPPI. Current loss ratios --claims paid out versus premiums earned -- run "round 37 percent,"according to Cooper, "but might go above 50 percent" if the recession continues to swell unemployment rolls.

After the initial year of coverage, homeowners can renew their policies for an annual premium equal to 4 percent of a monthly mortgage payment. Policies cover mortgage interest, principal, private mortgage insurance and other escrowed items.

For more articles by Ken Harney, please press here.

Published: January 14, 2002

Use of this article without permission is a violation of federal copyright laws.

Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.