Should new home buyers expect to receive free unemployment insurance -- guaranteed payment of their monthly mortgage costs for six to nine months -- along with their home loans?

Two big mortgage market players apparently think so, at least for first-time and other purchasers who can't afford large downpayments.

MGIC Investment Corp. last week began offering certain low-downpayment buyers "mortgage payment protection" coverage. The program, which MGIC insists is totally free of direct or indirect cost to consumers, provides automatic payment of up to $2,000 a month of principal and interest for up to 9 months of "unexpected unemployment" or disability for the first 5 years of the mortgage, as long as MGIC continues to insure the loan.The total potential payout on behalf of an insured borrower is $18,000.

MGIC normally provides only mortgage insurance coverage to lenders, compensating them for losses attributable to extended borrower defaults or foreclosures. The new payment protection program is an add-on to MGIC's standard mortgage insurance policies. MGIC is purchasing the extra insurance from Stonebridge Life Insurance Co., a subsidiary of giant Aegon USA, Inc.

Patrick Sinks, MGIC's executive vice president for operations, said the unemployment protection "may sound too good to be true, but it really isn't." MGIC believes it will save money by helping vulnerable buyers -- typically young, immigrant or minority households -- avoid foreclosures following unexpected job losses or disabling injuries or sicknesses.

Sinks said layoffs and job-related disabilities are among the major causes of serious defaults and foreclosures. Since MGIC typically has to pay its lender clients tens of thousands of dollars when borrowers go into foreclosure, the company is now willing to absorb the cost of unemployment coverage policies itself.

The program is not for all home buyers, however. Only those making downpayments less than 10 percent and who have Fair Isaac (FICO) scores of 620 or higher can qualify. The extra coverage will only be available through lenders using MGIC as the supplier of basic mortgage insurance.

A second large mortgage underwriter expects to roll out a competing, but different, plan shortly. Genworth Financial Corp., which recently absorbed GE Mortgage Insurance Co. and other General Electric financial units, is currently pilot testing its own version of no-cost unemployment insurance for home buyers.

The Genworth plan offers up to $2,500 a month in principal, interest, taxes and insurance (PITI) for as long as 6 months of an unanticipated job loss. The coverage, which comes with no direct cost to the borrower, extends for the first year of the loan only. After that time, borrowers can sign up and pay for job loss coverage directly from the insurance agency that administers the program for Genworth.

Like the MGIC program, the forthcoming Genworth insurance plan will be available from lender clients of the mortgage insurer. There are no credit score features attached to the Genworth program now being pilot-tested, nor are there loan-to-value (LTV) limitations.

Over 75 private and public mortgage lenders around the country already offer an independent program known as "Mortgage Guardian" unemployment insurance as an add-on option, according to Mortgage Payment Protection, Inc., a Florida-based insurance agency that developed the plan.

"I think more and more lenders are seeing this as a real consumer benefit," said Mortgage Payment Protection's Teri Cooper. "This is definitely a trend that's here to stay because it's a win-win" for everybody involved -- the home buyer, the lender, secondary market investors, and now mortgage insurers.

Published: May 31, 2004

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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.