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New Leading Economic Indicator: Jobless Insurance for Homeowners

December 13, 1990

NEW YORK (AP) _ First they bought a piece of property. Now, as fears of joblessness spread, homeowners are being urged to buy some peace of mind.

More and more lenders have been trying to sell coverage to homeowners that promises to pay monthly mortgage bills in the event of a job loss.

The new insurance pitch, appearing in glossy brochures recently mailed out by banks to prospective and current homeowners, is one of the latest leading indicators of today’s rising unemployment.

The Labor Department reported last week that the nation’s jobless rate shot up to a three-year high of 5.9 percent in November.

″We’re getting swamped now with requests from all over for the coverage,″ said Richard T. Harris, president of Morgard Inc., of St. Davids, Pa., which is one of the largest insurance agencies offering this sort of coverage.

Roughly 40 banks and mortgage companies recently began marketing the new insurance, he said, including Chase Manhattan Corp., Shearson Lehman Brothers’ mortgage division and California Federal Savings & Loan.

For years banks have offered consumers the chance to buy insurance that covered the minimum balance on their monthly credit card bills in the event of unemployment, death or disability.

Banks say the new mortgage coverage is good for them as well as mortgage holders - protecting the bank’s monthly loan payments and guarding a homeowner’s most valuable asset against foreclosure.

But consumer groups, who have vigorously criticized credit card insurance as a high-profit product that costs consumers too much, say that homeowners should approach the new mortgage insurance with similar caution.

″We found that various forms of mortgage insurance are priced extremely high and are one of the primary methods banks are making their profits,″ said Peggy Miller of the Washington-based Consumer Federation of America.

Miller said the group had not yet studied the new unemployment insurance offerings. But, she added, prospective homeowners are particularly vulnerable to buying insurance without shopping around because they are ″extremely worried about getting a mortgage.″

Morgard said it graduates rates according to the occupation and geographic location of the policy holder. Its insurance is underwritten by large insurance firms, including Montgomery Ward Insurance Co.

Using monthly reports from the U.S. Labor Department, Morgard deems some occupations and locations riskier than others in terms of their job-loss potential and raises rates accordingly, Harris said.

Morgard’s average national rate is 3 percent of a homeowners monthly mortgage payment, he said. For a homeowner with a monthly payment of $1,000, that would mean an insurance premium of around $30 a month.

However, some consumer groups said the window through which policy holders can collect seemed narrow. For example, the insurance doesn’t begin paying benefits until 31 days after the homeowner becomes unemployed, or the second mortgage payment.

If the homeowner becomes unemployed within 90 days following the inception of coverage, benefits are limited to a refund of premiums. After the second year of coverage, the 90-day cap is eliminated.

Coverage also is limited to a year of monthly payments and a maximum of $2,500.

Considering the payback, ″it’s a fairly high premium,″ said Robert Hunter, president of National Insurance Consumer Organization. He said that it made sense for homeowners who are ″very high risk for losing your job and are not going to get laid off too soon but maybe some day.″

Harris expects 5 percent to 8 percent of Chase’s roughly 200,000 mortgage holders to sign up for the insurance. Initial mailings went out to 30,000 Chase customers on Dec. 1.

Harris said the bank’s profit on the premium was minimal, with commissions averaging 5 percent to 10 percent of the premium and usually covering only the bank’s cost of adminstering the insurance.

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