Dennis' Mortgage Blog

Question of the week:  Should I get earthquake insurance?

Answer:  This question was asked a few times since the earthquake in Japan last week.  Since California is on the opposite edge of the “Ring of Fire” there of course exists the possibility (probability?) that we will experience a massive trembler in the future.  With the media coverage of the Japanese quake and subsequent stories about California’s vulnerability and possibilities many homeowners are wondering about protecting their primary asset, their home, should a large earthquake hit the region and cause damage to their home.

Whether you should or should not have earthquake insurance is a conversation you should have with your insurance agent who provides your homeowners’ coverage.  In California individual companies no long write earthquake policies, rather they provide policies under the California Earthquake Authority (www.earthquakeauthority.com).  The CEA provides the coverage, determines the premiums for coverage and deductible options available to you.

When considering earthquake coverage three questions to consider are:

1. What are you protecting
2. What is your deductible
3. What is your cost

1) What are you protecting?  How much equity do you have in your home?  Are you upside down?  Do you have ten or fifteen percent equity in your home? 

2) What is your deductible?  CEA has two deductible options, 10% or 20% of the coverage.  If your dwelling is insured to rebuild for $200,000 then your deductible is either $20,000 or $30,000.  Does this exceed your equity in your home?  If so do you feel it worth the cost to pay not only premiums but also a deductible to rebuild your home given the current value?  If you home is valued at $450,000, you owe $415,000 and your deductible is $20,000 do you feel it makes for your to get earthquake insurance?  A difficult question to answer.  Finally, if there is partial destruction of your property, but not complete, the cost to repair may be just beyond your deductible, say $30,000 to repair some damage as the house was not a complete loss to the earthquake.

3) What is your cost?  Premiums, as you can see by going to the CEA site, depend on a myriad of factors, as most insurance premiums do.  Type of home, zip code, deductible, etc all factor into your premium.  The analysis of premium comes down to how much it is worth to you per year to insure how much equity against how much of a deductible?  It is a risk-benefit analysis that only you can answer, with the assistance of your insurance professional providing the costs and deductibles.  If your premium is around $500 per year and you have significant equity you may decide there is a good value in obtaining a policy.  If you premium is over $1000 per year, you have little equity and a large deductible you may feel the value of the policy is not worth the premium and should your home undergo significant destruction in an earthquake you are comfortable walking away from the home and the mortgage(s). 

In California it is important to note that with a few exceptions earthquake insurance is not required by lenders.  (The primary exception is that Freddie Mac requires earthquake insurance on condominiums, Fannie Mae and FHA do not.)  Because the insurance is not a requirement of obtaining your mortgage the lender does not need to be listed as a loss-payee for any earthquake insurance policy you may purchase.  This means that if you do have cause to submit a claim on your earthquake policy your lender need not be named and therefore a co-payee on any checks or claims paid. In short if you chose not to add your lender as an additional insured they do not have a claim to any funds to pay down/off the mortgage or control who gets the funds for rebuilding etc.

There is no set “yes” or “no” answer to “should I get earthquake insurance?”  Every situation is different and every family’s comfort level of risk and benefit is different.  Answering the question however is a valuable exercise and one every homeowner should engage in annually when reviewing their insurance coverages.

Have a question for me?  Ask me!

Last week I discussed resistance and pricing for Mortgage Backed Securities (MBS).  There was a hard level of resistance for Fannie Mae MBS at 102 basis points that was keeping a floor on mortgage rates.  This week that resistance was pierced, closing above the mark every day this week and above it today.  With momentum from stock market sell offs due to the disaster in Japan and concerns moving from the destruction and rebuilding from the earthquake and tsunami to possible nuclear meltdown of several reactors, bonds fared well.

Lost in the news from Japan was more mundane economic news on prices, employment, production, housing at home was off the radar for investors.  But long term those numbers do matter to U.S. consumers and businesses and the news was worthy of being off the radar.  Not much of news in any of the numbers indicating the economy is just going through the motions so to speak.

But only because of statistical manipulation.  When reports of prices are released the primary numbers that are regarded as “important” are prices minus costs for energy and food.  Why? Because energy and food prices are the most volatile month-to-month and can skew data that should determine if we have inflation or not.  This stripped down data is what the Fed and other analysts use as their gauge for inflation.  Ex-food and energy the Producer Price Index for February was up only 0.2% for the month and 1.8% for the year, the Consumer Price Index was up only 0.2% for the month and only 1.1% for the year.  But…add back in those volatile, but necessary, energy and food costs and the PPI jumps to 5.6% for the year and CPI doubles to 2.1%.

Food and energy costs are rising rapidly in 2011 and while the Fed does not take this into account when analyzing inflation, consumers do when deciding when, where and how much money to spend.  If my costs to commute to work go up from $300 per month to $400 per month, and the cost to feed my family goes from $500 per month to $650 per month that is $250 per month I cannot spend on…going out to dinner, a new iPhone, a new set of wedges for the golf bag, or new shorts and shoes for the kids for summer.

Investors have ignored the news as evidenced by the surge in MBS prices and the drop in Treasuries this past week. At some point Japan and its nuclear reactors will become the last news cycle and we will see focus again on the economy and the lack of growth but increase in costs leading to decreased consumer spending.  Then what?

Take advantage of this current rate cycle.

Rates for Friday March 11, 2011 Rates have dropped from last Friday as anticipated, with some give back yesterday and today as the stock markets have gone up pulling investors from bonds and MBS.

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conforming                               4.625%             Down 0.125%

30 year high-balance conforming           4.790%             Down 0.085%

30 year FHA                                         4.25%               Down 0.125%

30 year FHA jumbo                              4.50%               Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. 

*Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

A very sad week in Long Beach as a private plane crash took the lives of five men, husbands and fathers all.  One of the victims was Mark Bixby who I have known for many years.  Mark was the type of man everyone considered a friend once they met him.  Sharp wit, tremendous kindness, generous, thoughtful and just plain nice were just some of his many positive traits.  Our community was a much better place because of the time and commitment Mark, and his wife Theresa, put into various endeavors. 

Please put Mark’s wife Theresa and their three children Ryan, Kirra and Jessica in your prayers so that they may find the strength to cope with this tragedy. 

God bless you and thank you Mark for the opportunity to call you friend,

Dennis