This was an interview originally recorded on The Jon Sanchez Show - May 22, 2018
Host: Jon Sanchez (Sanchez Wealth Management)
Co-hosts: Corey Edge (Edge Realty) and Dwight Millard (Academy Mortgage)
Link to edited show: https://youtu.be/vEss5mcIPLg (specific segment links below)
Link to original broadcast: https://www.spreaker.com/user/10565136/sanchez0522
SHOW INTRODUCTION: Listen >
Discussion of why down payment protection is an interesting topic and needed:
Jon Sanchez: All right. Let me tell you what we have lined up tonight. Got a great show lined up. We're, we're fascinated about having this guest on. His name is Joe Melendez. He's the CEO of a company called ValueInsured. If you want to look up more information before he joins us after the first break, ValueInsured.com. Now what his organization does is somewhat revolutionary. I am not aware of anybody else that does this. Maybe there's some other competitors out there, but as you will learn among many other things, but the primary reason we're having him on is, his company ValueInsured will insure your down payment. Now, let me repeat that. His company will insure your down payment, so we all know of course, after the financial crisis, right? People said I had to short sell my house or foreclose on my house, got foreclosed on, etc. Cory, correct me if I'm wrong, as a real estate broker, you probably didn't get too many people saying "geez, you know, my house was worth X at the peak and I had a short sale" or you know lost it and it's then worth Y. They're saying, "hey, you know what? It's that down payment that I put into that house that's gone." That seems to be the part of it that hurts people the most from a psychological standpoint.
Cory Edge: Well I think so. And if you remember back to those days, that was one of those quirks, there were zero down loans. There were loans that not only were the zero down but you got money at closing. Yes. So nobody had skin in the game and so they felt that hurt a little bit but not enough. So now they're back to the down payment. Exactly. which is a perfect. And you know, we have a million questions for how you insure people's down payments. Yes. But if it works and if it's a good system, it makes sense because that is the pain that people feel. That's right because that's real money that they used.
Jon Sanchez: And what you're going to learn. Again, we've got so many questions for Mr. Melendez. It's basically 10 percent of your down payment. That's the insurance cost per year. So you put it here, you put down. I think it's per year. I think it's per year. After I said that, I'm like, maybe it's just one time. So yeah. I'm not sure if you were recording. I see. And I read a different article where they didn't do a percentage. They said it was about a thousand bucks one time. Okay. And they're pushing again. We'll, we'll ask him directly. They're pushing a lot of real estate agents and lenders to say, hey, you can pick this up for your client. You can do these things because it's one time. Okay. Smaller it was CNBC had on them. So yeah, little percentage would make more sense because it's correct. Yeah.
Jon Sanchez: Yeah. I put 100,000 dollars down payment. You're going to charge me 10,000. I'll do the exactly. The CNBC interview that, that, which is where we picked him up from, um, it was 10 percent of the down payment. So you put down, put down 10, it cost you a thousand bucks, you know, and he's been in this business for a long time. Like he just, he absolutely has spent a decade developing residential properties, uh, so on and so forth. And so, um, yeah, it's a absolutely amazing. So he will be joining us. So we'll learn about what ValueInsured does and how you can insure some of your, uh, some of your down payment. And I think it's only on your primary home, correct? Okay. Perfect. All right.
SEGMENT #1: Listen >
Discussion of who ValueInsured is, what and how does down payment protection work, how it works in comparison to MI and what needs it addresses:
Jon Sanchez: Welcome back to the John Sanchez show, at news talk 780 KOH, with my buddies, my cohosts, Mr Cory Edge of Edge Realty and Dwight Millard of Academy Mortgage. Let us bring on without further ado, our very special guest tonight, Joe Melendez of ValueInsured. Joe, it's a great pleasure to have you on the program. How are you tonight?
Joe Melendez: I'm good, Jon. Thank you so much for having me tonight. I look forward to chatting with you and your audience.
Jon Sanchez: Oh, thank you so very much. Before we get started, Joe I want to introduce you to my cohosts, I got some real estate pros sitting here with me to chat with you. Mr. Cory Edge of Edge Realty. Cory is a local real estate broker. Hi Joe. How are you?
Joe Melendez: Hi Cory, good to talk with you.
Jon Sanchez: and my good friend, Dwight Millard of Academy Mortgage, a 30 year mortgage veteran, a branch manager of Academy Mortgage here in Reno. Ok my friend. Let's get started. You, you have so much experience and we are so excited to learn what ValueInsured is all about. Um, let's talk a little bit about, first of all, what the company does and then I want to get into all the details.
Joe Melendez: ValueInsured as the name implies, we're insuring the value of the home. What does that mean? It means that the down payment that somebody has worked so hard to save up, to be able to buy a home now has the ability to be protected against risk of loss in the event that the homeowner has to sell in a down market.
Jon Sanchez: Okay. So let's go into details. I watched a great interview you did on CNBC and you explained this program. Talk to us about the details of it because all three of us are sitting here saying, we have never heard anything like this. So we are fascinated. Give us the nuts and bolts, Joe.
Joe Melendez: Well, the nuts and bolts are, when the financial crisis came about, I was looking around and I said, look at all these people that are suffering through no fault of their own, are losing their life savings and having been in the financial services industry for 35 years, I said that there has to be a tool, a way to protect people the same way the banks are being protected with mortgage insurance, with their investments to insure that that person that is taking money out of the bank to buy that dream home to be part of the American dream, they had the same protections and that was the basis of, of coming together and forming ValueInsured to really give homebuyers the same type of opportunity that financial institutions had in being able to protect their hard earned down payments.
Jon Sanchez: Fascinating. Do you have any competitors?
Joe Melendez: We have no competitors at this point. This is a very tough product to bring to market. It's taken several years of working within the regulatory environment of the insurance departments and the banking regulators, but we're here today, we're backed by one of the largest reinsurers in the world, Everest reinsurance, and they stand as our partner in this program to change the way that Americans buy homes and bringing them into the modern way of homeownership.
Cory Edge: That's fascinating. So, you mentioned the private mortgage insurance, which most people realize if you don't have 20 percent down, the bank's going to tack on the private mortgage insurance. I don't know that a lot of people realize it's a third party company that does that insurance, but it makes complete sense that if the bank can do it and [then] why can't the person do it? So what kind of roadblocks have you run into, I guess in other word, why is it so easy for a bank to do it but so hard for the consumer to do it?
Joe Melendez: Well, because on the bank side of the page, you have Fannie Mae and Freddie Mac who are mandating that you have to have it. It's a mandated insurance. So it's been around. It's being forced on the consumer as a way, as a condition to get the loan, and the worst part of that is actually paying that premium to insure the bank's money against risk of loss, but yet nobody's looking out for their risk of loss. So today there's a lot of talk about front end risk transfer. You hear about it all the time around Fannie and Freddie, and really when we talk about front end risk transfer, we really are the front end risk transfer because that homeowner is our insured and they're the only person who can change the outcome of a loan. They're the only person who can default. So if we give that person a financial incentive through this, a down payment protection product, not to default because they have the ability to recover their down payment in the worst market conditions, then you're going to have a change in behavior and you're going to have...we're not going to have 7 million boomerang buyers coming out of the next crisis because they're going to be able to be financially secure in owning their homes.
Dwight Millard: Right? You bring up a great point because you know, the financial crisis, you got these boomerangs come back once bitten, twice shy, right? [Saying] "I'm not going to do this again... this just isn't gonna make any sense to me." So, you know, it's funny that you say this because I've often thought that same thing where the consumer is paying the mortgage insurance premium for the bank, you know, so I'm glad you came up with something that can kind of eliminate that and help the consumer have a better peace of mind.
Joe Melendez: You know, and I appreciate that. And you know, what we've also done is we've made it look and feel just like mortgage insurance so it can be put into the loan so you don't have to write a big check at the closing table. It just comes out to a couple of dollars a month on the monthly payment, just like mortgage insurance. So again, we've made it simple for the consumer now to protect their down payment. And you know, what's really interesting is as we look at this market and this new millennial cohort, which is the largest cohort of homebuyers ever, that have put family formations on the back burner for so long, they all want to be part of the American dream, but the differences are that they're used to buying everything as they need it. They only want to consume things on their terms and that includes housing. They want to be able to consume housing on their terms. They want to be able to have optionality and flexibility. And by giving the financial security of down payment protection, it basically says, look, you can consume and own this home on your terms and if you want to up and go for whatever the reason is in the markets against you, you don't have to worry about getting wiped out.
Jon Sanchez: Perfect. Alright, so we're going to take one of our breaks. When we come back, I want to walk through a hypothetical borrower, right? Let's say this person is going to put $10,000 down payment. I'd like for you to walk us through A to Z how this program works and costs and everything associated with it. Our very special guest, Joe Melendez, CEO of ValueInsured.
SEGMENT #2: Listen >
Discussion of down payment protection cost and how it is priced, how claims are made and results from the latest ValueInsured Modern Homebuyer Survey:
Jon Sanchez: Welcome back to the John Sanchez news talk 780 KOH, pleasure to be with you this evening as it is with our very special guest. He, of course is Joe Melendez, CEO of ValueInsured. All right Joe, let's go back to our example. But Dwight, had me change something and that changes. He said, oh hey, let's go. Something more realistic. John, our average price medium price here in northern Nevada, about 400,000, a five percent down payment. So, 20 grand, walk us through this hypothetical scenario.
Joe Melendez: So $400,000, you're putting down $20,000. We're going to insure that $20,000 for seven years from the date of purchase, let's say three years down the road you have to sell the house and for whatever the reason is, you know the most that you can sell the house for is $380,000. And the market was down five percent, which is $380,000. For the cost of $5.42 you would be able to recover your entire $20,000.
Dwight Millard: So. Okay. So I guess my question is, is there a limit to the amount that you will ensure on the down payment? And do I have to put this payment in impounds or do they pay it separate? Does it come as a ..
Joe Melendez: Great question? So first of all, it's a single premium, so it's just like lender paid MI, it's one and done right. So there's no monthly payment, it goes right into the mortgage and it's built into the monthly payment. Okay. And then as far as the limit goes, we have a $200,000 limit, so we'll insure a house up to a million dollars with 20 percent down or we'll, we'll do a $3,000,000 house with 20 percent down, but we'll only insure up to a $200,000 maximum.
Dwight Millard: Do you do a risk based pricing, meaning the lower, like the MI companies, you know, if you have a lower credit score and you put your put down, I mean that is, yeah,
Joe Melendez: This is not a credit product, so the only thing that we look at is where is the house located, what state is it located, and how much are you paying for it and how much are you putting down those with the characteristics that we look for and it has to be a single family owner occupied residence, whether that's a condominium or a single family home. Those are our parameters. We don't do investment properties or vacation homes.
Dwight Millard: Can you add it after the fact? Meaning let's say I close, I go, you know how they get solicited for disability insurance, all sorts of. Is this something you could add after the fact?
Joe Melendez: You can. You can add it within 30 days of closing. So if you get into the house and you decide you don't want, I don't know, I may have a job change coming and you're unsure and you say, maybe I have a little buyer's remorse. Let me get that coverage. You can buy it 30 days after. The only thing obviously is we can't build the premium into the mortgage because we have mortgages already closed.
Dwight Millard: But do they have the option to pay a separate. And the reason why I'm saying this is, you know, I got to go track down everything before I get my final numbers. I got to go get everybody's HOA homeowner's association, the HOA, the taxes. This is just another element that I got to put in, you know, I assume what that kind of premium is not going affect my debt to income ratios, but I'm just wondering is this something. So when I'm going out checking with, you know, my insurance agent, this is just another thing to offer them going, okay, here's another. And it's you get another declaration page or something that goes with it.
Joe Melendez: Well, what happens is most of our clients are lenders, so we have 19 lenders across the country that offer this program as a feature of their mortgage offerings. So when they're offering the mortgage product to their borrower, they're saying this mortgage comes with down payment protection and it's, it's part of the origination process. So typically when the loan closes, the funding of the premium is in the closed loan. Now that doesn't mean that the consumer, if they opt and want to write a check, they can write a check themselves, have a seller, can pay for it, a builder can pay for it. We are a MISMO approved product. So the gamut is wide open about who can pay for the premium on behalf of the borrower.
Dwight Millard: So my million dollar question is: Is Academy on this or do I need to make a phone call tomorrow?
Joe Melendez: I think you need to make a phone call, but we do have, you know, we have today over 4,000 loan officers nationally on the retail side and 700 account executives on the correspondent and wholesale lending side. So we'd love to have Academy join our family.
Jon Sanchez: What's the criteria for somebody to, to collect on this policy?
Joe Melendez: The only requirement to have a collection is you have to sell the house, you have to sell it at a loss and the market has to be down, right? I mean you can't just not take care of the house and you know, turn it into a frat house and then have it be destroyed and think you're going to collect on the policy. It doesn't work that way.
Jon Sanchez: So when you say the market has to be done, what is your, what is your specific criteria?
Joe Melendez: We use the Federal Housing Finance Agency's, home price index, so similar Case Shiller, but this was published by the federal government and we look at what's the value of the home on the day it was bought. And what was the value of the index on the day it was sold. So when we look at the, let's say it was 100 on the day that the home was purchased and it was 95 on the day that it was sold than the index went down five percent. So in that case, if you sold your house from minus five percent, you'd have a full recovery.
Cory Edge: And so with that index Joe, I'm guessing do you need to do any reconnaissance or what not on the specific house or you're just looking at the index to say we know we're in a down market. We know this person sold their house for..
Joe Melendez: We are just looking at the index.
Cory Edge: You're just trying to. I just want to make sure the market is truly ... going down
Joe Melendez: That is correct. The federal government publishes that on a quarterly basis. They've been doing it since 1975.
Cory Edge: And how long have you been doing this when you're just this business?
Joe Melendez: Well, we launched the product about two years ago and it's been growing every year. And especially as home prices have continued to rise, people are getting more concerned, there are more distractions in the market. As home prices are rising, interest rates are going up. Am I buying at the top of the market as our latest research showed people believed that, um, we have a greater propensity to have a correction in the next 24 months than to have continued price appreciation. So what we say is, look, we can't call the top of the market, we don't, we're not trying to do that. All we are saying is if we can take the risk off the table, take the risk off the table at a reasonable price, then you have a terrific investment. So you know, if you think about homes, you put up five percent, you borrowed 95 percent, you get 100 percent of the appreciation. If you can take the risk off of the five percent that you put into the deal, you have a risk free investment.
Cory Edge: Absolutely. And so I'm guessing if you started two years ago, you haven't had to pay out too many policies yet, right? Because of the way the market's been.
Joe Melendez: No, but there are markets down across the country. I happen to live in one. [laugh]
Cory Edge: Yeah. And then the million dollar question, I don't mean to put you on the spot, but if everybody's right and if the market is getting towards the top and we're gonna see some downtrend, how do these policies get paid if tomorrow the 100,000 clients or whatever the market goes down in two years from now, they'll call and say, hey Joe, give me my down payment. How, how do they know that money's there to be paid?
Joe Melendez: Well, unlike the mortgage insurers that are solely tied to mortgages, my partner is a global reinsurance company, so mortgages only represent and residential risk only represents a small part of their total risk portfolio. And they have over $8,000,000,000 in excess capital. So, uh, this is a company that insures Fannie Mae and Freddie mac and many of the MI's. So we have a very strong partner in a solid balance sheet. A+ rated by the way.
Jon Sanchez: Joe you mentioned just a moment ago this terrific research report you guys recently issued at ValueInsured, the housing confidence, you titled it Housing Confidence Bottoms Out. Really grabbed my attention on this. Talk to us about this report and your findings and what you're seeing among the consumers.
Joe Melendez: Well, what's really happening is a tale of divergence. You have people that want to, have this emotional desire to have a home and that's keeping the number very high for people who want to be inside of a home. Right? So the overall number of homeownership is still relatively high, but when you look at the financial realities of homeownership and which is pulling back the covers and understanding all of these incremental costs, whether it's rising interest rates, whether it's the impact of the tax code, you're starting to get a divergence between affordability and the financial metrics of homeownership and the emotional metrics of homeownership. Um, You know, Bob Shiller from Yale consistently talks about, um, homeownership is completely emotional. But what our studies are showing is it's not our home buyers today are smarter. They have more tools. They understand the marketplace, uh, yet they need to be rational players. And that's what we were trying to do with down payment insurance, which is make these folks, rational players, make them think about what they're doing.
Jon Sanchez: Real quick, we got about a minute before our next break. Here's the discussion that the three of us and we have a numerous real estate guest, developers, et cetera, Joe, and whether it's a guest from you know, we've had CoreLogic on, so we're getting a national flavor also. It's the same issue whether we're talking here in Reno, NV, or around the country. It's the home affordability slash lack of inventory. Do you see any solution to the lack of inventory situation that our nation is facing?
Joe Melendez: Well, it's an interesting question Jon. We have a bunch of very creative realtors down in Southern California who have targeted homeowners that they say should either be trading up or trading down or we call right sizing and those folks had been reluctant to move and to unlock to let go of that house because they're saying, hey, I paid X for this and now I have to pay Y for the new house. Suppose the market goes down. so these realtors are using our product to talk to these sellers and say it doesn't matter because the risks that you face in going into the new property is being mitigated with the down payment protection. So this is a tool that can be used by realtors to help sellers come to market, get out of the home that they're in, and be in the right size property and hopefully free up some inventory.
Segment #3: Listen
Discussion of how down payment protection reduces risk and how it fits with seller guidelines:
Jon Sanchez: Alright, back to our very special guest, Joe Melendez, CEO of ValueInsured. So, so we find ourselves in this, this situation, like you said, realtors down in Southern California and talking to their real estate clients about ensuring the down payment. Is there any downside to this? I mean, I know you're the product creator and it's your company, et cetera, but you're also a very honest, ethical man. Is there any downside that people should think about?
Joe Melendez: No, there's no downside. The only downside is not having the coverage because then you're totally at risk. I mean, we've worked hard to bring this product across the country to really make homeownership a part of the American dream and make sure it stays that way and just bringing it into the next century.
Jon Sanchez: Yeah. How come someone hasn't done this before? You know, famous last words, right?
Joe Melendez: Because it's really hard.
Jon Sanchez: Don't be so candid Joe. Don't be so candid. No, I can imagine. I can imagine.
Dwight Millard: So Joe, so Fannie, Freddie, FHA, VA, they've all, they're all okay with adding this to the ... [loans].
Joe Melendez: We're compliant with all the seller guidelines. We've been doing this now for a couple of years. Like I said, we have, we have over 4,000 loan officers, we've sold product at every venue and um, you know, we've had, look, they loved it because we're changing default behavior, so loans that have our product are less likely to default vs. loans that don't. So all of the creditors love our product.
Jon Sanchez: Why hasn't a Fannie or Freddie created this type of program. Why did it take the private marketplace to do it?
Joe Melendez: Because Fannie and Freddie are interested in their risk, which is the dollars that they're advancing. So when they write that loan for $100,000 and they know that for that first 20 percent they have private mortgage insurance, they don't get paid. They know that that money belongs to the consumer. Then not worried about that money. That's my money.
Jon Sanchez: Amazing. Yeah. Joe, you've got to keep us abreast. Love to have you back on very soon as this product grows. And Dwight, you already just sent an email to the corporate office.
Joe Melendez: Well, thank you so much for having me and I look forward to coming on again.
Jon Sanchez: You bet. Just been our great pleasure. Once again, you want to find more information, just go to ValueInsured.com and learn more about this. Joe Melendez, CEO of ValueInsured our very special guest. Thanks joe. I can't wait to have you back on and give us an update on it.