Do you believe negative equity homeowners should be allowed to make hardship withdrawals from their 401(k) to make payments on a mortgage loan in default?
- Yes (58%, 106 Votes)
- No (42%, 78 Votes)
Total Voters: 184
Can the government help distressed homeowners and mortgage lenders and not spend a cent? The Hardship Outlays to protect Mortgagee Equity Act (HOME) is the legislation currently being discussed in Washington which believes this is attainable. HOME proposes to allow underwater homeowners to make tax penalty-free hardship withdrawals from their 401(k) retirement accounts to avoid foreclosure.
The way the tax code currently stands, individuals who make early hardship withdrawals from their 401(k) accounts pay a 10% penalty in addition to income taxes. HOME pushes to remove the penalty and grant homeowners the right to withdraw up to $50,000 to either pay a delinquent mortgage, make up for lost household income or incorporate it in a lender’s loan modification arrangement. The legislation provides withdrawals be capped at 50% of the 401(k) account and requires the withdrawn amount be spent within 120 days. Proponents of HOME believe the plan gives distressed homeowners one last alternative to foreclosure while avoiding additional government expenditures .
first tuesday take: This is a lender-end run to grab what liquid funds distraught underwater homeowners have left. Pouring retirement savings into a black hole asset like an underwater home is throwing good money after bad. HOME is not sound advice for homeowners, and it most certainly is not Capitol Hill at its brightest moment. Lenders, again, are the sole beneficiaries of this one. Congress just doesn’t get what is going on in this country.
When the housing bubble detonated and deflated property values after the Millennium Boom, emotional homeowners began turning to the option of making hardship withdrawals from their retirement accounts to prevent foreclosure and eviction. [For more information on the increasing number of hardship withdrawals from retirement accounts, see the September 2010 first tuesday article, Workers take 401(k) hardship withdrawals to avoid foreclosure.]
However, if a homeowner comes to the point where all options to save the property have been exhausted, brokers and agents must counsel the homeowner against siphoning from his retirement savings. Consider, with the recovery looking grim for real estate and the stock market facing massive dissavings by Baby Boomers, is it really a wise decision to guillotine cash retirement savings – the last and only good source of investment still (somewhat) standing? (Retirement portfolios have lost value since the recession hit, although not to the level that real estate and the stock market fell.)
HOME does not guarantee the homeowner will keep his home and nor does it provide for a secure monetary future. In its effort to defray the financial hardship of a negative equity home, it threatens to derail a homeowner’s future standard of living while shifting solvency to — guess who? — the lender.
Brokers and agents must advise California’s negative equity homeowners in dire straits to turn to the benefits of a strategic default, a legal right guarded by the put option of their trust deed and California’s antideficiency rules. Part with the property, protect retirement savings and put aside for the future. That is prudent. Period. [For more information on a California homeowner’s option to strategically default, see the June 2011 first tuesday article, Strategic default smarts.]
RE: “Bill would remove penalty for tapping 401(k) to avoid foreclosure” from the LA Times
I agree entirely with this article that people should not be encouraged to rob their retirement savings to
chase loan balances on homes. The whole purpose of pensions, including sec.401-k accounts, is to provide additional funds when people are retired. Therefore, the purpose of the 10% penalty, which is really not a penalty but an additional tax, is to discourage people from early withdrawals. It would be better to eliminate the hardship withdrawal and protect the retirement savings.
I agree that taking $ out of investments to payoff mortgages or the IRS when you are underemployed as I am, being a starving RE Broker, should not carry the 10% penalty. It just adds to the drain of the public dole the government has over us. When you are not making $ you can’t re-fi without a steady income. I have a couple hundred K in equity I can’t touch. I’m not in the same boat as many are with an upside down home, I’m the other side of the coin and without relief I’ll be bankrupt and loose it all to Uncle Sam anyway.
“Good water over Bad water…” This is got to be the most idiotic idea from our folks at capitol hill !!! Most home owners in default are upside down by as much as 40%, why would they want to blow up to 50% of the only thing of value they may still have, just to save their current default condition, and in a few month be back to the same… perpetuating the inevitable.
Homeowners should not use thier 401k to save a house in default. The banks should modify these mortgages and write down mortgage principal.
Allowing long-term unemployed workers to withdraw money from their retirement funds without penalty is far overdue. When unemployment comp runs out, many folks don’t have a lot of options. Why make them pay a 10% penalty tax? Doesn’t long-term unemployment the definition of hardhip? Current rules requre borrowers to be significantly behind in mortgage payments and facing foreclosure to avoid the penalty.
Rest assured that the mortgage payment is just a part of most peoples financial hardships in the majority of cases. Using future Retirement $ to pay off a mortgage, can sometimes be beneficial, but using those monies to make a mortgage payment or two is totally ludicrous. Not to mention the fact that the majority of pension plans (401K etc), are severely under funded.
I suppose someone will come up with some convoluted (il)logical connection explanating why banks should be responsible for the downturn in home values, I know – a butterfly flaps his wings in China and breeze moves a leaf on a tree in London, there’s always some connection, right, no matter how much of a stretch?
Should the bank then be allowed to go back to the original seller of the home and ask them to return what they were “overpaid” when the currently underwater owner bought took title? How far should we go back to recover the money for “overpriced” and “overvalued” homes – the seller before that, maybe back to the original developer/builder?
Notice how NO ONE ever complains about “overvalue”, “overprice”, “got too many offers over the asking price” when they are stuffing their pockets full of cash, and there’s absolutely nothing wrong with stuffing your pockets full of cash in a good market. Once again it needs to be pointed out that you can’t decide to change the rules after it starts effecting you in a manner no longer to your benefit.
The housing market, just like Greece, should just be allowed to once and for all find it’s market bottom and then allowed to work it’s way back from there in a normal manner. All this propping up and artificial market manipulation does nothing to help any situation and in fact just adds to the uncertainty as to the direction and depth of the market conditions.
I agree with your “take” on this issue——this shows the fed is still in bed with the banks—–the homeowner loses again.
The fed ought to require banks to take the hit by lowering the principal balance of underwater homes to the current appraised market value.