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 The legislation provides withdrawals be capped at 50% of the 401(k) account and requires the withdrawn amount be spent within 120 days.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