2,500,000 California homeowners are in dire financial straits after the Millennium Boom wiped-out the value of their largest assets, their homes. In response, many homeowners are making hardship withdrawals from their 401(k) retirement accounts to prevent foreclosure or eviction. Over the past twelve months, 11% of Fidelity’s 401(k) account owners initiated a loan — borrowed — from their 401(k) retirement accounts.

Overall, hardship withdrawals have increased since last year. Nationally 62,000 participants in 401(k) programs initiated a hardship withdrawal during the second quarter of 2010 — up from 45,000 in the first quarter of 2010. Nearly 45% of retirement account holders who took a hardship withdrawal in 2009 took another hardship withdrawal in 2010.

Early 401(k) withdrawals are also subject to income taxes. To add insult to injury, many 401(k) accounts have lost value in recent months. Fidelity accounts averaged $61,800 at the end of June 2010 — a $5,100 drop from March 2010.

first tuesday take: Retirement accounts are the only form of savings many homeowners have. To tap into retirement savings and use the funds to prevent an underwater home (read: a home with a loan-to-value (LTV) over 125%) from going into foreclosure makes no financial sense. It’s directly akin to throwing good money after bad money — a nonperforming investment in a home — the “sunk cost” of irretrievable monies spent in the past. Homeowners destroy their financial future by moving cash from any source into a dead-end housing debt.

If a homeowner is considering depleting their retirement savings in any amount to save a negative equity home, thoughtful real estate agents seeking to brand themselves by building up collective good will during this recession can do their part by educating homeowners of their put option rights. A “put” is built into the terms of every trust deed. The option grants to California homeowners the legal right to force the lender holding purchase-assist financing to take back the property at a trustee’s sale for the balance due on the loan — all with no recourse — by simply defaulting. [For more information on strategic defaults, see the September 2010 first tuesday article, The LTV tipping point: when negative equity owners are most likely to strategically default.]

RE: “More workers take 401(k) early withdrawals” from U.S. News and World Report