Lenders have resorted to lobbying Washington to let loan owners rob their retirement accounts to repay bad loans from the housing bubble.
Irvine Home Address … 43 SPARROWHAWK Irvine, CA 92604
Resale Home Price …… $579,000
I’m gonna pick up the pieces,
And build a Lego house
When things go wrong we can knock it down
It's hard to admit a mistake, change course, and pick up the pieces left behind. People who bought in the frenzy of the housing bubble made a mistake. A big one. But rather than short sell or allow the house to be auctioned in foreclosure, people will do nearly anything — including sacrificing their future — to avoid admitting the mistake and doing what's necessary to get on with their lives.
Bill would remove penalty for tapping 401(k) to avoid foreclosure
The proposed legislation would amend the tax code to allow homeowners who have 401(k) retirement plans to pull out money to save their houses from foreclosure without the usual tax penalties.
IHB: are they saving their homes from foreclosure, or saving the banks from taking a loss at the expense of their retirement?
By Kenneth R. Harney — October 16, 2011
With hundreds of thousands of homeowners facing imminent foreclosure and estimates of 2 million or more in the wings, are there any financial tools available to distressed borrowers that haven't been tried yet? And is there a way to help owners that won't rack up huge federal expenditures and add to the deficit?
The Obama administration has been exploring options — including a new refinancing program expected this month — but a concept has surfaced on Capitol Hill that might offer modest help with no revenue cost to the government: Amend the tax code to allow homeowners who have 401(k) retirement plans to pull out money to save their houses from foreclosure without the usual tax penalties.
That is a horrible idea. Retirement accounts are supposed to be protected. If you allow loan owners to sacrifice their retirements to save the banks, what we will end up with is millions of people with no retirement savings in order to save the banks. I think that is terrible.
The change would work like this: Under current rules, anyone making what's known as a “hardship” early withdrawal of funds from their 401(k) must pay the IRS a 10% penalty on top of ordinary income taxes. A bill introduced Oct. 5 would waive the penalty if the purpose of the distribution is to make loan payments to avoid loss of a primary home to foreclosure.
Saving the banks is a special hardship now? This proposal makes me particularly angry. A foreclosure would eliminate the hardship, and the loan owners would adjust to life in a rental — with their retirement savings safely protected.
Co-written by Sen. Johnny Isakson and Rep. Tom Graves, both Republicans from Georgia, the bill would allow owners to pull out up to $50,000. The money could be used in a lump sum to pay down the delinquent mortgage balance or to fill shortfalls caused by reductions of household income.
Using retirement savings to bail out lenders or support a family's current lifestyle is a really bad idea.
It could also be used as part of loan modification agreements with lenders designed to avert a foreclosure. No matter how the money is used to resolve the mortgage delinquency, it would need to be spent within 120 days of receipt and could not exceed 50% of the funds in the retirement account.
Owners would still be subject to income taxes on the amounts withdrawn.
Good. That will likely stop most people from doing it.
Though neither of the co-sponsors assert that the bill would raise revenue — they simply say it won't cost the government anything — some retirement program experts say it might. Edward Ferrigno, vice president for Washington affairs at the Plan Sponsor Council of America, a group that represents employers that offer workers 401(k) accounts, said that by triggering taxable distributions from otherwise untouched, tax-deferred plans, the bill “should generate revenues.” Ferrigno declined to comment on the bill overall, pending further review of its provisions.
Titled the HOME Act, short for Hardship Outlays to protect Mortgagee Equity Act,
Protect mortgage equity? These government labels and acronyms are misleading. If these people had any equity in their properties, they could merely sell them and pay off the loan. Nobody with equity needs this money. It's the loan owners who will take the money.
the proposal sheds light on the potential foreclosure-avoidance resources — and the drawbacks — connected with tapping employee retirement accounts. Many, but not all, 401(k) plans allow loans to participants, including for housing-related purposes. Retirement advisors generally recommend taking a loan from a plan because the money withdrawn is not taxed or penalized. Borrowers are required to pay interest on the loan, but in effect they are paying it to themselves to offset any earnings lost on the balances taken out.
Many 401(k) plans also allow “hardship” withdrawals. But these come with much stricter rules and fewer eligible uses, plus the tax penalties. The Internal Revenue Code limits hardship distributions to situations in which there is an immediate and urgent financial need and there are no other funds available to meet this need. On top of that, the rules require that taxpayers must opt first for a loan from the retirement plan — if permitted — before pursuing a hardship withdrawal.
Though avoiding foreclosure is one of the permitted hardship uses under the code, the 10% penalty discourages potential users, Isakson and Graves argue. Their bill would remove that disincentive and provide an emergency escape hatch for owners sliding fast toward foreclosure.
I have a better idea for legislation: remove “avoiding foreclosure” from the list of permitted hardships. Rather than make it easier for people by removing the penalty, we should make it harder for people to waste their retirement money in this manner.
Putting aside the potential positives, are there downsides to making a hardship withdrawal from your 401(k), even penalty-free? You bet. Pulling out 401(k) dollars early — with or without a tax penalty — is still an expensive way to raise money. Not only does it deplete the tax-deferred savings you've set aside, but in the case of hardship withdrawals you are prohibited by IRS rules from making new contributions to your plan for six months.
It is a very expensive way to raise money. When someone takes money out of a retirement account, it isn't just the loss of the money, it's the loss of the growth of that money over time that gets really expensive.
Even if the HOME bill makes it through Congress — and there's no assurance it will — taking the hardship route should never be your first choice. It should be your last resort, when there's nothing else that will save your house and you don't want to walk away.
Most people who would consider this option would be better off if they walked away.
But also consider the retirement plan alternative that may already be buried away in your plan documents: a save-the-house loan to yourself. If the numbers work, and you have a reasonable chance of avoiding foreclosure and repaying the loan, check it out. It just might be your solution.
kenharney@earthlink.net
So what do you think, IHB readers, should loan owners be allowed to take money out of their retirement accounts without penalty to give to the bank?
Short sale caused my HELOC abuse
The owner of today's featured property is selling short despite the small profit on the transaction. If not for the HELOC abuse, this would not be a short sale. Of course, if not for the HELOC abuse, this owner wouldn't have had the pleasure of blowing over $300,000 either.
- The property was purchased on 6/8/2003 for $551,000. The owner used a $440,800 first mortgage, a $51,100 second mortgage, and a $51,100 down payment.
- On 3/19/2004, only 9 months later, he refinanced with a $502,001 first mortgage and a $60,000 HELOC.
- On 4/25/2005 he got a $100,000 HELOC.
- On 8/7/2006 he obtained a $700,000 first mortgage and a $87,450 HELOC.
- Assuming the final HELOC was maxed out, the total property debt was $787,450, and the mortgage equity withdrawal was $295,550.
$300K in three years. Not bad.
——————————————————————————————————————————————-
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599
sales@idealhomebrokers.com
Irvine House Address … 43 SPARROWHAWK Irvine, CA 92604
Resale House Price …… $579,000
Beds: 4
Baths: 3
Sq. Ft.: 2129
$272/SF
Property Type: Residential, Single Family
Style: Two Level, Contemporary
Year Built: 1976
Community: Woodbridge
County: Orange
MLS#: S675445
Source: SoCalMLS
Status: Active
On Redfin: 12 days
——————————————————————————
Fabulous opportunity to own this outstanding home in Woodbridge, 4 bedrooms, 3 baths with one bed and bath downstairs, nice sized back yard, Formal living and dining room, breakfast nook, family room, open and spacious. Just walking distances to all the ammenities that Woodbridge has to offer
——————————————————————————————————————————————-
Proprietary IHB commentary and analysis 
Resale Home Price …… $579,000
House Purchase Price … $551,000
House Purchase Date …. 6/8/2003
Net Gain (Loss) ………. ($6,740)
Percent Change ………. -1.2%
Annual Appreciation … 0.6%
Cost of Home Ownership
————————————————-
$579,000 ………. Asking Price
$115,800 ………. 20% Down Conventional
4.20% …………… Mortgage Interest Rate
$463,200 ………. 30-Year Mortgage
$115,067 ………. Income Requirement
$2,265 ………. Monthly Mortgage Payment
$502 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$121 ………. Homeowners Insurance (@ 0.25%)
$0 ………. Private Mortgage Insurance
$85 ………. Homeowners Association Fees
============================================
$2,973 ………. Monthly Cash Outlays
-$372 ………. Tax Savings (% of Interest and Property Tax)
-$644 ………. Equity Hidden in Payment (Amortization)
$174 ………. Lost Income to Down Payment (net of taxes)
$92 ………. Maintenance and Replacement Reserves
============================================
$2,223 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,790 ………. Furnishing and Move In @1%
$5,790 ………. Closing Costs @1%
$4,632 ………… Interest Points @1% of Loan
$115,800 ………. Down Payment
============================================
$132,012 ………. Total Cash Costs
$34,000 ………… Emergency Cash Reserves
============================================
$166,012 ………. Total Savings Needed
——————————————————————————————————————————————————-
Larry Roberts and Shevy Akason will host a first-time homebuyer workshop at 6:30 PM Wednesday, October 26, 2011, at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618). Register by clicking here or email us a sales@idealhomebrokers.com.
Larry Roberts will be hosting a Las Vegas Cashflow property workshop at 8:00 at the same location.
“US banks have an average leverage of 15:1, so a 7% loan loss will wipe out their capitalizaton.”
Source: Ray Dalio, founder of the Bridgewater Associates hedge fund and a multi-billionaire, on Charlie Rose last nite.
So you can expect DC to come up with more-and-more desperate measures to prop up banks, with raiding 401k just the opening shot.
Unless ofcourse the banks returns are far greater than 7% and the banks have mark to fantasy. There is no need for new bailouts the theft has already occurred and still on going.
The crooks don’t need to rob the bank, they are the bank. It’s a great time to be a bank they have been given the power to print money with the interest rate and accounting policies in place.
By the time interest rates rise, inflation will have been so bad for so long. Highly inflated prices and high interest rates are only a decade away.
Will government meddling into the real estate markets ever end?
Answer: probably not in our lifetimes.
Even if such a piece of foolhardy legislation were to pass, I wonder how many of those *irresponsible* loan owners would have been *responsible* enough to contribute to their 401(k) to begin with?
My hunch: not many.
As usual, renters need not apply. We do not have any 401k raiding plans to help you pay the rent. Now if you would like to sign up for a 30 year mortgage why then, how may we help you today, kind sir? Right this way my fine upstanding citizen mwa mwa mwa mwa mwa. Perhaps a hand job before we get started today?
All your previous cartoons have AZDavidPhx. I guess I have to start using SanJoseDavid now.
I’m glad you stopped by. I hope everything is going well for you in San Jose.
BTW, if you are ever in OC on a Wednesday, you should stop by one of the presentations we are doing. It would be nice to meet face to face.
This makes me laugh. Kinda reminds me of my 341 meeting with the bankruptcy trustee and the blonde chick from the treasury department.
The T-girl told us to stop contributing to our 403b accounts so my creditors could get a piece.
She then summarily dismissed the BK as ABUSIVE. I lost it. You shoulda seen me, a 40 old man downtown throwing a tantrum, cursing out my BK lawyer. Suprised the weren’t called. Sour times.
Turns out, it was the best thing that ever happened. Instead I opted for the IRS 1099 plan and paid them. 3k is better than 1 million any day.
No effing way I am gonna stop funding my retirement. Financially and morally, it just doesn’t add up.
The beauty of having a BK dismissed is that all creditors must now independently prove their case if they sue. They know you can’t pay.
This means mortagages usually get charged off, and credit cards can be easily be defeated by making sure they have all assignments, charges, signatures, etc according to state law and UCC.
I didn’t know it at the time but the treasury broad actually did me a favor….
So because you refused to stop funding your retirement, they wouldn’t let you go Chapter 7?
You’re right, if paying a few thousand enables you to keep funding your retirement, you will be far better off in the long run.
The bankruptcy felt very cleansing, didn’t it? Some may argue there should be more consequences for you walking away, but I don’t. If you went through the bankruptcy process, you really haven’t gamed the system. You went through the system as the system is intended to work. Now you get a fresh start, and with limited access to new debt, hopefully, you won’t use debt anymore and live debt free.
It sounds like his BK wasn’t cleansing, as it was dismissed – his debts weren’t “discharged” through BK.
If I understand him correctly, he had to go chapter 13 which is like a partial cleansing. If a million dollar shortfall is reduced to $3K, that sounds pretty cleansing to me.
Could be, but then he said all of his creditors will have to sue him individually now.
What happened ChicagoWalkAway? Was your BK filing dismissed and you just settled with the IRS, or was your Chapter 7 filing converted to 13?
The Chapter 13 bankruptcy which contained mortgage and credit card was dismissed as abusive.
The mortgage lenders issued me IRS 1099s for the investment properties.
I paid the 1099s.
The credit card companies sold the debt to 3 separate collection agencies.
I got 1 dismissed because they could not prove ownsership of the debt.
I am waiting for the other two.
Thank you.
Much of the talk of moral hazard applies only to the little guy.
Lending should involve risk. With bankruptcy reform, the lenders tried to extend the risk-free profits they enjoyed in writing student loans to all manner of credit granted.
Funny you should mention Chapter 7 because I read the law and knew I had to go 13 due to my income.
The idiot lawyer (no older than 26) told me I could go Chapter 7, when I told him he was wrong, he and my wife looked at me like I was stupid.
In the middle of the process, we had to switch to a Chapter 13, which was a blessing in disguise because it gave us more time.
Then we had another delay that prevented a successful filing because our debt exceeded the 1.04 limit as allowed to be discharged by law.
To top it off, at the 341 meeting, the trustee told us that we had to stop our retirement contributions because that was money that should have gone to our creditors. So instead of allowing us to file BK with out payments adjusted higher to match our 403b deductions, she dismissed it.
I only “cussed out” my lawyer because I didn’t know that there wasn’t a system in place to force me to re-file BK after I either stopped my 403b contributions and/or my creditors wrote down the appropriate amount of debt.
Initially, I thought I thought my creditors would be waiting at my job the Monday after the bankruptcy was dismissed. Instead I shoulda kissed him on the mouth and let him slap my wife because he did me a favor. My BK payments were estimated at 1500 a month for 5 years = 90K, ouch!
I really didn’t mean to game the system. I TRIED to file, but it was dismissed as “abusive”. It’s just that a dismissed bankruptcy worked out better. The kicker is I still have the right to go back and file BK under the original payment.
The failed BK filing effectively “broke up” my mortgage debt from the CC debt. As I said earlier, I was issued 1099s for the mortgage debt which made the CC debt way easier to defend in court as civil collection cases.
A lot of people would have looked at this as bad luck, but I do not. I view it as an education in my own foolishness, and fortune.
I am a paper pauper. When I run my credit I get back a letter of condolence. My credit is 4, not 400. I mean 1,2,3….4. I am currently live without a car payment, mortgage, or credit cards.
Well, it’s the American way to let people make the mistakes they decide to make, and even the mistakes they get conned into making. A good proportion of the rich got rich by finding ways to take people’s money with a maximum of profit. Pet rocks, anyone?
That said, I personally think one of the roles of education system and consumer protection agencies is to provide the means and resources for people to face the predators out there. The government should not be in the business of helping people to get fleeced.
This recession started a few years ago, but yesterday I received my first request from a close friend to borrow some money. Her story is typical. Her husband hasn’t worked in over a year. She lost her good-paying job and now earns much less. They filed BK and are trying to keep their house. And she wanted to borrow $2,500 from me to help make her mortgage payments.
I tried to explain to her that her underwater house isn’t worth saving; that she cannot afford the house and needs to live rent-free for the next ~9 months and then move on.
I don’t think she heard a word I said…
If she was capable of hearing it, she would have faced reality a long time ago and downsized lifestyle including the house. Since she didn’t, must still be in denial, so can’t hear you.
I wonder what makes lenders think that this is a solution? Only 60% of Americans even have a 401K and I would be willing to wager that over 50% of those are way underfunded ( in most cases people can sock away $16,500 this year plus company matching contributions), but most people never do this because they have poor savings discipline, or because their high monthly household expenses prevent them from diverting earnings to savings.
Most people who got into 401k’s in the 1980s that are now trying to retire have found them insufficiently funded for retirement living and no freaking wonder…1987 crash, 1998-2000 dot bomb era, and then the massive financial crisis of 2009). It’s difficult to get a leg up in a 401k over the last 20 years, but savings just a little is better than not saving at all.
When you sign a mortgage you need to prove your income and your net worth anyway to the lender.
They know what you have and will probably try to go after it if need be.
I’m surprised banks even care to waste their PAC money. I thought the reason for all the no-doc business was because banks it was a quick buck and they just shoved those mortgages down the line and made them someone else’s problem?
The contribution cap in 2012 will be $17K (slightly higher if you’re over 50). The cap for SSI contributions has increased for the first time in three years too. It’s going from $106,800 to $110,100 in 2012.
The money in 401Ks isn’t just sitting on a pallet in a vault some place in Tennessee with pretty little fairies sprinkling interest dollars on top.
It’s being used by investors and as capital in other ventures – small businesses, factories, production, services, and presumably creating or preserving jobs in the global economy.
Yeah, great timing, with 9% unemployment in the US and tons of financial market uncertainty, this is just perfect. Let’s suck as much savings and capital out of the economy as freaking possible and put it all into the hands of the initial doofuses (banks). They’re not going to be happy until we’ve got “nothin’ but debt” on the books.
….Let’s suck as much savings and capital out of the economy as freaking possible…
Not to mention that by depleting 401(k) accounts
for purposes other than intended use (retirement), underfunded individuals will have to lean more on public assistance of all types to maintain lifestyle.
Of course, those additional costs are then transferred to the taxpayer.
This is a coincidence, I just got my quarterly VIP/401K investment results..
QTD= Quarter to date CYTD = Calender Year to date.
Here’s some excerpts from my statement:
Lifepath 2020 QTD -8.1% CYTD -4.3%
S&P Stock index fund QTD -13.9% CYTD -8.7%
Company stock QTD -23.7% CYTD -15.2%
To put it in perspective, I could have paid cash for a Condo listed on MLS located in Quaill Hill with what I lost.
So what they are saying is that if I was a distressed LoanOwner, I could withdraw 50% of whatever I have left in my 401K and continue to live in the Banks’ House and work until I die.
They are also getting so desperate to plug the sinking ship that they are willing to fastrack any immigrant into the USA as long as they are willing to pay cash for a $500K Property.
http://www.latimes.com/business/la-fi-visas-home-buyers-20111021,0,6715779.story
@Duran: this irritates me! We don’t need more immigrants, terrorists can easily cough up $500k with all the oil money we give them, and this will block me from home ownership forever. Please, please, please don’t let this pass…it’s a bad idea all around.
I wonder if making it easier for people to take out their retirement money will make it easier for judges to attach it to satisfy judgments of one type or another – such as a deficiency (sp?) judgement when a lender forecloses on a house. The lender can say, “You could have used the money to make your payments, so we can take the money to satisfy our deficiency.”
…so we can take the money to satisfy our deficiency…
Very interesting point.
Once the barn door is opened to allow such transfers, it would seem to me to be a quick slippery slope to scenarios as described.
Another scenario could come from incompetent/crooked financial planners/tax advisors who advocate such transfers.
While they cannot attach it legally, I’ve heard from friends seeking shorts sales/mods that their lenders have balked at allowing either when the borrowers’ retirement accounts have large balances (relative to the underwater amount).
To allow a debtor to access these funds without penalty is not the same thing as to requirement to do so. Usually I agree with IR, but I think he has gone one step too far in believeing that because he thinks that in most cases this would be foolish, this should not be allowed. This is illiberal, since the unspoken premise is that borrowers are incapable of determining themselves what is in their interest. In nearly all cases they are capable of doing so, and in those cases where they legally are not, the more important question might be if they were legally competent to enter the contract to begine with. As for protecting retirement savings in bankruptcy, perhaps the law should be modified such that the petitioner can shield funds up to the median balance (or some fraction thereof) of such funds held by the population of the same age. If the median 37 year old holds $19,000, I don’t see it has any great injustice that a 37 year old with $80,000 has to forfeit $61,000 to his/her creditors. Whether the person was intentionally gaming the system or not really isn’t my point here – it simply makes little sense to favor post-retirement hypothetical debtors over actual ones right now. If the median (or lowest quintile, or whatever) 37 year old is facing the future with $19K, so can you buddy.
…borrowers are incapable of determining themselves…
I don’t think that is the issue at all.
Individuals can make such foolish transfers *today* (albeit at a hefty penalty).
The broad issue as I see it is to preserve the integrity of the 401(k) for its original purpose — that is as a *retirement* account.
Lame proposals such as this one encourage (not prevent) the 401(k) to be used as a whimsical rainy day cookie jar.
So what’s next? Tax free transfers from a 401(k) to fund a junket to Las Vegas? Quite frankly I don’t see much a difference between the two.
That’s why I’m liberal on many issues (all social issues & some fiscal issues). I think our government must protect people from themselves when it comes to financial ruin. I don’t think half of America is competent enough to understand a 30 year mortgage contract and therefore only boring and very basic types should be available. If you want an interest-only or neg-am product, perhaps you should have to prove somehow that you actually know what this is.
You shouldn’t be voting liberal if you want the government protecting the people.
The liberals are for higher taxes and more government, both of which hurt the “people” of the U.S.. When I look at the gross amount of my paycheck vs. the net amount, I can plainly see the liberal criminals stealing the “peoples” money.
Fannie Mae and Freddie Mac were run by the most liberal politicians you could find and look what they did to the “people of the U.S.”. They created a ponzi scheme so that they could personally get rich while bankrupting the U.S. financial markets and forcing the taxpayers to pay for their mess.
A liberal is just another word for thief.
Well all 401k contributions are made pre-tax, so theoretically if a bank wants to raid the money all at once for deficiency judgement, then wouldn’t they also be responsible to pay all of the income taxes on it, plus any penalties? That could be significant if done in one fell swoop.
They’ll get some money, sure, but I don’t see this as an easy 1 for 1 to cover debts.
Also, the two things people often forget about saving $1.00 today in a 401K is that:
a.) what will income taxes be like in 20 years? You have to pay taxes on 401K withdrawals. Answer: Pretty damn high the way things are shaping up.
b.) What will your retirement dollars buy you in 20 years? Answer: If you retire in the US, not very much, since the Fed’s print shops are running extra shifts. Living in another country (with better healthcare) might be an attractive option.
What’s the alternative – investing in hard assets like residential real estate? 😉
“safe as houses” 🙂
Swiping retirement funds to pay for housing loans is already govt policy. The Fed has been printing lots of money, and may print more to keep the interest rates down for mortgage holders. This
1. devalues the dollar, which reduces value of bonds and deposits for retirees (ie. they can buy less stuff now as the price of stuff rises)
2. benefits loan owners because they can refi at lower rates. Also helps them in the long run when houses, like all the other real goods in the economy, are worth more because there are more dollars floating around now
Per #1 – also, obviously, retirees now getting pitiful interest on their money don’t have as much to spend
Timeshare mogul drinks too much of his own RE kookaid and loses his gigantic mansion under construction
http://online.wsj.com/article/SB10001424052970204346104576638981631627402.html?mod=WSJ_hp_MIDDLETopMiniLeadStory_1#articleTabs=article
Factoid: The American 401(k) program is so famous that some other countries also officially call their retirement plan “a 401k.”
I just heard that the proposed foreign cash buyer visa has some pretty awkward terms:
– US residence visa, but you can’t work
– must pay for $500,000 in real estate
– must be a US resident at least 180 days per year.
Generally Chinese want to off-shore some assets while still working full-time in China.
And other foreign cash buyers want to move here and work.
The 180 days residency can also cause tax jurisdiction issues – ie. forced to pay US income taxes.
So I don’t understand what demographic can follow those visa terms. Retirees?
Mortgage Insurer Wilts
Arizona Takes Over Struggling PMI Group; Move Hits Lenders and Investors
http://online.wsj.com/article/SB10001424052970203911804576649454068446160.html?mod=WSJ_hp_LEFTWhatsNewsCollection
The PMI article above is fascinating.
I didn’t know that a private company ran that program, and that there were other companies offering similar mortgage insurance products.