A new proposal to help beleaguered homeowners keep their homes out of foreclosure would take a bad situation and make it even worse. U.S. Sen. Johnny Isakson (R-GA) and U.S. Rep. Tom Graves (R-GA) have introduced the Hardship Outlays to protect Mortgagee Equity (HOME) Act, legislation that would allow Americans to make withdrawals from their retirement accounts without penalty to make mortgage payments. (This HOME Act should not be confused with the Housing Opportunity and Mortgage Equity Act, a bill re-introduced this year by Dennis Cardoza, a Democratic Congressman from California, that would allow expanded refinancing for home loans owned by Fannie Mae and Freddie Mac.)
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According to Representative Graves’ website:
The HOME Act allows a taxpayer to withdraw money from a qualified retirement plan penalty free to make mortgage payments toward his primary residence with a lifetime cap of $50,000 or one-half of the present value of one’s 401(k) account (whichever is smaller), so long as those funds are used for that purpose within 120 days of withdrawal. Deferred income tax otherwise due on those withdrawals would still be due to the Internal Revenue Service.
On the surface, it sounds reasonable. Why not remove penalties that may dissuade homeowners from using their own retirement savings to save their homes? But while many of the current programs designed to help homeowners have been largely ineffective, this one is truly toxic. Why?
1. It makes it easier for homeowners to throw good money after bad. Retirement funds are often safe from creditors. “Pulling funds from a 401(k) is generally a bad idea … ,” says attorney Chip Parker with Parker & DuFresne, P.A. “It is converting an exempt asset to a non-exempt asset. In other words, since 401(k) money is protected from creditors, the homeowner is being encouraged to give creditors money from a source that is off-limits otherwise.
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2. It’s another one-sided effort to prop up the ailing housing market. Anne Weintraub, a Sarasota, Florida-based real estate attorney with Band Weintraub who helps homeowners who are negotiating short sales, says, “The proposed Act will not help homeowners, but banks. Regardless of IRS penalties, most homeowners on fixed incomes or those who are unemployed only have their 401k and IRA funds, along with Social Security, to survive. Other homeowners are living paycheck to paycheck.” Once again, banks get paid while homeowners chip away at their financial futures.
3. These withdrawals are penalty-free but not tax-free. Homeowners may still find they owe the IRS taxes on the balance withdrawn. And that could mean they catch up on their house payments only to fall behind later when the tax bill comes due.
Parker warns that, “estimations are that the housing market will continue to slide. Therefore, the legislation is encouraging the middle class to bail out a sinking ship with their own retirement funds at the same time there are serious concerns about the future of Social Security.”
Let’s hope this isn’t the best our elected officials can come up with. If it is, we’re doomed.
[Related article: Fed: Anti-Foreclosure Programs Can Succeed]
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