U.S. Senator Norm Coleman (R-MN) today introduced the Home Ownership Mortgage Emergency Act (cleverly, the HOME Act), which would allow troubled borrowers under certain conditions to make penalty-free withdrawals from their 401K or other retirement accounts in order to bring their mortgages current. From the press statement:
The HOME Act would allow homeowners who are 60 days late in their mortgage payments to withdraw penalty-free up to $100,000 from their retirement accounts through 2009 for the purpose of refinancing into an affordable mortgage or avoid foreclosure. Except for very limited cases, a 10% penalty is currently applied to early retirement distributions, although the tax code waives this penalty for distributions from Individual Retirement Accounts (IRAs) for first-time home purchases. The HOME Act would make withdrawals for the purpose of refinancing or avoiding foreclosure penalty-free as well, as long as they are paid back within three years.
The bill, which would limit the penalty-free withdrawals only until 2009, was quickly supported by the Mortgage Bankers Association, with MBA president and CEO Jonathan L. Kempner characterizing the bill as “the kind of flexible, creative solution that will help many delinquent borrowers in the current market.” The MBA’s support is rooted in the fact that most delinquencies and defaults are traditionally rooted in a so-called “external event” that temporarily affects borrowers; things like divorce, job loss, and the like. Part of me loves the idea behind this bill, because it would seem to provide targeted help to that more traditional troubled borrower — but a larger part of me is very uneasy, because I don’t know that what we’re facing now is defaults driven by more traditional causes. I think we’ve got a problem internal to the borrower and the loan they’re a party to, which would put us into very different territory as it relates to this bill. The result here is that even in the absence of a so-called “external event,” we’ve got borrowers in every credit class finding themselves unable to keep up with their mortgage or finding themselves upside-down badly with no chance at short-term price recovery. Don’t believe me? Wachovia essentially admitted as much today in their earnings call. So while I think this bill might be a good idea for the more traditional defaulter, I think it could be absolutely ruinous for less traditional borrowers: losing your home is traumatic enough, but it need not completely torch your future. A bill such as this might actually do just that (remember the word recidivism that I wrote about earlier this month). In a nutshell, this bill could potentially incent borrowers that can’t afford the mortgage they’ve got, irrespective of the existence of any “external event” — not a small group, IMHO — to raid whatever nest egg they have in a futile attempt to save their home. When they’ve exhausted all available finances available to them, these borrowers would then be out of not only a home, but also their retirement savings and would receive a nice little tax bill from Uncle Sam for failing to repay their borrowings within the prescribed three year window. It’s worth noting here that 401K plans are excluded from federal bankrupcty estates as part of the BAPCPA reforms enacted in 2005 — so a troubled borrower essentially forfeits that protection under this bill.