Pay mortgage with 401(k) funds?

By Christopher Quinn
he Atlanta Journal-Constitution
A proposal by two Georgia congressmen to let homeowners take money from retirement accounts to pay down mortgages could help some avoid foreclosures but is drawing fire for encouraging risky financial behavior.
The HOME Act would let homeowners withdraw up to $50,000 from a 401(k) without paying the normal 10 percent penalty for early withdrawals.
The sponsors, Sen. Johnny Isakson and Rep. Tom Graves, say people threatened with the loss of homes should not have to pay a penalty for withdrawing their own money to reinvest in their houses.
“If you look over time, and people are saving for the long term, a home is the most important asset a family has,” Isakson said.
But many experts question whether home values have yet bottomed out or will resume rising any time soon. And taking money from a 401(k), which is protected from creditors, and investing it in a house that may lose more value or be taken by a lender if the owner defaults could be throwing good money after bad, financial advisers say.
“If you lose your house, you just contributed your $50,000 to someone else’s pocket,” said Casey Smith, of Wiser Wealth Management in Marietta.
Those getting an immediate gain from the infusion would be banks or lenders, he said.
Joe Brannon, the president of the Georgia Bankers Association, said his group did not ask for the bill. He added it might help some homeowners but that they should make such withdrawals only after conferring with experts.
The HOME Act’s prospects are unclear. The bill has been assigned to committees in both the Senate and House.
Isakson, a longtime real estate executive before his election to the Senate, agreed that such a withdrawal would not be wise in every case. He said good candidates could be those who owe more on a home loan than their house is worth — known as being underwater — because of recent precipitous fall in property values. That owner could pay down the debt and get back above water, which would allow them to refinance at a lower interest rate, saving them hundreds of dollars a month.
Or a homeowner with a relatively small mortgage could pay it off and have more money to live on, he said.
In metro Atlanta, 82,285 owners have received default notices so far this year. And 423,130 homeowners in metro Atlanta are underwater on their loans, according to the California analytics firm CoreLogic.
Graves said the HOME Act would protect retirement accounts by limiting withdrawals to $50,000 or half of what is in the 401(k) account, whichever is smaller. And those tapping an account must meet hardship guidelines that already allow account holders to withdraw money without penalty to pay for college tuition or medical emergencies.
Not every 401(k) plan allows hardship withdrawals, but those that do have requirements such as an owner has an immediate financial need and no other funds available, and the owner must have first have tried to get a nontaxable loan from the account.
Withdrawals for the purchase of a principal home can be considered as a hardship need.
Graves said the idea came from a mortgage industry worker who serves on his economic advisory council of Northwest Georgia businessmen.
Tapping retirement money could be a final lifeline for families trying to hold onto a home, Graves said.
“In most cases we’ve heard of, that would generally be a last resort, and when someone reaches that point in order to preserve their home, they should not be penalized by the government,” he said.
Nancy Montgomery of College Park has been fighting to keep her home from going into foreclosure for two years through a morass of paperwork and changes in lenders as mortgage companies collapsed.
When she got a letter saying her home would be sold on the courthouse steps in October, she took the only course she could see to save her home. She tapped $6,000 from her 401(k) to pay off the debts.
“It came too late for me,” she said of the Isakson-Graves proposal.
“I got it out, but I had to pay the penalty,” Montgomery said.
People in such financial distress are the ones most likely to default later on a mortgage, Smith said. Many of them are in danger of losing their homes because of the bad economy or poor personal financial management.
“If you have a hard time controlling money, then you are dealing with the inevitable of either walking away from a home or bankruptcy. At least keeping money in a 401(k) gives you some protection,” Smith said.
Chris Tierney of Hays Financial Consulting in Atlanta applauded the legislators for trying to remove government sanctions for people accessing their money, but he questions using the money for mortgage payments.
Tierney said it would be better for those in foreclosure to try and cut a deal with the bank than spend retirement money, he said. He said the $50,000 limit is not enough to make a real dent in the middle-incoming housing market problem anyway.
Also, those whose houses are worth less also are the most likely to not have substantial or any retirement income, he said.
“Those are the people when they turn 65 are going to have nothing, so they are going to have to work until they are 70 or 75 and are going to be on every social program.”