Homeowners facing foreclosure soon may have another option for help. The administration has tried many things with little success so far, but the latest proposal would involve changing the tax code without costing any revenue to the government – a potential "win-win" situation. The bill, dubbed the HOME Act (short for Hardship Outlays to protect Mortgagee Equity) would allow homeowners who have 401k retirement plans to pull out money early to save their houses from foreclosure without the usual tax penalties for early withdrawal.
Under normal circumstances, a person cannot take funds out of his retirement account before the age of 59 ½ without incurring penalties. Even for a hardship withdrawal, he'd have to pay income taxes on the money being taken out, plus a 10% penalty fee.
The bill that was introduced Oct. 5 would work kind of like a hardship withdrawal, except that it would waive the 10% penalty if the funds are used to make loan payments in order to avoid foreclosure on a primary residence.
Like a lot of the previous housing initiatives in Congress, this one sounds great on the surface, but lacks substance underneath. Here's why:
Pros of this idea:
- It presents a possible temporary solution for those facing foreclosure.
- It wouldn't cost the government a dime.
- It would put the heavy lifting on the homeowner – which goes along with the notion that those who have more "skin in the game" will work harder to keep their homes rather than walk away.
Cons of this idea:
- It's only a temporary solution for the borrower. If the borrower lacks a longer-term plan, it could end up delaying the inevitable except that with this delay he's now put a large dent in his retirement accounts.
- Raiding retirement accounts early should always been seen as a last resort, not a prime solution. Hopefully, this bill would not perpetuate a misconception that raiding accounts early is OK in desperate times. Sure, it may actually work out for some people. But chances are that many people are not ahead of the game on retirement savings. In fact, most are probably behind given the recession of recent years.
I'm not a financial advisor, but I see this latest move as lacking real substance. It's easy to see why Congress would like it: it presents a nice gesture with overall low risk government revenues. Unfortunately, I don't really see it doing much in terms of helping significant numbers of homeowners stave off foreclosure.