Every once in a while, it would be nice to see Congress think all the way through their proposed actions to their logical consequences. Instead, they act from not-always-pure motives, and the devil gets the hind-leg.
Last week, the U.S. Senate grappled with the problem of trying to stanch the number of home foreclosures. One proposal would remove the ten per cent penalty retirement plans place on early withdrawal of funds, if those funds are used to avoid foreclosure on a primary residence. While the Senators' intentions may be honorable, their logic is flawed.
The current crisis is the logical result of combining greed and heedlessness, and any attempt to forestall the inevitable outcome, particularly one funded by retirement savings, is unwise.
The subprime mortgage meltdown resulted from predatory lending practices that targeted people with marginal credit, inducing them to "buy now and pay later." Many buyers, enticed to buy homes they could not otherwise afford, were counseled by mortgage brokers to ignore contract language specifying payment and rate increases. Brokers sometimes told consumers that future increases would be offset by escalating home values, ostensibly enabling the buyer to refinance at more favorable terms.
Thousands of buyers rushed headlong into obligations they are now finding themselves unable to meet, while the lenders who seduced them are discovering the downside of the arrangement—inventories of illiquid assets, the McMansions whose construction they fueled. Would-be refinancers cannot find mortgage brokers willing to lend them money at better rates.
Now come the politicians, fully cognizant that this is an election year, ready to the rescue. Without regard to whether those being rescued need or deserve rescuing, they step to the podium with heroic measures designed to "help their constituents." Along the way, the measures prevent scoundrels from reaping the fruits they have sown. The politicians may be more concerned with their reputations than the true results of their actions.
The rescue plan resuscitates corporations whose directors made unwise decisions. Normally, under the free market system that the U.S. government professes to support, these corporations would die relatively quickly and without fanfare. Consumers unable to pay their mortgages could resort to bankruptcy or allow lien holders to foreclose, as they saw fit. Indeed, many people would lose their homes, but those same people would never have had homes (or would have bought more modest ones) had it not been for the greed which motivated them to overreach their own buying power, and that of predatory lenders. In econo-speak, the free market would produce a "painful but necessary correction." The upside of such a market correction is that it would impact only those who made questionable decisions, leaving those who exercised restraint and good judgment free of the consequences.
Instead, the Senate, lead by the Honorable Christopher Dodd (D-CT), wants to allow people to raid their retirement funds. Considering the tight market for mortgage money, consumers will likely withdraw funds to cover missed payments. They will turn the wolf away from the door temporarily, rather solving the actual problem, which is that they cannot meet their obligations. Many economists see the senate plan as being helpful only to lenders.
Even assuming that people who tap their retirement funds manage to keep their homes, deferring the problem to some future date, when they retire is a bad idea. The senate plan creates the possibility that hundreds of thousands of people will drain their retirement savings now and worry about retirement the same way they worried about their inflating house payments—later or not at all.
The penalties the senate wishes to remove were instituted to discourage people from spending their retirement savings before retirement. Removing them may encourage consumers to throw good money after bad, with no guarantee that they will find better terms than they currently have or ultimately be able to stay in their homes. The plan may contribute to a far worse situation when those caught in the mortgage crunch now try to retire and discover that they have insufficient resources to do so, leaving the burden once again on the American taxpayer, who will be required to support them.
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Comments: 28
Suze said if you are after a temporary measure - up to 60 days - you can take the money from your 401 K without penalty and put it in a separate account (not sure if she said it had to be an IRA savings) and draw/borrow from it. As long as you put the money back into the 401 K within 60 days no penalties apply.
I know - just enough to keep the wolves from the door and not a real answer, but it may help in some cases.
As far as congress eliminating the 10% penalties - well, they might. I don't think it is a good idea and it encourages people that are already in trouble to use their retirement funds in the present. End result - the poor house.
I am sure there will be all kinds of legislation to help the poor banks recoup their losses. Hello - taxes.
They were the unconscionable ones in the first place for making loans to people who could not afford to become first time homeowners in the first place or simply suckering in those that wanted to keep up with the Joneses and upgrade to a house they couldn't afford either.
Bad idea? no Untterly Idiotic is more like it.
If raiding retirement funds keeps a roof over families' heads, maybe it's not a bad idea.
I don't want to support them when they are too old to work. They can lower their standard of living now, and not lower mine later.
Thank you!
Whatever happened to people living in apartments, then moving up to small starter homes, then maybe being able to afford bigger/better later...and maybe not...?
Once the glut of money flooded the market we were inundated with offers to re-finance and get the equity out of our home to "take a vacation, buy a boat, remodel, whatever you want!" Well, it sounded like a good idea, but the only re-financing offer we took had us taking no cash, and just financing our balance at 7% (down from 8.25%).
We overpay the mortgage every month, and will have it paid off in as little as 5 more years.
Bailing idiots out of trouble does nothing good for them, or the economy. Call this market "correction" a form of tough love, if you will.
I have to agree, this sounds like such a bad idea. I'm sure Dodd is only thinking of keeping people in their houses until something else can be worked out. But of course the problem is that there is no guarantee that "something else" will ever get worked out.
The only thing that will solve this is for the banking industry to be re-regulated and watched closely. Our government should not allow institutions to bait, switch and run with the money that hard working Americans are willing to pay in order to have a house that they can call their own.
Regards,
Doyle I <~~~~~
You've got the right idea, don't raid your retirement to compensate ridiculously greedy mortgage holders, but some of the reasoning behind your decision is not entirely true. You are correct in assuming that many of these people may not have qualified for a loan as large as they acquired, but some of that was caused by an inflated market value increase. Homes rose at a rate which was not logical, driven by false economic indicators. Yes, there were many people who took out loans which were well beyond their means to grab a celebrity worthy property, but many more were just unwilling participants in the wave of inflated home values.
Many realtors pushed mortgage brokers who simply pegged people into bad loan options. Hoping to make money without concern for the ability of the client to pay for the purchase, caution was thrown to the wind.
Everyone needs to have a home. Owning and renting usually finds the renter paying more than many home owners. Yes, there are some people out there who squander their meager (or ample) incomes and don't consider a payment due unless its on shut-off or foreclosure, but there are many more people who had "good" credit, myself included, who were considered riskier because we didn't have credit cards up to our eyeballs or had never owned a mortgage, who were pigeon holed into believing that we had to accept 15% interest. Ten years prior to my home purchase, I would have qualified for a standard mortgage, but since these companies were allowed to regulate themselves, they saw the gold and hit hard!
Perhaps a better fix would be to regulate the ethics of mortgage companies, prevent them from preying on consumers. Eventually the housing market will stabilize and "regular" people can get reasonable loans.