This post first appeared on Minyanville.
Our elected officials want to play financial adviser to distressed homeowners ? and dole out terrible advice.
In their infinite wisdom, Congress is proposing yet another ill-conceived plan to slow foreclosures. The latest scheme is not simply misguided, but could be downright ruinous for American families.
Two Republican Senators from Georgia, Johnny Isakson and Tom Graves, introduced a bill to Congress that would give borrowers the green light to withdraw retirement money, penalty free, to make mortgage payments. According to HousingWire, borrowers could withdraw up to $50,000 or half their account value (whichever was smaller), from qualified retirement accounts without incurring the 10% penalty for early withdrawal.
In defending his plan, Isakson argued ?This bill will help Americans who risk foreclosure use their own resources to make their mortgage payment on time without being penalized by the federal government.? Isakson neglected to add that families heeding his advice would likely not only lose their home, but lose half their retirement nest egg in the process. A lose-lose, if you will.
What is so very wrong about the concept that plundering your retirement account to save your house is a good idea, is that if a borrower has to dip into retirement money to make mortgage payments, he or she should not be making those mortgage payments in the first place. It is the definition of throwing good money after bad.
Congress has this very altruistic, yet economically illogical notion that to solve the housing crisis, all we have to do is keep people in their homes. No matter that millions of underwater homeowners are scraping by, pinching pennies to stay current on a home that won?t be worth more than the loan for a decade, if not longer. Pour all your disposable income into a sinking mortgage and there?s nothing left to spend on, well, anything else. Its bad economics at best, political theater and vote-pandering at worst.
The sad reality is that most foreclosures currently occurring, should be occurring. This is not a soulless acquiescence to banks like JPMorgan Chase (JPM), Citibank (C) and Bank of America (BAC) repossessing homes from struggling American families. It is reality. Congress claims that a strong housing market is essential to economic recovery, as it is. So why then do they continue to push legislation that prevents the housing market from actually recovery?
The real risk housing poses to the economy isn?t a flood of foreclosures over the next couple years that drives down home prices. The scarier thought ? and in my view the most likely outcome given the current political climate ? is that we are still talking about the foreclosure crisis in 2016. That is five more years of a stagnant housing market, sapping confidence from our already wounded collective psyche. A cinder block tied to our economy?s already feeble legs.
On a personal note, my company is deeper into the trenches of the foreclosure market than most would ever care to venture. And what I see, on a daily basis, is not hoodwinked families getting the American Dream ripped from their arms by fat-cat bankers at Goldman Sachs (GS). It?s not even reckless speculators getting their just desserts. As appealing as these media-friendly narratives may be, it is simply not reality.
Instead, the vast majority of today?s foreclosure victims are families who simply made a bad financial decision and are suffering the consequences. Their American Dream is long since over, foreclosure simply the final chapter. The end to what went from dream to nightmare, almost overnight. But because of the labyrinth of foreclosure-related logistics banks must navigate to actually repossess a home, the stress of looming foreclosure has dragged on for months, if not years. Sure, for part of this time some lived rent-free, but not many are socking that money away for big screen TVs and lavish vacations.
It surprises people to hear this, but my company receives countless calls from former homeowners post-foreclosure. We acted as agents of the banks, for all intent and purpose the actual people who took their homes. But we do it with grace and respect. Not everyone in the business does, but we pride ourselves in being different. And when they call, they sound relieved. Some are even happy. Some even refer their friends to us, urging them to call us for help in buying a home, or making an investment in real estate. I once watched a woman cry as she signed away the deed to her home. When I went back a month later to pick up the keys, she looked and acted like a different person, as if a giant weight had been lifted from her shoulders. She lost her home, but she got her life back.
Foreclosure is not the devil that the media, pundits and politicians make it out to be. It is a nightmarish process to go through, to be sure. But as a wise man once said, to get through this, we need to go through this. And its the same way with foreclosure. On the other side is freedom, a fresh start. A chance to rebuild.
And that?s why this bill irks me so much. Retirement money is generally untouchable, even in bankruptcy. And it certainly is rarely at risk during or after foreclosure. What gall a politician has to suggest that a struggling family deplete the only resources they may end up having after something that is, if you have to pay your mortgage with retirement money, inevitable.
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