Earlier this week, I ran across an article about a new piece of legislation being promoted by two Georgia Congressmen who want to allow people to pull money out of their retirement accounts to pay down their mortgages.
Dubbed the Hardship Outlays to Protect Mortgage Equity (HOME) Act of 2011, the legislation would allow homeowners to withdraw up to $50k or half of the account value, whichever is smaller, without paying the usual 10% penalty. In short, you’d have to use the funds to make mortgage payments within 120 days of receiving the distribution.
You can read the text of the bill here: HOME Act of 2011
The sponsors, Sen. Johnny Isakson and Rep. Tom Graves, argue that people who are faced with losing their homes should not be forced to pay a penalty to access their own money. At the same time, many financial experts are skeptical. One big concern is that people would be pulling money out of 401(k) accounts that are protected from creditors and putting it into a home that could ultimately be taken from them.
Another justification that Isakson gave is that people could use the withdrawals to get their underwater mortgages back above water, thereby allowing them to refinance their mortgage to a more favorable rate. Of course, with the recently announced changes to the HARP program, those with underwater mortgages will now have an easier time refinancing, so it might not be necessary to raid their 401(k) to make this happen.
One concern I have is that, if passed into law, the new rules would effectively allow anyone with a mortgage to raid their retirement account, whether or not they really need the money to cover their payments. While I understand the desire to help people stay in their homes, the last thing we need to do is make it too easy for anyone and everyone to pull money out of retirement accounts.
What do you think? Is this a good policy move? Or are we just kicking the can down the road, essentially transforming the problem from unaffordable mortgages into unaffordable retirements?
As an aside, I know of at least one reader out there will likely be strongly in favor of this idea… Our good friend Carlos, who cashed out his 401(k), paid the 10% penalty (plus taxes), and used the proceeds to pay off his mortgage just three years after buying his house.