A proposed bill circulating in the House of Representatives would waive early distribution penalties on qualified retirement plans if the money is used to buy foreclosed homes.
Sponsored by Rep. Bill Posey, R-Fla., the Housing Recovery Act of 2011 is expected to apply to distributions from Roth IRAs, 401(k)s and company pension plans.
The bill requires individual distributions to be used within 120 days for the purchase of a residence that has been in foreclosure for at least one year. Purchasers must agree to hold the property for at least two years in order to be exempt from withdrawal penalties.
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HousingWire, a financial news organization for the mortgage market, reports Posey, a Realtor, anticipates that the one-year period "would begin at the point that the foreclosed property is listed for sale," but a press secretary said the congressman is "open to amending the bill to be more specific about when the clock would start ticking." Simply-foreclosures.com states lenders typically begin a foreclosure process when a third mortgage payment is missed.
But would tappping into a retirement account be a reasonable move to help the purchaser and to stimulate housing markets, especially when this is a revival period for 401(k)s? It's a cautionary situation, according to 401(k) expert Charles Epstein, founder of The 401K Coach Program, who says the legislation might coax the average 401(k) plan participant into a risky decision.
"At first glance one would think, what a great idea to unleash the power of 'locked 401(k) assets' to help stimulate the real estate market," Epstein says. "It's the other side of the 'retirement equation' that would concern me most and that is unskilled 401(k) investors transferring their 401(k) balances to purchase foreclosed real estate."
According to the National Association of Realtors, there are things home buyers need to be wary of when they consider purchasing a foreclosure. These include unpaid liens, such as mortgage debt, taxes, construction loans, home equity lines of credit, and possibly a second or third mortgage. Any or all of these financial obligations could become the buyer's responsibility when they purchase a property in foreclosure. Unless the property goes through a foreclosure auction and becomes a bank-owned REO, the outstanding foreclosure liens and fees could be simply transferred to the new owner.
The state of Florida had more than 320,000 foreclosure notices in 2010 alone, according to FloridaRealtors.org.
"I can just see Wall Street figuring out another credit scheme to lure unsuspecting and less knowledgable 401(k) participants into using their retirement nest egg to purchase 'leveraged foreclosed property,'" Epstein continues. "Goldman Sachs would just love this. Remember the two largest assets the average 401(k) participant will own in their lifetime is their home and their 401(k) account. They would never go to the casino and bet their mortgage on 'red #7!' so why give them the option to do it with their 401(k) money?
"I believe we need to do more to 'secure' 401(k) participants' retirement future and guarantee them a paycheck for life, not increase the risk already available inside their 401(k)."
As of April 13, the legislation has been referred to the House Committee on Ways and Means.
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