Lender of last resort: your 401k

[zoog]

From the WSJ

Despite potential tax and investment consequences, more individuals have been borrowing from their 401(k) plans or taking hardship withdrawals in recent months, some retirement-plan providers say.

Not all plans have seen jumps, and more-comprehensive statistics won't be available until next year. But a number of plan providers that follow month-to-month patterns, including T. Rowe Price Group Inc., Hewitt Associates and Hartford Financial Services Group Inc., have seen a small but noticeable uptick.

Many in the field expect more 401(k) borrowing in 2008 as consumers struggle with tighter credit and potentially higher mortgage payments.

"I don't think it's a groundswell, but it's enough to be noticed," says Rick Meigs, president of 401khelpcenter.com, which provides information on 401(k) plans.

To be sure, the indications are preliminary, and some big providers, such as Fidelity Investments, say they haven't seen any increase in 401(k) borrowing. About 20% of Fidelity 401(k) investors have a loan, a figure in line with the industry.

Even those firms that are seeing increase in 401(k) borrowing aren't sure what to ascribe it to, though financial advisers say it could be due to the effects of the credit crunch and slumping housing prices.

[c1ue]

Re: Lender of last resort: your 401k

Ugh, that's a fairly strong bear sign to me - but then I see bears everywhere :p

[jimmygu3]

Re: Lender of last resort: your 401k

This is one reason I see an impending stock market correction and recession. When subprime borrowers get their rates reset they simply lose their house because they have no savings and little flexibility to reduce discretionary income. On the other hand, the current and coming wave of prime mortgage resets will find many homeowners who are able to keep their homes (at least for a while) by raiding their retirement accounts and eating beans and rice.

[zoog]

Re: Lender of last resort: your 401k

This is one reason I see an impending stock market correction and recession. When subprime borrowers get their rates reset they simply lose their house because they have no savings and little flexibility to reduce discretionary income. On the other hand, the current and coming wave of prime mortgage resets will find many homeowners who are able to keep their homes (at least for a while) by raiding their retirement accounts and eating beans and rice.

Definitely a possibility. Might be a while though if it doesn't happen soon. (How's that for going out on a limb with predictions?:rolleyes

[GRG55]

Re: Lender of last resort: your 401k

From the WSJ

Here's the expected follow-up from your friendly Federal Government. When the authorities in Canada did something similar to drag the country out of the mid-80's housing bust, the "temporary" measures to borrow from private retirement accounts eventually morphed into permanent legislation. When the patient recovers the IV fluid just gets replaced with steroids, but the tube can never be cut off.

COLEMAN INTRODUCES BILL TO HELP HOMEOWNERS FACING FORECLOSURE Legislation would allow for tax-free retirement savings withdrawals

October 19th, 2007 - Washington DC - In an effort to provide relief to homeowners who are facing foreclosure due to difficulty with their mortgage payments, Senator Norm Coleman yesterday introduced the Home Ownership Mortgage Emergency Act (HOME Act). The HOME Act would allow homeowners who are 60 days late in their mortgage payments to withdraw penalty-free up to $100,000 from their retirement accounts through 2009 for the purpose of refinancing into an affordable mortgage or avoid foreclosure. Except for very limited cases, a 10% penalty is currently applied to early retirement distributions, although the tax code waives this penalty for distributions from Individual Retirement Accounts (IRAs) for first-time home purchases. The HOME Act would make withdrawals for the purpose of refinancing or avoiding foreclosure penalty-free as well, as long as they are paid back within three years. Senator Mel Martinez (R-FL), former Secretary of Housing and Urban Development, is a cosponsor. “As a former Mayor, I know the value of homeownership for our communities,” said Coleman. “I have been troubled by the increase in the number of foreclosures to date, and the projections that the worst is still to come. While there is no one single solution to the housing crisis, my bill offers a reasonable and measured effort that can help folks stay in their homes in these difficult times. We should not penalize them for trying to keep a roof over their head and I urge my colleagues to support this measure as we seek to help out homeowners in trouble.” Minnesota is currently fourth in the nation in terms of the percentage of sub-prime mortgages in foreclosure. More generally, the number of foreclosures has increased 183 percent in the last year. Nationally, foreclosures have doubled in the last year, and more than 14.5 percent of subprime mortgages are past due. Coleman is also an original cosponsor of Federal Housing Administration (FHA) Modernization Act of 2007, which would allow more homeowners to refinance with Federal Housing Administration-backed loans, increase penalties for fraud, and ensure pre-purchase counseling demonstrations are available for first time home buyers. Additionally, he is a cosponsor of the Mortgage Cancellation Relief Act of 2007, which will make mortgage debt forgiveness tax-free. And the predictable MBA endorsement: Washington, DC (October 19, 2007) – The Mortgage Bankers Association (MBA) applauded legislation introduced today to assist delinquent mortgage borrowers. S. 2201, The Home Ownership Mortgage Emergency Act, was introduced by U.S. Senator Norm Coleman (R-MN) and would allow troubled borrowers to make penalty-free withdrawals from their retirement accounts in order to bring their home loan current. “This is the kind of flexible, creative solution that will help many delinquent borrowers in the current market,” said Jonathan L. Kempner, President and CEO of MBA. “Most delinquencies are caused by an event in someone’s life that puts them temporarily behind on their bills, including their monthly mortgage payment. Senator Coleman’s bill will allow borrowers who have fallen behind to help themselves without being penalized by the government.” S. 2201 would allow borrowers to access up to $100,000 of their retirement account in order to bring their mortgage current. The borrower will be allowed to repay the amount back into his or her retirement account over three years without incurring a penalty. The bill requires that the delinquent mortgage must be on a principal residence and that the borrower must have an adjusted gross income of $114,000 or less ($166,000 or less for joint filers). The borrower must be at least 60 days behind on his or her mortgage to qualify. The option would be available through December 31, 2009. Kempner stressed that, if this were enacted into law, it would be crucial that consumers fully understand how this allowance would work. “It is essential that borrowers completely understand the repayment requirements so as to avoid future tax penalties and to ensure replenishment of retirement savings,” warned Kempner. “We need to make sure that borrowers who decide to use this approach in order to catch up on their mortgage are able to save their home and also pay back their retirement account.”

[jk]

Re: Lender of last resort: your 401k

The HOME Act would make withdrawals for the purpose of refinancing or avoiding foreclosure penalty-free as well, as long as they are paid back within three years.

so the borrower with the subprime mortgage will be paying his new, refinanced mortgage and also will pay back the $100k loan from his 401k within THREE years? i guess it puts the penalty off for 3 years anyway. and the taxes, too, since once it's a withdrawal income taxes will be due on the whole amount. on the bright side, with any luck, norm coleman will no longer be a senator then.

[jimmygu3]

Re: Lender of last resort: your 401k

What am I missing here? A middle-income person is who is 2 months delinquent is in the hole $5k, tops. Even if it's double that, what's the need for a $100,000 loan due in 3 years? And why only people who are already delinquent? Isn't that rewarding irresponsibility? How about the guy who's current on his mortgage and drowning in credit card debt?

I suppose plans and rules vary, but my 401k with Fidelity allows for a $50k loan for any reason, payable over 5 years. Home purchase loans, 10 years. This seems like a better deal than what Coleman is proposing, and it requires no new legislation.

If they feel the need to legislate, I say they should offer interest-free (you pay the interest to yourself anyway) debt consolidation loans from personal retirement accounts, with a 5 to 10 year penalty-free repayment period.

I can hear the stock market drain plug being pulled right now.

[jk]

Re: Lender of last resort: your 401k

What am I missing here? A middle-income person is who is 2 months delinquent is in the hole $5k, tops. Even if it's double that, what's the need for a $100,000 loan due in 3 years? And why only people who are already delinquent? Isn't that rewarding irresponsibility? How about the guy who's current on his mortgage and drowning in credit card debt?

I suppose plans and rules vary, but my 401k with Fidelity allows for a $50k loan for any reason, payable over 5 years. Home purchase loans, 10 years. This seems like a better deal than what Coleman is proposing, and it requires no new legislation.

the loan isn't just to let you catch up on your payments, since you'll likely fall behind again given the high rate reset. read the proposal again -- it's to allow you to refinance. that may mean coming up with major bucks, since you can only refinance, say, 80% of he home's current value, and your original loan was perhaps 110% of some inflated value, i.e. you're underwater. and you need to pay closing costs, points, penalties on the early refi, etc. somehow, it seems to me, the first mortgage holder and the new lender come out the winners here. hmmmmm...

[GRG55]

Re: Lender of last resort: your 401k

the loan isn't just to let you catch up on your payments, since you'll likely fall behind again given the high rate reset. read the proposal again -- it's to allow you to refinance. that may mean coming up with major bucks, since you can only refinance, say, 80% of he home's current value, and your original loan was perhaps 110% of some inflated value, i.e. you're underwater. and you need to pay closing costs, points, penalties on the early refi, etc. somehow, it seems to me, the first mortgage holder and the new lender come out the winners here. hmmmmm...

Once again I think you've got right to the heart of the matter jk.

It's difficult to avoid sounding like some sort of conspiracy-monger, but we all know that US monetary and fiscal policy discouraged new savings for many years. Now that the credit cycle is in contraction, it appears policy is being shifted to encourage draw-down of whatever savings citizens may have, including any meager amounts they may have set aside for retirement.

Watching all this I am reminded of something Martin Mayer said: "It's the weak creditor, not the weak debtor, who threatens the system - the inability of the borrower to pay matters systemically only to the extent that the lender cannot afford not to be repaid."

Could it be that the derivative-enabled wide dispersion of credit risk, much lauded by everyone including Greenspan, has resulted in a large cohort of lenders that "...cannot afford not to be repaid"?

[c1ue]

Re: Lender of last resort: your 401k

Could it be that the derivative-enabled wide dispersion of credit risk, much lauded by everyone including Greenspan, has resulted in a large cohort of lenders that "...cannot afford not to be repaid"?

GRG,

This is the unspoken message behind the Fed's actions - clearly telegraphed in the primary iTulip message.

The subprime, Alt-A, corporate, and PE loans support tremendous derivative sales and banking fee overhang(s) which cannot survive if the original underlying collateral collapses.

The only question in my mind is whether the American people are stupid enough to continue to buy into the latest myth.

History does not invite kind comparisons.

[GRG55]

Re: Lender of last resort: your 401k

GRG,

This is the unspoken message behind the Fed's actions - clearly telegraphed in the primary iTulip message.

The subprime, Alt-A, corporate, and PE loans support tremendous derivative sales and banking fee overhang(s) which cannot survive if the original underlying collateral collapses.

The only question in my mind is whether the American people are stupid enough to continue to buy into the latest myth.

History does not invite kind comparisons.

None of this is surprising to any of us, but still disappointing leadership IMO.

When the Canadian Govt. did something similar with tax-sheltered retirement plans in the 1980's (under the guise of helping the first-time homeowner) the vast majority of people did not repay their withdrawals and missed out on many years of compounding for retirement (few first-time homebuyers are likely to be close to retirement age).

The main difference is the Canadians implemented this AFTER the housing market had already tanked (due to the commodity collapse). That meant people who used these funds to purchase a house bought in a soft market and had the opportunity to ride the housing price rise over the last 20 odd years.

[Uncle Jack]

Re: Lender of last resort: your 401k

I took a break from iTulip for a month or so while I was bullish. I'm back to the bear camp and I see this news, not news, about 401k withdrawals.

I got news for you, this isn't news. I've been seeing it in my financial planning practice for more than a year down here in bubble-ville, Florida. It's getting worse. The other fee-only planner in my city (there are two of us, the others are commissioned-based) is losing clients with money to manage as his client base was heavy, too heavy, with people in the real estate business. They are pulling money from their retirement accounts, and in many cases closing them, in order to make ends meet.

This lender of last resort idea, the 401k, is one of the main reasons I am long-term bearish on the markets. Just by cutting back on contributions will reduce the demand to hold up stock prices. Now consider withdrawals, especially in a declining market, and stock prices are going to come down, hard.

Back to enjoying my silence. Pardon this brief interruption. Enjoy the show.

[Jim Nickerson]

Re: Lender of last resort: your 401k

I took a break from iTulip for a month or so while I was bullish. I'm back to the bear camp and I see this news, not news, about 401k withdrawals.

I got news for you, this isn't news. I've been seeing it in my financial planning practice for more than a year down here in bubble-ville, Florida. It's getting worse. The other fee-only planner in my city (there are two of us, the others are commissioned-based) is losing clients with money to manage as his client base was heavy, too heavy, with people in the real estate business. They are pulling money from their retirement accounts, and in many cases closing them, in order to make ends meet.

This lender of last resort idea, the 401k, is one of the main reasons I am long-term bearish on the markets. Just by cutting back on contributions will reduce the demand to hold up stock prices. Now consider withdrawals, especially in a declining market, and stock prices are going to come down, hard.

Back to enjoying my silence. Pardon this brief interruption. Enjoy the show.

Hey, U Jack,

Why not put the information you disclosed about yourself in your profile? I like expertise, and I appreciate yours, but I forget who is who from when they make mentions of their expertise in some long lost, forgotten post.
Florida, fee-only financial planner, 22 y/o, hobby: counting my money, etc.

Your post is a very good one, thanks.

[jk]

Re: Lender of last resort: your 401k

welcome back, uncle jack. we won't hold these brief bullish spells against you.

[metalman]

Re: Lender of last resort: your 401k

I took a break from iTulip for a month or so while I was bullish. I'm back to the bear camp and I see this news, not news, about 401k withdrawals.

I got news for you, this isn't news. I've been seeing it in my financial planning practice for more than a year down here in bubble-ville, Florida. It's getting worse. The other fee-only planner in my city (there are two of us, the others are commissioned-based) is losing clients with money to manage as his client base was heavy, too heavy, with people in the real estate business. They are pulling money from their retirement accounts, and in many cases closing them, in order to make ends meet.

This lender of last resort idea, the 401k, is one of the main reasons I am long-term bearish on the markets. Just by cutting back on contributions will reduce the demand to hold up stock prices. Now consider withdrawals, especially in a declining market, and stock prices are going to come down, hard.

Back to enjoying my silence. Pardon this brief interruption. Enjoy the show.

welcome back uncle jack! didn't we all talk about this last year when we were all wondering out loud about where joe sixpack is going to get $$$ after the home equity well dries up? i think you were the one who said 401ks.

i take breaks from itulip too but not because i get bullish but you can read the old piece on gold from 2001 and it's all there. nothing's changed. you could have read that, bought gold and fallen asleep like rip van winkle then woke up and, hey! here we are, expensive gold, shit dollar, crappy housing market, and pols jumping from this friggin cess barge economy they built like it was on fire. which is kind of is.