Congress to Homeowners: Destroy Retirement to Avoid Foreclosure
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.
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.
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