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Homeowners Raiding Retirement Accounts to Avoid Foreclosure

Fees and penalties for early withdrawals can be severe

April 9, 2008

Rather than borrow money from their 401(k) accounts, which would have to be paid back, a growing number of beleaguered families have been cashing out, according to retirement plan administrators.

A USA Today reported cited new figures from plan administrators showing the number of 401(k) "hardship withdrawals" is up in early 2008 compared with the same period last year.

During the first month of the year, as the economic slowdown tightened pressure on mortgage holders, hardship withdrawals rose 23% at plans that Merrill Lynch administers, compared with the same period in 2007, the report said.

Merrill Lynch found that the primary reason for the rise in hardship withdrawals was to prevent foreclosure or eviction.

Likewise, in the first month of the year, compared with January 2007, Great-West Retirement Services saw a 20% increase in hardship withdrawals to save a home.

Severe consequences

For workers, the consequences of raiding a 401(k) plan can be severe.

About 85% of employers bar employees from making contributions for six months after taking a hardship withdrawal.

Worse, employees who pull money out of tax-deferred 401(k) plans before age 59 1/2 generally must pay a 10% penalty on top of the taxes owed.

"The repercussions of the housing crisis are all around us, including in depleted 401(k) plans," said Ruben Burks, secretary-treasurer of the Alliance for Retired Americans.

In its latest report of pending home sales, the National Association of Realtors concedes that measure has hit its lowest level on record.

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in February, fell 1.9 percent to 84.6 from an upwardly revised reading of 86.2 in January, but was 21.4 percent lower than the February 2007 index of 107.6.

NAR Chief Economist Lawrence Yun called it "a slip in sales" and admits it shows the housing market isn't out of the woods yet. However, he said he thinks the worst of the deep sales declines is over.

"Existing home sales could start to show a sustained increase within a few months, unless there are some additional economic problems or excessive inflationary pressure," he said. "We're looking for essentially stable sales in the near term, before higher mortgage loan limits translate into more sales in high-cost markets. The wider access to affordable credit should increase sales activity notably this summer as pent-up demand begins to be met."

The pending sale index for homes in the Northeast rose 3.2 percent in February to 71.8 but remains 25.4 percent below a year ago. In the Midwest, the index declined 3.7 percent to 82.7 and is 17.4 percent lower than February 2007. The index in the South fell 5.5 percent in February to 85.0 and is 30.3 percent below a year ago. In the West, the index dropped 9.8 percent in February to 84.6 and is 17.1 percent below February 2007.

The Realtors' group predicts existing-home sales are likely to rise from an annual pace of 4.9 million in the first quarter to 5.9 million in the fourth quarter.

With relatively weak activity in the first part of the year, existing-home sales for all of 2008 are forecast at 5.39 million, increasing 6.6 percent to 5.74 million in 2009.

"Exceptionally weak home sales related to jumbo loans problems will depress home prices in the first half of the year, but steady liquidity improvements in the conforming jumbo-loan market will help prices recover in the second half of the year," Yun said.

He said the aggregate existing-home price will probably ease by 1.4 percent to a median of $215,800 for all of 2008 before rising 3.7 percent to $223,800 next year. He also that there will continue to be wide variations in regional housing market conditions.

"Some parts of the country that can expect improvement include the Northeastern region and the oil-patch states of Texas, Oklahoma, Louisiana and Arkansas," he said. With lower interest rates and flat home prices in many areas, he predicts NAR's housing affordability index will rise 14 percentage points to 127.0 in 2008.

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