Wednesday, October 7, 2009

Mortgage lenders try to trick homeowners out of 401k and IRA retirement accounts

There are few instances of bank behavior that anger me more than hearing of lenders and servicers who attempt to trick homeowners into making a withdrawal or loan against their 401k or IRA as a “prerequisite” of loan modification.

If a homeowner owes more than their house is worth and has insufficient income to afford both their monthly mortgage payment and basic living expenses then taking money out of the homeowner’s IRA or 401k is a mistake.

We have heard from several of our clients that the servicer would not approve loan modification because the homeowner had money in a 401k or IRA and that the owner would have to deplete their retirement savings before the loan modification could be approved. In most cases this is bold faced lie. For an upside down homeowner to raid their retirement saving is a always a huge financial blunder.

Florida Statute 222.21(2)(a) provides that any money or other assets payable to participant or beneficiary in a qualified retirement or profit sharing plan such as an IRA or 401k is exempt from all claims from creditors of the beneficiary or participant. Florida Statutes specifically include under the protection umbrella pension plans designated for teachers, county officers and employees, state officers and employees, police officers, and firefighters. In other words even if the lender filed for foreclosure, was able to win its case, took possession of the property, sold it for a loss, obtained a deficiency judgment and attempted to collect on the deficiency the lender STILL could not get its dirty hands on homeowner’s IRA or 401k. The only way the lender can get money out of the homeowners 401k is if the homeowner is DUMB ENOUGH to give it to the lender voluntarily. Further, with proper foreclosure asset protection planning, other assets can often be protected from the homeowner's creditors.

One family that consulted with us had household income of over $150,000 when they bought an $800,000 home in 2006. While the couple put over $80,000 down today their Broward home is worth only $560,000. After the husband was laid off in 2008 the family’s income fell to less than from $150,000 to $50,000 a year. Following the husband’s layoff the couple used their 401k to pay their mortgage of over $5,000.00 per month. They thought the husband’s unemployment would be short lived. Today, nearly one year later, their retirement savings are gone. They have negative equity in their home and have nothing to show for the payments they made since the layoff. If spending $5,000 a month on rent after losing your job is foolish, spending $5,000.00 in mortgage payments when you are not building equity and will not have equity anytime soon is also a poor financial decision. Unfortunately, many homeowners make poor business decisions about their homes due to emotional attachment to the home, ego, and pride. This family paid a huge price because they attempted to handle the problem themselves.

A better solution for this homeowner would have been a short sale that would likely eliminated the negative equity that continues to burden family. In the alternative the homeowner should have sought loan modification and forbearance to delay and reduce payments while the husband sought new employment. If the bank was unwilling to agree to forbearance and/or modification then suspending mortgage payments due to the hardship would financially be a better move than depleting their retirement savings.

The only time a homeowner should use retirement savings to make mortgage payments is when the homeowner has substantial equity in the property. If your house is nearly paid off and is worth far more than you owe then taking money from retirement accounts to protect your hard earned equity makes good financial sense. An upside down homeowner lives in a house that belongs to the bank and essentially owns “less house” than a homeless person. Squandering retirement savings, that the bank could not otherwise touch, is not a worthwhile exchange for minor or temporary interest rate concessions that do nothing to address the homeowner’s negative equity problem.

When borrowers are upside down and the lender is looking at loosing 25% to 50% of the loan balance in a costly protracted litigated foreclosure the homeowner has FAR MORE leverage than they realize. We have seen loan modifications made for homeowners who had no hardship and six figure incomes but simply stopped paying their mortgage because they were upside down and wanted reasonable interest rate concessions from the bank.

If the bank asks you to deplete your 401k in order to get a loan modification it is time to fight back and get professional help. When the representative of the lender or servicer says they cannot approve you because you have assets in your 401k obtain the name and E-mail address of the person you are dealing with and confirm the conversation in writing by e-mail.

There are some homes that could be saved but an essential step in the analysis is whether it is in the homeowners best interest to save their home and at what price is the home worth saving. Detached, objective professional advice is essential part of what we at Shuster & Saben do. Florida homeowners from Dade, Broward, Palm Beach, Collier, Lee, Martin, St. Lucie, Indian River, and Brevard counties can e-mail our firm at
In the meantime hold on to your IRA, 401k, 529, and Florida Prepaid College accounts. You will need these in the future.