Workers take 401(k) hardship withdrawals to avoid foreclosure [Press Version]

2,500,000 California homeowners are in dire financial straits after the Millennium BoomThe years 2000-2007 leading up to the current economic recessionAn economic event triggered and controlled by the Federal Reserve to maintain the sustainability of economic growth., characterized by loose lending practices and unsustainably high property prices and sales volume. wiped-out the value of their largest assets: their homes. In response, many homeowners are making hardship withdrawals from their 401(k) retirement accounts to prevent foreclosure or evictionAn unlawful detainer action filed to physically remove a tenant from actual possession.. Over the past twelve months, 11% of Fidelity’s 401(k) account owners initiated a loan — borrowed — from their 401(k) retirement accounts, reports US News and World Report.

Overall, hardship withdrawals have increased since last year. Nationally 62,000 participants in 401(k) programs initiated a hardship withdrawal during the second quarter of 2010 — up from 45,000 in the first quarter of 2010. Nearly 45% of retirement account holders who took a hardship withdrawal in 2009 took another hardship withdrawal in 2010.

Early 401(k) withdrawals are also subject to income taxes. To add insult to injury, many 401(k) accounts have lost value in recent months. Fidelity accounts averaged $61,800 at the end of June 2010 — a $5,100 drop from March 2010.

Negative equityThe condition of a property owner owing more on a mortgage than the current fair market value of the encumbered property. homeowners are caught in a black hole, and pouring retirement savings into that black hole will only help to pull them in deeper. Retirement accounts are the only form of savings many homeowners have. To tap into retirement savings and use the funds to prevent an underwater home (read: a home with a loan-to-value (LTV) over 94%) from going into foreclosure makes no financial sense. It’s throwing good money after bad money (a nonperforming investment in a home) — the “sunk cost” of irretrievable monies spent in the past. Homeowners destroy their financial future by moving cash from any source into a dead-end housing debt.

If a homeowner is considering depleting their retirement savings in any amount to save a negative equity home, thoughtful real estate agents seeking to brand themselves by building up collective good will during this recession can do their part by educating homeowners of their put optionThe option built into the provisions of every trust deed allowing the buyer to force the lender to buy the property for the remaining loan amount. rights. A “put” is built into the terms of every trust deed mortgage. The option grants to California homeowners the legal right to force the lender holding purchase-assist financing on their principal residence to buy that home at a trustee’s sale for the balance due on the loan — all with no recourseA lender may pursue a homeowner for a loss due to a deficiency in the value of the secured property if the lender forecloses judicially or is a wipe out recourse second trust deed. to the homeowner — by simply defaulting.