Jim Guido's Blog

The proposed legislation would amend the tax code to allow homeowners who have 401(k) retirement plans to pull out money to save their houses from foreclosure without the usual tax penalties.

Their are hundreds of thousands of homeowners facing imminent foreclosure and estimates of 2 million or more in the wings.

The Obama administration has been exploring options which includes a new refinancing program expected this unveiled this month. But new a concept has surfaced on Capitol Hill that might offer modest help with no revenue cost to the government. It would mean amending the tax code to allow homeowners who have 401(k) retirement plans to pull out money to save their houses from foreclosure without the usual tax penalties.

It would work like this: Under current rules, anyone making what’s known as a “hardship” early withdrawal of funds from their 401(k) must pay the IRS a 10% penalty on top of ordinary income taxes. A bill introduced Oct. 5 would waive the penalty if the purpose of the distribution is to make loan payments to avoid loss of a primary home to foreclosure.

The bill would allow owners to pull out up to $50,000. The money could be used in a lump sum to pay down the delinquent mortgage balance or to fill shortfalls caused by reductions of household income. It could also be used as part of loan modification agreements with lenders designed to avert a foreclosure. No matter how the money is used to resolve the mortgage delinquency, it would need to be spent within 120 days of receipt and could not exceed 50% of the funds in the retirement account.

Home owners would still be subject to income taxes on the amounts they withdraw.

Titled the HOME Act, short for Hardship Outlays to protect Mortgagee Equity Act, the proposal sheds light on the potential foreclosure-avoidance resources and its drawbacks that are connected with tapping employee retirement accounts. Most, but not all, 401(k) plans allow loans to participants, including for housing-related purposes. Retirement advisors generally recommend taking a loan from a plan because the money withdrawn is not taxed or penalized. Borrowers are required to pay interest on the loan, but in effect they are paying it to themselves to offset any earnings lost on the balances taken out.

The CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today that California home sales fell in July but were up from the previous year.

As reported closed escrow sales of existing, single-family detached homes in California dropped 4.1 percent to a seasonally adjusted 458,440 units in July. This  information was collected by C.A.R. from more than 90 local REALTOR® associations and MLSs statewide.  July home sales were up 4.5 percent from the 438,850 units sold in July 2010.  The statewide sales figure represents what would be the total number of homes sold during 2011 if sales maintained the July pace throughout the year.  It is adjusted to account for seasonal factors that typically influence home sales.

July sales did improve over last year but they were somewhat weaker than expected with the current prices and mortgage rates. The Economic uncertainty and recent developments in financial markets have caused hesitation among buyers, the effects of which we may see in the coming months.  We really need to see sustained job and income gains along with an increase in consumer confidence before we can expect to see consistent improvement in the housing market.

The statewide median price of an existing, single-family detached home sold in California dipped 0.3 percent in July to $294,230 from a revised $295,210 in June.  July’s median price was down 7.6 percent from the $318,550 recorded in July 2010.

C.A.R.’s report July also included the following:

• The Unsold Inventory Index for existing, single-family detached homes was 5.5 months in July, up from 5.0 months in June, but essentially unchanged from July 2010’s 5.6-month supply. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.
• Thirty-year fixed-mortgage interest rates averaged 4.55 percent during July 2011, virtually unchanged from 4.56 percent in July 2010, according to Freddie Mac.  Adjustable-mortgage interest rates averaged 2.97 percent in July 2011, compared with 3.73 percent in July 2010.
• The median number of days it took to sell a single-family home was 52.1 days in July 2011, compared with 42.4 days for the same period a year ago.
• View Unsold Inventory by price point.

The Mortgage Bankers Association’s (MBA) National Delinquency Survey is reporting that the delinquency rate for mortgage loans on one-to-four-unit residential properties increased to a seasonally adjusted rate of 8.44 percent of all loans outstanding as of the end of the second quarter of 2011. As reported this is an increase of 12 basis points from the first quarter of 2011, and a decrease of 141 basis points from one year ago. The non-seasonally adjusted delinquency rate increased 32 basis points to 8.11 percent this quarter from 7.79 percent last quarter.

Also reported was that the percentage of loans on which foreclosure actions were started during the second quarter was 0.96 percent, down 12 basis points from last quarter and down 15 basis points from one year ago. The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the second quarter was 4.43 percent, down 9 basis points from the first quarter and 14 basis points lower than one year ago. The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 7.85 percent, a decrease of 25 basis points from last quarter, and a decrease of 126 basis points from the second quarter of last year.

The combined percentage of loans in foreclosure or at least one payment past due was 12.54 percent on a non-seasonally adjusted basis, a 23 basis point increase from last quarter, but was 143 basis points lower than a year ago.

Foreclosure start rates fell to their lowest level since the fourth quarter of 2007 plus the Foreclosure inventory rates also fell to their lowest level since the third quarter of 2010. The percentage of loans 90 days or more past due continues to fall along with the foreclosure rate, and is at the lowest point since the beginning of 2009. Were there a growing backlog, we would expect to see the 90-plus day delinquent category increasing.

The percent of loans in foreclosure also decreased nine basis points overall to 4.43 percent. The foreclosure inventory rate for prime fixed loans decreased three basis points to 2.56 percent. The rate for prime ARM loans decreased 37 basis points from last quarter to 9.16 percent. The rate for subprime ARM loans decreased three basis points to 22.23 percent and the rate for VA loans decreased nine basis points to 2.30 percent. The rate for FHA loans decreased 11 basis points to 3.24 percent. Subprime fixed loans saw an increase of 48 basis points to 11.01 percent, which sets a record high in the survey for three straight quarters.

Also the non-seasonally adjusted foreclosure starts rate decreased six basis points for prime fixed loans to 0.62 percent, 14 basis points for prime ARM loans to 1.82 percent, 12 basis points for subprime fixed to 2.44 percent and five basis points for subprime ARMs to 3.62 percent. The foreclosure starts rate decreased 20 basis points for FHA loans to 0.73 percent and 18 basis points for VA loans to 0.55 percent.