Fossella to Introduce Legislation that Would Allow Struggling Staten Island Homeowners to Tap Retirement Funds

Staten Island Advance - Sunday, December 09, 2007

Should struggling homeowners facing foreclosure be allowed to tap nest-egg retirement money without suffering penalties and interest?

Rep. Vito Fossella believes they should.

He plans to introduce legislation this week that would allow homeowners with adjustable rate mortgages to withdraw up to $25,000 from retirement accounts and IRAs. The cash could be used to make mortgage payments or refinance into more affordable fixed rate mortgages.

"I think it's a common sense way of allowing individuals who may be having mortgage issues to tap into their own accumulated capital to help them through a period of financial duress," said Fossella (R-Staten Island/Brooklyn) of his proposed Homeowners Assistance Act.

There were at least 89 legal notices advertising foreclosure auctions on Staten Island in the third quarter of this year, a 65 percent jump over the second quarter and the biggest increase citywide, according to PropertyShark.com.

It is estimated that more than 2 million U.S. families with subprime loans have lost -- or will lose -- their homes. Many of those homeowners have adjustable rate mortgages.

Fossella's bill applies to homeowners with adjustable rate mortgages resetting between 2005 and 2009.

Eligible homeowners can't have incomes that exceed $114,000 for a single person and $166,000 for a couple. The money must be withdrawn within 90 days of the scheduled mortgage interest rate reset.

Senior advocates and economic experts are cautious about the idea of using long-term retirement funds to help with the current subprime lending crisis.

"Rep. Fossella's plan could provide some homeowners with a last resort plan to avoid foreclosure, but homeowners at risk should understand that tapping in early into retirement savings compounds into a bigger loss of their nest egg. Homeowners should look for other solutions before risking their long-term financial security," said Jim Dau, a spokesman for the AARP.

Simone Wegge, an economics professor at the College of Staten Island, said taking money out of a retirement fund, even if it's going to be repaid over time, means the cash is not earning interest and dividends.

"There is another cost to it," Ms. Wegge cautioned of the bill. "If it becomes so easy to access these funds before you are 65, people might do more frivolous spending."

Still, Ms. Wegge acknowledged, such a program could help some homeowners. "It's an interesting idea and it should be discussed," she added.

To encourage repayment, homeowners would not be taxed on the additional income if the loan is repaid within five years.

Right now, people who take out money from IRA and 401k funds before age 59 are charged a 10 percent penalty on the amount they withdraw. The money is also taxed as income.

"It's not going to be helpful to everyone," Fossella said of his plan. "But if someone has set aside capital and they can repay that over time, they should be allowed to access their own capital."

Nancy Goldhill, project director of the Legal Services office in St. George, where a foreclosure prevention project was implemented last year, said Fossella's bill is not likely to help homeowners who come into her office seeking relief from burdensome subprime loans.

"We need a broader based solution to help people who don't have something set aside for a rainy day and don't have retirement accounts," she said.

Reprinted here with permission from the