Can Pension Power End The Foreclosure Mess?

If you’ve been looking at your pension statements recently — if you’re lucky enough to have pension statements to review — you may have noticed that the bottom line hasn’t changed much. For all the talk about compound interest and investing for the future, the reality is that pension balances have actually shrunk.

The Federal Reserve reports that America’s pensions held assets worth $6.080 trillion at the end of 2010, down a touch from the $6.083 trillion we had in 2006.

These numbers are actually worse than they appear. Corrected for inflation, we would need $6.580 trillion to simply equal the buying power of our 2006 pension dollars.

But why not get better pension results and clean up the foreclosure surplus at the same time? This is the essential idea put forward by Rep. Bill Posey, a Florida Republican who represents Brevard County along the Atlantic coast, including Cape Canaveral and NASA’s Kennedy Space Center.

Posey has introduced H.R. 1526 — the Housing Recovery Act of 2011, legislation which would eliminate tax penalties for early pension withdrawals when retirement money is used to purchase foreclosed homes.

“If enacted this legislation could make a substantial dent in the shadow market of foreclosed and distressed homes,” said James J. Saccacio, chief executive officer of RealtyTrac. “If you reduce the supply of distressed properties, home prices will stabilize and perhaps even rise. As home prices solidify property taxes will begin to rise, state governments will be able to reduce deficits, and local economies will improve as newly purchased homes create fresh spending and local jobs. No less important, this marketplace correction could be accomplished with private money and not taxpayer dollars.”
 
Pension Realities
Today pension funds yield little to contributors. As an example, one-year CD rates have recently been around 1 percent. This means if someone is lucky enough to have $1 million in such insured instruments the return will be about $833 a month.

Earning 1 percent on a CD is an automatic loser. The rate of inflation was 2.7 percent in March, meaning an investment which yields 1 percent is surrendering 1.7 percent a year in buying power.
The stock market is always an option, but retirees need to be careful here as well. Between 2006 and the end of 2010, households saw the value of their stocks lose more than $1 trillion.

Most people, of course, have far less than $1 million set aside for retirement. The Employee Benefit Research Institute says that as of 2008 the average IRA balance was just short of $55,000. The group also notes that three-quarters of those aged 50 and above have no pension. Of the fortunate quarter who do have a pension, the typical payment was $15,600 in 2009.

Market Impact
“You can’t have an economic recovery without a housing recovery,” Rep. Posey told us, and it’s not a stretch to say that if enacted his proposal could have a significant impact nationwide. To see why let’s look at some back-of-the-envelope calculations:

The National Association of Realtors says that in March the typical home sold for $159,600. NAR also says that distressed homes were selling with a 20 percent discount — that means across the country a distressed property might be available for $127,680. Imagine such properties could be bought with 20 percent down plus another 20 percent for closing costs and repairs. So, figure $51,072 in cash will be needed to buy a typical property. In high cost areas, of course, the numbers will be very different, but national averages are a fair reflection of the overall marketplace.

The shadow inventory of distressed homes today — foreclosures, REOs and people who want out for various reasons — likely totals several million homes. Let’s say we want to put a serious dent in this inventory and acquire 3 million properties. The cash requirement would be $153.2 billion ($51,072 x 3 million).

Is this a lot of money? You bet — but it’s less than 2.5 percent of the national pension system.
 
Specifics
Posey says under his bill pension holders would be able to take money from retirement accounts for the purpose of acquiring foreclosures without the 10 percent penalty which often applies to early withdrawals. The money can be used to purchase either a prime residence or an investment with one to four units, but not commercial property. In addition, Posey told us, his intent is to allow individuals to purchase more than one foreclosure, if they want.

The legislation sets up a number of requirements to qualify for the exemption.

  1. The properties would have to have been foreclosed at least a year. This is to prevent quickie deals among friends that could short-change lenders.
  2. Funds must be spent to within 120 days of withdrawal.
  3. The properties must be owned for at least two years.

Could the Posey proposal go further? For instance, why should foreclosures languish on the market for a year before being qualified for purchase?
 
Also, why just foreclosures? Why not include short sales as well?

Lastly, why not allow the credit to be applied in cases where the seller has been unemployed for at least three months or the property has been financed with a toxic loan — say any mortgage made between 2002 and 2009 which has such features as negative amortization, a prepayment penalty or was originated with a no-doc loan application.

Posey explains that his legislation is designed to be as “simple as I can get it to get us started” and that he would be open to an expansion of the bill.

“Could I have made the bill broader?” asks Posey. “Yes.

“Would I have a harder time passing it? Yes.”

Limitations
Even if the Posey bill were to pass this week, the idea of using pension funds to purchase real estate is not for everyone.

One problem is that pension money invested in stocks and bonds is highly liquid, something which is not the case with real estate. Because of the need to maintain liquidity in case cash is needed for an emergency most pension accounts would be too small to buy foreclosures.

Another issue concerns opposition. Right now the pension system is a $6 trillion asset which yields enormous fees, charges and benefits for fund managers. The Posey bill will no doubt face substantial resistance from Wall Street and the major banks.

Lastly, the pension system is remarkably complex. You may be able to easily withdraw funds from some accounts but not others. Withdrawal size may be limited. You may be able to purchase a prime residence but not an investment.

The bottom line: Even if the Posey bill passes you’ll still need help from pension fund managers and tax professionals to figure out what’s allowed and how to avoid tax penalties. You’ll also need help from local brokers to see which properties are best and which should be avoided.

Meanwhile, keep your eye on the Posey bill. The Florida congressman is on to something. Imagine the value of such legislation if we dropped the one-year seasoning requirement and allowed the purchase of short sales and distressed homes. With enormous speed the real estate marketplace could be radically changed — and changed for the better.
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Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.

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