Loan Modifications, Foreclosures Affecting Retirement Savings (IRAs and 401k)

by David Ning · 47 comments

house under waterWith foreclosure rates sky rocketing and no end in sight, banks are much more willing to negotiate with homeowners on the specifics of their mortgages. These days, “loan modification” have almost become an industry by itself as banks allocate more and more resources to work on this.

Sparked by all the news surround it, a reader had this question:

What happens to IRAs and other retirement accounts when someone approaches a bank asking for a loan modification? Can the bank take over those retirement savings to satisfy part of the debt (in the case of a short sale for example)?

Loan Modifications

A loan modification is basically a change to the terms of your loan. In theory, it could be lower interest rates, shorter loan terms or even completely writing off the whole mortgage.

From what I’ve read (and heard), lenders will not agree to any loan modification unless you start to show inability to repay the monthly mortgage payments. Once delayed (or missing) payments become frequent though, they might work with you on a loan modification.

The modification process is basically a negotiation where the lender will reduce your monthly payment if it believes it is better off with you paying a reduced mortgage payment. Therefore, the modification needs to be better than your house being in foreclosure (in the bank’s eyes).  In process, the retirement accounts are safe because they are still working with you to get you current with the mortgage payments.

What About Foreclosures

Think of foreclosure as a few months of non-payment.  If loan modifications weren’t enough to reduce your payment to an affordable level (or if there were no loan mods to begin with), a notice of default may be sent to your house after 90 days of missed mortgage payments.  At this point, the lender will seize your house and put it up on auction in an attempt to recoup the cost of lending you money.

If the proceeds doesn’t cover all the cost  such as mortgage, administration fees, lenders may initiate a deficiency judgment (basically, they are suing you to get their money back).  Most believe that lenders won’t even bother with this because this process is long, complicated and expensive.  The argument is that if a homeowner weren’t able to repay the mortgage in the first place, he/she probably don’t have enough funds for the legal actions to be worthwhile.

If however the lender do decide to sue and win in court, you are obligated to repay any debt that the judge grants to the lender.  At this point, it is like any other time you owe someone else money in which you try to repay it with all means possible (job, 401k withdraws etc).

If you don’t want to take money out your 401k and IRA, you can always file for bankruptcy where those types of accounts are safe from debtors.

The Shorter Answer to the Question

Basically, 401ks and IRAs are safe from all types of debtors even though other types of assets (savings, other investment properties and taxable investing accounts) could be in danger.  However, in the case of fraud (as determined by the court), nothing is safe.

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{ read the comments below or add one }

  • w says:

    Sounds like the same old balderdash to me. The key ingredient to all of this talk is as follows. Is anyone out there allowing upside down mortages to actually LOWER their mortage amount owed, thereby dipping into the TARP money used by Bush and Obama to bailout these super rich Wall Street gamblers and mafiosos, or are these lending servicers simply pushing these loans off the end of the table, continuing to get every ounce of usury out of the original “PRODUCT”, knowing full well that R.E. prices in our lifetime will never escallate enough to gain back the equity we borrowed against. The only hope for individuals in the upside down situation is Hyperinflation, which may well happen. We will then be able to pay our mortages with a deflated Dollar because we will be making more of them. I know of only ONE person who actually had his Mortage lowered. His payment stayed the same but his years to pay were reduced.

  • areyousureaboutthat says:

    I was wary but modified with IMPAC anyway. I had a fixed rate one day away from default when I modified into a 5 year plan 2% first 2 years 3% 3 years and reverts back to fixed rate after 5 years. I can choose to sell or refinance in 5 years hopefully. It increased the balance yes and the loan was a little underwater anyway so I couldn’t refinance nor sell anyway. The only other option was Chap 13, which tacks all back payments including interest on your mortgage repayment plan anyway and really burdens you with heavy payments when you have the least ability to pay them.
    If you want to pay out your house and save, pre-pay principle payments over the first years and this will reduce the principle, allowing you to reduce the total interest paid, effectively lowers the total interest paid. In reality, forget about interest and equity principle, you are actually paying 3-4 times the sales price of your home because the cost of borrowing (interest) is the larger part of what you pay in your note. Most people don’t pay off a house and live “happily ever after” in the family cottage. They trade up or down and refinance or whatever.
    Interest only loans were only popular when the bubble kept expanding because equity was only market increase, not actual principle paid. No one has much principle in their house with low down loans. They were paying interest to have a place to live or tax deduction. When the government removes your IRS mortgage interest deduction you might just as well rent and hand the upkeep costs over to a landlord.
    Anyway I made my first mortgage note to GMAC this month after IMPAC arranged modification. I am satisfied with the deal made. I have another house that Wells Fargo won’t even talk to me about modifying without thousands up front to modify and increased notes. I wish IMPAC would handle the modification but they can’t. The value is underwater. Sometimes you need to just walk away. My credit score is so low that it probably registers a – now:)
    Others times people like IMPAC can help you out. I am pleased with my modification and I am a super wary type because I am in the real estate business. They did exactly what they said they would do and when. It worked and I am back on track.
    You wonder how I got down if I know real estate mortgages, etc and even saw the bubble that burst into a global meltdown before it burst? I saw it coming because I am a real estate appraiser and Realtor. I watched the sub-prime begin to foreclose in 2005-2006 when doing comparable sales for appraisals. Now, sales are so flat that I can hardly find comps to do appraisals. Loans are underwater in most areas so people can’t refinance either so lending is down. I do liquidation appraisals where REO-bank owned houses are sold for pennies on the dollar to investors. Sad, that lenders won’t modify and help people but rather give away the house to an investor and write off the loan. Just too much trouble to modify and work with people, etc.
    We all got our pinkies burned, didn’t we? Living like there was no tomorrow. Remember the S & L failure and the Great Depression? All about mortgage loans. As defunct Greenspan recently said, we are destined to repeat it all again when the next “big thing” comes along in about 20-30 years. Long enough for a generation to forget where we’ve been.

  • mattseds says:

    Listen, people. IMPAC is skimming a confused market. They are publicly traded (were IMPM, became IMH), and you’re telling me that a company with market cap of 27 million and EPS of .27 is the actual loan backer, and not BofA or GMAC?. That’s flat garbage.

    Here’s what they ARE doing, to clear up any confusion. They’re handling a process for you. It’s a rate adjustment, at the expense of a principal adjustment (upward) and a drawn-out amortization (outwards). This means that yes, your “payment” goes down, even for a fixed term (5 years), but you owe more on your house, and for longer overall.

    They target folks with interest only loans (80/20 was a common gem in the heyday), and pitch it as “the interest-only feature will remain”. Like that’s a good thing. Remember that the only reason you chose interest-only was to artificially lower your payments in the first place. And artificially lowering your payments is exactly IMPAC’s sweet spot.

    If your goal is to simply get away with “living” in your house for a while longer, then by all means, go for it. But if your goal is to OWN your home in the LEAST amount of time possible, and for the LEAST amount of money, then you’re taking a step in the wrong direction.

    What they are doing is not illegal, by any means, but it falls into a gray area. Especially when it is pitched as some sort of wonderful service to the public. If you want a simple way to think about what they’re doing, it’s this: if you have a 30 year loan (80/20, interest only), and you’re 4 years into it, you’ve likely not paid much principal anyhow. If you decided one day to make it instead a 35 year loan, and have the first 5 years be much cheaper payments, again at the expense of paying more in the long term, well then IMPAC is giving you that option.

    And, they’re taking your $2k. Because why not. I’ll charge you $50 to keep your seat warm for you. 🙂

  • areyousureaboutthat says:

    Did anyone but Abbie go through the process and complete?

    • pete says:

      I completed. It is for real. However, now I think I know why loan servicers and note holders are being so generous. In the news lately, many notes and mortgages were not properly transferred. By getting us to sign up for a loan modification, we are essentially attesting to the legitimacy of the original mortgage. Something to think about depending on your situation. In other words, owing to “clerical errors” including, probably, outright fraud, you may be in a position that would not allow your note holder to foreclose. If you proceed with the modification, however, I would think that you would lose that advantage. I proceeded with the modification and am completely satisified. good luck to all

  • talktotennessee says:

    I checked with GMAC on this and they never heard of Impac. They said there should not be an upfront fee for loan modification. Impact had my personal information. What is the deal here?
    Who is telling the truth?

  • mike says:

    contact, Impac, Gilbert Salazar, 800-597-4101 ext.6597
    fax. 949-252-6597
    Gilbert.Salazar@impaccompanies.com
    best of luck , be honest and be patient and make sure you can back up your paperwork.

  • Lisa Smith says:

    Excellent analysis. … The Impac rep said that is not the case and that Impac owns my loan (true) and Countrywide cannot disapprove the modification. I’ve seen on TV and print is: try to negotiate with your bank as much as possible to come up with a plan that will allow you to keep your home

  • mike says:

    Mine went thru on sat 5-1-10 , and it was exactly what we had planned , I not sure how BOA took this but Impac took care of everything and now I have 5 years to get the hell away from this countrywide/boa nightmare. Those people
    did nothing but make my life a living hell because when it was time to re-fi
    over 5 years ago there should have been no problem. But when my interest rate
    began to rise they just said no ,no,no. They just sucked me in like everyone else who at the time thought it would go to a fixed rate when it was time to re-fi .
    I,m not usually a mean person , but those mortgage brokers who would have given a bad mortgage to thier grandmothers will pay dearly for what they did.
    I might not get to see it when it happens but fate has a strange way of taking care of itself , not only did they lose thier jobs first but when they tell people what they did for a living ,no person will show any mercy. Its a good thing for me that the mortgage dept. is on the other side of the country. thanks you Impac.

  • coucou says:

    Can bank count monthly 401 K deduction as part of your income? After all, the money in the retirement account is not accessible until legit age. Besides, it does not make sense to me if you do not take advantage of the company match. The match accelerate your retirement savings. My BofA negotiator says, if you have financial hardship, you should cash out every penny instead of saving it.

    Is there anyone encountering the same question from BofA?

  • Abbie says:

    Its true. I had a $2,000 fee but over 5 years its so worth it. Good luck.

  • sharon says:

    I got approval from Impac with upfront fee of$2,495. Is this true. It feels like a scam. Good to be true.

  • KG says:

    I’ve been on the fence with my decision since I originally got he call from IMPAC. The first time they called me was back in May – June 2009. They just contacted me again in two weeks ago. I did verify with GMAC but this whoe thing sounds way to good to be true. So I’m torn. I’ve never been late on my mortgage, but would love to have a modification as my ARM will adjust for the first time in July.

    I think I’ll work with GMAC first and see what they can do since I deal with them on a monthly basis. If they don’t seem to be responsive, then I’ll go with IMPAC.

  • mgreen says:

    should boa be contacted first before going thru with 5 year mod with impac…thanks

    • Abbie says:

      I didn’t notify GMAC but I did call to verify that they knew about this and it was legit and it is and I’m at a 3.5% interest rate for 5 years. I did have to pay a $2,000 loan modification fee but over 5 years its works out in the long run. Who knows where we will all be in 5 years, perhaps some other modification will happen in 5 years, otherwise you just go back to where you would have been 5 years from now with the original loan agreement from BoA or in my case GMAC. My interest only mortgage bill went from $2850 to $1528/mo. That is huge for us, since I’m unemployed and spouse has own biz. Good luck.

      • mike says:

        checks on the way, it took 5 days to go over everything, if everything gos according to the plan this should work out fine…….I’ll report back after 30 days plus…………

  • Richard says:

    My experience is the same as all these. I signed up for the IMPAC program but called GMAC & the low-level rep didn’t know what I was talking about. My concern is that I won’t pay GMAC for 2 months & they won’t know why. Has anyone actually experienced the 2-month moratorium & actually experienced the payment modification so that GMAC expects the modified amount?

    • Abbie says:

      Hi Richard,
      I had the same thing happen. Eventually it all catches up and after the 2 months of my not paying my mortgage bill (which scared the hell out of me but I went with what IMPAC told me to do), I got the corrected statement reflecting my 3.5% 5 year remodification and all is good. The GMAC didn’t know what I was talking about but I asked to speak with her supervisor and she talked to me about if and know what was happening. Good luck. Feel free to ask me any more questions.
      Abbie

  • peter says:

    funny, I got the same offer from Impac. But, they had just modified my loan at the end of last year, without my ever contacting them or ever being late on a payment. The prior modification amounted to fixing the interest rate at 4.99% for another 5 years. Only problem is, my fully indexed rate is about 4% now. So, I am losing short term but have more security for the medium term. I am also leary, but I will go ahead with it after confirming the relationship between the rep and IMPAC. I have been very happy with IMPAC. If my rate goes below 4% for 5 years, I will be ecstatic.

  • fiona says:

    we received the same call from impac so we decided to call gmac to confirm this. gmac did confirm so we went ahead with the process. the impac rep emailed us the welcome letter, the form we had to fill out, and instructions on how to write the hardship letter. we checked out the bbb and saw that impac is legit.

  • Adam says:

    I received the same phone call offering to lower my rates. I just looked up impac and it seems to be legit. I checked yahoo finance quote IMPM and it lists the same numbers that I have been using to contact Impac. I called GMAC, my servicer, and they confirmed that Impac owns the note and is actively contacting people about refis. I am just a little leary because it sounds too good to be true. They are offering a very good deal, but they want up front fees. I understand why they are offering the deal since I might just walk away from my investment property since the fees are going up so much and I’m underwater.

    Let me know how things turn out for everyone.

  • Abbie says:

    You I recvd the loan mod. documents. I just Fed Exd it to GMAC today. No late payment letter, just the regular bill in the mail. The rep at Impac told me that he would be happy to have a conference call with GMAC in the event that I need to talk to customer service. Are you thinking of doing this? Where do you live? I live in Northern CA where my house has depreciated about $125K. They say it will turn around but I can’t imagine that happening anytime soon.

  • RJ says:

    Has anybody had success with the Impac program?

    • Abbie says:

      I have, went from 6.5 to 3.5 for the next 5 years.

      • Rj says:

        Thanks Abbie. How long did your process take? 2 to 4 weeks is what I am being told. Was it as smooth as you expected? Do you have any advice about the process? Thx. ./rj

        • Abbie says:

          Its a little confusing at first but I spoke with someone at GMAC (which is where I got my loan) and they confirmed this loan modification program with IMPAC. Impac told me not to make July and August mortgage payments until the loan modif. has gone through, then I pay Sept. as scheduled. I could take up to 60 days for GMAC to get this new loan modif. in their system and bill be correctly. Makes me nervous but I’m going with it. My payment went from $2809 to $1530 (interest only, which is what its been for the get go) but we are planning on paying a bit more so we can start paying down the principal which has been a struggle for the past 3+ years. let me know what you decide to do, I’d be interested in hearing for someone that is doing this as well.

          • RJ says:

            Have you received your loan mod docs? Did GMAC call and/or send you a late payment letter for July payment? Thx. ./rj

          • Richard says:

            How has this turned out for you? I’m in the middle of the same thing, concerned that GMAC won’t be on the same page as IMPAC. Thanks.

  • Abbie says:

    I have been speaking with IMPAC, it sounds like a great program they have going on. Better to modify existing loans then have to own homes because we can’t afford the mortgage payments. Mine is going from 6.5 to 3.5, $1,300 less a month (interest only), which is what I have anyway. So I can pay some principal down as well. Let me know if anyone else is doing this. I hope I’m not being a fool.

  • KG says:

    Hello. I just got the very same call yesterday. I pay my mortgage to GMAC and received the call from Impac. I’m really curious to know if anyone has gone through Impac. I’ll call them shortly to get the details of what they are offering.

  • Maritza Quintanilla says:

    Hi, I just got the same call from Impac (my loan is serviced through countrywide, now BofA). Did any of you go through with the modification?? I called Impac and they said it is a legitimate offer and I’m getting some BofA contact names of the people that the rep works with when putting these through. But let me know if any of you actually went through with it.

  • MoneyNing says:

    Pat: I’m against paying someone upfront to perform a service that you can do yourself for free. Like Liz said, call the bank up and negotiate a contract yourself. If you try to use someone else, I’m sure they will ask you to sign a contract that says in the fine print “results not guaranteed”.

    If there was any guarantee, it wouldn’t be called negotiation. It would be called free money here. You could also ask whether they are willing to just take a percentage of what they end up saving you. Turning the offer around might save you some hassle.

  • liz says:

    Personally, I haven’t dealt with this situation (yet) however in South Florida, there have been several reported scams already. The advise from Dave Ramsey and others I’ve seen on TV and print is: try to negotiate with your bank as much as possible to come up with a plan that will allow you to keep your home. Many ex- mortgage brokers and some attorneys are now making a living promising people that for $1,500-$3,000 they’ll negotiate with their bank. I’d be very cautious before handing out my money to them. You could use that money to use to pay for your mortgage or other debts. There’s a big back log of loan modification requests at most banks and response may be seem slow. Be persistent and hang in there. Good luck.

  • Pat says:

    I have had the same offer from Impac (Countrywide services my loan) and also dubious. Sounds a bit too good to be true and, when I called Countrywide, they told me they would need to approve any modification. The Impac rep said that is not the case and that Impac owns my loan (true) and Countrywide cannot disapprove the modification. I am uncomfortable with paying this $1995 fee up front and then not having the modification come through. I was reassured that this cannot happen. Do you have any more info?
    Pat

  • Jer@LoanModificationFirstAid.com says:

    The craziest thing happened. I make my mortgage payments to GMAC. I am not behind on my payments nor have I ever reached out to them for help. I can easily make my mortgage payment.

    So… Today I got a call from Impac. Apparently they “own” my mortgage while GMAC is simply my loan servicer. Impac offered to lower my interest rate and reduce my principal. They faxed the “hardship letter” and a “financial situation and expenses letter” over to me immediately.

    Their rep says there is very little due-diligence performed on the docs I send them and it’s a very easy process.

    Then he tells me my cost for having this done is $1995. He says they’ll forgo my first payment on the modified loan to cover this expense.

    I own a home on a lake in Southern Calif. My current payment is $3800/month plus taxes, etc. The rep claims he can reduce my payment by $1000/month.

    Sure sounds like a scam… But, I’ll check it out.

    My main point is that I am NOT behind nor have I ever been late on my house payment. My mortgage holder REACHED OUT TO ME. And yet a close friend with Country Wide cannot seem to find out who or what department to talk to for help on her mortgage loan.

    JerJer

    I have personal experience with loan modifications.

    • Jeff says:

      Jer,

      Did you go through with the IMPAC modification? I just got off the phone with a rep………..same details.

      Thanks,

      Jeff

    • Lorraine says:

      Hi Jer.
      I just read your comment on the Impac Modification Loan. We got the same call this week and it sure does sound good. They seem legetimate. Did you ever go through with the modification? Did you ever find out if it was a scam or legit. Thank you Lorraine

    • pete says:

      JerJer, I can assure you that the program is for real. My interest rate went from 4.99% to 3.875% fixed for another 5 years dropping my payment by $700/month. I am in norther CA. After executing the documents this fall, I came to wonder if I had, perhaps, changed the terms of my loan to give IMPAC recourse to my other assets in the event that I default. Not sure yet.

      Anyway, I was in your exact situation, and the process was almost effortless.

      Good Luck, and please check out the recourse issue and let everyone know.

      … pete

    • J says:

      I reached out to Bank of America over a year ago. It was a HARP loan. (Offerd to people who were drowning with debt)
      Supposedly a no doc loan.
      7 mths go by…several faxes of the same doc’s.(againa no doc loan, I was asked to provide several docs, which I did)
      4 different people handling acct…..Boa claims appraiser was at my home.(never did I see one) Shortly after that, I was informed by a letter from BOA that they were not giving me the loan, with no explanation mind you.
      To date, I stopped paying my mortgage because I can’t. Now BOA is making all types of attempts for a loan modification…
      It is a little too late…..I am now looking at a short sale.
      Why do u have to stop paying your mortgage in order to get the banks attention.
      I worked hard to keep my credit spotless…Now all for naught.

      🙁 Sad world we live in…

      J

      • Areyousure says:

        B of A likes to send out those notices to modify but they are meaningless. It just covers them so they can say they offered modification. I got tons of those. I also sued them to try to get them to modify and they just paid a high priced lawyer. I lost the case and he couldn’t modify the loan. B of A talks a good game but does nothing. I tried to modify and then did a short sale on the house, which takes a while. If you opt to short sell be sure to ask about the incentive payment that B of A offers. I was offered several thousand in the short sale but there was an IRS lien on the property so the good old IRs confiscated my incentive payment!. You just can’t win it seems. If the banks don’t get you the government will!

  • Debbie says:

    Good to know that retirement savings are protected (as long as the homeowner is honest).
    This is good information. Thanks for posting it here.

  • Liz says:

    Excellent analysis. This is the first online article I’ve found on this topic so far.
    As long as a home owner is making an effort to get caught up on payments and there’s no evidence of fraud, things should be OK.

  • Pev says:

    That pretty interesting to know; filing for bankruptcy should be the last resort though.

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