Because of the subprime collapse, employers are dealing with a rising number of employees who want to take loans against their 401(k)s to meet their spiking mortgage payments. Some organizations are having to reassess the makeup of funds that underpin their plans.
Employee assistance programs are seeing spikes in calls from workers who are on the verge of losing their homes or having to declare bankruptcy. Employers are rethinking their relocation packages in the face of widely varying housing prices between markets and worker resistance to moving.
Finally, if the economy founders, some companies that have nothing to do with lending, home building or home buying may have to do what Countrywide Financial and other mortgage lenders have done: lay off workers by the hundreds or thousands.
Here is a look at how the subprime collapse is playing itself out for employers and their workforces:
During the past few weeks, financial advisors have received an increasing number of calls from 401(k) plan sponsors concerned about two things: how plan participants are reacting to the subprime mortgage crisis and whether they, as plan fiduciaries, should replace funds in their plans that might be affected by the blowup in subprime mortgages.
"All of a sudden our phones just started ringing off the hook from employers asking me to come to their offices and go over what all of this means for employees in their plans," says Scott Brookes, director of retirement plan services at Sharkey, Howes & Javer, a Denver-based financial advisor for retirement plans.
Many employers are seeing a jump in 401(k) loan activity, although it’s hard to say whether it’s directly a result of the subprime mortgage issues, says David Wade, president of 401(k) Direct, a Campbell, California-based 401(k) plan administrator.
Employees are allowed to borrow the lesser sum of either $50,000 or half of their 401(k) balance as a loan without paying penalties. However, the increased demand for loans as a result of the subprime mortgage crisis has put many HR managers in an uncomfortable position, experts say.
On one hand, companies want to make this money available in cases of emergency. But on the other hand, the money is meant for retirement.
Increased loan activity in 401(k) plans is always a concern because the point of a 401(k) is long-term retirement savings, says Donna Van Auken, HR information systems manager at Community Bank, a DeWitt, New York-based bank with 1,700 employees.
"At times like these, we try to put forward the message that this money is for retirement," she says. However, Community Bank doesn’t ask employees what the loan is for or advise them how to spend the money.
Brookes says 80 percent of participants in his clients’ plans talk to him before they take out their loans. "I have that worked out with the HR departments," he says. "I don’t try to be Big Brother, but I want them to know what their options are and what it all means."
The subprime mortgage crisis has also caused many plan sponsors to become concerned about the investments in their plans, particularly money market, bond or stable-value funds.
Specifically, they are concerned that the money market and bond funds in their portfolios have exposure to subprime market instruments, says Don Stone, president of Plan Sponsor Advisors, a Chicago-based 401(k) consultant.
Stone advises employers to look into their funds and understand what they invest in. "These are usually assumed to be safe investments," he says. "The lesson here is that employers should never assume that anything is safe."
Nor can they assume that employees will understand when subprime troubles affect their retirement plans. On September 12, Countrywide employees filed a lawsuit claiming they suffered losses of millions of dollars in their 401(k) accounts after the company failed to warn them about its financial troubles. The plaintiffs, who filed suit in U.S. District Court in Santa Ana, California, are seeking class-action certification.
EAPs get the call
The psychological and emotional stress of workers dealing with unaffordable spikes in their mortgage payments—which in some cases are on homes worth less than their loan amounts—is taking its toll among workers nationwide, according to EAPs, which are seeing an upturn in financial stress calls to their help lines.
Ann Clark is CEO of San Diego-based ACI, which is hired by companies to provide counseling for workers with emotional and behavioral problems. During the past three months, her company has seen a 3 percent increase in counseling calls for those in legal and financial trouble because of mortgage payment problems and foreclosures.
"A majority are related to home fears—either not being able to buy a home, or keep one they’ve got, or they can’t sell and have to take a big loss," Clark says.
When hit with the realization that they can’t keep making the payments on their homes, people are typically seized with depression and anxiety that often paralyzes them from taking any quick action—which is what is needed for a solution, Clark says.
"By the time they get to us, they are in serious trouble," she says. "We try to stabilize them emotionally and help them make a plan, which relieves anxiety."
John Jones, financial counselor for Chicago-based ComPsych Corp., which also supplies psychological counseling services for employees at 9,400 organizations, says 1 out of 3 of his calls are for financial stress. That is two to three times the number of such calls he received a year ago. And last year’s financial calls were double those of the previous year. The company has increased its financial counseling staff by 25 percent in the past year because of the increase in calls.
"This is by far the worst that I’ve seen," he says. Normally, says Jones, half the people calling have financial problems. Now, about 75 percent are reporting that they’re unable to pay the mortgage. He estimates financial distress-related call volume is up 300 percent from three years ago.
"A lot of people bought homes they shouldn’t have bought," he says. He also blames "unscrupulous mortgage brokers that knew these mortgages would strangle these people in two to three years."
Jones has heard stories of people who owed $1,600 a month who are suddenly faced with $2,800-a-month payments. To pay that amount, they couldn’t afford to pay utilities, he says. Some have told him they’ve used credit cards to pay their mortgages.
"At least 60 percent of them wait too long for us to come up with a solution that will make them happy," Jones says. "In some cases, I just tell them to sell their home and start over. I tell them it’s like going to the doctor and getting a shot. If you do it today, you’ll get better. Otherwise you’re going to be sick for months."
Georgia Critsimilios, vice president of marketing and sales for New York-based Corporate Counseling Associates, says that during the past three to six months, employee hot line calls have increased "across the board" for stress, anxiety, depression, drug addiction and alcoholism. The same uptick took place at this time last year.
"There are so many stressors affecting everybody right now," Critsimilios says. "It’s sort of cumulative."
People are stressed not only about mortgage payments and other real estate woes, she says, but also about the anniversaries of painful crises like the New Orleans devastation from Hurricane Katrina two years ago and the September 11 tragedy six years ago. Then there are the woes of identity theft.
But the mortgage crisis is now fully in the mix.
"An employee may call with marital problems, legal problems, a teenager," says Critsimilios, whose company has 250 client organizations around the country. "But as we do more exploring, we are finding their mortgages are contributing to the problem. They need to sell the house, take a second job or move in with extended family."
Seminars on basic financial planning are offered, she says, and they can help if the callers haven’t waited too long to start solving their financial problems.
"They’re not interested in personal feelings," she says. "There are too many other issues to deal with. Three months later there can be some grief and depression. I think it will happen with the mortgage crisis as well."
The business of managing employee relocations is suddenly much tougher, thanks to slower, protracted home buying and selling cycles. Just selling a home can take months, while qualifying to buy is tougher than ever. And that has made workers reluctant to accept a job in another city.
"There are fewer mortgage products available and there are greater lags in home sale transactions with delayed financings and closings," says Anita Brienza, spokeswoman for Washington-based trade association Worldwide ERC. The association serves government and private sector managers of employee relocations.
Companies may try to sweeten the deal to get employees to accept transfers by offering loss-on-sale assistance and extensions for duplicate housing and temporary living assistance, Brienza says.
In a spring survey, the organization found that 35 percent of the responding organizations had changed their relocation policies during the past year in reaction to the unsettled housing market. Among the policies shifted were increasing home-marketing periods; requiring the use of selected agents for home sale and home purchase; limiting list prices to a certain percentage, such as 105 percent of broker’s market analyses or buyout offer; and capping points paid and real estate agent fees.
Kevin Russell, vice president of home loan sales for Cartus, a Connecticut-based provider of relocation services, says a foreclosure crisis has thrown a monkey wrench into relocations between variously priced home markets.
Moving from low-value to high-value housing markets, or from overvalued markets to deflated ones, isn’t a good idea these days, Russell says. That’s because home values are adjusting downward by 7 percent to 10 percent in markets like Washington, D.C. And home values in markets like California and Florida have become prohibitively expensive because of high appreciation rates during the past three years.
Just selling now to relocate anywhere, he says, is "the biggest hurdle since the mid- to late 1970s."
Despite those complications, Guy Cecala, publisher of Inside Mortgage Finance, says any added costs of relocating a highly sought after star executive aren’t going to be an issue for the company involved, mortgage crisis or not.
"If you’re hiring somebody for a million bucks, and it costs an extra $50,000 [in relocation housing costs], I think you’re going to eat it," Cecala says. "People are too valuable."
Layoffs have spiked in the home mortgage industry nationally in the wake of the imploding subprime segment, with the count reaching 40,000 by mid August—before Countrywide’s announcement that it would lay off about 20 percent of its workforce.
Some companies are giving workers severance packages, information on how to continue benefits and job counseling. Before his company was sued over its 401(k) plan, Countrywide CEO Angelo Mozilo said in a letter to employees that the company was providing job placement services for displaced employees. "We will work to find them opportunities both inside and outside the company," he wrote.
The impact of a layoff on workers "depends on the company," says John Challenger, CEO of the Chicago-based outplacement consultancy Challenger, Gray & Christmas Inc.
"Some companies have planned for this day. A couple of years ago there were concerns the housing bubble might burst. The smart companies put in contingency plans to manage this kind of thing. So some were not caught unaware of the need for severance packages and information on health benefits," Challenger says. "But some companies acted precipitously and as far as I can tell are throwing people into the street."
Some employees of failed mortgage companies are fighting back. Laid-off employees of Aegis Mortgage Corp., HomeBanc Corp. and American Home Mortgage Investment have filed class-action lawsuits, alleging that their former employers violated the Worker Adjustment and Retraining Notification Act, which requires that companies give workers 60 days’ notice before instituting mass layoffs. The WARN Act generally applies to companies with more than 100 employees.
One company prepared to deal with layoffs was Capital One, which cut 1,900 jobs this summer when it closed most of its GreenPoint mortgage origination operations nationally. All but its Colorado and Georgia sites were shuttered, including 31 locations in 19 states. The layoffs were necessary because the GreenPoint unit couldn’t find buyers for its mortgages, which the company routinely sells into a secondary market, spokeswoman Tatiana Stead says. Finding buyers was necessary for its survival.
Judy Pahren, Capital One’s senior vice president of human resources, says that when layoffs take place she figures out how to serve affected employees with a "high touch" approach, reflecting the company’s corporate values of keeping its employees fully informed.
Among the decisions to be made are how long of a notice period will be given and when severance pay begins. Capital One has a 60-day notice.
"This gives them time to finish up work and time to think about how they’re going to take care of their future," Pahren says.
At the same time, she says, there have to be standards to decide how much will be paid in severance and benefits.
"A lot goes into that," she says, including how medical coverage is transitioned, 401(k) rollovers, and their funds in health care and child care savings accounts.
"It makes a lot of sense to get experts involved for support," she says. Providing a help line and informational material to answer questions, along with career counseling services, says Pahren, helps soothe what is usually a harrowing experience for laid-off employees.
It’s difficult to call it a silver lining, but Lou Adler, who heads the Adler Group, an Irvine, California-based firm that trains companies to recruit top talent, says the current instability in financial markets presents an opportunity for some employers to hire quality people.
"The mortgage industry is very complicated," Adler says. But the skills it requires, he notes, are transferable to those needed in call centers for financial services and insurance, for example.
"It could be any industry that has a call center," he says.
When layoffs occur at a company, he says, remaining employees who are high performers are more apt to be looking around for another company to which they can jump.
"It won’t take much to get them to move," he says. "It takes a little bit of creativity."