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Open House

Encore Presentation: Mortgage Meltdown

Aired January 07, 2007 - 16:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

(NEWS BREAK)
GERRI WILLIS, HOST: From coast to coast, foreclosure rates are soaring. Families are losing their homes at an alarming rate. The outlook particularly bleak right here in Denver, Colorado.

What can you do? Are you safe? And is your home at risk?

In this hour, we'll focus on how to protect your home, the biggest investment you'll ever make.

This is a special edition of OPEN HOUSE, "Mortgage Meltdown."

We're in Denver, where the deep freeze is settling over an area reeling from record foreclosures this year. In November, one in 362 homes were in foreclosure in the state of Colorado. And that's one of the hardest-hit states.

Overall, things are somewhat better across the nation, but not by much. Nearly one in 1,000 homes are in foreclosure in this country.

So what happens to all of those foreclosed homes? Well, mostly they get sold, privately or in public auctions, often for a whole lot less than the regular market price.

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: Here we go. At $26,500...

THOMAS ROBERTS, CNN CORRESPONDENT (voice over): This is how you sell real estate real fast.

UNIDENTIFIED MALE: Eighteen thousand. Do you want it?

Second row, $17,500.

Here we go. Last call. Thirty-six thousand.

Last call. Here we go. You got another bargain at $13,500.

ROBERTS: Real estate auctions are nothing new.

UNIDENTIFIED MALE: Last call. Here we go.

ROBERTS: What is new, the staggering amount of homes in foreclosure across the country. According to the online databank RealityTrac, foreclosures rose by 17 percent nationwide in the third quarter compared to the year before.

Tonight's auction is in Memphis, Tennessee. A city ranked 10th in the nation for foreclosures.

PAT HARVILL, HUDSON & MARSHALL AUCTIONEERS: There's 22 properties that we'll offer here this evening. It will take just less than an hour to sell them. It takes about two minutes a property to sell.

ROBERTS: The homes range from fixer-uppers, to the modest, all the way to the extravagant. The largest property is this 4,300 square foot home with five bedrooms. Market price, $225,000.

For this auction, it's a packed room, with newcomers and the savvy regulars. Their common goal, to nab a bargain.

ROB MUNN, INVESTOR: I've researched all of them, found out what their value is and everything. So, based on the condition of the home and the value, you know, I'll basically buy based on a percentage of that.

ROBERTS: As the auction unfolds, all the homes sell in a matter of minutes.

UNIDENTIFIED MALE: Third row, $60,000.

ROBERTS: Some for as little as $15,000.

Rob Munn, seated in the front row, is ready to pounce but bides his time until the very end, when he aggressively goes after the last and largest property. But he faces stiff competion from a quiet bidder in the back of the room. As the tension escalates, so does the price.

UNIDENTIFIED MALE: $190,000.

ROBERTS: In the end, Munn lost to the bidder willing to pay $191,000.

UNIDENTIFIED MALE: Sold.

UNIDENTIFIED MALE: Today we walk away with nothing. Hopefully something will come out of it. You know, a lot of times buyers will fall through.

ROBERTS: As it turns out, this was the winning bidder's first auction. And she plans to live in this home with her family.

BOBBIE BROOKS, HOMEBUYER: The energy was -- oh, gosh, it was so exhilarating. I tell you, that's why I was so nervous. You know. Yes, but you had the opportunity to be in on this beautiful home. And then to receive it, oh, it's just a blessing. Just a true blessing.

ROBERTS: Auctioneers say buyers should first tour and research all properties properly.

UNIDENTIFIED MALE: Here we go. You got it, sir, at $43,000.

ROBERTS: Every deal tonight sells as is.

Thomas Roberts, CNN, Memphis, Tennessee.

(END VIDEOTAPE)

WILLIS: From Denver and around the nation, there are stories behind every home hitting the auction block. We'll have much more this hour about facing foreclosures, losing your house, and finding your way back home.

But first, if you're thinking about buying a house at an auction, there are some legal issues you need to know about. Real estate attorney Oliver Frascona says surround yourself with a team of experts.

(BEGIN VIDEOTAPE)

OLIVER FRASCONA, REAL ESTATE ATTORNEY: The bottom line is, people's whose houses are in foreclosure have probably turned to a real estate broker to get it listed. It's in the multiple listing system. They probably got some competent advice.

But buyers are just trying to make shore that the house his physically OK. The foreclosed property has a higher propensity to have damage that wasn't taken care of or a lack of maintenance because they didn't have any money.

WILLIS: And that's critical. I think people need to understand that these houses may not be in the condition that they would want. But that's also why they're getting a good deal on it, right?

FRASCONA: No question. But, if it were me buying one, I would make sure I got a structural inspection, because the structure is something that will be covered up in trying to sell the house. There is a reason that house hasn't already sold in the marketplace. Reluctance of the owner, or a physical defect in the property.

WILLIS: OK.

FRASCONA: So, that buyer needs to inspect the property carefully before they purchase it.

WILLIS: Now, you say you really need a team of experts to help you along the way as you're vetting these houses and trying to figure out the best one to buy.

Who do you need?

FRASCONA: I think you need a decent home inspector. I think you need a structural engineer, someone who will go through and take a look at the structure. That may be combined in a very efficient contractor.

WILLIS: Or a home inspector, they're sometimes called in other parts of the country.

FRASCONA: Some home inspectors are great. Some are not, like everybody else. You need someone who is capable of looking at the house for structural defects, as well as cosmetic defects.

WILLIS: OK. All right.

FRASCONA: You need someone who can write the title insurance. You need someone who can do the financing.

WILLIS: Tell us about that, the title insurance you say is critical. Why is that so important?

FRASCONA: I wouldn't buy a house without title insurance because you want the title insurance company to guarantee that your title is complete. Otherwise, all you have is the warranty deed from the seller. And then your remedy is just to sue the seller.

You really want the title company to say the title is clean, the foreclosure was done correctly, all the little Ts were -- I's were dotted and Ts were crossed so that you have a clear title when you acquire it. Plus, that lender is going to want to make sure they have a clear new mortgage for our purchaser, so they're going to require title insurance anyway.

WILLIS: So some of the sales are done at auctions. Some of these are done privately, even before the foreclosure.

What is the best way to go about buying one of these houses?

FRASCONA: There's two ways to buy it. You can buy it from the owner...

WILLIS: Right?

FRASCONA: ... who is currently in trouble. And I think that's the best way to buy it. You get to go through the house. You get to look at it. You get to get...

WILLIS: Isn't that a little grisly, Oliver? You have got to find these people in the first place.

FRASCONA: They're in the multiple listing system. The listing broker is trying hard to get them sold. Your buyer's broker knows where they are. The house has been discounted.

WILLIS: So they're on the market?

FRASCONA: They're on the market.

The second one is to buy at the foreclosure sale or at the sheriff's (ph) sale. A much more risky opportunity because you haven't had the ability to get it inspected before the purchase. You have to be very careful when you find those.

WILLIS: So there you are standing on the courthouse steps, and all you know is maybe the address?

FRASCONA: And maybe you've been by the house, you've driven by the outside, but you haven't seen the inside structural integrity of the property.

Plus, to make it a little worse, lenders aren't really bidding fair market value. They have a tendency to bid the amount of their debt, which could be way too high.

It's a crazy system. The house is worth this, the lender bids their debt. Owns the house, and the REO company sells it here.

So one of the good places to look is to the REO, real estate- owned companies. They will turn around and once again list with a real estate broker and put it back on the market so they can sell it at a much more reasonable price.

WILLIS: What do you -- what do you want to make sure that do you? What is the one thing you shouldn't forget?

FRASCONA: I'd get a good real estate broker to help me if I were a buyer, because you're talking about an ordinary citizen buying a house, not a sophisticated investor. They need all the things that come from a regular transaction, not the purchase (INAUDIBLE) on the courthouse steps. Plus, on the courthouse steps it's cash.

(END VIDEOTAPE)

WILLIS: Straight ahead on OPEN HOUSE, "Mortgage Meltdown"...

(BEGIN VIDEO CLIP)

TARA PARRISH, FMR. HOMEOWNER: We asked what we could do to make it right. We've done all this, and now, you know, what do you want? And they wanted us to put about $8,000 down for another repayment plan. And I couldn't go to my family and ask for $8,000.

(END VIDEO CLIP)

WILLIS: You'll meet some folks who thought they did all the right things and still got thrown out of their home. We'll have a heartbreaking foreclosure story. That's from Chicago up next.

(COMMERCIAL BREAK)

WILLIS: Welcome back to Denver.

Foreclosure rates across the country are on the rise. The reasons, adjustable rate mortgages, predatory lending, and toxic loans, just to name a few. And it has homeowners across the country grasping for a solution to stop a foreclosure free-fall.

(BEGIN VIDEOTAPE)

WILLIS (voice over): If you live Nevada and you're a homeowner trying to fight off foreclosure, the odds are against you. The state had the highest rate of foreclosures in the country in November, one in every 346 homes. That's nearly triple the national average and up 188 percent from last year.

And that's no surprise to mortgage bankers.

DOUG DUNCAN, CHIEF ECONOMIST, MBA: Nevada is a state that has among the highest, if not the highest share, of adjustable rate mortgages, and among the highest, if not the highest share, of subprime mortgages. That's mortgages to people who have not managed credit well in the past. In that instance, you would expect that they would have higher delinquency and foreclosure rates.

WILLIS: Indeed, the numbers nationwide are mind-boggling. More than two million of those subprime loans have already failed in recent years or stand at risk of foreclosing.

In California, there are fewer foreclosures per household, but the numbers are up more than 200 percent from the year before. Mortgage industry experts say that's partly due to a jump in home value allowing homeowners to cash out and often overextend themselves.

In the Midwest, the numbers are about the same. However, foreclosures in this area are closely tied to the local economy.

RICHARD HARMON, SENIOR VICE PRESIDENT, FIRST AMERICAN: States like Michigan, Indiana, Ohio, they've had some significant regional impacts. In many of these states, the auto industry has been hit severely hard by the oil shock, the price increase. And that has had an impact on jobs, as well as employment levels.

And so, you -- they've had generally slower economic growth, much slower house price increases. As a result, they don't have the ability to leverage the equity that other households and other states have.

WILLIS: New Jersey is the only state in the Northeast making the top 10 list with one in 648 homes in foreclosure. Maine had the country's lowest foreclosure rate. In November, there were only four foreclosures out of half a million households.

(on camera): Listen, the numbers are important, but this isn't about stats. And it's not all about the money. Losing your house is about giving up your refuge, the one place you call home. It could be a mansion, it could be a starter home. It could happen to just about anybody.

(voice over): Tara and Jason Parrish thought they had the American dream, a beautiful new home for themselves and their 2-year- old son.

PARRISH: We were very naive and trusting. You know, we thought that it sounded right. And we thought it was just speeding along the process for us to get our home that we wanted.

WILLIS: That was three years ago. Today they're celebrating Christmas in this small rental house after a terrible ordeal. A year after buying their home, the troubles started.

PARRISH: We had a minivan, and he had a Grand Am, and the cars were just constantly breaking down. And we had to keep paying to have those fixed, which in turn made our credit card bills go up. And we decided to file Chapter 7 bankruptcy to get rid of the debt that was just weighing down on us.

WILLIS: They thought...

(INTERRUPTED BY BREAKING NEWS)

WILLIS: It's one thing to get a home equitiy loan to actually make improvements to your house, but many folks are using their houses as piggy banks, paying for expensive cars, luxury vacations, even second homes. Now that means less equity in the home, more debt, and much higher monthly payments.

Here is CNN's Thelma Gutierrez.

(BEGIN VIDEOTAPE)

THELMA GUTIERREZ, CNN CORRESPONDENT (voice-over): Christmas season at the Basore home. It was supposed to be a time of joy.

MARY BASORE, HOMEOWNER: This is probably going to be our last Christmas here.

GUTIERREZ: Mark and Mary Basore had planned to raise their son in this Sunland, California, home. It represented their future.

MARY BASORE: We did the new floors, new carpet.

GUTIERREZ: They bought the house four years ago. In that short amount of time, their home more than doubled in value. Things never looked better.

(on camera): You guys were sitting on a mountain of equity.

MARK BASORE, HOMEOWNER: I know.

GUTIERREZ: Right? You had, what, $300,000 equity.

MARY BASORE: We were sitting on a mountain of equity. And that's where the dollar signs, you know, we could do it on our own.

GUTIERREZ: They wanted to start a business. So they did what a lot of people do, they took out a home equitiy loan. The Basore's pulled out everything, $300,000.

UNIDENTIFIED FEMALE: Got free samples today.

GUTIERREZ: And they opened a Juice It Up franchise in Valencia, California. But the spending didn't stop there.

MARY BASORE: We decided let's just buy a little $5,000 boat. MARK BASORE: Taking friends out to dinner, you know on a Saturday night or something. Just because we have all the money in the bank.

MARY BASORE: This is my 34-foot RV that I love.

GUTIERREZ: And they remodeled their house. But their new business was slow to start. And money wasn't coming in.

MARY BASORE: We refinanced and took the cash out. Came up short. Refinanced again to get some more money out and then after that money, we came up short, too.

GUTIERREZ: So they took out loans on their vehicles which had already been paid off and they racked up more credit card debt.

What is the pressure like when you have all these mounting bills?

MARY BASORE: I just -- I just don't want to look at them. They're not going to go away.

GUTIERREZ: Now they're dangerously close to foreclosure. Their only choice, to sell their home in a California market that's cooling down.

MARY BASORE: This is my ad on Craig's List begging people to come look at my open house.

GUTIERREZ: You used the word begging.

MARY BASORE: Begging. Literally. In capital letters, owners are desperate, must sell.

GUTIERREZ: Was it hard when you put up that for sale sign?

MARY BASORE: Yes.

MARK BASORE: I just came out and almost hit the ground. Oh, no! My house.

GUTIERREZ: The unfortunate irony, Mary is in the real estate business. She's a loan processor.

You're around the business and yet it happened to you.

MARY BASORE: Just like everybody else, saw the equity. Saw the future, the cash we could use.

GUTIERREZ: The Basore's say they learned the hard way to live within their means. But they still have faith in their business. And that maybe their home will sell before the bank takes it away.

MARK BASORE: We will get through it.

MARY BASORE: We will get through it.

GUTIERREZ: Thelma Gutierrez, CNN, Sunland, California.

(END VIDEOTAPE)

WILLIS: A sad story.

If you can't make your mortgage payments, there are steps you can take to avoid foreclosure. Real estate attorney Oliver Frascona says you have to be proactive if you want to save your house.

(BEGIN VIDEOTAPE)

FRASCONA: I think the first aspect is to realize when you're down a month or something that causes you to have a cash shortage, tjat you stop and have a realization to yourself that you have a financial problem.

WILLIS: Right. And so you say a month. But when does the real trouble start? I mean does it start in a month? Is it two months? 90 days?

FRASCONA: Well, it depends a lot on what kind of loan you have. If you have an FHA or a VA assured loan, you have a longer preforclosure period, because the government gives you that amount of time to work things out.

WILLIS: So you have a little squishy room if you have that type of loan. It's very important to know, right?

FRASCONA: You have got six months, generally speaking, if you have an FHA or a VA loan, before the process starts. You're still dealing with the lender, but it isn't formally in foreclosure at that time.

WILLIS: If you don't have that loan, if you have a conventional loan, how fast do the wheels start turning?

FRASCONA: Well, it depends on each lender and how they want to handle it, each servicing entity. But they're from 45 to 180 days. And you're going to be in some serious trouble. Once you're five, six months down, you're in foreclosure in every state.

WILLIS: All right. So let's talk about other steps you can take. You can go to a consumer credit counseling service.

FRASCONA: You can. And that's a great place to start.

What you really need is a third party to help reflect back on you what the issue is, because you're having a hard time grappling with it. So you could talk to your local realtor. You could talk to your local minister or your rabbi or whomever it may be. You can talk to consumer credit counseling.

Sometimes a family member, although they tend to be judgmental, you want someone who will sit down and say here's what you make, here's where your house payment is. With that rate adjust, here's where you are. We need to find out what it's worth and get it sold. I give one final thing to tell you and you're welcome to do as you choose with it, but sometimes the smartest thing the homeowner can do is stay in the home through the whole foreclosure.

WILLIS: Why so?

FRASCONA: In some states it's six, seven, nine months. In this state can you stay there almost for a year if you had an FHA loan. So you have got a single mom with kids, she could stay in that house for a year not make any payments, saving up enough money to get a fresh start somewhere else rather than just giving up the house and that potential free living.

(END VIDEOTAPE)

WILLIS: Straight ahead, if you're facing foreclosure, you are not alone. We'll tell you who to turn to for help. And everything you need to know about the future of foreclosures in this country when OPEN HOUSE: Mortgage Meltdown comes right back.

(COMMERCIAL BREAK)

WILLIS: There comes a time when you have to give in and ask for help. That's what people like Sue Hunt, of the Consumer Credit Counseling Service in Atlanta, are there for.

(BEGIN VIDEOTAPE)

JOHN THOMAS, CONSUMER CREDIT COUNSELING SERVICE: My name is John Thomas. So you understand what we do here. I'm a housing counseler here at Consumer Credit Counseling Service. We are a nonprofit financial counseling agency that offers free confidential budget counseling to people such as yourself that are having financial difficulties.

SUE HUNT, HOUSING COUNSELING MANAGER: What we do in our counseling area is we work with consumers who are having trouble making the mortgage payments, to help them avoid foreclosure.

THOMAS: How far you are past due with your mortgage? About eight months. And have you have received a notice for sheriff's sale? OK. What is the date they have on?

HUNT: We have telephone counselors available 24/7 to talk with consumers having financial problems. And the largest growing service area that we have is our Internet counseling.

A typical Internet counseling session probably takes a homeowner about 20 to 30 minutes to input the information.

LINDA JACOBS, HOUSING COUNSELOR: All I need for you to do have a list of your monthly expenses that you pay out on a regular monthly basis.

HUNT: We ask for a good bit of detailed information about their budget about, their day to day living expenses, about how much it costs them for food.

JACOBS: What is the reason that you're past due?

HUNT: The homeowner immediately will get what we call a post counseling package. And it summarizes everything about the homeowner's financial situation that they've shared with us. They get their budget back. They get their assets and liabilities. They get a recommendations. They get local referrals in their areas that they can use.

DAMIEN LYLES, HOUSING COUNSELOR: All of these will help improve the overall budget, help you get back on your feet where you can handle the monthly mortgage payments.

HUNT: Studies show that 50 percent of the people who lose their houses to foreclosure never contacted their lender.

THOMAS: With tomorrow being your foreclosure date, it is real hard to convince your lender unless you have money to be able to turn your situation around.

HUNT: Well, what most people think is that when they fall behind on the mortgage that lender really wants to take the home away from them. And that's really the first myth that we try to dispel when we talk to a consumer. Nothign could be further from the truth. It is really, really expensive for lenders to take back houses through foreclosure. And they would really want to work with a motivated consumer who's got at least some budget surplus to help them stay in that home.

THOMAS: So we're calling to find out the amount that is due and what can be done to see if he can somehow save his home.

HUNT: It's wonderous to me to listen to my staff talk to people who call us in really desperate situations. And within 30 or 40 minutes we've given them advice that they need. We've put them in touch with their lenders. We've given them a plan that can help them to stay in their house. And really, there is nothing that i've done in my career that has been more satisfying than that.

(END VIDEOTAPE)

WILLIS: It's good to know that there are people like Sue Hunt out there to help.

For more information, you can log on to their web site, CCCSATL.org. And in the final few moments of this special edition of OPEN HOUSE in Denver, we look into the new year. Today's mortgage meltdown could turn into tomorrow's slowdown of the economy, or maybe not. We'll find out next.

(COMMERCIAL BREAK)

WILLIS: Here in Denver and elsewhere, it's been a tough year for the real estate market. And particularly bleak for those who have lost their homes. So what is next? (BEGIN VIDEOTAPE)

WILLIS (voice-over): Mortgage delinquents and foreclosures are on the rise almost everywhere. But how much longer can this trend last? We talked to people who follow this for a living and they don't see any relief in sight for the new year.

MARK ZANDI, ECONOMY.COM: I think this is going to be the most significant stress in the economy next year. As we see these foreclosures begin to mount and as we see more homeowners turn back their keys to their lenders, I think this is where the stress line in the economy is most significant.

WILLIS: You don't need a crystal ball to figure out what areas will have high foreclosure rates. In fact, one of the best predictors for high foreclosure rates is high unemployment.

RICK SHARGA, REAL ESTAT AGENT: The areas where you have too much inventory, depreciating prices, slowdown in housing sales, higher unemployment rates, plant closings, things like that, that's where you're going to seat problems in 2007.

What is likely is that we'll see the largest number of foreclosures in 2007 in areas of the midwest where unemployment rates are highest or in areas like Las Vegas or South Florida where a lot of speculative buying went on and the type of investment in the property was much riskier.

WILLIS: The biggest headache on the horizon? Resets on adjustable rate mortgages. Next year, at least $1.2 trillion in ARMs will reset to a higher rate. And that's going to put an even bigger squeeze on homeowners who are already struggling with monthly payments.

UNIDENTIFIED MALE: The nonincome verification.

ZANDI: It is important for people not to stick their head in the sand. You need to go look at your mortgage. For many people that go bad on their mortgage is because they don't understand the mortgage payment resets. They don't understand the features of the mortgage. And I think they need to go now, take a look and really get a grip on, you know, what kind of things that they'll face in 2007.

WILLIS: But the news may not be all bad: while the Mortgage Bankers Association says that even though delinquents and foreclosure will increase, the housing market should, quote, regain its footing in the middle of 2007. Now that's something we can all look forward to.

(END VIDEOTAPE)

WILLIS: With that, we would like to think 2007 will be a turn around year for homeowners.

Still, no one can really predict what will happen next in the housing market. So taking the right steps and educating yourself before you buy a home can make all the difference in the world. We cover stories like these every week on OPEN HOUSE every Saturday on CNN at 9:30 a.m. Eastern. You can also catch us on Headline News every Sunday, 5:30 p.m. Eastern. We thank you for joining us. Have a great day.

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