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Subprime Woes; Tax Tips

Aired March 17, 2007 - 09:30   ET


T.J. HOLMES, CNN ANCHOR: And Gerri Willis and OPEN HOUSE coming up next. Of course we've been talking about the subprime market...
BETTY NGUYEN, CNN ANCHOR: Meltdown, as they're calling it.

HOLMES: Meltdown crisis, whatever you call it, it ain't good. But stick around. Some very useful information coming up. And of course, we'll see you back here at the top of the hour.

GERRI WILLIS, HOST: Good morning. This is OPEN HOUSE, the show that saves you money. Coming up, how to lower your taxes and cut your budget. And staying safe at home. We'll show you how to avoid a break-in without breaking the bank.

But we begin with mortgage meltdown. We've been telling you for months now about problems with skyrocketing foreclosure rates in the subprime market. Subprime refers to a loan with sky-high interest rates given to someone with low credit scores.

Well, this week, subprime problems finally hit the front page. The nation's second-largest subprime lender, New Century, announced it had stopped making loans because creditors cut off its funding. New Century could face bankruptcy and is under investigation by the SEC. It's just one of more than two dozen lenders who have had major financial problems in recent months.

And that is making the mortgage market shaky for home buyers and it could eventually impact you.


WILLIS (voice-over): Goodman Griffin and Ann Brenner (ph) thought they had lined up a mortgage for their dream home, when suddenly, it fell through. They weren't outbid, their subprime lender decided to tighten its rules.

GOODMAN GRIFFIN, POTENTIAL HOMEOWNER: What we had qualified before was no longer available.

WILLIS: It's something that's happening more and more often all across the country. The mortgage industry is struggling because of homeowners unable to make their monthly payments on high-interest loans. Now, experts say, it's affecting the entire mortgage money machine. Here's why.

Home buyers take out a mortgage from a lender. Lenders sell those loans to investors. When times are good, everyone benefits. But when borrowers default on their loans, lenders become stressed, which erases investor returns. Now, new borrowers have to pay more to borrow money, and some don't qualify to borrow at all. All of this leaves Robert Shiller, who accurately predicted the dot-com crash, to believe the housing market will be the next bubble to burst.

ROBERT SHILLER, PROF. OF ECONOMICS, YALE UNIVERSITY: Well, we live in a very interconnected economy. And so, in a very important sense everyone is at risk.

WILLIS: Meaning the ripples could extend to the economy as a whole.

SHILLER: A recession has a good chance of happening later this year and extending on into maybe 2008.

WILLIS: Not everyone is so downbeat. Nick Retsinas helped run the nation's biggest housing agency, the Department of Housing and Urban Development during the '90s.

NICK RETSINAS, DIR., JOINT CTR. FOR HOUSING STUDIES: Well, I think it's a little early to say collapse. It's much, much too early in the process.

WILLIS: What's more, says Retsinas, the number of subprime loans isn't big enough to sink the entire market. For Goodman and Ann, and the dimming prospects of a new home, things couldn't get much worse.

GRIFFIN: You feel like they've got your life in their hands.


WILLIS: Brad Inman is the publisher of Inman News.

Brad, thanks for being here.

BRAD INMAN, INMAN NEWS: Great to be here.

WILLIS: You know, this mortgage mess could not be happening at a worse time. We're right at the start of the home selling season, the spring selling season. What is this going to mean for people in the market, whether they are buyers or sellers?

INMAN: Well, there is good news and bad news for buyers. It's going to be harder to get a loan. We're going to see a credit squeeze. Lenders are going to tighten up, regulators are going to tighten up. There is a lot of sunshine in the process now. Which there wasn't before.

WILLIS: That's right.

INMAN: If you could fog a mirror, you could get a mortgage, not anymore. The good news is there is going to be a lot of inventory out there because there is going to be really fewer buyers that are qualified. The homes are not going to sell. There is going to be more inventory. So...

WILLIS: Buyers have the leverage right now.

INMAN: That's right.

WILLIS: Absolutely, no question.

INMAN: If they can get along. That's the key here.

WILLIS: That's the problem right now, absolutely. You had something interesting to say, though, about whether you're one of those people in the subprime market, the market that served people who had with less than perfect credit scores, this is a real problem for you now, right?

INMAN: Yes. If you got one of these subprime loans -- and many people don't even know they have one, the fact of the matter is, you're paying a higher interest rate. You are also -- have an adjustable loan, which means it adjusts quite frequently. You probably paid very little down for your home, so without price appreciation, you could be under water.

WILLIS: Right, exactly.

INMAN: In fact, you could actually owe more than your house is worth.

WILLIS: Right, exactly. Those people are in trouble. They don't know even if they have a subprime loan.

INMAN: That's right.

WILLIS: Those people have to go in and start really looking hard at the caps on their rates, how high their rate could go, how much they could be on the hook for, right?

INMAN: That's exactly right, Gerri. This is the time to investigate that loan that someone pitched you a year or two years ago and find out exactly what kind of loan you have. Often when there's an adjustment to your loan, you should be notified by law, you should be notified by your lender.

This time around, check out the paperwork, see what's happening with your adjustable-rate mortgage, how much it's going up and go to your lender and say, I really want to spend some time talking to you about this and let's straighten it out.

WILLIS: Are we going to throw the baby out with the bath water here? Because I don't think all of these loans were equally bad. Some adjustables were good, made a lot of sense.

INMAN: Yes, I'm a fan of a 30-year fixed. I'm conservative and I think this is time to go back to basics. But if you've got a five- or seven- or 10-year adjustable, that gives you some waiting period. You have a fixed payment for a period of time.

WILLIS: But not everybody had that, right? I mean, some of these rates started adjusting at two months. INMAN: Exactly, and they have option -- you know, these option ARMs that, you know, you're adding to your principle, negative amortization, some really tricky loans were pitched out there to people. And so you have really got to go in and peel back the onion. And I think what this whole scandal is about, individual consumers peeling back the onion, regulators and others, because we have got a mess here that is going to unfold over the next nine months to two years.

WILLIS: That's so sad to hear, but we will be keeping up on this story. I'm sure we will have you back to talk about it. Brad, thank you.

INMAN: Thank you, Gerri.

WILLIS: Stick around. A little later in the program we'll have tips on what you should do if your mortgage company goes under.

Also ahead on OPEN HOUSE, it's time to lower your taxes and not get audited, we'll tell you how to do that next.

And our "Weekend Project" is all about locking up your home and keeping the bad guys out. You won't want to miss that.

But first, your "Tip of the Day."


WILLIS (voice-over): Think you're going green washing your dishes by hand? Wrong. Using a dish washer for a full load of dishes saves 35 percent more water than hand-washing. That's not the only way going green in the kitchen can save serious cash.

(on camera): Here we have a refrigerator with the regular fridge up here and the freezer down. That's one of the new design styles. And in fact, it's more energy-efficient than the side-by-side, 15 percent more energy efficient. So if you want to cut your bills, get a refrigerator like this.

(voice-over): What about cooking that casserole? A gas oven with an electric ignition is 50 percent more efficient than that electric oven. And make sure to check to find the most efficient appliances all over your house. That's your "Tip of the Day."



WILLIS: Lower your taxes, don't gut audited, well, it sounds like a pretty good deal. Let's find out how to do it. Donna LeValley is a contributing editor with JK Lasser.

Donna, welcome.


WILLIS: Big red flag, deductions, you say. What's one of the biggest problems?

LEVALLEY: Home office deduction.

WILLIS: This is a really bad one, right? Because people end up trying to write off everything and they can't.

LEVALLEY: Write off too much. Also it's a complicated rule. So people really maybe overestimate how much they are using for home office or maybe even for themselves undercounting those deductions they should be taking. Most important thing is to be concise, be honest on your return, and the deductions are large, but they are truthful, take them.

WILLIS: Be honest, that's always good advice. OK. You say some deductions are a problem if they're big relative to income.

LEVALLEY: Correct. I mean, that's what they're looking for, average in your income band and in your region. So any time things get larger than normal, it's going to sort of like raise a red flag. And then they sort of zone in on certain people and certain types of deductions. And they are looking at the previous returns you filed as well, and see if maybe you substantiated those deductions before.

WILLIS: Now what if you take business deductions on your personal income tax, is that a problem?

LEVALLEY: That's not a problem, but once again, that's a place where people maybe tend to sort of fudge, maybe expand what they think was a business purpose for something. So what you really need to do is keep good records, and if it seems unusual, you can actually attach an explanation and head off any type of examination or even contact with the IRS.

WILLIS: Good idea. OK, now sometimes I'm giving to charity, but I'm not giving cash, and you say that can be a problem.

LEVALLEY: Well, they have really honed in on that. People are sort of yet again overestimating the value of the used clothes or items they were donating. And so you really need to be more conservative, maybe choose the Salvation Army Web site, has terrific evaluations for donated items.

WILLIS: Very good idea. You know, I know there's a problem with people claiming too many dependents. I mean, come on, that's an easy answer, right?

LEVALLEY: It is an easy answer. Back in 1986 when they started requiring Social Security numbers for dependents, half of them disappeared. So it's one of those places...


LEVALLEY: Yes, they... WILLIS: So people do lie.

LEVALLEY: People do lie, and also, for your own protection, when your fill out your return, make sure the Social Securitys match and are correct and don't mess up a refund that you can expect.

WILLIS: All right. Well, let's talk a little bit about discrepancies. I don't think people keep in mind that it's not just you reporting your income. The IRS has other documents as well.

LEVALLEY: Those 1099s and the W-2. Anything that you receive in the mail, they received in the mail as well. So if somebody needed to sort of record how much they paid you so they could deduct it, so they have incentive to report the income that they paid you. So if you overlook even a small amount of bank account interest, it could wind up you getting a letter, but you don't want to have sort of a track record of omitting income. And that's the thing you want to avoid.

WILLIS: That sound like a great idea. OK. Well, let's not scare too bad here, I understand that only 1 percent -- less than 1 percent actually of people who file get audited. What is the chance that I'm actually going to get audited?

LEVALLEY: It's less than one in a 100, which maybe isn't so confidence-inspiring, but it is, it's less than 2 percent of all returns, and most people in the regular income bands aren't going to be affected. It's people who are target rich, either through complicated deductions or they target people in higher income brackets. Because when they knock out a deduction, it generates more taxable income.

And anybody who has -- or is self-employed, receives a lot of tips in the course of their business, when you're in control of reporting your own income, that's when they sort of look a little more closely because they know you have more ability to omit it.

WILLIS: We'll see you next week, Donna, to talk about that dreaded alternative minimum tax, thank you.

Up next, the nuts and bolts about locks, the information you need to keep you, your family and your home safe.

But first, your mortgage numbers.


WILLIS: According to the latest FBI numbers, there were more than 2 million burglaries per year in the U.S., and with that, the latest figures show that single women and men make up the majority of homeowners. So they're home alone. We wanted to make sure the place we call home is safe and secure. Here to join us, Heidi Baker and Eden Jarrin from Be Jane are here to show you how to be safe in your home.

Welcome, good to see you guys.



WILLIS: I've got to tell you, this topic makes me crazy, because the last time I got locked out, I had a locksmith come in. He was in my house in point-zero seconds, you know, it was like, bam, he was through the door. It's scary.

BAKER: You know, it's one of those things that you never realize really how safe you are until you have someone that comes in and shows you you're really not.

WILLIS: But you guys have locks, right, that are a good idea for people to install on their own. Show us what you have got.

JARRIN: Well, what we have here today really are three projects that we feel really puts women's safety back in their own hands, which is really important.

WILLIS: And fellas, too, you know, we want to help them as well.

JARRIN: Absolutely. So all of these have to with projects you can do in your own home really in a weekend, that we focus on creating a home you love to live in, but if you don't feel safe in it, what's the use?

WILLIS: All right. Let's get to the locks.

BAKER: Now, it is a really simple project to create an actual lock that you can put on that is going to be kind of a deadbolt. This is one you can actually install inside the door or one you can put on top of the door.

WILLIS: Deadbolts are best because those are the things that are toughest to get through, right?

BAKER: Yes, definitely. And if you don't feel comfortable drilling a hole in your door, if you don't already have a deadbolt, you can put this on, super easy, takes no time whatsoever. Super easy. Best way to keep trouble outside is by staying safe inside.

WILLIS: How much are they? Are they expensive?

BAKER: They are really not. Actually, what comes in to be expensive is when you call the locksmith to put it in. You know, you can get one for $25 now, if you want to get one that matches the gorgeous doorknob you have on the front, it may cost you a little more, but it's really worth it in the end because you know you've done it and you know you're safe when you are finished.

WILLIS: You know, one thing I like to recommend is that people simply trim the shrubs around their house and install lights, because, you know, these guys are typically young fellas who are looking to score a little dough, and if you give them any pushback whatsoever, they're going to your neighbor's house. JARRIN: Yes, exactly, they go to the next one. And lighting is a great point. And that is our next one is here, is not only does lighting make your home more inviting to guests, but it also makes it less attractive to strangers. Prevents of course, break-ins, criminals.

So two key lighting things that are great, one is motion sensor. You can install this anywhere around your property and of course, you can adjust the sensitivity of it. So if someone walks up to your front door or around your house, it is going to turn on. The next kind that, of course adds a lot beauty to your yard is pathway lighting.

Now this one, of course, is a pretty hanging one, but these are great, very easy to install. You know, not only lights up your garden and you know, highlights different plants or trees or whatever you want to do, but you can also put them on a timer. So that way, they're on by the time you get home at night and they turn off automatically by the time you go to bed.

WILLIS: So that's great. So you light up the yard at night. But it's not just the nighttime you have to worry about, right? People go on vacation, and that's a big time that people get broken into. What do you guys recommend then?

JARRIN: Actually when it comes to that, a great one is sensors within your house. You can actually have timers that turn on and off the lights within your home as well while you are away.

BAKER: You know, its funny, one thing that Eden does, giving away your secret...


BAKER: But when they go out of town, they leave a car in the driveway. Because if there's a car in the driveway, there may be someone home. If the lights are coming on and off, it's just the perception that you're home.

WILLIS: That's great idea. One thing I think people need to think about is this is stuff you can do on your own. You don't have to hire somebody to come in and do this for you, right?

BAKER: No, super easy. I mean, you think that would take you a period of time. I mean, something as simple as a peephole, as literally drilling a hole in your door, and you want to even put one at a lower level if you have got kids so they can see out.

WILLIS: Heidi and Eden, thank you so much for being with us today. I really appreciate it.

BAKER: Thank you.

JARRIN: Thank you.

WILLIS: We're going to have you back. JARRIN: Thank you.

BAKER: Thanks for having us in.

WILLIS: As always, if you have an idea for a weekend project, send an e-mail to And to check out this "Weekend Project" again, go to our Web site,

Up next, you hear about extreme makeovers for people and for houses? Well, we're going to show you how an entire city is getting the makeover of a century.

But first, one city where safety is second to none in this week's "Local Lowdown."


WILLIS (voice-over): San Jose, California, located about 50 miles south of San Francisco. This city repeatedly has the lowest big-city crime rate in the nation. San Jose is the third-largest city in the Golden State with close to a million folks calling it home. With over 6,600 tech companies like Cisco, IBM, and eBay, you can see why San Jose is in the heart of the Silicon Valley. And those companies must pay well. The average San Jose single-family home is over $700,000, one of the highest averages in the country. And that's your "Local Lowdown."



WILLIS: Just like people, cities go through good times and bad. For one town, job losses led to a 40-year decline. That city now taking elaborate steps to turn its bad times around, hoping to be an example for the rest of the country.


WILLIS (voice-over): Take the train an hour and 20 minutes north of New York and you'll find yourself in the modest city of Newburgh. It may look drab and rundown now, but it's a city with a rich history.

Years ago, the Hudson River vistas were inspiration for world- famous artists and architects who made their homes here. You can still see the prosperity of the past in the designs and details of nearly every building. But Newburgh has hit hard times.

DOROTHY HILL, NEWBURGH RESIDENT: This is an old city with a history on the Hudson River where shipping was part of the trade. When the jobs left the urban cities, there was tremendous poverty, so we have a very high poverty rate. And during the 1960s with urban renewal, much of the downtown was all bulldozed in the hopes of bringing up big, beautiful buildings.

WILLIS: Dorothy Hill lives in an historic house overlooking the Hudson. For 40 years, the lots in front of her house have been empty, bare patches of grass waiting for new buildings.

Today the people of Newburgh are hoping to bring back the stores and shops and beautiful buildings. The city invited developers to bid for the business of remaking those empty lots. The winner, Leyland Alliance, is bringing $100 million in private investment money to the project.

It thinks the city's proximity to Manhattan will pay off big-time as an alternative to big-city congestion and high property values. And unlike many major projects, Newburgh citizens will get a say in what goes there.

STEVE MAUN, PRES., LEYLAND ALLIANCE: Well, the (INAUDIBLE) process is a public process, so instead of designing a project in private and unveiling it later, it really involves the community by having all of the professionals gather here in a public event and inviting the public into the room in which the architects, planners, engineers, are actually working.

ANDRES DUANY, ARCHITECT, DPZ: Developers don't like to work in public. We work absolutely in public. We are starting from scratch this morning, we did. We're already in public tonight showing the first sketches.

WILLIS: After a week of meetings with locals, the designers have plans for what they hope will be a vibrant area that can draw folks from New York City.

DUANY: The vision of an urbanist is always a great street light. Like I'd love to see that these streets around here in front just filled with people. It's only when you think 20 years out and you see that proximity to Manhattan, it's such an asset, that if this place takes off, it could be -- it could be grand.

WILLIS: People who live here think it could be grand, too, and they're looking forward to seeing their ideas come to life.

HILL: They are planning, according to last night's report, townhouses, and as you move further down, there will be commerce, there will be high-rise office buildings, hotels, parks, plazas. It's just wonderful, wonderful. So we're looking forward to our future.

WILLIS: A future that could restore the city of Newburgh to its prosperous past.


WILLIS: Newburgh's not alone. Other cities across the country are finding success with plans just like this.

Back to mortgage meltdown and those tips we promised you. If your mortgage lender goes out of business, chances are good your loan will get sold to another lender, but you have rights. Your loan terms cannot change. The interest rate must remain the same.

You can expect to get a letter from the company within 15 days if your loan is sold. Now this letter should contain the new mailing address, the new payment deadline, and you should be give a toll-free number to call.

Most important, you have a grace period of 60 days, two months, to get your payments to the right place on time. And you can always go to your state attorney general's office to file a complaint if you have problems.

As always, we thank you for spending part of your Saturday with us. OPEN HOUSE will be back next week right here on CNN, and you can catch us on HEADLINE NEWS every Saturday and Sunday at 5:30 p.m. Eastern time.

Don't go anywhere, your top stories are next in the CNN "NEWSROOM." Have a great weekend.


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