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PAULA ZAHN NOW

Debtor Nation: The Mortgage Mess

Aired April 27, 2007 - 20:00   ET

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


PAULA ZAHN, CNN ANCHOR: And good evening, everybody. Glad to have you with us tonight.
Tonight, we are spending the whole hour on America's mortgage crisis. We have put together a panel of experts tonight, because, from coast to coast, millions of Americans are facing disaster. Debt is taking over their lives.

Now, it's not something anybody enjoys talking about. It creates a lot of shame. The idea of not being able to pay your mortgage is downright embarrassing. But millions of Americans are at risk of losing their homes. And they're scared.

Just take a look at these numbers. This poll shows that 22 percent of homeowners are concerned about foreclosure because they simply can't meet their monthly payments. That ends up being one out of five.

Well, tonight, we are bringing it all out into the open. How did this crisis happen? Who's to blame? How can you save yourself from going under?

Now, even if your mortgage is secure, even if you don't own your home, the mortgage crisis is already hurting you, because it's spilling over into the rest of the economy. Some people are even talking about a potential recession.

Well, today, we learned, in the first three months of this year alone, the pace of economic growth slowed to its lowest level in four years, in part because of the weak housing market.

So, how did the crisis happen? And what is it all about?

We asked personal finance editor Gerri Willis to bring it all out in the open.

(BEGIN VIDEOTAPE)

GERRI WILLIS, CNN PERSONAL FINANCE EDITOR (voice-over): You have heard the news. You have seen the headlines. You have read the dire predictions. But what does it all mean? And how did we get into this mortgage mess?

In recent years, with interest rates low and the housing market booming, lenders lowered their standards. People who would never have been able to buy houses in the past got loans.

ANA ROSADO, HAVING TROUBLE PAYING MORTGAGE: We were eager to have a home, on top of the fact that the rents were ridiculously high.

WILLIS: People like Ana and Radamus (ph) Rosado from the Bronx, who found the home of their dreams.

ROSADO: We had the baby. We didn't want to raise the baby in a bad environment. I wanted somewhere it was quiet, nice, where my son could play outside.

WILLIS: But they needed a loan to help them pay for it. They say they agreed to a fixed-rate mortgage, or loan, in other words, one that guaranteed they would pay the same amount every month for 30 years. But, at the closing, they were told:

ROSADO: Oh, I'm sorry. The banks didn't approve this loan.

WILLIS: They were told they didn't qualify for a regular loan. So, they got a so-called subprime mortgage, a home loan for people who have less-than-perfect credit scores. These mortgages cost more. They have higher, sometimes sky-high, interest rates and fees. That extra money goes into the pockets of the lender, incentive for that lender to take on the risk.

And remember how the Rosados' original loan was supposed to cost them the same every month for 30 years? With their new subprime loan, the rules were different. What they got instead was an adjustable- rate mortgage, one that would cost them $2,800 a month for two years, after which their interest rate would adjust or jump up, making their new monthly payment roughly $3,500 a month, an amount they simply couldn't afford.

They say they were victims of a bait-and-switch.

ROSADO: We should have went to the mob for a loan. That's the bottom line. I think the mob would have gave us a better loan.

WILLIS: Today, these subprime loans make up an estimated 20 to 25 percent of all home mortgages, up from just 5 percent a decade ago, homeowners across the country, and in record numbers, unable to make their monthly payments once the interest rate adjusts upwards.

Now, experts say, it's affecting the entire mortgage money machine. Here's why. Homeowners 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 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, PROFESSOR 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 is -- has a good chance of happening later this year, and extending on into maybe 2008.

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

UNIDENTIFIED MALE: Well, I think it's a little early to say collapse.

WILLIS: Still, experts are watching closely this crisis that already has far-reaching repercussions.

(END VIDEOTAPE)

WILLIS: So, the Rosados received the required paperwork from their lender in order to get another loan. They successfully refinanced into another fixed-rate with another lender -- Paula.

ZAHN: Well, they certainly got luckier than a lot of Americans out there, because I -- I want to put up on the screen something that I found shocking. And these are statistics talking about the foreclosures in this country for the first quarter of 2007 alone, 437,000 of them. And that's, what, a 35 percent increase over the first quarter of 2006.

Is this just the tip of the iceberg, Gerri?

WILLIS: I got to tell you, we could see more problems in this sector. And here's why. You and I have been talking about subprime loans. These are loans to people who don't have the best credit. They have got debt problems, right? They're getting loans that cost them more, that have higher fees, higher interest rates.

But there's another sector of people who are going to be affected, too. They're called the Alt-A category. These are the people in the middle. They don't have perfect credit. They don't have bad credit. But the contagion, Paula, is spreading.

ZAHN: And to avoid that contagion, you have to start off by getting the right broker, who gives you good, honest information?

WILLIS: Well, look, this is a category of folks that expanded exponentially with the home market that was doing so well. There are so many folks out there, it is difficult to pick the good ones.

And, as a matter of fact, buying a house is a big deal. You want to be surrounded by not only the people you trust, but by professionals who know what they're doing. One of the most important people in the process, well, they may be the least qualified.

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: We're going to match up who has got the lowest costs. WILLIS (voice-over): Chances are, it's the biggest purchase of your life. And it's overwhelming. Not only do you have to worry about finding the right house, but you have to figure out how you will pay for it, how you will find the right loan.

Who's there to help? Increasingly, it's a mortgage broker. They now act as middlemen for more than half of all new mortgages.

But are they looking our for your best interests? Bob Moulton has been a mortgage broker for nearly 20 years. He says they provide a vital service, helping consumers sort through the web of confusing loan options out there.

BOB MOULTON, PRESIDENT, AMERICANA MORTGAGE GROUP: There's 300 products that are available out there, from auction ARMs, to interest- only, to a myriad of adjustable rates, and then to your traditional fixed-rate mortgage.

WILLIS: But federal officials and consumer groups say, mortgage brokers are largely responsible for the record foreclosures across the country and the near collapse of the subprime mortgage market.

They say brokers put borrowers in loans they don't understand or can't afford. One of the biggest recurring complaints about brokers? Minimal or no training standards.

UNIDENTIFIED MALE: There are roughly 44,000 licensed mortgage brokers in the United States. Mortgage brokers are typically required to obtain a state license, but, frequently, there are no testing or educational requirements as part of that process.

WILLIS: Each state has different requirements for a license. Some states are beefing up their standards, like New York, which recently passed requirements saying brokers must attend 18 hours of training.

But many states still have few or no standards.

MIKE CALHOUN, PRESIDENT, CENTER FOR RESPONSIBLE LENDING: It takes more training to become a hairdresser than it does to become a mortgage broker. It is one of the least regulated professions in the country.

WILLIS: Another worry? How brokers get paid.

CONNIE CHAMBERLIN, PRESIDENT AND CEO, HOUSING OPPORTUNITIES MADE EQUAL: When people go to a mortgage broker, they believe that the broker is helping them find the best possible loan. That's not necessarily true.

And I think the real problem is the system of compensation, the fact that they are paid extra for higher-interest loans, and the borrower doesn't know that.

WILLIS: Brokers have no legal responsibility to make sure buyers can afford their loan, or that they're getting the best loan. Lawmakers in Washington are pushing for standards that would require brokers and lenders to give borrowers the best loan for their financial situation.

Some brokers do agree that stricter licensing requirements and changes in how brokers are paid will make getting a loan safer.

MOULTON: There are 95 percent -- maybe even higher -- of good loan officers in this country. And the unfortunate thing is, there's a small lot that's creating a bad image for a big group of people.

(END VIDEOTAPE)

ZAHN: So, I want to bring in the rest of tonight's "Out in the Open" panel now. Lynnette Khalfani is a personal finance expert who calls herself the money coach. She also happens to be the author of "Zero Debt. And Brad Inman of Inman News, a leading real estate news service, Gerri Willis back with us as well.

Brad, I wanted to start with you this evening and read a statement from the National Association of Mortgage Brokers.

And it states: "Mortgage brokers do represent every loan product available in the marketplace. Nor do we have the best loan available. As the decision-maker, the role of the consumer is to acquire the financial acumen necessary, and take advantage of the competitive marketplace."

So, what's he saying? It is the consumer's fault; they have nothing to do with it?

BRAD INMAN, FOUNDER AND PUBLISHER, INMAN NEWS: Yes, I really think this is quite disingenuous, to put the burden on the consumer.

We have had an explosion of new mortgage products. These are very complex financial instruments. And to expect a consumer to understand these mortgage instruments in a very short period of time -- keep in mind, we had a booming housing market. People were buying houses very, very quickly, refinancing very quickly, a very aggressive marketing on the part of mortgage brokers.

In fact, I think it was said in the segment very clearly that how they're paid -- do they represent the consumer? No. Yet, that is the perception of the consumer. Are they marketing consumers? Are they selling consumers? They're shoehorning people into loans they don't belong in, with short-term risk not there, but long-term consequences that we have seen in this foreclosure data.

And this call for regulation and more scrutiny, you know, it happened with stockbrokers, where they had conflicts of interest. And the federal government intervened years ago. And I think you are going to begin to see that with mortgage brokers as well. And it is necessary.

ZAHN: And, before that happens, though, Lynnette, people out there in our audience are saying, all right, how do I prevent myself from getting stuck with a subprime loan?

LYNNETTE KHALFANI, AUTHOR, "ZERO DEBT": To begin with, right. That's a great question.

I think the big thing is to protect your credit rating at all costs. You know, you should have a credit score in the 620 range or above, which means pay your bills on time all the time, those credit card payments, those auto loans, et cetera. All of that is what ultimately qualifies you for the best-rate mortgages. And, when you have a good track record, then you won't be steered into the subprime market.

ZAHN: Is there anything else you should be aware of?

KHALFANI: Well, certainly, you need to be careful about which lender you pick as well, and also which mortgage broker you obviously go with.

Let's be real. A lot of these lenders chose to offer these consumers very, you know, expensive loans. Some people call them toxic loans. Suicide loans, they have been called. And it's been, I think, a travesty that the banking community, in large part, has done this. Not every bank has done this.

Chase, for example, specifically said, we don't want to offer option ARMs, because we don't want people to get into negatively a negative amortization situation. But you have to be thinking about which lenders you go with.

ZAHN: So, arm people with even more specific information about what they should do when they're on the market for a loan?

KHALFANI: Well...

ZAHN: Offer some tips for us.

KHALFANI: Absolutely.

You know, you can arm yourself. You can take advantage of the situation, get what you need. But you have got to shop around. That's job number one. You have to get rate quotes from three different institutions. You don't have to use a broker. It's not necessary to go out and find a middleman.

You can go right to the lenders themselves, get the quotes. Go to Bankrate.com, HSH.com. You can find the rates that are available not just nationally, but in your area, to people who have your credit score.

Secondly, compare these offers when you get them. Look at the APR. This is the number that will tell you exactly what you're being charged for that loan. And, finally, as you think about this, make sure you get the best terms available. Understand the terms you're looking at. Are you getting a pre-payment penalty wrapped in? This is tens of thousands of dollars that people have to pay.

INMAN: Paula, if I could just add, too...

ZAHN: Real quickly, Brad.

(CROSSTALK)

INMAN: Ask some tough questions of your mortgage lender and your broker: Who do you represent? Do you legally represent me? Can I count on you for fiduciary advice? How do you get paid? Who pays you? If you work for a big financial institution, what is their obligation here?

Have them go through the loan documents with you in great detail. And, if you suspect for a moment that they don't understand what they're talking about, go find yourself another lender.

This is the time not to rush into anything. The housing market has cooled. There's plenty of inventory. Take the time to understand what they're selling you.

ZAHN: I hope people are taking the time to take notes right now, because it's all very helpful information. Thank you all.

We have a lot more to cover with all three of you tonight. Please stay tuned.

So, what is it like when you get in over your head with a subprime mortgage? Suddenly, your payments go through the roof because the interest rate changes. We're going to meet some homeowners who are, right now, in danger of losing their homes.

Also, in this special "Out in the Open" hour; the misery of seeing your home auctioned off because you couldn't make the payments.

And what happens when so many people lose their homes and whole neighborhoods become filled with empty houses?

All that and more in this special hour, "Debtor Nation: The Mortgage Mess."

(COMMERCIAL BREAK)

ZAHN: I would like to welcome you back to our special hour, "Debtor Nation: The Mortgage Mess."

Tonight, we're bringing out in the open the secret struggle millions of us face. More than a million Americans lost their homes last year because they couldn't make the payments. And it could be even worse this year -- the biggest factor, subprime loans, mortgages given to people with shaky credit.

By now, you're probably asking yourself, who are these people who got in so far over their heads?

We sent our Deborah Feyerick to find some typical cases. They could be your next-door neighbors, or maybe even you.

(BEGIN VIDEOTAPE)

ARLEVIA TAYLOR, HOMEOWNER: Whoa. This is where I want to live. This is it.

DEBORAH FEYERICK, CNN CORRESPONDENT (voice-over): There are a few things you should know about Arlevia Taylor. She's 63 years old, divorced, and lives on a fixed income.

TAYLOR: Oh, this is my house. I want it.

FEYERICK: So, when someone called promising she could lower her monthly mortgage payments and get a huge payout, she jumped at the chance.

TAYLOR: Well, I was hoping that I would get enough money to redo my kitchen floor, and have enough money in savings to -- to do other little things around the house.

FEYERICK: But that isn't what happened. After the closing and all the fees, she got barely $2,000, a lot less than the $15,000 she says she was promised. And that low fixed rate of 6.9 percent, it was fixed for only two years.

(on camera): So, you get this in the mail. It says, this adjustment increases your monthly payment by approximately $250. Where is that $250 coming from?

TAYLOR: I'm not going to have it.

FEYERICK (voice-over): Then how did Arlevia Taylor get the loan in the first place? Easy. She qualified based on the lower rate, not the rate she would have to pay later, a full 3 percentage points higher.

(on camera): The companies are going to say, we are giving these people an opportunity to get money that they wouldn't have ordinarily.

BILL BRENNAN, LEGAL AID ATTORNEY: What a joke to say that. They're giving them a chance to swallow poison that will kill them.

FEYERICK (voice-over): Legal aid lawyer Bill Brennan represents Taylor and thousands like her in the Atlanta area who got loans they can't possibly repay. He says Taylor, like many others, was targeted by lenders because she fits several categories: elderly, African- American, lower fixed income, and a woman.

Janice Harris (ph) also fits that profile. A widow who struggles to live on $700 a month, she has refinanced her mortgage twice. And the interest keeps going up.

(on camera): You pay $16,000 30 years ago, and now you owe more than $100,000 in the form of a loan?

UNIDENTIFIED FEMALE: Yes.

FEYERICK: Is that a little crazy to you? UNIDENTIFIED FEMALE: Yes, it is crazy. It don't make sense to me.

BRENNAN: You're told you're eligible. We wouldn't make you the loan unless you're eligible.

They're not eligible. That's ridiculous. They're not eligible for this loan.

FEYERICK (voice-over): In the last few years, the number of people losing their homes has skyrocketed. In 2006, there were 1.2 million foreclosures, up 42 percent from the year before.

BRENNAN: Here is the foreclosure listings...

(CROSSTALK)

BRENNAN: ... for one month for the Atlanta area.

FEYERICK (on camera): These are all foreclosures?

BRENNAN: Yes.

FEYERICK: This is unbelievable.

BRENNAN: It's a phone book.

FEYERICK: It's a phone book.

BRENNAN: And look at the dates of the loan. This just drives me crazy: ARM of '04, conventionals, '06, '06, '06.

(CROSSTALK)

BRENNAN: How can there be so many loans in the last two years that are now in foreclosure? What does that tell you? They're lending to people who can't afford to pay.

FEYERICK: I mean, this is page after page after page of heartbreak.

BRENNAN: That's right.

FEYERICK (voice-over): The scariest part, says mortgage expert Robert Manning, with interest rates about to go up on more than $1 trillion in mortgages, that could devastate the U.S. economy.

ROBERT MANNING, AUTHOR, "CREDIT CARD NATION": We're going to see millions of Americans who are going to find homeownership pushing them into bankruptcy and really questioning the nature of the American dream.

UNIDENTIFIED FEMALE: I just thought I could pay it. That's what was in my mind. I thought I could -- I could just handle it. And I couldn't.

FEYERICK: Deborah Feyerick, CNN, Atlanta.

(END VIDEOTAPE)

ZAHN: And, tonight, Janice Harris (ph) and Arlevia Taylor are both in jeopardy of losing their homes. Taylor so far has missed two mortgage payments. Her lawyer is fighting to get her a new loan. If she misses just one more payment, a foreclosure sale notice could come at any time.

So, of course, we all know now how easy it is to get in over your head. What happens next when your lender forecloses?

(BEGIN VIDEO CLIP)

BRENNAN: You get foreclosed on first Tuesday, and you can be out by the end of the month.

(END VIDEO CLIP)

ZAHN: And, before you know it, your home is on the auction block, and you can't do anything about it. That part of the story is next.

Also, whole neighborhoods all but empty because of foreclosures -- what happens to the value of your home when your neighbors lose theirs?

All that and more coming up in this special hour, "Debtor Nation: The Mortgage Mess."

(COMMERCIAL BREAK)

ZAHN: Welcome back.

Our "Out in the Open" special, "Debtor Nation: The Mortgage Mess," continues now.

More than two million Americans are in danger of losing their homes because they can't keep up with ballooning payments on adjustable-rate loans. It is absolutely brutal. And all it takes is missing just a couple of payments. So, what happens then?

Well, I want you to see something that looks like it came right out of the Depression in the '30s, homes being auctioned off on the courthouse steps. It is just devastating.

Deborah Feyerick witnessed this painful scene in Georgia, which happened to have one of the nation's highest foreclosure rates last year.

(BEGIN VIDEOTAPE)

UNIDENTIFIED FEMALE: One hundred and thirty dollars going twice.

UNIDENTIFIED FEMALE: One-seventy-one, 145.

UNIDENTIFIED MALE: Do I hear any other bids?

UNIDENTIFIED MALE: One hundred and one thousand, five hundred dollars the third time, and sold to the lender.

FEYERICK: It's the first Tuesday of the month, foreclosure day in Georgia. Today, across the state, people are losing their homes.

UNIDENTIFIED FEMALE: It's hereby declared due because of nonpayment of monthly installments.

FEYERICK: Here, outside the DeKalb County courthouse, lawyers, bankers, mortgage brokers and investors are looking to buy those houses and flip them for a quick profit.

(on camera): Is there like a comradery between some of the guys here, or is this...

(CROSSTALK)

UNIDENTIFIED MALE: No. We hate each other.

FEYERICK: You hate each other?

(LAUGHTER)

UNIDENTIFIED MALE: Yes.

FEYERICK: Is that because you're all bidding for the same properties?

UNIDENTIFIED MALE: Competitors.

FEYERICK (voice-over): They're competing for thousands of houses up for public auction today.

UNIDENTIFIED FEMALE: Kimberly Douglas (ph), 138-930. Ahmad Drake (ph)...

FEYERICK: Those names you hear, those are the people losing their homes this month. Some had bad loans. Others fell on hard times. All of them missed mortgage payments.

UNIDENTIFIED MALE: Going once, going twice.

FEYERICK (on camera): Who is representing the person who is living in that house?

BILL BRENNAN, LEGAL AID ATTORNEY: Nobody is representing them. They're sitting at home, waiting to be evicted.

UNIDENTIFIED FEMALE: Seventy-five thousand. Any other bids?

FEYERICK (voice-over): Last year, Georgia had 80,000 foreclosures, up almost 70 percent from the year before. And, with some two million foreclosures across America expected in the next few years, places like these courthouse steps are about to get a whole lot busier.

BRENNAN: You get foreclosed on first Tuesday, and you can be out by the end of the month. And that happens routinely.

FEYERICK: In fact, Georgia, Texas and Tennessee have the country's fastest foreclosures.

UNIDENTIFIED FEMALE: There you, dear.

UNIDENTIFIED MALE: Thank you.

UNIDENTIFIED FEMALE: Thank you.

FEYERICK: In Georgia, once the borrowers misses as few as three payments, the lender can start to foreclose. Forty days later, the house is up for sale.

UNIDENTIFIED FEMALE: Holloway (ph) 144-715.

FEYERICK: The courts have nothing to do with it. And, in this unstable market of high-risk loans and refinancing, that's a problem, says legal aid lawyer Bill Brennan.

BRENNAN: The closest the judge gets to the foreclosure system here is, he might look out the window or come out and go to lunch.

FEYERICK: Many homes are sold out right from under the owner to the banks and mortgage companies who made the original loans.

UNIDENTIFIED FEMALE: Sold to American General Finance.

FEYERICK: The lenders are trying to recover their investments, looking out for their interests.

JAMES OTTLEY, ATTORNEY, BANK OF NORTH GEORGIA: The bank entered in a credit bid for what they had in the property. And, so, it now goes back to the bank. And it's up to them how -- how they dispose of it.

FEYERICK (on camera): So, is the homeowner going to get anything on this? Or how does it work?

OTTLEY: No. There won't be any excess for the homeowner.

FEYERICK (voice-over): Not a penny in most cases, because, even though they were in trouble, the owners did not manage to sell the house before the banks foreclosed.

At an auction like this, the better deals go to bargain-hunting investors, wise to the rules of the game. Only a few people, like Burt Young (ph) and Tabitha Houston, are looking to buy a home where they would actually live.

TABITHA HOUSTON, PROSPECTIVE HOMEBUYER: I'm noticing, though, that there are teams of people that are working together, that, if we don't come as a team, you can forget it. FEYERICK: There are investors who follow foreclosures like stock picks or baseball stats. For them, the first Tuesday of every month is a good day.

(on camera): How many properties do you think you are going to walk away with today?

PHILLIP CAMPBELL, INVESTOR, MARKS & CAMPBELL PROPERTIES: One or two.

FEYERICK: And is that a good day for you?

CAMPBELL: Mm-hmm.

FEYERICK: Yes?

UNIDENTIFIED FEMALE: Starting bid is $41,000.

FEYERICK (voice-over): Somewhere in Georgia, someone has just lost a house. And that person is almost certainly having a very bad day.

UNIDENTIFIED FEMALE: Going once, twice, sold for $75,000.

FEYERICK: Deborah Feyerick, CNN, DeKalb County, Georgia.

(END VIDEOTAPE)

ZAHN: And Deborah also tells us that those people who lost their homes on the courthouse steps will receive a notice to appear in court to be formally evicted. They may end up having just seven days to leave their homes.

Let's go back to our "Out in the Open" panel now, our personal finance editor, Gerri Willis, personal finance expert Lynnette Khalfani, and Brad Inman of Inman News, a leading real estate news service.

Welcome back, Lynnette.

It is heartbreaking to see what happens to these families.

KHALFANI: It -- it...

ZAHN: So, once the home is on the auction block...

KHALFANI: What then?

ZAHN: ... what happens to them?

KHALFANI: Well, it really is the culmination of some tragedy that has already gone on in their lives. They have either suffered a downsizing, a pink slip, maybe a divorce in the family that they couldn't pay. Somebody got sick, medical bills, whatever the personal crisis was, now we see the manifestation of that in so many wretched emotional ways. They have to pull the kids out of school. They're embarrassed by it. You know, clearly they have to feel like, I failed to a certain extent. I wasn't able to maintain my most prized possession, my home.

ZAHN: And what often happens when people face foreclosure is they simply don't want to take the calls from the lenders, right? And that is the worst possible thing you can do when that call comes.

GERRI WILLIS, CNN PERSONAL FINANCE EDITOR: Absolutely right. They don't want to take the call from the lender. I have been in these living rooms where this happens. People are horribly upset. They don't know how to respond. They have to put the kids in a new school. Move out of the house. It is really emotional.

ZAHN: It is scary.

WILLIS: It really is.

KHALFANI: And they're in denial I think a lot of times because they're thinking that some last-ditch effort, something is going to come along and save the day. I'll get a new job. Maybe my spouse and I who are divorcing, we'll get back together. Somehow I'll get that bonus. They're praying and hoping for some last-minute solution and unfortunately it just never comes.

ZAHN: So if it doesn't come, what else can you do to be proactive, Gerri?

WILLIS: Well, what you need to do, at the very first sign that you might miss a mortgage payment, you have got to call your lender. Do the thing that you most don't want to do. Call your lender, ask for help. Look, these guys do not want to own these homes. Believe me.

It costs them tens of thousands of dollars to put these homes on the markets and to sell them. Ask them for a longer loan term. Lower interest rates. There are all kinds of things they can do to help you out. You want to get them on your side as early as possible.

Once they start listening to you and you have to ask for the loss mitigation department, by the way. Not fellow who sold you the loan. Be sure to ask for the loss mitigation department. They're the people that can help you. Then you can really start moving forward. And you might have to sell your house.

ZAHN: Which is something no one ever wants to hear, Gerri.

KHALFANI: But you know what? The alternative, it is much better than the alternative, to have a foreclosure on your credit report which is going to damage your credit rating for many years to come.

WILLIS: Absolutely. And you can do a short sale, which is a great thing to do. Some of the banks will say, if you bring me a buyer, I don't even care if I'm being made whole here. Maybe I don't get back all the money that I expected, that's fine. We'll call it a short sale. We'll write off our losses and we'll move on. If you can find that buyer.

ZAHN: Brad, we have heard searing stories about what has happened to families all over the country. But what we haven't really had a chance to address yet is the impact of all of the foreclosures. How will that affect all of us?

BRAD INMAN, FOUNDER & PUBLISHER, INMAN NEWS: Well, we should look back a little. Leading up to this is a big change in the housing market. The boom ended. And whether it's a collapse or it's a chill or a deep freeze, we have got a lot of adjectives, but the market is radically changed. And that is preceding this.

And what this does is makes the whole market even worse for a number of reasons. One, news about foreclosures and what can happen to you gives, you know, buyers that might have been in the market the heebie-jeebies. Also, these -- you know, anyone can get a loan days are over. So people can't qualify, so there are fewer buyers. And buyers are taking a lot more time and a lot more cautious as listings pour onto the market.

It started out as a trickle on subprime and what we're seeing this spring, and I'm really afraid this summer and the rest of this year, and as Bob Shiller pointed out at the top of the segment, what is going to happen in 2008, regardless of the economy. The housing market is getting hurt very, very bad by all of this.

ZAHN: Ouch. Thank you all. Appreciate your educating us. We have more work to do here tonight. Please stay with us. We'll be back in a little bit. There is one community that has been hit by the mortgage crisis harder than just about any other place in the country.

(BEGIN VIDEO CLIP)

MATTHEW REVITTE, COLORADO REALTOR: Probably the elements of a perfect storm took place. We had five years where we had healthy appreciation by well county standards and many of these homeowners, unfortunately, used their house as an ATM.

(END VIDEO CLIP)

ZAHN: Coming up next, me we're take you to what is considered ground zero for foreclosures in this country.

And when house after house on the same block is foreclosed, what happens to your neighborhood? A shocking look at one community suffering from the foreclosure blight when "Debtor Nation: The Mortgage Mess" continues.

(COMMERCIAL BREAK)

ZAHN: Welcome back. More now of our special "Debtor Nation: The Mortgage Mess." We are bringing "Out in the Open" tonight what is a desperate and frightening situation for millions of people who are swamped with debt and can't pay their mortgages. This crisis affects the entire nation but we're about to take you to a community where things are so bad that some people are calling it "foreclosure central."

Personal finance editor Gerri Willis back to share that story with us now -- Gerri.

WILLIS: Hi, Paula. This is really a terrible story. Foreclosure rates in Colorado rose to the highest levels in the country last year and one city in particular felt the pain. It's Greeley, Colorado. The town is still a long way from a full real estate recovery, but folks there aren't waiting for the foreclosure crisis to get worse. They are really trying to help homeowners at risk.

(BEGIN VIDEOTAPE)

WILLIS (voice-over): Greeley, Colorado. An all-American city. Manicured lawns. White picket fences. But for a growing number of residents in this community, the dream of home ownership has been shattered.

REVITTE: Probably the elements of a perfect storm took place. We had five years where we had healthy appreciation by, well, county standards. And many of these homeowners, unfortunately, used their house as an ATM and...

WILLIS (on camera): How so?

REVITTE: Well, they would refinance every year or two and pull out their equity. Oftentimes they would do it with an adjustable rate mortgage and when that did adjust, and their wages had not gone up to compensate for that increase, they got stuck.

WILLIS (voice-over): Stuck ultimately led to foreclosure for one in every 155 Greeley households in March. Countywide last year, it was one in every 37. And on this street, it seems like every other home.

(on camera): There are a lot of houses here, 1018, for example, a lot of houses on the street that are actually in foreclosure.

(voice-over): Across town, it is the same grim story.

(on camera): Dottie Chrispen has called this house her home for three decades. Today, she is packing up a lifetime worth of memories.

Do you think you're going to make your deadline?

DOTTIE CHRISPEN, LOST HER HOME: I don't think so. It's going to be touch and go if I can get them to extend. I don't think I will be able to though. Just not enough time and too much to move.

WILLIS (voice-over): Colorado led the nation in foreclosures nine out of 12 months last year and is now leading the way in prevention efforts. A foreclosure hotline, the first of its kind, connects homeowners with local counselors.

UNIDENTIFIED FEMALE: Thank you for calling the Colorado Foreclosure Prevention Hotline.

WILLIS: Twelve thousand calls have poured in over the first six months. The results, four out of five people who met with a hotline counselor avoided foreclosure according to a newly released report by the Colorado Division of Housing.

By getting help working with lenders to restructure their debts, the help can't come soon enough.

REBECCA SAFARIK, GREELEY COMMUNITY DEVELOPMENT DIR.: For Greeley I think we are seeing probably the worst of it right now. We sort of feel like we're moving towards the peak. In terms of perspective of how many homes are on the market, we have never seen a higher foreclosure rate.

CHRISPEN: Find out if we could have it at least until noon or later tomorrow. Other than that, I don't know. I know we won't be able to get it all out.

WILLIS: Like many homeowners struggling to fight off foreclosure, time ran out for Dottie. She lost her home and is moving to a much smaller rental.

CHRISPEN: I was a farm and ranch girl and out in the fields all the time. And, I didn't know that much about any of this stuff. But I'm learning and slow but sure.

(END VIDEOTAPE)

WILLIS: Dottie was a wonderful woman. We checked back in with her. She did make her deadline and she did get all of her belongings out of the house. But I have to tell you, to be there and see an individual go through this, to lose their home after more than 30 years of living there, well, it is heartbreaking -- Paula.

ZAHN: Oh, it is hard to watch it from here and you spent a lot of time with her. And when you talk about the success of this hotline, was there anything Dottie could have done that would have saved her from losing her house?

WILLIS: Well, Paula, as you know, a lot of women find themselves in this situation when they're older, maybe they're living alone, maybe their husband took care of all of the financial obligations. And they never learned how to do it themselves. They absolutely have to.

Yes, if you can get that information, there are hotlines now that can help you out. Give you education you need. You can turn it around. This can be done.

ZAHN: Yes, not the way Dottie did it. Though she is saying she is learning now slowly but surely.

WILLIS: That's right.

ZAHN: I feel terrible for her. Gerri, thanks. We're going to see you back in another segment.

The pain doesn't end when homes are foreclosed and sold at auction. It only spreads by creating empty neighborhoods.

(BEGIN VIDEO CLIP)

MARIE KITTREDGE, EXEC. DIR., SLAVIC VILLAGE DEVELOPMENT: I live in this neighborhood. And to see this kind of devastation, it hurts, it's painful.

(END VIDEO CLIP)

ZAHN: Believe it or not, entire neighborhoods of vacant homes because of foreclosures, when "Debtor Nation: The Mortgage Mess" continues.

(COMMERCIAL BREAK)

ZAHN: Our focus tonight, the nation's mortgage mess. We're spending the whole hour looking for answers to the crisis that has cost so many Americans absolutely everything.

We just took you to Greeley, Colorado, one of the cities that led the nation in foreclosures last year. Now, a different view of the crisis. You have to wonder what happens to a neighborhood when so many people are forced to leave their homes. Well, I want you to see a place where that has happened, where street after street is filled with empty homeless.

We sent Dan Lothian to Cleveland recently for the special hour to see the reality of foreclosure blight.

(BEGIN VIDEOTAPE)

DAN LOTHAIN, CNN CORRESPONDENT (voice-over): It's happening in Cleveland's inner city.

UNIDENTIFIED MALE: You have got another vacant house but then you have got another vacant house across the street here.

LOTHIAN: And more surprisingly, in and near the suburbs like on Luvania Menefee's tree-lined street.

(on camera): This house is empty, right?

LUVANIA MENEFEE, CLEVELAND HOMEOWNER: Mm-hmm. The neighborhood is changing. And that's what depresses you.

LOTHIAN (voice-over): Councilman Zack Reed (ph) says the ward in Cleveland's Mount Pleasant community can no longer live up to its name. The mortgage crisis mostly to blame.

(on camera): These are all foreclosures?

UNIDENTIFIED MALE: That would be correct.

LOTHIAN: Well, this is a perfect storm.

And the situation gets worse from street to street. This one could be considered the eye of the storm. That's because there are at least 25 vacant houses on this street like this one and the one next door.

JAMES ROKAKIS, CUYAHOGA COUNTY, OH, TREASURER: There are thousands and thousands of vacant homes in this city.

LOTHIAN (voice-over): Cuyahoga County Treasurer James Rokakis says a few years of job losses, a weak economy and predatory loans have caused this. A sea of boarded up homes, more than 16,000 foreclosures expected this year alone in this one county, an all-time record.

ROKAKIS: Anybody that can conjure up a breath on a mirror gets a loan. You have literally thousands of people not ready for home ownership being given loans, moving wherever they want to move and failing as homeowners within a matter of sometimes just a few months.

LOTHIAN: Facing foreclosure, they either walk away or are forced out of these homes. Leaving behind abandoned properties and creating even bigger problems.

(on camera): Scavengers will come on a house that has been abandoned for some time and will start taking anything valuable that they can remove from the house. In this case, it's the siding.

When this happens to a house, I mean, you are literally sucking all of the equity out of the house.

(voice-over): And negatively impacting the value of every home in the community.

KITTREDGE: I live in this neighborhood. And to see this kind of devastation, it hurts, it's painful.

LOTHIAN: It didn't happen overnight, but this darker picture motivates residents and community leaders like Marie Kittredge, who has been working to prevent neighborhoods from further decay.

KITTREDGE: We come in and clear out like these bushes were all up and overgrown. We mow the grass.

LOTHIAN: Long after all this snow has finally melted, neighbors will help her non-profit group maintain about 50 abandoned properties, until they are either sold or torn down. Yard work and art work.

(on camera): Take a look at the windows here and also the door. They have painted that wood gray and added some curtains. It just adds a little bit more life into a neighborhood that has been hit hard over the past few years.

(voice-over): A picture perfect solution to mask an ugly housing crisis no longer unique to the inner city. Luvania Menefee says as more properties are vacated in her quiet neighborhood, residents are finding ways to prevent this from happening here.

MENEFEE: The neighbors they park their cars in the driveways of the empty homes.

LOTHIAN (on camera): Why?

MENEFEE: So they can -- you know, people will think someone is still living there so they won't vandalize the house.

UNIDENTIFIED FEMALE: Going to have you fill out this paperwork.

LOTHIAN (voice-over): There's also an aggressive public/private effort under way to keep homes occupied by helping residents who are drowning in bad loans.

(on camera): If they can't help you, what will happen to you?

VIVIAN NICHOLS, CLEVELAND HOMEOWNER: I'll be out on the street.

LOTHIAN: So you really need this?

NICHOLS: Yes.

LOTHIAN (voice-over): This group helps homeowners like Vivian Nichols negotiate with mortgage companies for better terms.

MARK SEIFERT, EAST SIDE ORGANIZING PROJECT: If we can't keep them in the home, the crisis we see is just going to get worse.

LOTHIAN: A city hit hard by foreclosures, trying to limit the damage.

Dan Lothian, CNN, Cleveland.

(END VIDEOTAPE)

ZAHN: And the question tonight is how can you limit the damage? We're going to go back to our panel for important information on how you can avoid getting trapped in the mortgage mess.

And if you happen to already be caught up in it, how are you going to get out of it? Please stay with us.

(COMMERCIAL BREAK)

ZAHN: Our special "Debtor Nation: The Mortgage Mess" continues. Let's go back to the panel to find out what you can do to avoid this crisis, and what to do if you are already in trouble. Here again, personal finance editor Gerri Willis; Lynnette Khalfani, author of "Zero Debt"; and Brad Inman of Inman News, a leading real estate news service.

Welcome back. I want to put back on up the screen, Gerri, a number that I found absolutely staggering, 34 percent of American borrowers don't know have any idea what kind of mortgage they have.

WILLIS: It's terrible.

ZAHN: For starters, you have got to figure that out if you don't want end up to lose your home.

WILLIS: Job number one, know what kind of loan you have. Is it an adjustable rate mortgage? Is it a fixed rate? What do you -- go find that document. Go to the hallway closet, the box in the basement, wherever it is. Pull it out. Read this thing. It's tough but you can get through it and look for those words.

Find out what the penalties are that you're on the hook for. Is there a prepayment penalty of tens of thousands of dollar that you might have to pay? What are the interest rate set points that you may face? How much can your rate go up? What's the very most that they can charge you? You need to know all of these details and then think about getting a new loan if you don't like the terms you see.

You can lock in a fixed rate for 30 years. I've got to tell you right now mortgage rates are pretty darn low, 6.13 percent from the Mortgage Bankers Association. It is not that bad. You can make changes. You can make yourself safer with your mortgage.

ZAHN: So you...

INMAN: Gerri...

(CROSSTALK)

ZAHN: The bottom line is you're saying that you don't have to buy into these higher interest rates and the higher fees. Brad?

INMAN: Yes. I really want to echo what Gerri just said. It is really time for every homeowner that got into and adjustable, as Gerri said, pull out those loan docs, and this is the time maybe to take some short-term pain to lock in a rate, and it may not be a 30, it could be a five- or a seven- or a 10-year adjustable, to give you some security if the market tumbles some more, if rates rise.

But if you have a short-term adjustable, really think about reexamining that loan. This is the time to do it. And as you do it, be very cautious about the process and make sure you know what you are getting into for the second time.

ZAHN: Well, that is most important thing, being cautious about the process. Let's talk about examining some of the fine print in these loan documents. Look, you all have been to business school and you admit that this is really dense language to absorb.

KHALFANI: Right. I mean, you are looking at pages and pages and pages of loan documentation. Most people get into the closings, they just sort of sign on the dotted line. They are happy to be homeowners, right? But you really do have to scrutinize it.

And even if you don't get all of the legalese, all of the sort of mumbo-jumbo, ask the lender there, ask the mortgage broker, whomever you're dealing with, even if it's your appraiser who might be able to help you to work through the process of getting the mortgage and figuring out how much it's worth, for a plain English language explanation of anything you don't understand.

Don't just sign paperwork blindly.

ZAHN: Gerri, a quick final word of advice for all those folks out there that are worried about what they might face down the road.

WILLIS: If you don't understand what they are telling you, and they to intimidate you and make you think, wow, you really shouldn't ask those questions, don't deal with them.

KHALFANI: Hold off, yes.

ZAHN: And, Brad, final quick thought from you?

INMAN: Take time. Take the time you need. If anyone is rushing you into making a snap decision about buying or taking out a loan, remember, you are taking on huge debt. And hesitate and think about what you're up against.

ZAHN: I'd love to take more time, but I've got to rush into a commercial break right now. Brad Inman, Lynnette Khalfani, Gerri Willis, you all were very helpful to us tonight. Thank you.

And you can also find more information about avoiding foreclosure at cnn.com/paula. And tune in to "OPEN HOUSE" with Gerri Willis for more on this and other homeowner issues. That is tomorrow, you have got to get up early -- ah, not so early, 9:30 a.m. Gerri will be joining you.

"LARRY KING LIVE" is just minutes away tonight. Larry sits down with the cost of TV's "Heroes." We'll be right back.

(COMMERCIAL BREAK)

ZAHN: That wraps it up for all of us here tonight. Thanks so much for being with us. We'll be back same time same place Monday night. Have a great weekend, everybody. Hope you'll be back with us at the beginning of the week.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.voxant.com

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