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PAULA ZAHN NOW

Debtor Nation: The Mortgage Mess

Aired May 18, 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: Good evening, everybody. Thanks so much for joining us.
We are spending the entire 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 anyone enjoys talking about. The idea of not being able to pay your mortgage is down right embarrassing. But millions of people are at risk of losing their homes. And they are scared.

Just look at this latest poll: 22 percent of homeowners are concerned about foreclosure, because they can't meet their monthly payments. That is one in five.

And, tonight, we're bringing it all out in the open. How did this crisis happen? Who is to blame? And how can you save yourself from going under?

Now, even if your mortgage is secure, even if you don't own a home, the mortgage crisis is already hurting you, because it is spilling over into the rest of the economy. You may not have noticed it, but we did, when the Federal Reserve Board chairman, Ben Bernanke, gave a speech yesterday acknowledging that the number of mortgage defaults is still growing. He says foreclosures will keep rising through next year. But Bernanke predicts a limited impact on the general economy.

So, how did we get to this point? And what is the crisis all about in the first place?

Well, we asked personal finance editor Gerri Willis to bring it all out in the open tonight.

(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: The Rosados received the required paperwork from their lender in order to get another loan, and -- good news here -- they have successful successfully at a fixed rate of 6.9 percent with another lender -- Paula.

ZAHN: Thank you so much, Gerri. Got a lot more to talk with you about in a little bit.

But we have to move on now and talk a little bit more about, when you buy a home, you not only want to be surrounded by people you can trust, but by professionals who know exactly what they're doing.

Well, believe it or not, some of the most important people in the process, the mortgage brokers, could be the least qualified and the least trustworthy.

Democratic Senator Bob Casey of Pennsylvania wants to change all that. He's co-sponsoring a bill that could force lenders to meet new faith and fair dealing standards.

Good of you to join us as we head into the weekend tonight, sir.

SEN. BOB CASEY (D), PENNSYLVANIA: Thank you, Paula.

ZAHN: So, how much of this disaster do you blame on unethical brokers?

CASEY: Well, I think a lot of it is, Paula -- from the research and from the testimony given in Congress, a lot of it pertains to brokers and originators.

And that's what this legislation focuses on. Senator Schumer, Senator Brown of Ohio, and I have developed legislation -- I'm a co- sponsor -- which will focus on those players. This isn't a banking problem, necessarily. It's really these independent operators, who are not subjected to the regulation of the -- in fact, the Truth in Lending Act...

ZAHN: All right.

CASEY: ... and legislation like that. So...

(CROSSTALK)

ZAHN: So, does that mean they're part of a scam?

CASEY: Well, some of them are, because they're -- they focus on people who are particularly vulnerable.

And it's not just older citizens, and not just the poor, but people who are squeezed. And they could be middle-class homeowners as well, but especially people that are desperate. They're paying high health care costs, paying high costs for prescription drugs, and are particularly vulnerable when someone comes in and says, we can get you out of this jam that you're in, but you have got to pay this -- this rate.

And they don't give them enough information.

ZAHN: We...

CASEY: Truth-in-lending requirements would force them to disclose more to -- to homeowners.

ZAHN: We certainly understand the vulnerability of someone shopping for a mortgage that might be abused by an unethical broker. But where does personal responsibility come into this picture?

We're putting up on the screen now something that I think is very telling, that only 11 percent of subprime loans are to borrowers purchasing their first home. So, what does that say about the other 88 percent who have borrowed before and who should know better?

CASEY: Well, Paula, a lot of this happens on refinancing.

And this could happen to anyone, because of the complexity and because of the pressure that's created. What this legislation will do is two things, really, first of all, to provide $300 million, new money, to -- to help nonprofit organizations that are certified by HUD, that are good at this, that are experts at not just giving advice ahead of time, or sometimes after the fact, but also being a counselor, improving communications, and also even negotiating.

Some of the research shows that homeowners, especially who are pressured, often feel a lot more comfortable talking to a local nonprofit agency that they trust than going to a bank and being intimidated by that process.

ZAHN: But, Senator, isn't this a...

(CROSSTALK)

CASEY: So, this is a way to do prevention.

ZAHN: Sorry, sir.

CASEY: I didn't hear that question. ZAHN: What I want to do is, isn't this too little, too late, when you're -- you're talking about the numbers here? You're spending $300 million to help these folks out and counseling them. This is a $164 billion problem.

CASEY: Well, I think we have -- we have got to deal with the reality as it stands now.

It's not too little, too late, for this reason, Paula. A lot has happened already. A lot of people have been adversely impacted. But the rest of this year, 2007 and 2008, could be a lot worse. This is an effort to get ahead of it and to do some prevention on the front end.

And, if -- if Congress can get this legislation passed, it's very important. But then we have got to partner with -- with banks and the -- the Mortgage Association, the -- the American Bankers Association, and other organizations, so, they can put up money.

And we're asking for a match, a 2-1 match. If they do that, and they work with Congress, we can help not just hundreds of thousands of people, but upwards -- closer to 900,000 people. And that's big-time help for a problem that -- that could be getting even worse.

ZAHN: Senator Bob Casey, we will be watching this from here with a great deal of interest. Thanks so much for your time tonight.

CASEY: Thank -- thank you, Paula.

ZAHN: Now I want to welcome, and welcome back, CNN personal finance editor Gerri Willis, who is joined now with "Barron's" magazine's associate editor, Michael Santoli, and Terry Savage, syndicated financial columnist for "The Chicago Sun-Times" newspaper and author of "The Savage Number."

Welcome to our team, the first time that, Terry, we have had on -- you on as well.

(CROSSTALK)

ZAHN: So, Gerri, I really want you to analyze what Senator Casey just had to say. He talked about the unethical brokers and the fact that -- that many of these consumers are either misled or woefully uneducated about this conundrum here.

WILLIS: Well, you know, I think it's a cop-out to say that, you know, you know, consumers are all to blame here.

Look, there are hundreds of types of mortgages out there. It's really difficult, even if you have bought a home before, to understand the mortgage environment.

And I have been in living rooms, I have been in the kitchens with these people who have been cold-called repeatedly by mortgage brokers, who are convincing them that some toxic loan is in their best interests. They think, even when they're done with the transaction, that they have got a fixed rate of interest, when, in fact, they have got a loan that is going to reset over and over and over again, with possibly no caps. I have got to tell you that people have to step up and take responsibility for this, and really make the consumers whole.

ZAHN: So, who do you blame, Michael?

MICHAEL SANTOLI, ASSOCIATE EDITOR, "BARRON'S": It's the psychology of every financial boom which actually fed into all this. It breeds excesses and abuses.

Both the borrowers who actually had in their mind that housing prices do nothing but go up 10 or more percent every year, that went into their calculus of what they could afford, didn't take the time to figure out if they could actually afford the debt loads and the payments when they got reset to a higher level. So, really, there's plenty of blame to go around.

And I think is it that psychology of a boom. When it ends, you always see exactly how aggressive and how abusive, in some cases, people have been.

ZAHN: Terry, let's talk about the roots of this problem, because, as this was coming to a head, subprime borrowers represented, what, one in five new mortgages?

TERRY SAVAGE, FINANCIAL COLUMNIST, "THE CHICAGO SUN-TIMES": Oh, in many areas, more like 30 percent or 35 percent. It depends on where it was.

And -- and I want to add to what Michael said. He was so right. But what, in addition, was to blame was greed. That was plenty of greed to prey on the ignorance of consumers in this new, very complicated era. And it was the original mortgage brokers, you know, those unregulated people who went and got bonuses of $500 or $1,000. They're sitting on their yachts now paid for with the homes that people are losing.

They sent those to the mortgage companies, that were -- then sold those mortgages to larger financial services companies, who didn't sit on them, like your friendly local bank, so you could talk to them. They packaged them up, securitized them, divided them up. It was like a stew. Put the carrots, potatoes, peas, and meat in, put it through the blender, and divide it up.

And that all went out to investors, who were very glad, in an era of low interest rates, to get something that yielded more. So, there's a lot of incentive and greed along the chain all the way.

ZAHN: All right.

So, now that we know what is happening throughout the whole food chain, what is it that people can do to avoid getting in this mess?

WILLIS: Well, you're not -- you don't have any power at all.

I mean, you can help yourself out. First, you have got to shop around. You know, if you're out there looking for a loan today, you want to get three offers from three different lenders. Ask them for their APR. This is annual percentage rate. This simply combines the interest rate and fees into one number. That means you can compare all the loan offers to each other. Makes it easy to do.

And, of course, you have got to know your credit score before you go shopping. You can get that at MyFICO.com. Now, if your credit score, 650, below that, you know, take a time-out. Make your credit score look better. Pay off those credit cards, and then go back and try to get a loan.

I have to tell you, Paula, it's tougher now to get a loan, because the bankers are all tightening down. You are really going to have to make that credit score look good.

ZAHN: All right, trio, we have got...

SAVAGE: Paula?

ZAHN: Terry, I have got to move on, but you can hold that thought...

SAVAGE: OK.

ZAHN: ... because we have got a couple more segments coming up. And I know you all have a lot of information out there for our audience tonight.

Coming up: What kind of people are taken advantage of the most? They're like the woman we're about to meet. She barely understands English.

(BEGIN VIDEO CLIP)

ISABEL FRIAS, LOST HER DREAM HOME (through translator): The day of the closing, everything was done in English, and everything was done in a rush. I was simply told to start doing my wrist exercises, that I will be signing a lot of documents.

(END VIDEO CLIP)

ZAHN: Next in our special hour, "Debtor Nation": how a woman who made only $10 an hour ended up with a mortgage of $250,000.

Then, a little bit later on: the misery of having your home auctioned off because you can't make the payments.

(COMMERCIAL BREAK)

ZAHN: Welcome back.

It is a coast-to-coast disaster, but where is the mortgage mess absolutely the worst? We are going to take you to a city that is called foreclosure central a little bit later in this special "Out in the Open" hour, "Debtor Nation: The Mortgage Mess." We have seen how millions of people got mortgages, even though their credit was poor or they made barely enough to keep up with their payments. They were the people who could afford it the least when variable-interest-rate mortgages suddenly ballooned.

And, as you're about to see, legal immigrants were especially vulnerable, people whose shaky English made them easy marks for unscrupulous lenders.

Personally finance editor Gerri Willis is back with the story of an American dream that has turned into an absolute nightmare.

This one is sad.

WILLIS: This one is sad, Paula.

You know, immigrants, just like every American, they want to buy a house. They are here legally, and many have the dream of buying a home. Now more and more immigrants are finding themselves the target of predatory lending. And they are facing foreclosure.

(BEGIN VIDEOTAPE)

GERRI WILLIS, CNN PERSONAL FINANCE EDITOR, NEW YORK (voice-over): Isabel Frias arrived from the Dominican Republic 13 years ago. She dreamed of owning a home for herself and her three children.

ISABEL FRIAS, LOST HER DREAM HOME (through translator): The hope and the dream was always based on my kids. I have always wanted them to have a yard to play in.

WILLIS: It took a decade of hard work, but, finally, it came true.

(on camera): This the house Isabel Frias dreamed of owning. And she did, only to have to leave it again eight months later.

(voice-over): In early 2005, her then-boyfriend introduced her to a friend in the mortgage industry.

FRIAS (through translator): I trusted him, as I trusted my boyfriend, as well. And one day, we sat down and he said that he could get us a loan.

WILLIS: Isabel got two loans totaling more than $300,000, far more than she should have qualified for on a $20,000-a-year salary.

ANDREA BOPP STARK, ISABEL FRIAS' ATTORNEY: She was making $10 an hour at the time she applied for that loan. And, on the loan application, it does state that she's a machine operator. She was paying $400 a month in rent. And that's what the application said. Yet, the loan was still funded.

WILLIS (on camera): Immigrants like Isabel were easy prey for rogue mortgage brokers, more concerned about making big commissions than helping their clients. FRIAS (through translator): The day of the closing, everything was done in English, and everything was done in a rush. I was simply told to start doing my wrist exercises, that I will be signing a lot of documents.

WILLIS (voice-over): A month later, the first mortgage bill arrived. And it was $1,000 more than Isabel expected, and more than she could afford.

Like many immigrants, Isabel had unknowingly taken out a subprime loan, a loan for people with imperfect credit or few assets.

ARACELY PANAMENO, DIRECTOR OF LATINO AFFAIRS, CENTER FOR RESPONSIBLE LENDING: For Latinos specifically, for the year 2005, 375,000 mortgages, subprime mortgages, went to Latinos. And, of those, we anticipate that 73,000 mortgages will fail. So, we're talking about 73,000 families that will have lose their -- their American dream. It turns into an American nightmare.

WILLIS: For Isabel, the nightmare was a downward spiral -- losing her boyfriend, her job, and, finally, her home.

WILLIS (on camera): Who do you blame?

FRIAS (through translator): Well, I'm not going to tell you that I gave the broker all the blame. I think he has 90 percent of the blame. However, I also have to blame myself, because I was ignorant. I was too trusting. I did not seek out information. I did not educate myself. And, because of that, I am also to blame for what happened.

WILLIS (voice-over): The mortgage industry's leading consumer watchdog group isn't so sure.

PANAMENO: Documents are drafted in industry jargon, in legal jargon, that, even for those of us who are college educated and who are fluent in English or native English speakers, it is difficult for us to understand.

WILLIS: Not surprisingly, the mortgage industry takes a different view.

MARC SAVITT, VICE PRESIDENT, NATIONAL ASSOCIATION OF MORTGAGE BROKERS: It's important to make sure that they are fully informed. And, if they're -- they're not understanding the process, then, they need to remove themselves from the -- from the table, and make sure that they find somebody who can help them understand the process better.

WILLIS: Now that she's $80,000 in debt, Isabel certainly understands the process a whole lot better. But she's not sure whether she will ever own a home again.

FRIAS (through translator): I hope to be able to buy a home someday. However, in the meantime, all I want to do is fix my credit, make sure I move forward, even if that means just renting an apartment, and making sure my kids are OK.

(END VIDEOTAPE)

WILLIS: Such a nice lady.

But there is hope out there. Fannie Mae and Freddie Mac have come out with a set of documents in Spanish that can guide immigrants through the home-buying process -- Paula.

ZAHN: But I assume you need more than just documents...

WILLIS: Yes.

ZAHN: ... to guide you through.

WILLIS: Exactly.

ZAHN: A lot of these folks need counseling.

WILLIS: Yes.

ZAHN: Where do you go?

WILLIS: We have got some great contacts for that. It's the National Council of La Raza. Go to nclr.org. It's a great place. You get counseling there, lots of help for people who need it.

ZAHN: And we have got plenty of help to share with our audience tonight.

Gerri, thanks so much.

WILLIS: You're welcome.

ZAHN: We will be back to you in just a moment or two -- maybe six.

So, we know how easy it is to get in over your head -- and lose your voice. What happens next when your lender forecloses? Your home is on the auction block, and you can't do anything about it. Coming up next, we are going to take you to a dramatic auction on the courthouse steps.

And then we're going to see what's happening in those very same homes, as the owners wait to be evicted, sometimes in the dead of the night.

It's all ahead on our special, "Debtor Nation: The Mortgage Mess."

(COMMERCIAL BREAK)

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

More than two million Americans are in danger of losing their home because they can't keep up with ballooning payments on adjustable-rate loans. It is 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 1930s: homes being auctioned off on the courthouse steps. It's devastating.

Deborah Feyerick witnessed this painful scene in Georgia, which had one of the nation's highest foreclosure rates just 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.

DEBORAH FEYERICK, CNN CORRESPONDENT (voice-over): 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 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.

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.

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: Sold for $75,000.

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

(END VIDEOTAPE)

ZAHN: And Deborah Feyerick 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 have just seven days to leave their homes and pull their kids out of schools.

Now, when the auction is over, it's time for the really tough job. The marshals and the movers have to start kick people out.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE: We go in. Everything comes out. Whatever is cooking on the stove, everything comes out.

(END VIDEO CLIP)

ZAHN: You probably have never seen this before. Ride along with Deborah Feyerick for eviction day -- next.

(COMMERCIAL BREAK)

ZAHN: We are continuing with our special "Out in the Open" hour, "Debtor Nation, the Mortgage Mess." We just saw the incredible scene on the steps of a Georgia courthouse where foreclosed homes are rapidly auctioned off.

But that's not even the most painful part of the process. No. Worse than seeing your home sold out from under you is actually getting evicted from it. We sent Deborah Feyerick back to meet the people whose homes have been sold in courthouse auctions and then had to go through the awful experience of eviction.

(BEGIN VIDEOTAPE)

DEBORAH FEYERICK, CNN CORRESPONDENT (voice-over): Little by little, Andrena Kelly has been packing and moving things out of the home she loves.

ANDRENEA KELLY, EVICTED HOMEOWNER: I'm going to miss it. I mean, it's my baby.

FEYERICK: It's not by choice. She's being evicted, kicked out of her home.

(on camera): What are you going to do, are you going to put the furniture in storage?

KELLY: Yes. I'll get a place eventually. I'll stay in a hotel for a little while.

FEYERICK (voice-over): Kelly, an accountant lives in Atlanta, Georgia. She's one of the hundreds in the county who have their home auctioned off every month.

KELLY" This is it. It's like next week.

FEYERICK: Come next Thursday, barring some miracle ...

KELLY: Oh, it's over. It's over.

FEYERICK: After the death of her father and other personal problems, Kelly need cash. She refinanced her mortgage, but the new higher interest rate turned out to be more than she could afford.

KELLY: Everything that I was just doing just wasn't working. The mortgage process wasn't working. And I did put it on the market.

FEYERICK: Property she bought three years ago had almost doubled in value to almost $640,000, but she couldn't sell it before the bank foreclosed.

(on camera) What are you going to walk away with?

KELLY: Zero.

FEYERICK: So nothing, not a penny?

KELLY: In the hole, really.

FEYERICK (voice-over): Foreclosures have skyrocketed across Georgia, up 67 percent last year with some 80,000 homes sold at auction. Once the house is bought, the former owner has about five weeks to get out before county marshals show up at the door.

CHIEF CLARK BODDIE, FULTON COUNTY MARSHAL DEPT.: We've actually had individuals to barricade themselves in their homes, threaten the officers and actually end up in a standoff situation.

FEYERICK (on camera): The way it works is that the marshals meet up with movers sent by whoever now owns the property. It might be a mortgage company or a private investor, for example. The marshals here say that in more than half the cases, the homes are vacated, the previous owners leaving behind things they couldn't take or didn't want to take. The rest of the time, people may stay in their homes, praying for some miracle to stop the eviction.

QUINCY ALEXANDER, EVICTED HOMEOWNER: I believe that God is going to let me keep my house, even at this time.

FEYERICK: Quincy Alexander says she was scammed when she recently refinanced the house she bought 16 years ago based on what she calls an inflated appraisal. Her mortgage jumped to $3,200 a month, an amount she could barely afford, but she says the broker told her it would soon go down. ALEXANDER: It's not my fault. I trusted these people. I had no idea that they were wronging me. I just didn't think they were wrong me like that.

FEYERICK: Her house was auctioned off.

UNIDENTIFIED MALE: Sold to the lender.

FEYERICK: She is now slated for eviction.

(on camera): What happens if that marshal knocks on your door and says, you're out?

ALEXANDER: Yeah. He's not going to have that opportunity. I believe the Lord is going to work a miracle for me.

FEYERICK: But the marshals know better.

SGT. EMMANUEL BANKS, FULTON COUNTY MARSHAL DEPT.: When we go in, everything comes out. Whatever is cooking on the stove, everything comes out.

FEYERICK: These marshals see it more and more these days, people breaking down and crying, everything they own out on the street and nowhere to go. Deborah Feyerick, CNN, Atlanta.

(END VIDEOTAPE)

ZAHN: Time to go back to our "Out in the Open" panel. That is so hard to watch unfold before our eyes. Personal finance editor Gerri Millis, Michael Santoli of "Barron's Magazine" and Terry Savage, financial columnist for the "Chicago Sun-Times." It's heartbreaking all the way around.

I think it's the marshal that should be crying right along with these homeowners. It's brutal.

So how can folks avoid being trapped like this?

WILLIS: There are steps you can take. You don't have to get to this position. You should contact your lender as soon as you think you're having trouble. That means if you've missed one payment, call them. I'm not talking about calling the guy who wrote the loan for you, I'm talking about the lost mitigation department of the lender who gave you the loan. These are the folks who are empowered to make a difference in your loan. They can help you make a change. And of course, Paula, you can do something sometimes. Some lenders will allow you to do a short sale. This is when you bring in your own buyer. Maybe you're not making the lender whole, maybe don't have enough money to repay your loan in full, but some bankers, they don't want to own your house. It's too much trouble for them, too expensive. They may accept that kind of a deal.

ZAHN: So you have to be willing to compromise when you're in trouble like this?

WILLIS: Yes, you do.

ZAHN: Terry, we saw what happened to that woman. She said her life will go on. In the majority of foreclosure cases, what happens to these people who are evicted from their home?

SAVAGE: Paula, this is so sad. I wrote about this two years ago and I said this was going to wind up in the headlines in the evening news. You want to know what's worse that adds insult to injury? If the bank sells that home and takes a loss, can't recover the amount of the loan, that person that is evicted will receive a 1099 form for the amount that was lost that was forgiven and that will be considered income and taxes will be owed on that amount.

It's going to put a lot of people in a very, very deep hole. And I think maybe as we do these stories and the magnitude of the problem is made clear, that we will see more servicing companies trying to work with the people who are in these home if they have to foreclose, to maybe offer them to live in the home and pay some rent because there is going to be a lot of displacement of nice families who never knew what they were getting into.

ZAHN: Sure. And I think this should terrify all of us because of the cascading effect of this. What could be the repercussions down the road with the foreclosure rate as high as it is?

SANTOLI: We already have a sagging housing market. Obviously there are fewer sales, prices have been going down, so far in a controlled way. But you also have a record amount of unsold homes and inventory right now. On top of that you have the foreclosure rate going up at this level.

So with banks not wanting to own the homes, they're quick sellers and obviously it could potentially drag down home values more generally. It's obviously an economic risk. I don't necessarily think it's probable that it really drags down the economy in a wholesale way, but ...

ZAHN: You're not thinking recession like some people ...

SANTOLI: I don't think that's the most probable outcome. We don't know how the summer selling season is going to go. So it's obviously a concern. What I would point out, though, is that housing price inflation was so rampant for many years. What's essentially happening is you're giving back part of the incredible appreciation in your home values over a number of years. I know that doesn't make you feel any better. People internalize the implied value of their home. So it doesn't make you feel better when the neighbor's house goes for a lot less than you thought your house was worth, but it's a process that has to work its way through the system.

ZAHN: So how worried is the government about this or this administration as we're heading into another election cycle?

SANTOLI: They're pretty worried. I think the financial authorities, the Federal Reserve, etc, it's considered to be the number one economic risk that's foreseeable right now for the remainder of the year. It's the thing that Fed is most on alert about, the thing the government is most on alert about. Right now, I think they're satisfied that it's contained, the job market is OK, it's not weakening in line with housing and the auto recession. So I do think right now people have their fingers crossed.

WILLIS: Have their fingers crossed -- I don't care about if the politicians are sad about this. Do you know that there's a foreclosed home in your neighborhood, it takes one percent off your value of your home. Even though you've had a fantastic loan, you've been making your mortgage payments, it hurts you and one percent doesn't sound like a lot, but you add two and three in and suddenly you're talking about, where did my appreciation go? I don't know.

ZAHN: Terry, final thoughts about how easily you can get caught in this maze.

SAVAGE: Well, this is a very difficult problem. We've seen this as the economy modernized. There were all these choices. I want to mention a great Web site, a consumer oriented mortgage Web site called freeratesearch.com put up from the consumer perspective to give individuals access to comparing rates and deals around so you won't get caught in these traps.

And finally, there is going to be an issue with home prices. They're down 4.5 percent from their peak now. It usually takes consumers about 18 months, will the summer selling season work? And when everybody decides they'll have to get out is when they'll see the big decline. So I'm afraid it's not over yet.

ZAHN: Buyers and sellers, forewarned.

SAVAGE: Yes.

Thanks, we'll be coming back to you all in just a moment.

There is one community that has been hit harder by the mortgage crisis than just about any other place in the country.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: Probably the elements of the perfect storm took place and many of these homeowners, unfortunately, used their house as an ATM.

(END VIDEO CLIP)

ZAHN: Coming up next, we're going to take you to Ground Zero for foreclosures. You're going to be stunned by these numbers.

(COMMERCIAL BREAK)

ZAHN: More now of our special "Debtor Nation, the Mortgage Mess." Welcome back. We're bringing out in the open the desperate and frightening situation for millions of people who are swamped with debt and can't afford their mortgages. This crisis affects the whole country. But we're about to take you to a community where things are so bad that some people call it foreclosure central. Ooh, not what you want to be called. Personal finance editor Gerri Willis was there not too long ago.

WILLIS: That's right, Paula. Foreclosure rates in Colorado rose to the highest level in the country last year. And one city in particular felt the pain. That's Greeley, Colorado. Now the town is still a long way from a full real estate recovery. But folks there aren't waiting for the crisis to get worse. They're trying to help the 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 homeownership has been shattered.

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

WILLIS: 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: Stuck ultimately led to foreclosure. For one in every 165 degree Greeley households in April. Countywide last year, it was 1 in every 37. On this street, it seems like every other home.

(on camera): There are a lot of houses here, a lot of houses that are actually in foreclosure.

(voice-over): Across town, it's 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 will 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 it -- I don't think I will be able to, though.

Just not enough time and too much to move.

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

UNIDENTIFIED FEMALE: Thank you for calling the Colorado foreclosure prevention hot line. WILLIS: Twelve-thousand calls have poured in over the first six months. The results? Four out of five people who met with a hot line 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're 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've 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're not going to 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 slow but sure.

(END VIDEOTAPE)

WILLIS (on camera): We checked back in with Dottie. She did make her deadline and she was able to take all of her belongings with her. But I've got to tell you, to be there and to see her go through this, Paula, it was just heartbreaking.

ZAHN: It's heartbreaking and she had so much pride. I think that's what makes it even harder to watch and to have to learn that lesson so late in your life. It's too bad.

Stay with me, Gerri. A lot more to talk about. So how can you limit the damage? We want to go back to our panel for some important information on how you can avoid getting trapped in this mortgage mess.

And if you happen to be already caught up in it, how you can get out of it. Stay with us.

(COMMERCIAL BREAK)

ZAHN: And we're back with our special hour, "Debtor Nation, the Mortgage Mess."

Let's go back to our panel for tonight's "Biz Break" and a look at what you can do to avoid getting trapped in this crisis and what to do if you're already in trouble. Here again, personal finance editor Gerri Willis, consider her yours tonight. Michael Santoli and of "Barron's Magazine" and Terry Savage, financial columnist for the "Chicago Sun-Times."

All right. Some final tips for all these folks out here who, by this part of the hour, are pretty concerned about what they've heard tonight.

WILLIS: Right. If you are worried tonight that maybe you have a toxic loans and maybe you're in for some very high interest rates that you can't afford, the solution right now is easy. This weekend, pull out your mortgage documents and check the details. The fine print on the interest rate you have, the caps, how high that rate can go up and the mortgage resets. That's the information you need to know. Where is my interest rate going? What am I on the hook for? Then look for this language. Prepayment penalty. A lot of people who got subprime loans, Paula, also are on the hook for prepayment penalties that could cost them thousands of dollars when they refinance, and you may not know that, so you want to look for that phrase.

And finally, get a new loan, a 30-year fixed rate loan. Mortgage rates are still low, low, low. It is a good time to refinance if you can.

ZAHN: Now, everything that Gerri is talking about means you have to read the fine print in your documents. And I find it pretty astonishing that over a third of folks who are getting these loans have no idea what kind of loan they have. And I don't mean to say that in a disparaging way.

SANTOLI: Certainly, yeah.

ZAHN: These things are really hard to understand.

SANTOLI: They are. And I think ultimately that's the fix as opposed to going to banks and saying, don't make this particular kind of loan. Making much more clear in terms of disclosure what these loans entail. What the terms are. Essentially making it plain English as opposed to essentially legalese. And I think that ultimately what people have been talking about for at least a soft fix for the interim term.

ZAHN: And what is your best advice that you can hand out tonight, Terry?

SAVAGE: Well, many of these people won't be able to refinance because they don't have any equity left in the home. They didn't in the first place and now the home value is down. First of all, there are wonderful organizations in every community, NHS, Neighborhood Housing Services, Neighborworks, go to an organization and get them on your side.

Call the servicing company. They're not the ones that really own your original mortgage, but they're responsible for your mortgage now and keep working your way up the chain until you find somebody who will be helpful and eventually you might get to the point where you can make them an offer. If you cannot keep the home as your own, they're going to be stuck with a lot of homes. There may be a moment where you might be able to buy the home, the person who buys the home or the lender who is foreclosing, let me stay here and let me pay you rent. It's better than you having an empty house that you can't sell. It is going to be a tough slog for people in this situation. ZAHN: And Gerri, you're warning people should really look at when they're analyzing these loans. Do you want to go above and beyond that? Some of the finer points of things to look out for?

WILLIS: Well, you know, you want to know what your rate is and where it's going absolutely. Is it an adjustable rate mortgage? Are you on the hook for fees that maybe you didn't expect? It's all of these details that are important. If you had somebody help you get the loan, a mortgage broker or a lender, ask them to help.

But to Mike's point about the soft solution being clearer documents, I've got to tell you, we may need more than that. The problem is so big at this point that we may need brokers to have limits and constraints. It's going to be interesting to see how Congress reacts to this.

ZAHN: Right. We were talking to Senator Casey at the top of the hour, and he's hoping that if this bill finally gets passed that it will require a discipline on the broker's part. But that's not going to do anything to stop brokers from being unethical.

SANTOLI: No, it won't. Therefore, one of the principles people have to follow, if you're looking to buy a home, you can't stretch to barely afford the introductory teaser rate payment. That's what a lot of people did. They wanted to buy more house than they could truly afford. So yes, obviously, mortgage brokers are always going to try to basically go on from one deal to the next, so the educated consumer principle probably applies here.

ZAHN: And we should remember, Terry, the more exotic the loan, of course, the more the broker makes, right? Quick final thought.

SAVAGE: Absolutely. You need to understand this yourself. You need to get help. There is help out there. Whether you're now in the market for a home, and it's more affordable, Mike's advice is right. Don't stretch. And if you're caught in the switches, don't just sit and wait. Be proactive. The person who complains, who offers a solution, who shows they're willing to help just might get a deal from the lender. You want to be that person.

ZAHN: Well, I want to thank all three of you. I think you gave us a lot of very useful information tonight. Three personal finance editors here on a Friday night. That's great.

WILLIS: That's a record.

ZAHN: Coming up at the top of the hour. LARRY KING LIVE. Larry's guest is playboy founder Hugh Hefner. Yeah. He's still having a good time at his age. We'll be right back.

(COMMERCIAL BREAK)

ZAHN: And that wraps it up for all of us tonight. Thank you so much for joining us for this special hour on the mortgage mess. I want to thank my panel tonight. Gerri Willis, Michael Santoli, Terry Savage. Again, thanks for dropping by. Have a great weekend, everybody.

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