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Open House

Debt in America; Mortgage Fraud; Recession

Aired December 29, 2007 - 09:30   ET

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

BETTY NGUYEN, CNN ANCHOR: And these people, were they just stranded on top of their roofs.
CAPT. JIM MCPHERSON: They've never had flooding like that before, so they had no place to go. To the roofs and nobody knew how long the water was going to continue to rise.

NGUYEN: That is really remarkable to see. Why do you put out this top 10 list of the most incredible rescues of the year? I mean, what's the message here?

MCPHERSON: Well, I think it is that we -- our number one job is to save lives and we've been doing that for over 217 years. And this year it's just unique, certain, different things. We're in the rescues in the Dominican Republic, we did East Coast, West Coast, Gulf of Alaska, so we're out there every day and we just want people to see what we're doing. They are the taxpayers, they need to know what we're doing.

NGUYEN: See where their money is going and, boy, is it to a good cause. Again, 40,000 rescues in 2007 alone. That's a lot of work. And you know what, you deserve a vacation, Captain. So, hopefully you'll take a little time throughout the end of the year to sit back and rest a little bit. We thank you for your service and your time with us today. Captain Jim McPherson with us. Thanks for your time.

MCPHERSON: Thank you very much.

ROB MARCIANO, CNN ANCHOR: A great time of year to be thankful for those guys.

NGUYEN: I know. Good to have them around.

MARCIANO: Well, John McCain is on stage now in Dover, New Hampshire. We're going to go there live next hour with our Jim Acosta.

NGUYEN: But first, OPEN HOUSE with Gerri Willis starts right now.

GERRI WILLIS, CNN HOST: Hello. I'm Gerri Willis and this is a special edition of OPEN HOUSE, "Financial Security Watch." We're tracking three threats to your financial security in 2008, threats that may impact your wallet.

(BEGIN VIDEOTAPE) WILLIS (voice over): Debt, your house, recession -- three of the biggest threats to your financial security in 2008. The average family with credit cards has more than $8,000 in credit card debt, according to most estimates. The folks who ensure bank deposits, the FDIC, say Americans are spending one percent more each year than they are actually making.

SUZANNE BOAS, CCCS, ATLANTA: Americans are in love with debt and they are very comfortable carrying debt and that's good on one hand because it's a driver of our economy, but on the other hand, it can be really a problem for us.

WILLIS: Even if you aren't too far in debt, your neighbor's debt could affect you. It's a contributing factor to the mortgage meltdown that will continue in 2008. Nationwide, we've had nearly two million foreclosure filings this year and counting. And a recent study says every foreclosure in your neighborhood drops your home value by about one percent.

MIKE LARSON, ANALYST, MONEYANDMARKETS.COM: I think 2008 is going to be another ugly year for the housing market. You know, foreclosures are going to be a real issue that we're going to be deal with for some time.

WILLIS: Home losses might not be the only losses. Many economists are predicting a recession in 2008.

LARSON: The private recession, the housing market has been in for the last 18 to 24 months is definitely spilling over into the regular, you know, the broader U.S. Economy.

WILLIS: Already, consumer inflation rose nearly one percent this month. That coupled with lower consumer spending and housing troubles stokes fears that the recession could be near. That means negative growth, potential layoffs and stagnant or falling wages.

(END VIDEOTAPE)

WILLIS: We're going to start off talking about debt in America. We've put together some of the smartest minds to discuss your money. Jack Otter is with "Best Life" magazine. Lynnette Khalfani is personal finance expert and author of "Your First Home." And Mike Santoli from "Barron's" is here, as well.

Thanks guys, all of you for coming in and helping us out today, really appreciate it.

You know, we usually talk about mortgage debt on this show, but I'm going to tell you, families have all kinds of debt out there. I want to show some numbers here that will help you see what I'm talking about. Folks have almost $10,000 in credit card debt.

Look at this, total debt, $285,000 if you are looking at everything from the total mortgage debt to credit card debt, debt from going to school. Jack, let's start with you. I am wondering 2008, who it's shaping up, are people going to have to downsize their expectations?

JACK OTTER, BEST LIFE MAGAZINE: They should be. Those debt numbers prove that people need to start doing two things. One, on the spending side, obviously, they've got to tone it down. You should not be carrying nearly $10,000 of credit card debt unless you have a really good reason and, obviously, 80 percent of Americans don't have a really good reason.

On the other side of the ledger, they've just got to figure out how to pair it down. I mean, the good news is, I think, there's pretty broad agreement, which is always scary, but I think we can say with some degree of assurity that interest rates are going to come down. So, it's not as if that debt is going to get more expensive.

WILLIS: Well all hope you're right. Mike Santoli, personal responsibility. Should there be more personal responsibility for all this debt that consumers have?

MIKE SANTOLI, BARRON'S ONLINE: Yeah, I mean, it's sort predictable when you have a crisis like this you do have people screaming for the authorities for a bailout for salvation. Obviously, people have to take responsibility for what's on their personal balance sheets. And yet, the solutions that are being proposed here, let's point out, are really not relieving most people of that personal responsibility, despite what the politicians are screaming for.

WILLIS: We'll get to that in a second. Lynette, I want to talk about, though, about credit card debt, too. This is out of control. Come one. You know, we've talked a lot about credit cards this year, and the rules around them. Congress is talking about them, is this just too much, too high interest rates that are being charged, too bad rules?

LYNNETTE KHALFANI, AUTHOR, YOUR FIRST HOME: I mean, I think there's a lot of things. Yes, the interest rates on some cards are quite exorbitant, especially when you look at universal default kicking in and penalizing customers for being late on one card and charging them higher interest rates for others.

Default rate, obviously, tend to kick in when you're late on a payment by even as much as an hour. And then when you look at the overall statistics on consumer debt, we've got a record $2 trillion in the aggregate in consumer debt, most of which is credit card debt. So, clearly, the debt situation has gotten out of control.

WILLIS: Mike, you know, come on, Wall Street is encouraging all of this to happen. They are securitizing this debt, they're selling it to other folks, whether it's your credit card debt or your auto loan, it doesn't matter.

SANTOLI: It doesn't matter. No, look, we have an economy for better and for worse where we allow the industry to essentially go to excess. And you do have this prolonged period of low interest rates and financial -- I call it financial sinovation. You know, the next new thing out of Wall Street, but it's always going to hurt somebody down the road. Yes, obviously, we have this machine for churning out new types of debt. It looks like it's finally kind of ground to a halt temporarily, though.

WILLIS: Jack, you know, look at consumers out there, they're responsible for so much of GDP. You know, we rely on consumers to spend out there. Can we continue to rely on that or are they just going to totally drop out next year?

OTTER: Well, as you well know, people have been predicting the end of the consumer boom for how many years, now? And it's just not coming. I mean recently, finally people said, "uncle." OK, now the consumer is going to stop spending. And then the most recent numbers actually suggest an uptick. So, it's extraordinary.

But, I think mike touched on an interesting point, though, the sinovation point, which is that credit card companies really don't care if you don't pay your bill. They are looking at their margins on millions and millions of loans. So, if 10,000 people declare bankruptcy, hey, as long as they get 17 percent interest rates from the rest of them, they're...

WILLIS: They're more focused on their bottom line than my bottom line. but your best advice, Lynette, for people who feel they're pressed against the wall with debt. What should they do first?

KHALFANI: I think they should negotiate. You know, a lot of people don't know very basic things you can do. Call up your credit card company and ask for a lower interest rate.

WILLIS: I've done that. It works. I'm here to tell you.

KHALFANI: Three out of four customers who do so, actually get that lower rate right on the spot. It's theirs for the asking. They don't know about it. Even with auto loans, believe it or not, you can refinance your auto loan if you've got good credit, of course. And a lot of people can save $100, maybe even $200 on those high monthly payments. So, don't be afraid to negotiate.

WILLIS: You know, that's one of my sticking points, I've got tell you. People spend so much on cars these days. And, you know, what they spend on cars now, they used to spend for houses. Have our expectations just gotten totally out of line?

KHALFANI: Absolutely, I talked to a woman literally yesterday who e-mailed me about her financial problems. I talked to he on the phone, she has a mortgage that's $1,200 a month. Her car payments for her, her husband and her two children, $1,800 a month. I said, listen, you should be living out of those cars at those prices.

WILLIS: Wouldn't it be nice if they had a bathroom and a bed, right? Listen guys, we're going to come right back to you in a second. Stick around. We've got a lot more to talk about.

Up next, on this special "Financial Security Watch" edition of OPEN HOUSE, solving the security meltdown. Plus, how not to be a victim of foreclosure fraud. And the question we're all talking about: Will there be a recession or is there one now?

(COMMERCIAL BREAK)

(BEGIN GRAPHIC)

UNIDENTIFIED PERSON: One out of five (19.4 percent) subprime loans issued during 2005-2006 will fail.

(END GRAPHIC)

WILLIS: All right. Over 1.2 million people who took out adjustable rate mortgages are now in danger of losing their home. Officials in Washington started to take notice with plans to freeze interest rates, counseling services, fed cuts and proposals to regulate the mortgage industry. But is it enough? Back now with Jack Otter, Lynnette Khalfani, and Mike Santoli.

OK guys, there's every possible mortgage meltdown solution out there on the table. Mike, I'm going to want to start with you. The fed came out, they said we've great ideas for changing the rules and they were pillaring with criticism. Why?

SANTOLI: Well, one reason is that these rules are aimed at choking off an industry that's already basically died. The aggressive subprime mortgage offerings really have not been on the market for recent months.

So, basically telling banks and lenders they have to make sure somebody can afford a loan before they give it to them. They've already kind of done that by force on their own. That's why it doesn't seem that it's currently directed at the real problem or really an immediate future problem, but more long-term trying to set rules for the industry.

WILLIS: Right, it's really forward looking and not in the rearview mirror.

SANTOLI: It's for the next cycle.

WILLIS: You know, though, Jack, the president's plan, the agreement with the private industry to come together and make new rules, you know, do things just a little differently is forward looking. It's supposed to help some people. Is it enough?

OTTER: No. And the reason, I think, is because of the dynamic that has existed literally for centuries between the borrower and the lender. It all went away in about '04. You know, it used to be if I lent you money, I really wanted you to pay that back because I was on the hook for it. Well, what happened with the subprime mortgages is I was just looking for the fee. I farmed out the risk to investors all around the world.

There's a town in Finland that is hurting right now because of its subprime exposure. But the point is, since I no longer care whether you pay me back, I just want the fee, I don't hold you to a responsible lending pattern. As long as I get you that teaser rate, which gets you in the door, I can bump it up to 12 percent two years later, but I'm out of the picture. WILLIS: But nobody told the consumer, they were just out of the loop. There was no information to them, Lynnette, is that fair?

KHALFANI: Well, I think we have to look at both sides. Some consumers really did know what they were getting into. Let's be honest. We had those so-called liars loans, the stated income loans, the ninja loans, you know, no income, no job, no assets that kind of thing. And so, yes, I do fault some consumers.

But at the same time, if you look at what's happened with the mortgage brokers, you know, slapping on commissions, yield spread premium that frankly a lot of customers have no clue about, you know, that is egregious and predatory lending standards, obviously, need to be raised and enforced.

WILLIS: Right. Well, you know, OK, here's my big question, though: OK, FHA Select came out in August, we've had something from the fed, Congress is figuring it out, obviously, something coming out from treasury. Why did it take so long -- Mike.

OTTER: It always takes so long. We always actually wait for the disaster and then we pick up the pieces. I'm not saying it should happen that way, but it really does. Forever it's happened that way in the country. We sort of wait and you know, if two years ago somebody came up with these proposals they would have said, but you're going to keep people out of their first home.

It looks like -- you can always spin it both ways. You had the banks saying we have to participate in this flow of business and you had the regulators saying we have to allow people -- the homeownership rate is going up, isn't that a good thing?

WILLIS: Yeah, well I want you to hear what Secretary Paulson said when he talked about his plan for getting this problem solved. Listen to this.

(BEGIN VIDEO CLIP)

HENRY PAULSON, TREASURY SECRETARY: This plan is not a silver bullet. It can't undo the excesses in the housing market over the last number of years. It can't undo the bad lending practices. But this is, I believe, a creative solution by the private sector to make a difference and to handle the number of resets that we have coming in a fair and expeditious way. It's not perfect, but I haven't heard any better ideas.

(END VIDEO CLIP)

WILLIS: Lynnette, I want to ask you this question: OK, so the industry created the mortgage meltdown and we go to them for solutions. Why?

KHALFANI: Well, I don't think that's a reasonable expectation in terms of, you know, going -- It's like the wolf guarding the hen house there, so to speak. But at the same time, I think one of the biggest problems with this solution that's been offered, that frankly not a lot of people have talked about is that, A, obviously, it's voluntary, it's not mandatory. And, B, it puts the onus on the consumer to first reach out to the lender.

Let's be real, here. People with mortgage problems don't do that. We already know from statistics that 50 percent of homes that go into foreclosure, the owners never talked about it -- the problem with their lender.

WILLIS: You've absolutely got to do that.

Jack, I want to ask you about FHA Select for just a second. You know, I read an article that said only 266 people have been helped by this so far. This was the president's first plan that came out. What is going on here? It seems like we've got this patchwork of solutions in no overall kind of process for dealing with the problem.

SANTOLI: Well, the rules were awfully tough. For instance, if your credit score, your FICO score, I think it was over 660, then you were ineligible for this. Which means the people that are getting it together, sorry, you aren't part of the plan.

So, it was awfully exclusionary. And I think that is true that, I mean, the people that -- the people who are smart enough not to get in a subprime mess are the ones who could probably work their way out of it and the people who aren't savvy enough, who get caught in this mess, they're not in a position to negotiate with the lender, as you said, to figure out, hey, this new plan, that's for me. I'm going to figure out how to deal with it.

WILLIS: And there's a lot more questions than answers, right now. OK, Lynnette, Mike, Jack, we'll be back to you in just a minute.

Still ahead on this special edition of OPEN HOUSE: fighting foreclosure fraud. Learn the secrets from one of the best. And once and for all, do you need to worry about a recession? The answer, just minutes away.

(COMMERCIAL BREAK)

(BEGIN GRAPHIC)

2002-2007: Mortgage Fraud Investigations up 237 percent.

(END GRAPHIC)

WILLIS: With thousands facing foreclosure, there are also, unfortunately, thousands of scam artists trying to take advantage of them. Foreclosure fraud is the fastest growing white collar crime in the country Ann Fulmer the Georgia resident who found mortgage fraud in her own backyard. She's now vice president of Interthinx, a fraud detection and prevention fraud service for the mortgage industry in Atlanta.

Ann, great to see you. I'm going to start with these scams that you've talked so much about. You say there are three types. The first one, take the money and run. What does that mean? ANN FULMER, V.P. INTERTHINX: That's kind of an advance fee scam where the fraudsters will offer, for a fee, maybe as much as $1,500 to refinance or negotiate with your lender, but you give them the money and they do nothing and just take the money and run.

WILLIS: Wow, that's depressing. OK, bait and switch. Is this pretty conventional stuff, what I'd expect?

FULMER: Yeah, in this case, the fraudsters will tell you that they will help you get a refinance into a better loan, but in the middle of all the documents that you are signing at your loan closing is actually a deed that transfers title to the fraudsters.

Once they have control of the house, they can turn around and sell it for an inflated value without you even knowing about it, they scrape off the excess money and you end up getting evicted, because a lot of times they'll foreclose on their own loans.

WILLIS: Wow, OK, if a lender says to you, "let me just hold that for you," you say that's a sign something's wrong.

FULMER: Well, I doubt that a lender would do that, but certainly a fraudster might. That's kind of a credit restoration scheme, rolled into a foreclosure rescue scheme. A fraudster might say: look, give me the title to your home for about a year. I'll lease it back to you, the rental payments will help you re-establish your credit.

At the end of the year, your credit will be better, you can get a better loan product and I'll let you buy the property back. The problem is that the rental payments are going to be higher than your original mortgage payments and the fraud ster is counting on you not being able to make those rental payments, either. You end up going into default and the fraudster forecloses, you get evicted anyway.

WILLIS: You know, I think this is so hard for people to understand. but the reality is, if you are in a situation where you could go into foreclosure, you're so panicked you aren't exercising good judgment to begin with. Are there things you can tell people out there to avoid doing if they are in this situation?

FULMER: Well, the first thing to be concerned about is unsolicited offers of help. Nobody is in this to help you out of the goodness of their heart and if you start getting e-mails or people knocking on the door helping -- offering to help you escape foreclosure process, be very, very careful.

Another thing that you can do is you can see this train coming, you know if you are going to have problems with your mortgage payments, you need to act quickly, before you miss a payment and certainly before more than 90 days or three payments have gone into default, talk to your lender.

WILLIS: Call your lender, call your lender, call your lender. That is definitely the first thing to do. You know, here's what happens. If you go into foreclosure, there's public notice and before you know it, your mailbox is full of postcards, letters from people you've never heard of. What do you do with those?

FULMER: Throw them away. Talk to your lender. Call the consumer Credit Counseling Service in your city, they are a legitimate company that can help you work your way out of these kind of financial situations.

WILLIS: Ann Fulmer, excellent advice. Thank you so much for helping us out today.

FULMER: Thank you, Gerri.

WILLIS: Up next on this "Financial Security Watch" edition of OPEN HOUSE, we'll talk about one dirty word you never want to mention on television: Recession. Should you be worried? The answer, next.

(COMMERCIAL BREAK)

(BEGIN GRAPHIC)

"Today the foreclosure crisis has the potential to bread the back of our economy, as well the backs of millions of American families..."

(END GRAPHIC)

WILLIS: Welcome back to OPEN HOUSE, "Financial Security Watch." Jack Otter, Lynnette Khalfani, and Mike Santoli. All right, let's talk a recession.

Let's start with you, Mike. Are we in a recession, now? Are we going into a recession?

SANTOLI: We're very close. The economy is probably at stall speed. We're not know it, expect in retrospect whether, in fact, overall economic growth went negative. I almost think it doesn't matter very much for the average consumer. We might have a consumer recession, a slowdown in spending without having the overall numbers go negative.

In the early part of the decade, we had only a business recession, the consumer didn't stop spending. We might have this back half of the recession coming in the next couple of (INAUDIBLE).

WILLIS: I know you disagree, Lynnette.

KHALFANI: Well, I don't disagree, but I just feel like for all intents and purposes, for the average consumer, we're already in a recession. People are struggling, as we've talked about, with higher debt levels, credit cards, auto loans, student loans, mortgages, they've got to contend with higher gas prices at the pump, higher heating costs for their homes, you know, healthcare costs that are out of control.

Everybody feels -- not everybody, but certainly a huge number of Americans already feel like they're living paycheck to paycheck. So, for their purposes they feel like they are in a recession, whether the statistics say so or not. WILLIS: Jack, you know, I think what's interesting, and you made this point, Mike, it's a rearview mirror kind of thing. We're not going to know until the middle of the year whether we went into recession. Does that matter?

OTTER: Well, I think it's kind of like a bear market. I mean, if stocks are down 19 percent versus 21 percent, you know, we all write headlines about the difference, but to your portfolio, who cares. Same with a recession, as you say, things are going to stall. I think the thing that people ought to be worried about, because this would hit them, would be stagflation. If inflation should go up, while growth slows, then that will start to hurt a lot of people.

And I think everyone looks at these inflation numbers that you see that are two percent, three percent, and you think, well, my gas, my tuition bills, my groceries, my housing. You know, as the old joke is, as long as you photo synthesize and don't eat then you don't have to worry about -- only worry about core inflation.

WILLIS: Let's be clear about stagflation, low growth, high inflation, really, the worst of all worlds. Is that possible -- Mike

SANTOLI: It's possible and I think it really is -- it would probably be below potential growth and an upward trend in inflation as opposed to absolute negative growth in the economy and double-digit inflation like we saw maybe in parts of the '70s.

WILLIS: You are an optimist.

SANTOLI: I actually just think the overall economy is really good at -- you know, Wal-Mart can't show disappointing sales below the rate of economic growth and say that everything's going up in price because Wal-Mart would have caught a big chunk of that.

WILLIS: Lynnette, if you're a consumer out there, you're worried about your debt, how do you plan for recession? What do you do? What are the steps?

KHALFANI: I think you've got to start conserving cash a lot more. You have to really shore up in that area, plan for contingencies, know that stuff happens: layoffs, divorce, medical bills. All these things impact American on a day-to-day basis. You also have to jealously guard your credit rating. Credit conditions are going to continue to be tight and not just in the mortgage arena, for auto loans, for credit cards, and student loans, et cetera, as we've discussed. So, those are the two areas I would recommend most consumers pay attention to in 2008.

WILLIS: Great ideas. Great advice. Great commentary. Thanks so much, guys. Appreciate it.

CNN's "Financial Security Watch" continues in just a few hours at 1:00 p.m. Eastern Time on YOUR MONEY, some of the best financial minds out there make their predictions for 2008, the price of gas, your investments, the economy and the election. Even a psychic will be put to the test. And I'll be joining Christine Romans and Ali Velshi, as well.

As always, we thank you for spending part of your Saturday with us. OPEN HOUSE will be back next week right here on CNN. And you can catch us on HEADLINE NEWS every Saturday and Sunday at 3:30 p.m. Eastern time. Don't go away, your top stories are next in the CNN NEWSROOM. Have a great weekend.

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