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Open House

How Will Presidential Candidates Affect Your Bottom Line?; Mortgage Broker Rehab; Another Blow to Housing Market

Aired January 19, 2008 - 09:30   ET

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

JOSH LEVS, CNN CORRESPONDENT: Well, there's a big team. We have teams in all the states themselves, and also in D.C. and also here at headquarters on cnn.com so everybody combines, everybody all over the country who's part of it sends in information and it goes through all the processes and then it gets sent out to everybody who signs up for it.
T.J. HOLMES, CNN ANCHOR: Magic Johnson didn't do too bad as rookie for the Lakers, actually.

LEVS: He uses a story from that in the ad about how as a rookie he pretty well and even then he had to learn his lesson that he shouldn't be leading the team.

HOLMES: He led beautifully, are you kit kidding?

LEVS: Anything could be twisted.

HOLMES: All right, Josh, we appreciate you. And folks, you, of course you can stay with CNN and next hour we're going to take you to the Sundance Film Festival.

SUSAN ROESGEN, CNN ANCHOR: Yeah, and it's not all politics. And we do have the best political team on television. We've got the live coverage of the South Carolina primaries and the Nevada caucus.

But first, we've got OPEN HOUSE with Gerri Willis talking about economic news that's so important for not only the candidates, but for you and me.

HOLMES: All right, and that starts for you right now.

GERRI WILLIS, CNN HOST: Hello, I'm Gerri Willis and this is OPEN HOUSE, the show that saves you money.

Coming up, how will the presidential candidates affect your bottom line? We'll tell you about it.

Then mortgage broker rehab. That's right. Some are changing their focus from profit margins to client counseling.

But first, another blow to the housing market, a government report out shows that construction of new homes plunged 14 percent last month to their slowest pace in 16 years.

As the mortgage meltdown spans across the nation, few areas have felt the pain the state of Michigan has. I visited the Detroit area this week and I can tell you, it is a tough situation.

(BEGIN VIDEOTAPE)

WILLIS (voice over): Kimberly Sikorski is about to lose her home near Detroit, Michigan to foreclosure. Her $900 adjustable rate mortgage went up to an unaffordable $1,300. With job losses in the Detroit area, there's less demand for her services as a manicurist. And her home has dropped in value by nearly $40,000. So, she can't sell it for enough to pay off the mortgage.

KIMBERLY SIKORSKI, FACING FORECLOSURE: It's very sad because I worked very hard for what I have and I love the community that I'm in and it's very sad for me to think that I have to leave.

WILLIS: Sikorski is not alone. The Detroit area has the fifth higher foreclosure rate of any metro area the U.S. Job losses in the auto industry has helped fuel a 7.4 percent unemployment rate in Michigan. Coupled with rising mortgage rates, the housing market has tanked.

Real estate broker, Ralph Roberts, showed us that even upscale communities have been hard hit. This subdivision has eight foreclosures on just one street.

RALPH ROBERTS, REAL ESTATE BROKER: This neighborhood here, a house that was originally sold is now selling for 40 percent less than it was a year ago.

WILLIS: In fact, a Michigan Association of Realtors report shows the average home price in Detroit was $39,000 in November, down from $62,000 just a year earlier. The Center for Responsible Lending estimates the Detroit metro area has lost more than $1.7 billion in home values and decreased tax revenues. Roberts says the area needs to take dramatic steps for recovery.

ROBERTS: We need to work together, put a task force together here in metropolitan Detroit and come up with a plan with the business people and the real estate people and all work together to bring more companies and jobs here.

WILLIS: The mayor's office says Detroit has lured seven new hotels and three new casinos to the city in the last five years. But economic development takes time and for people like Kimberly Sikorski time in her home is running out.

(END VIDEOTAPE)

WILLIS: So, what is Detroit doing about the foreclosure crisis? Well, let's go straight to the source. Joining us now the Detroit mayor, Kwame Kilpatrick.

Mayor, thank you so much for joining us. We appreciate it.

MAYOR KWAME KILPATRICK, DETROIT, MICHIGAN: Thank you, Gerri, for having me. WILLIS: You know, I want to show our viewers some of the numbers we have been looking at about Detroit, in particular these foreclosure numbers, really painful. One foreclosure filing for every 138 households in Detroit. That's high. What can you do about it? How are you dealing with it?

KILPATRICK: Well, it's the toughest thing I believe that we've had to deal with. This is bigger than the economic transition that we went through in the 1980s with automation. People are losing their homes here and unfortunately, unfortunately, there's no magic wand, there's no silver bullet.

What we're doing is, we have a whole neighborhood preservation task force that's gone out. We're funding it with additional dollars that we get from our casinos and other places, we're doing some different creative programs with senior citizens using a mix of federal and state dollars to keep people in their homes, but mostly we're working with the banks and mortgage companies which have been very slow to work with us on this issue to try to keep people in their homes.

We would rather have and they would rather have people staying in their homes than that home going back to them and it's been tough.

WILLIS: Wow, you say the lenders are not all that cooperative. It seems to me at some point it's doing to be in their best interest to do something. Is there any way you can motivate them to help?

KILPATRICK: You know, as a body the U.S. Conference of Mayors is really going to deliver that message. We had a meeting here, U.S. Conference of Mayors meeting on the issue of foreclosure and we delivered that message to the mortgage bankers, unfortunately a lot of people that participated in that meeting were not the culprits that we want to go after.

And so, I'm not real hopeful that a lot of those companies that we really need to get to are going to help us out. But, at the same time it's in their best interests that they do something about this.

WILLIS: You know, in Baltimore, and in Cleveland, those cities are suing lenders, right now. Why don't you do that? Would that be a solution?

KILPATRICK: Well, as an alternative, we started to put together information, we're seeing that, you know, one is based on predatory lending, the other one is Cleveland is based on unscrupulous lending which will probably be a new lexicon in law now around the country. I commend both mayors for moving in that direction. We're now compiling information to figure out what's going on here.

As you know, Detroit is predominantly African-American. For a predatory lending has been an issue here for years, we move away from strict predatory lending problem, because 1.2 million or more whites are now in foreclosure.

But you know, predatory lending has turned into unscrupulous lending and so we're looking at all of the data right now to figure out how do we position this in a court of law. I would much rather work with the banks to figure out a solution where both of us can move forward together. They don't want the house and I don't want to start code enforcing them to death to keep the houses up so we can have a vibrant city.

WILLIS: Of course, it's more than just lenders who are the problem, here, obviously. Detroit and Michigan as a whole have a lot of economic problems that seem intractable. What can you do? I know you brought Quicken Loans to Detroit, but what else can be done to improve the economic base of the city?

KILPATRICK: Well, first of all, let me just make a distinction, our state government has about a billion deficit, the city of Detroit is balanced. We built seven hotels in five years, we're doing $2 billion in riverfront development. Not just Quicken Loans, but the Cadillac Center, we just opened up a brand new $833 million casino complex at MGM with average salaries is $50,000 and we have 2,500 people working. We're continue to move our economy forward here.

Just coming up over the next 60 days, I have what we call the Detroit economic stimulus package where we're going to take some dollars and do some different things with.

So, we're fighting, the problem is Michigan saved this country in the 1940s. I mean, we built the weapons in World War II that did it. We need a stronger more aggressive and tenacious focus by our country to help Michigan as we go through this economic transition.

WILLIS: You need some federal help, but you're continuing to fight. Mayor, thank you for being with us today. We appreciate it.

Coming up on OPEN HOUSE, mortgage broker rehab. We'll show you how some are changing their ways. Then the next president will have a very big impact on your bottom line. We'll tell you the candidate's plan for your money. And the biggest money blunders you should avoid. But first, hey, bit of trivia.

Do you mean how long a foreclosure stays on your credit report? Is it two, five, seven or 10 years? Reality check is next.

(COMMERCIAL BREAK)

WILLIS: Mortgage brokers get blamed a lot in the mortgage meltdown, sometimes rightfully so. But as with anything, there's always the exception. We found a group of mortgage brokers making the transition from hunting profit margins to client counseling.

(BEGIN VIDEOTAPE)

BRUCE MARKS, CEO, NACA: Virtually everybody here is a broker, right?

WILLIS (voice over): Many in this class are trained mortgage brokers, but what they learn here is much of what they know is wrong.

MARKS: Brokers were in an environment where in order to survive in their company hay they had to rip off the homeowner.

What is a NACA product and what are the terms of that?

WILLIS: Bruce Marks is the founder of NACA, the Neighborhood Assistance Corporation of America. He says many of the brokers who now work for him were taught that profit margins are more important than finding the right loan author their clients. Robin Davis was one of those brokers.

ROBIN DAVIS, MORTGAGE BROKER: You did have quotas, you had to have numbers, you had performance reviews, you had your managers running around, you know, hollering, you know, book a loan, get on the phones. Why aren't you on the phone?

WILLIS: Davis worked for one of the largest subprime lenders in the nation, making loans to people with weak credit for few assets.

DAVIS: We were taught that if you had low scores, that you pretty much weren't worthy enough to get a good rate.

WILLIS: A good rate or a mortgage where the interest rate was fix.

DAVIS: We had basically just their products, which was ARMS, they did have a couple of fixed products but it wasn't pushed, you know?

WILLIS: Adjustable rate mortgages which had initial low teaser rates that could double or even triple.

MARKS: These are strangulation ARMs which means no matter what happens to the prime rate, they're always going to go up and not go up by one or two percent, go up by five or six percent sometimes eight percent to 11 or 12 percent.

WILLIS: These types of loans were pushed by Davis and other brokers.

DAVIS: Everyone was hired with zero experience. I really, truly felt that I was helping people. But as time went on and I started getting more educated on programs and yield spreads and maximum charging from the state, I realized that we're charging the maximum on every single loan.

WILLIS: So she got out.

DAVIS: So, I couldn't do it anymore. I couldn't knowingly give someone a 12 percent interest rate or a nine percent to 12 percent when they could go somewhere else and get six, seven.

WILLIS: But instead of turning her back on the industry, Davis like some of her peers, came to NACA, a nonprofit mortgage broker and advocacy group.

MARKS: We have one product, we counsel people into that one product. Always a 30-year fixed, it's always one percent below market.

WILLIS: Here, the focus is on counseling people into loans they can afford.

MARKS: We might have to work with somebody maybe for a week or two because they're all ready or we might have to work with someone for six months...

WILLIS: And brokers get paid a flat fee for every loan they close.

DAVIS: It's a nice living. It's an average American living, but it's not nearly what I was making screwing people over.

(END VIDEOTAPE)

WILLIS: I want to answer some of your questions. Deb from California asks, "Can you give me a clear definition of subprime loan and what the difference is from a prime or a regular loan? Also how can I tell if I have a subprime loan?"

Well, Deborah, subprime loans typically made to people with sub par credit. For the extra risks the lender makes to someone's whose credit is not pristine the lenders charge higher interest and fees. Now, you won't necessarily know if you have a subprime loan, it's not like lenders advertised the fact that they were making these loans.

However, if you had a credit score in the mid to lower 600 when you look out the loan, chances are it was subprime. Other singles, your interest rate was significantly higher than advertised rates and your loan documents say you're on the hook for prepayment penalties worth thousands of dollars if you refinance shortly after taking out the loan.

Robert in Virginia writes: "I purchased a home in April 2007 with a 30-year fixed rate at 6.5 percent. Currently the 30 year fixed rate is six percent. Do you see the rates falling more within the next 18 to 24 months? Also, when is a good-time to refinance?"

Well, usually a refinance makes financial sense when the new interest rate you can get is at least a half of a percent points below your current rate. Given that, it probably makes sense to refi (ph), you'll want to shop around for the best rate and the lowest fees. But refis, hey, they aren't free. You'll pay two to three percent of your loan balance for the privilege of locking in the better rate and most banks require that you have at least 20 percent of equity in your home.

Keep those e-mails coming. Send your thoughts or questions to openhouse@cnn.com.

Still ahead on OPEN HOUSE, the presidential candidates and the plans they have for your money. We'll break it down for you. Then, the biggest mistakes people make with their money and how you can avoid them. But first, your mortgage numbers.

(COMMERCIAL BREAK)

WILLIS: Super Tuesday is less than two weeks away and the candidates are talking about ways to kick-start our economy. Here to talk about what the candidates' tax plans means to you is Donna Levalley-Cocovinis, contributing editor with J.K. Lasser.

Donna, good to see you.

DONNA LEVALLEY-COCOVINIS, J.K. LASSER: Thank you for having me.

WILLIS: All right, we've six candidates, three minutes, let's go. Let's start by talking about Hillary Clinton. Now, she has suggested a $70 billion stimulus package to really get the economy going, 30 billion help folks in trouble with their mortgages, 25 million to help with energy assistance out there -- you know, so many people suffering with high energy bills -- and even more, extending unemployment insurance. What do you make of Hillary's plans? How do we pay for it?

LEVALLEY-COCOVINIS: That's the question and it's going to be either selling bonds, raising the debts of what we carry as a nation, raising taxes, because she wants to reduce the top tax rate that existed under her husband's bills isn't and even more extending unemployment insurance. What do you make of Hillary's plans? How do we pay for Cincinnati.

It's going to be either selling bonds, raising the debts, raising taxes because she wants to reduce the top tax rate that existed under her husband's administration. And something like the fuel plan, well, that can't really get to people until 2010, I mean, she wouldn't take off until 2009, so I think we need something more immediate than that.

WILLIS: Interesting and I should say that the Democrats are all suggesting ending Bush's tax cuts, so they all agree on that. Mike Huckabee, though, has a very different plan. He wants to put in something called the fair tax, which would essentially eliminate the IRS. Now, is this even possible? I mean, I know fair tax and problems with the IRS, people are very upset with them, but reality or just a crazy candidate's suggestion?

LEVALLEY-COCOVINIS: Well, I think it's a suggestion and some people's dream to get rid of the IRS, but I don't think it's very likely. I think for instance, people who buy homes, sell homes, build homes, would be upset about losing the mortgage deduction and charity wouldn't be too happy about losing the deductions for those type of things, so wasn't that it's possible.

And also, you'd need retailers responsible for collecting the nation's tax. You'd have to subsidize them, too. So, it's a lot of money and it's not so simple getting rid of the IRS, because somebody has to collect it and remit it.

WILLIS: OK, so the devils in the details, obviously.

Barack Obama, let's talk about him. He's about tax fairness for the middle class. Talks a lot about the middle class and wants to use a number of tax credits to make it all happen. What do you make of that?

LEVALLEY-COCOVINIS: Well, he wants to send us some checks, $250 checks to people who are working and people, also Social Security recipients because it's supposed to offset payroll taxes.

WILLIS: What's wrong with that?

LEVALLEY-COCOVINIS: That's not bad, but it's sort of a one-time thing and the checks that were sent out by President Bush, most people either paid down debt or saved them. So, whether or not it would actually stimulate the economy in another thing. And $250, I don't know how much of a dent that could actually make in the suffering, I suppose, that people are having, would make.

WILLIS: OK. All right, so, let's talk a little bit about Mitt Romney. Now, his is a conservative blueprint. It would look a whole lot like President Bush. He wants to end Washington's spending binge, even though he was telling Michigan voters last week that he wants to go out and help them. What do you make of Mitt?

LEVALLEY-COCOVINIS: Well, you're tight, it would be a lot of permanentizing (ph) the Bush tax cuts, in which exists across the board. One of the things he's proposing is making capital gains tax free for those who make under $200,000. That would solve the kiddie (ph) tax problem, so that's very appealing. But otherwise, I think you're right, it's sort of restarting proposals that didn't actually get very far in the first round of the Bush administration.

WILLIS: John Edwards, of course, he has that tax break to strengthen the middle class, as well, and he has something very different dealing with how you pay your taxes, tell us about that.

LEVALLEY-COCOVINIS: He is proposing a system where about 50 million people would be able to have their returns prepared the IRS.

WILLIS: So, isn't that a good idea?

LEVALLEY-COCOVINIS: People would like to have a simpler ways to pay the IRS or get their refund, but having the person a who's collecting the tax preparing the refund -- preparing the returns? Sounds like a little bit of a conflict of interest to me. I don't know if I'd trust the IRS to find all the deductions that I'd be getting. It would be based on old data, so people would probably have to amend a lot to reflect that they got married or had kids.

And also feasibility. You can't directly file with the IRS at the moment and they can't accept credit cards. So, whether or not and how they'd get to the point where they could actually prepare returns, you know, to be able to directly file would be a good place to start.

WILLIS: John McCain has been anti-tax. What do you think of his plan?

LEVALLEY-COCOVINIS: His plan would require a super majority to actually increase taxes. So, it would be interesting and I don't know if Congress itself would restrain itself to raise taxes. That's one of the biggest proposals that he has.

WILLIS: All right, well Donna, thank you very much for your help today, we appreciate it. We'll continue to follow all the presidential candidates and their plans for your money on this program. And as always, stay with CNN for the best political team on television.

Coming up, the biggest money mistakes people make and you should avoid.

(COMMERCIAL BREAK)

WILLIS: We all make money mistakes, problem is sometimes you don't even know it's happening. Whether it's a big investment or just an everyday occurrence, there are choices you are making right now that could cost you thousands of dollars. Amanda Walker is a senior editor with "Consumer Reports."

Welcome Mandy, good to see you.

AMANDA WALKER, CONSUMER REPORTS: Good to see you, too.

WILLIS: All right, let's start with mortgage costs. We talk about mortgages all the time, there's lots of mistakes we can make.

WALKER: There sure are.

WILLIS: Tell me how much money we're wasting.

WALKER: Oh, you could waste tens of thousands of dollars on a 30-year fixed term mortgage. And so, people think about all the funky products that were out there right now, but just researching the amount you're going to pay, your annual percentage rate, can really make a lot of difference. It can vary by as much as a point, which doesn't sound like a lot, but in fact, it can be a lot over 30 years. So, we calculated it out, we found that it can be, yes, tens of thousands of dollars you can pay in extra interest.

WILLIS: That's a lot of money.

WALKER: That's a lot of money.

WILLIS: I mean, that's just something you don't want to do.

WALKER: No. So, you really want to do your research, you want to check with your current bank, but also with other national lenders in your area, your credit union. Shop around.

WILLIS: All right, this is one of my favorite ones, because it's so subtle and most people don't understand the cost of divorce and you say a divorce war even more costly?

WALKER: Yes, it certainly could be, up to $200,000 or so depending on how much litigation you go through. No, this is kind of a toughy because you're getting divorced, you're probably not getting along. But, if you can get along and actually use a mediator instead, you can save tens of thousands of dollars.

WILLIS: All right, losing weight. Hey, OK, it's not just about my health now, it's about my wallet. Are you kidding me?

WALKER: It's about your term insurance. Your term insurance can be reduced greatly by just losing weight or going on some medications to control different conditions that can end up costing you a lot of money, like high blood pressure, so you definitely want to talk to your doctor before you sign up.

WILLIS: All right, you have a great fact: 45 percent of workers cash out of their 401Ks when they leave a job.

WALKER: Yeah, this shocked me.

WILLIS: Big error, right?

WALKER: That really shocked me. Yep, absolutely. You know, over time you're losing all that great compound interest and you'll be hit with a 10 percent early withdrawal penalty in most cases. So, definitely not something you want to do. You want to roll it into an IRA or into a new 401K when you get a new job.

WILLIS: How much does that cost me if I do...

WALKER: Oh, tens and tens of thousands of dollars. It depends on how much you've got invested and what if you get the early withdrawal penalty or not.

WILLIS: Here's another one people don't pay attention to, investing too conservatively. And, you know, it's a lot of really young people who are all in bonds?

WALKER: Right, that's true and especially if you're retired. When you go to retire, there's that old say, you switch more of your money into bonds, but in fact, we looked at different 25 and 30-year periods from 1940 to 2006 and we found out that it can be again, hundreds of thousands of dollars. So, you want to make sure you keep probably the same percentage, same asset mix you've got before you retire, of 70/30 or 80/20, equities to bonds.

WILLIS: Great ideas, Amanda, and thank you.

You can hear much more about the impact of this week's news on your money on "YOUR MONEY" with Christine Romans and Ali Velshi, Saturdays at 1:00 p.m. Eastern and Sundays at 3:00, right here on CNN.

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 anywhere, your top stories are next in the CNN "NEWSROOM."

Have a great weekend.

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