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Your Bottom Line

Homeowner Affordability and Stability Plan; Spot Investment Scam; Landlord

Aired February 21, 2009 - 9:30   ET

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

GERRI WILLIS, CNN NEWS ANCHOR: Hello. I'm Gerri Willis and this is YOUR BOTTOM LINE, the show that saves you money. Every weekend we're here to help you save, protect and build your money. On tap today, President Obama's Homeowner Affordability and Stability Plan. It's just a name, but we'll tell what you it means to your bottom line.

(BEGIN VIDEO CLIP)

BARACK OBAMA (D), UNITED STATES PRESIDENT: The plan I'm announcing focuses on rescuing families that played by the rules and acted responsibly. By refinancing loans for millions of families in traditional mortgages who are underwater or close to it, by modifying loans for families stuck in subprime mortgages they can't afford as a result of skyrocketing interest rates or personal misfortune, and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments.

(END VIDEO CLIP)

WILLIS: President Barack Obama on Wednesday announced a foreclosure rescue plans aimed at reducesing the tide of Americans losing their homes while making what the government estimates will be $1 trillion in mortgage debt more affordable to consumers.

(BEGIN VIDEOTAPE)

(voice-over): The wide-ranging program comes way price tag of $75 billion. It targets two groups: Homeowners, who because of falling real estate values owe more than their home is worth. Group two, those families caught in the wave of massive layoffs.

OBAMA: Through this plan we will help between seven million and nine million families restructure or refinance their mortgages so they can afford, avoid foreclosure. And we're not just helping homeowners at risk of falling over the edge. We're preventing their neighbors from being pulled over that edge, too.

WILLIS: The multi-pronged plan modifying loans for borrowers who are struggling to make payments and facing foreclosure. The goal:

Bring payments to no more than 31 percent of a borrower's income.

Refinance loans for homeowners currently making payments into a 15 year or a 30-year loan with a fixed rate of interest. Give bankruptcy judges the power to reduce the mortgage debt of individuals in bankruptcy.

Encourage lenders to cooperate by offering them a payment of $1,000 for mortgages that are modified successfully.

Professor Nicholas Retsinas runs Harvard's Housing Research Center.

NICHOLAS P RETSINAS, HARVARD CTR FOR HOUSING STUDIES: How successful we'll be will be in part determined with how successful the stimulus is in putting people back to work. If people keep losing their jobs we'll see more and more foreclosures.

WILLIS: On the other hand, the federal government is in a better position than any time before for influence the housing industry because it operates the largest lender to first-time homebuyers, plus, it's cash injection into the nation's lending industry gives it leverage over banks.

(END VIDEOTAPE)

While the devil's in the details and we will have more of those when eligibility requirements are released March 4. Now, the crux of President Obama's economic rescue plan revolves around fixing the mortgage meltdown. Well, something we've been talking about on this program more than years. Here to discuss the road to recovery is personal finance author Lynnette Khalfani Cox, Ryan Mack is the president of Optimum Capital Management. And Mark Zandi is the chief economist with Moody's Economy.

I have to say this the perfect panel for this conversation.

Mark, I want to start with you. Actually are, Ryan, let's go to you first. This question is particularly appropriate to you because, you know there's a question out there about is everybody being served? And there were fairness questions, really, about, you know, all of these people getting money. I pay my mortgage faithfully and I'm not getting help. This plan speaks to some of that.

RYAN MACK, OPTIMUM CAPITAL MGMT: It definitely does. And to those who have loans through Fannie and Freddie, they'll be able to get assisted by releasing or letting go of some of their eligibility requirements. So now, if you have a mortgage value up to 105 percent of your home value, you'll be able to get a refinance if you have a loan through Fannie and Freddie and for those individuals who have a modest income homes, or price levels of $417,000 and less, you'll also be able to get assistance from the government in terms it of additional help you need to pay your mortgage payments.

The bottom line is, prices are going to be decreasing, because the government's coming in and trying to assist individuals to pay those payments down.

WILLIS: Well, you know, Mark Zandi, you follow this more closely than anyone. I want to you hear a little something from the president himself about how much this plan is really going to do to turn around home prices. Listen to this. (BEGIN VIDEO CLIP)

OBAMA: It will prevent the worse consequences of this crisis from wrecking even greater havoc on the economy and by bringing down the foreclosure rate, it will help shore up housing prices for everybody. According to estimates by the Treasury Department, this plan could stop the slide in home prices due to neighboring foreclosures, by up to $6,000 per home.

(END VIDEO CLIP)

WILLIS: Hmm. So, Mark you know, big promises here that prices really stabilize, recover, and I don't know that your forecast for housing prices really calls for recovery in short order. Will this help?

MARK ZANDI, MOODY'S ECONOMY: Yeah, it'll help. It'll help stem the declining in housing values -- house prices are going to decline further but this should help put a floor under prices and hopefully bring forward the day when we find a bottom in pricing.

So it's helpful, but I think everyone should realize that we are going to experience much further price declines and that'll occur throughout most of this year.

WILLIS: Wow. So, the bottom coming fourth quarter here?

ZANDI: Yeah, with a little bit of luck. If everything comes into place, and the policy steps, are able to get mortgage rates down, get more credit out there, and the stimulus plan helps shore up the job market I think Q4 '09 would be a good baseline forecast, yes.

WILLIS: All right. OK. Well, I wish it would happen sooner, but Lynnette, you know, we've talked a lot about have the plans in the past really rewarded bad behave. I know that's a concern of yours. Does this plan speak to that issue?

LYNNETTE KHALFANI-COX, PERSONAL FINANCE EXPERT: I think it does, and frankly, President Obama was very clear in saying, we're not going to reward everybody. Everybody's not going to be helped. This plan is not for investors, anybody who has a second property. It's not for those who, frankly, got mortgages that they knew were more expensive than they could afford. That's from his own words. And so it's not going to stem the tide of foreclosures completely. You know, as Mark's data show, we've had almost 2.5 million homes slip into foreclosure last year, but it is going to make a dent in the problem.

WILLIS: All right. Well, let's talk a little bit about you know, this program that Ryan was describing at the top about, you know, if you owe more than your house is worth right now. Let's say you owe five percent over what it's really valued at in the marketplace, you're going get some help.

But, Mark, you and I both know that prices have gone down far more than that in many parts of the country, the West Coast, Florida, you name it. Is that going to put a floor under prices in those economies?

ZANDI: Well, again, it should help, if it does stem foreclosures. For homeowners able to reduce their monthly mortgage payment, which this plan will allow for, that's certainly a benefit and certainly will reduce the pressure on them and reduce the odds that they end up in a foreclosure process, but it doesn't eliminate those odds.

You know, if you are significantly underwater on your home and even with the lower monthly mortgage payments, something else goes wrong in your financial life or even if you spring a leak in your roof and that costs you another 5K, 10K to fix the roof, you may not want to do that, it may not make financial sense and still may default and go into foreclosure.

So, you know, it helps, it helps, but it doesn't solve the problem. It's not a silver bullet for those millions of homeowners out there that are really underwater.

KHALFANI-COX: And Gerri, we should note the scope of the problem, because Mark's data shows that we've 52 million U.S. homeowners and about 27 percent of them are, in fact, underwater, they owe more than their homes are worth. So, this is a big, big problem.

WILLIS: All right, well more questions I didn't get to. I'm sure we'll get to them. Stick around. Ryan, Lynnette and Mark. We'll look a bit more closely at the stimulus to see what will really create jobs for Americans.

(COMMERCIAL BREAK)

WILLIS: We're talking the mortgage meltdown, the Obama stimulus package and what it means to you. Back with us once again, Lynnette Khalfani-Cox, Ryan Mack and Mark Zandi.

Lynnette, I want to start with you, another housing question. You know, reporters across the country struggling to describe this housing package, what it mean, trying to understand it in the first place. How is this going to get communicated to homeowners out there effectively, and do you see problems really implementing this.

KHALFANI-COX: This, I think, is going to be one of biggest challenges that the Obama administration will have, because you do have to explain all this. I think they're going to have to set up a Web site, they're going to have to make it clear to people who qualifies and who doesn't. They're going to have to have a massive educational effort just to let people know do I qualify and who does own my loan? You know? A lot of people have asked me over the last 24 hours, how do I find out if Fannie owns or backs my loan? That's going to be a key point, that one question that frankly millions of homeowners have absolutely no idea about.

WILLIS: Call your lender. But, you know, just getting that out is a real problem and Ryan, you know, we had more folks claiming unemployment benefits than ever before. You know, and jobs have to be the topic No. 1 with the administration. Is this stimulus package, is it doing enough to crank up the jobs market?

MACK: Well, the biggest thing in this market right now, at least of a (INAUDIBLE) recovery, is consumer confidence. And people are just not confident in purchasing homes and spending money, because they're worried about losing their job.

So I think what it does is, it does a lot of job creating and job saving in the package by helping individual create energy jobs and essentially every dollar spent on energy job creation is $3 saved by individuals. So, it creates school construction jobs. So, a lot of individuals have more.

I don't think it creates enough jobs, but I do think it creates a lot of confidence in individuals to say, you know what? The government's behind me, going to back me. I love what Barack Obama is talking about. So, I'm a little bit more confident standing and going forward, so.

WILLIS: Mark Zandi, thought, these numbers, they're frightening, really, what's going on in the jobs market, now. Can the stimulus bill, can this housing plan, can it have a real impact on the number of new jobs being created in this economy?

ZANDI: Yeah, it will have an impact. I think -- when we look out a couple years from now, it will have resulted in a couple, three million more jobs than otherwise would have been the case. It has a benefit. There's a lot of help to state governments, local governments who would be cutting jobs and programs if they didn't get the help and also helped all of those unemployed workers who are really under significant financial pressure. Helps them with the U.I. benefits, food stamps, COBRA payments for health care. And so, that will keep them spending more than they otherwise would have, and that helps to support jobs.

But then there's the infrastructure spending which kicks in in 2010 and 2011 and that will help construction trades and manufacturing. So yes, this will help. Is it big enough? You know, if I had my druthers I would have made it bigger. I think the economy's problems are very large and need more help, but I do think it is substantive.

WILLIS: You know, what is interesting, there's lots of carrots and sticks in the housing plan for different groups, little incentives, you know, little problems for people who don't cooperate with the game plan. Let's talk a little about that home owner tax credit for just a second, Lynnette, because people saw that as really important when it was originally a $15,000, now that it's dialed back to $8,000, will it really do anything?

KHALFANI-COX: I think it will help. You know, in the Senate, the Republicans were actually the ones who were pushing to make it $15,000, but they did push through one great change, which is that you don't have to pay it back.

Before the $7,500 tax credit implemented last year was essential lay loan had you to pay back over 15 years. This new $8,000 tax credit, it it's going to bring some buyers into the market, some first-time homeowners who've been sitting on the sidelines and saying, this is incentive for me to buy, now.

WILLIS: Right. One of the big sticks in this, of course, is the cram-down provision for bankruptcy. Changes to the bankruptcy law that would allowing bankruptcy judges to write down mortgage debt. Now, to lenders this is an (INAUDIBLE). Right? But, can it make a difference?

MACK: I think does make a difference. Again, it builds consumer confidence. Before individuals who owned two and three and more homes or that, where the only ones who could declare -- write down their principle going through bankruptcy. Now if you only own one home, can you get assistance on that and use bankruptcy is an option.

Now, what they're saying, well, they're going to go into bankruptcy now and they're going to be the ones, it's almost a moral hazard. Well, individuals don't want to have to live under the observation of a creditor for five years, individuals don't want to have Chapter 13 on their credit report for 10 years in terms of time. So, this is not -- I don't consider that to be a more hazard. I do think that's an additional incentive to gave a boost in consumer confidence to people to say that we're looking out for everybody.

WILLIS: Lynnette, Ryan and Mark, thank you so much for helping us out today.

Well, whether you have a little money or a lot, you'd probably like to have more, not less. Keep your money in your hands by knowing how to spot an investment scam.

(COMMERCIAL BREAK)

WILLIS: The Bernie Madoff scandal served as a wake-up call to all investors. And the Stanford financial scheme announced just this week could be as big. So, whether you're a big-time investor or just looking to jump in, you need the telltale signs your investment mighting a scam.

Steve Weisman is an attorney and the author of "The Truth about Avoiding Scams."

OK Steve, let's see, Bernie Madoff, $50 billion, Steve Weisman (SIC) this week, I think it's something like $6 billion. Huge losses for investors. What are the sign, the signals I'm looking for, as an investor that, you know, my investment adviser might not be on the up and up?

STEVE WEISMAN, ATTORNEY: Well, one of the things, unfortunately, is I'm from the government and I'm here to help you doesn't work. The place to look for that helping hand is at the end of your own arm. You've got to do your homework. You've got to understand the kinds of things that can go on. You've got to do your investing in. And that's a big problem.

You mentioned like Allan Stanford, who was -- civil charges were filed by the SEC this week. If people had done some research, they would have found that there were some charges brought against him by FINRA, a private authority. He settled them.

But what's kind of interesting is when he settled them he settles them by not admitting any guilt, as matter of fact, Bernie Madoff settled his fraud civil fraud charges with the SEC, not admitting any guilt, but they promise not to do it again. So, what you've got to do is, you've got to do your homework online and check these people out.

WILLIS: OK, let's talk about the red flags I'm looking for. No. 1, if somebody is promising me a risk-free investment, what do I do?

WEISMAN: You go out the door.

WILLIS: Run the other direction.

WEISMAN: Because, there's no such thing as risk-free, and usually it's going to be coupled with risk-free guaranteed return and it's really terrific and the Red Sox are going to win the pennant. I mean, these things just -- they're too good to be true, you've got to walk.

WILLIS: All right, well let's talk about online places to go. Finra.org, I believe it is, great Web site, you can learn things, like you were saying there was information about this most recent scam, right on that Web site, you could have found it if you had been investing with this fella.

WEISMAN: Absolutely. As a matter of fact, one of the tools that I suggest to people is type in the name of the investment or the investment advisor in Google. Put the word "scam" next to it and see what comes up. I've seen that work so many times and it is a way of getting information.

WILLIS: Can we talk about affinity fraud for just a second. This was a problem with the Bernie Madoff scandal, you know, there were people who all -- who knew each other pretty well, who met this guy and everybody invested because their friends invested.

WEISMAN: This is a typical, typical scam, trust me, you can't trust anyone. And what happens is you've got these con artists, scam artists, they're the only criminals known as artists. They've got a knowledge of psychology that would make Freud envious.

And what they they do is they hook people into a particular ethnic group or a -- some kind of organization to which you belong, they gain their trust and these people unwittingly go out and bring you in. and with Madoff, that's what happened over and over again. You cannot trust the people to do your homework for you.

WILLIS: All right, well I appreciate your help today. Steve Weisman, you are a wise man.

So, here's the bottom line, if you think you are a victim of an investment scam, file a complaint with the SEC at sec.gov. Contact your state attorney general or secretary of state and alert your local FINRA office at finra.org. They can help.

Now, think you can't afford your dream house, how to turn your home into a cash machine.

(COMMERCIAL BREAK)

WILLIS: Well, it might be a great time to buy, homes are still out of reach for many homebuyers, but some are opting to become landlords to afford that dream out. We met up with Kevin O'Connor of TV's "This Old House," who chose Brooklyn homeowners Karen Shen and Kevin Costello of the winners of the show's annual project. They're converting their Brooklyn brownstone into both a living space for their growing family and a few renters.

(BEGIN VIDEOTAPE)

Kevin, tell me about the house.

KEVIN O'CONNOR, THIS OLD HOUSE: Well, I think it's a quintessential New York brownstone. It was built in 1904 and at about 1940 or so, they actually turned it into a boarding house and they had nine units into this place. The homeowners saw the outside was in good shape and they wanted to turn it into their primary residence and to help them pay for the cost, they're going to put a rental unit on the third floor and down on the ground level.

WILLIS: That's really smart. Let's take a look.

OK Kevin, so this is a garden floor apartment, right?

O'CONNOR: This is one of two rental units in here. And I tell you, without the two units, I don't think the homeowners could afford to buy the building or to renovate it to the level they want. So, this is a really good idea to make these homes affordable.

WILLIS: Let's talk about how you separate out these units and what the laws and the rules that you have to pay attention to?

O'CONNOR: If you're going from a single family to a multifamily, the first thing I think you should start with is doing what the code requires. And that's different depending on where you live. But here, as soon as this went to a multifamily, that meant putting sprinklers in the hallways and also meant making sure that you separate all the utilities, so one electrical box for each one of the units, that's critical.

And the other thing that you point out, which is separating the space is a good idea, because you want to keep some separation between the private part of the house and where the owners are going to be and where the tenants are going to be.

WILLIS: Because you don't want to see those tenants every day if you're actually living in the house full time, right?

O'CONNOR: You know, they're good for paying the rent, but you don't want to bump into them every day. So, as you come through the front door, this is an entryway to the tenant's unit, but right here, this starts the owner's unit. Now the owner is the only person that can get into this space right here. And this is great, because it gives you access to your unit, but it also controls access to the backyard, so only the owners can use it.

WILLIS: Are you nervous about renting at all?

KEVIN COSTELLO, HOMEOWNER: I am.

WILLIS: Well, tell me about it.

COSTELLO: Well, yeah, now with all this time and effort that's been put into it, like oh, my god, you know, when you rent a place, it gets beaten to death. You know, that's one, and I've never been a landlord before, so.

WILLIS: So, tell me a little bit about how much money this is going to save you on your mortgage just by having tenants in the house.

KAREN SHEN, HOMEOWNER: Well, we're not sure exactly, but we're hoping for maybe around $5,000 per month.

WILLIS: And that will save you big-time on your total mortgage, correct?

SHEN: Yes.

WILLIS: So, this is a great move to make it more affordable and to make you guys feel real comfortable with the finances, I would think.

COSTELLO: I mean, it is, it's just like a security blanket over and under you.

WILLIS: Are you going stay in this house for a lifetime? Is this, you know, the kind -- seriously, I mean, you look at this, and you look at the work going into it, I would think I'm here.

COSTELLO: Bury me in the backyard is what I would say. Forget it. I'm not ever doing this again.

(END VIDEOTAPE)

WILLIS: What a great family.

Here's the bottom line. If you want to become a landlord, you have to be able to handle surprises. Rents may not be paid on time, tenants may break leases. If you need total control, renting may not be the right way to go.

Now, that said, before accepting a tenant, make sure you do your homework, run a credit report on all applicants and always verify information that's given to you. You might want consider using a tenant screening company to help you select the very best candidates. As always, we thank you for spending part of your Saturday with us, YOUR BOTTOM LINE will be back next week, right here on CNN. You can also catch us on HLN every Saturday and Sunday at 3:30 p.m. Eastern Time. And 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. Don't go anywhere, your top stories are next in the CNN NEWSROOM, have a great weekend.