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Open House

Bush Has Plan to Help Struggling Homeowners; Interview with Treasury Secretary Henry Paulson

Aired December 08, 2007 - 09:30   ET

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

GERRI WILLIS, HOST: For the past 15 months, we've highlighted the meltdown in the subprime sector, watching as federal regulators failed to step in and help. This week, finally, a step in the right direction. President Bush this week unveiled a plan to help struggling homeowners, but says the government's role is limited.
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GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: The government has a role to play, as well. We should not bail out lenders. Real estate speculators or those who made the reckless decision to buy a home they knew they could never afford.

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WILLIS: You may want to jot this down because it is a little confusing. Here is who the plan will help. Up to 1.2 million struggling homeowners are eligible to be considered for a five-year freeze on their interest rates. But, and it's a big but, it only applies for people who are in danger of defaulting on their mortgage who have made their mortgage payments on time and who can prove that they would not be able to afford the reset rate.

Also, it only applies to mortgages that were originated between January 1, 2005 and July 31, 2007 with the adjustable interest rates due to reset between January 1, 2008 and July 31 of 2010. So, only those with subprime mortgages and all these specific terms are eligible for a potential rate freeze and that will bring the actual number of people who qualify down significantly.

So, here are the people that are left out: if you don't have an income, if you've missed more than one payment in the last year, if you can afford a mortgage rate increase, or if the value of your mortgage exceeds the value of your home, you'll want to figure out a way to deal with the rate hike. And don't worry if you missed any of the details, we'll keep putting them on the screen throughout the program.

President Bush first approached Treasury Secretary Henry Paulson in August to find a way to keep struggling homeowners in their homes. Secretary Paulson is with us now from Washington, D.C.

Secretary Paulson, good to see you.

HENRY PAULSON, TREASURY SECRETARY: Good to see you.

WILLIS: Now, you convened this group to get together to talk about how to solve this problem. Tell us who will be helped.

PAULSON: Well, Gerri, you laid it out and again, what we're trying to deal with is subprime mortgage holders who are going to be facing a reset over the next couple of years in their mortgage rate which they may not be able to afford. And as you look at this group, there's obviously going to be some subprime mortgage holders who are going to have no trouble making their payment. That group doesn't need to be helped.

There will be another group that doesn't have the capability to own a home. They may have never made a down payment, they've -- they haven't been able to make their initial payments on their mortgage and that group, we've asked them, we've put together a number to call and get counseling, we have mortgage counseling service, they may be able to put into another mortgage that will help them out -- one from, for instance, FHA.

WILLIS: I want to talk to you a little bit more, too, now about the criticism that's coming out now about the plan. On the same day you announced it, one senator had this to say about the plan:

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SEN CHARLES SCHUMER (D), NEW YORK: The administration is finally dipping its toe in the water, but what it really needs to do is finally jump in the pool.

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WILLIS: And, of course, that was Senator Schumer who said that essentially the administration here had failed to do enough, taken enough steps, gone far enough to help as many people as possible. Of course, as you know, I don't have to tell you, Secretary, some 1.7 million people have gone into foreclosure this year. Should the program be bigger? What do you say to your critics?

PAULSON: First of all, that surprises me because I've had a number of conversations with Senator Schumer, he'd been very complimentary about the plan in private. But, again, 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.

WILLIS: Secretary, you know, one question that I hear over and over again is that, in fact, the people who are responsible for this mortgage meltdown are allowed to come up with the solution. Should this solution actually come from government? Why not? That's another criticism of the plan.

PAULSON: Well, if I have ever seen a role for government, it's to play a convening role where we have complexity really outgrow the private sector's ability to cope with it. We've got a big wave of resets coming, and the industry needs to have the capacity. And frankly, the industry was very grateful that the government got them together to work out a solution that makes sense for investors, as well as homeowners. Investors do not want to have needless foreclosures. They're very costly. And they're costly for neighborhoods and they're costly for the economy, overall. So, we want to do everything we can to avoid those foreclosures which are preventable.

WILLIS: How will we know whether or not the plan works?

PAULSON: Well, we're going to have to watch it very closely. And we're going to -- we've got these criteria, and now we need to monitor our performance under that plan and let's just watch it carefully. I'm not going to promise it's going to work perfectly. This is a complex, difficult problem, but we're doing everything we can to solve it. And if we need to make changes, we'll make changes, and it will evolve over time.

WILLIS: And of course the phone number, if you want to get help, 888-995-hope. Secretary Paulson, thank you for being with us today.

PAULSON: Gerri, thank you.

WILLIS: Up next, once and for all, is this plan the answer to the mortgage meltdown? We'll get you the inside scoop from industry insiders.

Then, how presidential candidates plan on dealing with the subprime crisis, all that and more when this special edition of OPEN HOUSE comes right back.

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WILLIS: This is a special edition of OPEN HOUSE focusing on this week's developments in the mortgage meltdown. What everyone wants to know: Is this enough? Mike Larson is with the Wise Research Group and is a housing analyst for MoneyandMarkets.com in West Palm Beach. Mark Zandi is chief economist with MoodysEconomy.com and joins us from Westchester, Pennsylvania. Aracely Panameno is the director of Latino affairs with the Center for Responsible Lending. She joins us from Washington, D.C.

ARACELY PANAMENO, CTR FOR RESPONSIBLE LENDING: Good morning.

WILLIS: All right, well let's just start into it and talk about the president's plan for curing this mortgage meltdown. Is this what the country needs or is it too little, too late -- Arsilio.

PANAMENO: It's a good idea. You know, no question that we actually need to have modifications -- loan modifications in the marketplace. I am concerned that it is coming after a lot of harm has been done at this point in the marketplace and more mortgages actually were issued within the same terms. I am also concerned that it doesn't go far enough. WILLIS: Interesting. Let's remind our viewers, here. Just exactly what the president is suggesting. Probably the main component of this is that it would freeze interest rates for subprime mortgage holders, some of them, not all of them, for five years. You know, we've been talking a lot about this, but the devil's in the details. Mike Larson, what do you make of this? Is this too little, too late?

MIKE LARSON, ANALYST, MONEYANDMARKETS.COM: Sure. Well, I think it's better than nothing. It's not exactly a ringing endorsement. Like FHA reform, like interest rate cuts from the Federal Reserve, all of these moves will help to some degree, but the real problem is that we have too much home supply and not enough home demand for the underlying market. And as long as that's the case, there's going to be a lot of pressure on home prices and borrower performance.

WILLIS: You know, there was another number out just this week from the Mortgage Bankers Association. The number of folks, homeowners, late in payment for the third quarter, the highest on record -- highest in 20 years. Take a look at this. And what I find really interesting, here, and what gets missed in this conversation all the time, a lot of these people are not subprime adjustable rate mortgage holders. They are just folks who are in prime products who are not making payments, they're late with them. Mark Zandi, talk to me about this. Is the economy generally at risk, here?

MARK ZANDI, MOODYSECONOMY.COM: Oh, it's a significant risk. The job market is weakening. These folks are obviously struggling with falling housing values, many of them face higher payment resets. Lenders are tightening up so that many of these folks can't refinance into another loan. You mix it altogether and you've got record high levels of delinquency and foreclosure.

WILLIS: Right, and can this keep us from going into recession, this plan that the president's put across?

ZANDI: Not by itself, no. I mean, I think it's a step in the right direction and in theory could help a lot of people, about three- quarters of a million homeowners could potentially qualify, but I think, as you point out, it's the devil's in the detail -- the detail is in the devil or whatever that saying is. Once you get down right to the practice of it, it's going to be very difficult to help a lot of these folks. I only think about a quarter million people will actually get help.

WILLIS: Wow. OK, so Mike, will lenders cooperate with this, do you think?

LARSON: Well, I think the problem -- one of the big problems we have is that this isn't your father's mortgage market. It's not like you as a borrower can just sit down with your lender and negotiate. These days, mortgages are bundled, packaged, sold and resold to investors. So you've got them involved. You've got servicers involved, the people who collect your payments and it's a lot tougher to sort everything out and get everyone to the table.

PANAMENO: And Gerri, I have to add, servicers do not have an incentive to actually do loan modifications. They actually do not get a significant reimbursement for that type of work. They actually get more if they actually follow through a foreclosure procedure.

WILLIS: Well, Aracely, I want to follow up with you on something, here. You know, I think minorities and immigrants have sort of born the brunt of this mortgage meltdown in many ways. Do you think the president's plan will reach out to those groups adequately?

PANAMENO: I would hope it does. I mean, you know, over the last two years, which we have collected data through the home mortgage disclosure act, over 40 percent of Latinos were sold into subprime mortgages and over 50 percent of African-Americans were sold into subprime mortgages. Of those, Fannie and Freddie have calculated that 25 percent to 50 percent of those home buyers could actually have qualified for prime mortgages.

The problem I have with the president's plan and with Paulson's plan is that you create three tiers and only one of those tiers actually qualifies, but the reality is that many of these home borrowers were not at fault of having been steered into a bad loan product. And so in essence, they're actually getting, you know, more harm done for having been steered into something that they could have done better with to begin with.

WILLIS: It's like getting penalized twice, once when you get the bad loan and then again, you're not part of the president's plan to get help.

Mike Larson, talk to me about this. You know, we've looked at the different solutions and talked on and on about what can be done. Does there need to be legislation now? Does there need to be other solutions from other corners?

LARSON: Well, sure. The big problem, as I see it, is falling home prices. The Boston fed just released a study that showed that's the primary driver of foreclosures. And this potential solution may freeze interest rates, but it doesn't do anything about the fact that a lot of borrowers are upside down, they owe more than their homes are worth.

There's a proposal in Congress to -- legislation that's been proposed that would allow bankruptcy judges to cram down or reduce the amount of principle actually owed on a mortgage to the fair value of the home. That might be a solution worth looking into because then it would eliminate that whole sense of being upside down and psychological and financial incentives that gets borrowers to walk away.

WILLIS: And very controversial it is. Mike, Mark, Aracely, please stay right there. We'll check back with you in just a second.

This is a confusing story. If you have questions, send them to us, e-mail us at openhouse@cnn.com. We want to hear from you.

Still ahead on this special edition of OPEN HOUSE, the mortgage meltdown and the 2008 presidential election, find out which candidates say they have a plan to fix the problem.

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WILLIS: With the mortgage meltdown such a hot topic these days, it seems everybody in Washington wants a piece of the action and that includes the presidential candidate. With Laura Bush's announcement, Hillary Clinton and John Edwards both spoke out saying that the plan does not go far enough. Clinton called for a foreclosure moratorium for at least 90 days. Edwards called for a seven year interest rate freeze and a federally financed home rescue fund. Chris Dodd was also on the record criticizing the plan. He said it amounted to little more than financial wallpaper because it won't help people already in foreclosure.

Gloria Borger is CNN's senior political analyst and she's joining us now from Washington, D.C.

Gloria, great to see you.

GLORIA BORGER, CNN SR. POLITICAL ANALYST: Good to see you.

WILLIS: All right, I was so interested in Hillary Clinton's press conference earlier this week in which she really criticized the plan and came up with solutions of her own. Is this just political, you know, speech or is it something serious? I mean is she really trying to solve the problem?

BORGER: Well, I think she was playing a little bit of beat the clock here, Gerri, because she clearly wanted to beat President Bush who announced his plan today. And she wanted to be a little tougher than President Bush is. She says, as all the other Democrats do, that President Bush's plan doesn't go far enough.

Of course, it's political. This is an issue that really plays to the middle class anxiety, out there. And plays to Democratic voters in particular and we are in the middle of a presidential primary.

WILLIS: Well, you know, we've been following this issue for a long time. We've watched this Congress all year long. And in the time the Congress has held press conferences and all kinds of meetings and talked about this and played it for political points, really, nothing is really happened of substance and something like 1.5 million people have gone into foreclosure. Why has this Congress been so reluctant to take action on this issue?

BORGER: Well, welcome to my world. Congress -- this is why Congress has an 11 percent approval rating with the American public. You've got a lot of proposals out there, some of which have been stuck in committee. And in the end, I think that this White House was feeling an awful lot of pressure, not only from the president himself, whose popularity is in the 30 percent range, but also from members on both sides of the aisle saying, look, we're going to look to you to try and come up with some kind of compromise solution with Wall Street, with the lenders, and with government taking some action and that's exactly what's happened. WILLIS: What are going to be the political ramifications of what Bush has come up with, here? You know, it's really tricky. People may not respond as you expect. Some folks are very critical of this even in the heartland.

BORGER: Right. Well, as you were saying to the treasury secretary, you know, this is going to get criticism on both sides of the aisle from the Democrats for not going far enough and lots of Republicans are out there saying, wait a minute, this is getting a little too close to government intervention, that we don't like as Republicans, or to a government bailout that we don't like. So, you know, it's going to get criticism on both sides of the aisle.

In the end, though, as the secretary was saying, you're going to have to monitor this to see whether it really does affect those borrowers out there who are going to be in real trouble. And so far, Congress hasn't done anything, so let's see what the White House can do.

WILLIS: Will this issue and the issue of the economy, generally, play out in a big way in the presidential election?

BORGER: Absolutely. As someone once said, I think it was James Carville, "it's the economy, stupid." While we're all worried about the war and issues about immigration, I think that in the end, the economy is going to be a huge issue and right now, as you know, I don't have to tell you, there's economic anxiety out there. People are worried about housing prices going down, about gas prices, about home heating oil, and this just plays into that general anxiety about the question of whether we're heading toward a recession in this country. And, of course, that issue is going to be topic "A" in the presidential election.

WILLIS: Gloria, thanks for joining us, today, really great to see you.

BORGER: Good to see you, thanks.

WILLIS: Up next, we'll look beyond this week's subprime plan. The next steps to fixing the mortgage meltdown when this special edition of OPEN HOUSE comes right back.

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WILLIS: Back now with our panel on this week's subprime rate freeze deal. Mike Larson with MoneyandMarkets.com, Mark Zandi with MoodysEconomy.com and Arcely Panameno from the Center for Responsible Lending.

Welcome back, guys. You know, we just want to look forward a little bit, here. I want to start with you, Mark. What's in your crystal ball, here? Can the states have been in so much trouble economically from the mortgage meltdown recover?

ZANDI: Well, I think it's going to be tough. I mean, policymakers are going to have to become more aggressive. The treasury's plan is not enough, they'll have to do more, Federal Reserve will have to lower interest rates aggressively. We'll need a little luck, hopefully oil prices will head lower and then we'll get out of this without a full-blown recession. But, even under the best of assumptions, I think the economy is going to struggle and we're going to see more mortgage foreclosures and defaults.

WILLIS: Mike, best of assumptions here, will they hold true?

LARSON: I think so. I think we've probably got maybe another five, 10 percent possibly in terms of home price declines ahead of us and a real recovery not until late 2008 or early 2009 when all of the cumulative effect of all these measures starts to kick in and help things out.

WILLIS: Aracely, what does your crystal ball hold?

PANAMENO: Well, I think that for starters, before I look into the crystal ball, I want to make sure that we provide the best opportunity for consumers to actually have a successful experience. Five years is not good enough. We need to actually push for seven years.

Bankruptcy reform actually does need to occur so we need to actually have a combination of all of the elements that have been mentioned. And I know at the local level communities are being hard hit. There is a spillover effect into communities in terms of revenue generation for education and social services and police and so it's very hard, but I think that we are going to come through.

WILLIS: Well, we're going to come through. Do you have advice for folks out there with these loans, right now? What should they do?

PANAMENO: I think that they should actually try to work with servicers or they should try to get in touch with a community organization, a non-profit organization that can provide some assistance like ACORN Housing, for example, and we definitely need wholesale modifications of this loan. So, you know, it cannot be one by one.

WILLIS: Not one by one. Mark, what do you say, any advice for folks out there?

ZANDI: Well, I think you need to talk to your -- as the person mentioned, your servicer, your lender. You have to be forthright. Now that you have some options, the treasury plan will give you some option, you should see if you can qualify for that. So, you need to be forthright and aggressive. You can't just sit back and wait for someone to come to you.

WILLIS: Mike, last thoughts here on what people should do.

LARSON: Sure, I think, absolutely, contact your lender. Don't hide under a rock and hope this problem will go away. At the same time, you know, understand that prices are going to be under pressure for a while and factor that into any decisions you make about staying in the home or maybe looking to foreclose and rent instead. WILLIS: We'll continue to follow this story and talking with you folks, as well. Thanks so much.

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 here next week, right here on CNN. 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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