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Open House

Financial Security Under Attack; Keeping Your 401(k); Renting Your Home; How to Deal With Financial Worries and Stress; Turning to a Higher Power

Aired March 01, 2008 - 09:30   ET

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

GERRI WILLIS, CNN HOST: Hello, I'm Gerri Willis and this is a special edition of OPEN HOUSE, "Financial Security Watch."
It's been quite a week for your money, home sales are down, more Americans are filing for unemployment, plus President Bush and the Senate are at odds over just how much the government should help struggling homeowners.

All in all, it's tough going out there for a lot of you folks. Some are struggling to pay more mortgages, some are losing their jobs and some are just drowning in credit card debt. Ask anybody these days and they'll tell you that their financial security is under attack.

(BEGIN VIDEOTAPE)

WILLIS (voice-over): The credit crunch, the mortgage meltdown, up and down investments, uncertainty in the job market, your financial security is under assault.

UNIDENTIFIED MALE: There were already budget cuts I work.

UNIDENTIFIED MALE: I just have no money for anything apart from bare essentials at this point.

UNIDENTIFIED FEMALE: People are just finding a really tough time just finding a new job.

UNIDENTIFIED FEMALE: We're concerned about the younger generation. I think that it's going to be a little tougher for them.

UNIDENTIFIED MALE: People don't have discretionary income.

UNIDENTIFIED FEMALE: The are just so many things that impact your finances nowadays, it's not even funny.

WILLIS: The average American household with a credit card owed nearly $10,000 in 2007, according to cardweb.com which serves the credit card industry.

Adam Levin of the consumer information Web site credit.com ...

ADAM LEVIN, CREDIT.COM: It's a disastrous threat and it's a threat based on the fact that the more debt that you get yourself involved in, the less income you're going to have available to pay for other things.

WILLIS: The nation's housing crisis doesn't help with debt problems. Even if you make your mortgage payments, the more than 400,000 foreclosures last year affect the value of your home. A Center for Responsible Lending report says nearly 41 million homes will lose value because of foreclosures in their neighborhoods.

If the loss in home value wasn't enough to pinch your pocket book, the loss of value in your investments certainly could. The stock market started this year with one of the worst Januarys on record. Those declines lead to fears of recession and with recession comes the possibility of job losses.

JACK OTTER, DPTY EDITOR, BEST LIFE MAGAZINE: Job loss is about as big a threat to your financial security as there is. It's not terrible right now, the problem is the trend is going in the wrong directions. Jobless claims are creeping higher.

WILLIS: In the last U.S. recession in 2001, nearly two million people lost their jobs in mass layoffs. Mix all of these factors together, it signals a threat to your bottom line, a threat to your money.

(END VIDEOTAPE)

WILLIS: Protecting your money and saving for your future is important. And a major part of that savings plan should be your 401(k), but how you deal with that 401(k) could make a big difference on how much money you get down the road. Doug Flynn is a certified financial planner with Flynn Zeto Capital Management in New York.

Doug, great to see you.

DOUG FLYNN, CERTIFIED FINANCIAL PLANNER: Great to see you.

WILLIS: All right, so let's start with a 401(k). I'm getting all kinds of e-mails from young people who want to stop contributing to their 401(k) because of what's going on in the market. What's wrong with that picture?

FLYNN: Well, one thing that you don't want to is give away the free money and that's what I'm talking about in terms of the employer match. Most employers will match if you put in six percent of your salary, they'll put 50 cents on the dollar and you'll get three percent. So, you definitely don't want to give away the free money.

Now, if you're contributing more than that, then I wouldn't necessarily have a problem, if you were a little tight, with cutting it down. But, try not to go below what they're matching for you because you do not want to give away that free money.

WILLIS: But Doug, what about the other point? Which is that yes, stocks are cheap right now, many of them are, not all of them, but this is when you want to be a buyer, not a seller, right?

FLYNN: Absolutely, and that's part of this. If you developed your 401(k) asset allocation in the last year and you're putting money away from retirement that's 10 or 15 or 20 years away, you want sort of a down market right now while you're accumulating and buying and adding into it, because you're picking up more shares. It's down the road when you retire that you don't want to have this happen to you. But by then, you probably would be more conservative. So right now, if you have a long-term time horizon, this is exactly what you want to have happen.

WILLIS: Well, let's talk about that time horizon, because I hear from young people who want to put a lot of money in bonds, which I always say not a great thing to do. As you get closer to retirement, though, you do want to change your asset allocation. As you approach that retirement date, how different should your allocation be from your when you were say, in 20s and 30s?

FLYNN: Well, it should be different, but not so far that you are out of the market all together. And what you are probably referring to is people, because they are scared of what's going on in the market, are thinking about cutting down on stocks, right now.

But right now, we're talking about a timing situation, where you're going to try to time the market by being away from it now and then getting back into it at some point in the future. But, typically that means is that we're going to wait for things get better and that means the market get higher and then we'll be buying when things are higher, that's not what you want.

WILLIS: Makes no sense at all. Let me ask you another critical question of people right now who own a home, there's so many people out there, we're reading numbers, right now, that as many as 10 percent of Americans are in a situation where they owe more on the home than it is worth. What should you do?

FLYNN: Well, the one thing you should not do is cash money out of the 401(k). A lot of times when people take money out of their 401(k) they're assessed a 20 percent withholding and a lot of people are under the impression that that's all the tax that they owe.

If you're not 59.5 years old, not only do you have to pay your ordinary federal income tax, you'll have state income tax and a 10 percent penalty. So, you could lose up to 50 percent of that money you withdraw and if you spend the difference between the 20 percent they with held and the 50 percent you owe, they're going to get a bill next April that you might not have the money for, so you definitely don't want to do that.

WILLIS: I know you can borrow from your 401(k) and I know it's your money, but you're best off leaving it put. But I think some folks are making more dangerous decisions right now when they're under water in their mortgage. They're tempted to walk away. Now, that has big implications for down the road. What do you make of it?

FLYNN: Well, if you walk away from your mortgage, obviously you're going to affect your credit rating and the possibility that it's going to hurt you later on in trying to get another home. Just because you're upside-down in your mortgage versus what you owe, and what the home is worth, if you bought a home, that's your home, that you intend to stay with for 20 or 30 years, it doesn't matter what's going on with the value of the home right now.

You stay with it, you put your money in, you pay the mortgage and down the road, everything will work itself out as it always does, whether it's the stock market or the real estate market. It's going to go up and down. But you go into it with a long-term horizon. If you bought a home and you were trying to flip it or something else like that, well, then you're going to have some problems, but if it's your home that you're stay with, your primary residence, I don't think you want to walk away.

WILLIS: OK, well Doug Flynn, thanks for your help today, we appreciate it.

Coming up on OPEN HOUSE, make extra money now, learn how to use your house to bring in extra cash. Plus, money and stress, not a good combination, we'll show you how to deal with it all and looking to a higher power to sell your house.

(BEGIN VIDEOTAPE)

WILLIS (voice over): The FBI opened over 1,200 new mortgage fraud cases that 2007, nearly triple what it did in 2003. With mortgage fraud on the rise, it's important to protect yourself and your home.

If a deal sounds too good to be home, it probably is, steer clear. Fraudsters often prey on people who are already at risk of losing their home to foreclosure. Scammers will dupe homeowners with promises of saving their home, but they deliver fees, payments and even deed transfers.

If a buyer approaches you with promises to pay off your mortgage or give you a sum of money when the property is sold, it's likely a scam. Commonly called equity scammers, these fraudsters will sell your home, pay off debts and keep the equity you could have had if you sold it yourself.

Property flipping is another common scam, fraudulent appraisals and doctored loan documentation allow the new buyer to sell the home at an inflated price. Be sure to choose a broker wisely. A seasoned broker should be able to help you detect fraud and protect your home.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

WILLIS: OK, falling housing prices might be a gift for buyers, but it is a nightmare for people trying to sell their home. Renting your home out might be an option, but before you put that ad in the paper, you'll want to listen to our next guest. Dan McGinn is the author of "House Lust," and hey, he's a landlord himself and he's joining us from West Newton, Mass.

Good to see you. DAN MCGINN, AUTHOR, HOUSE LUST: Good to see you.

WILLIS: All right, so everybody thinks this is a great idea, but I have to say I have big questions about it. Because, look, not every market is a great rental market, right?

MCGINN: Absolutely, I mean, you really have to think hard before you do this. At the same time we're seeing many more people at least consider it. If you can't sell your house and you're outgrowing it and you think it's a bad time to try to sell it and you want to move to a new house, renting it out, if you can cover the costs of the mortgage are one option.

WILLIS: All right, well, that can be a tall order in and of itself. Now, you have done this yourself, correct? How successful have you been?

MCGINN: It's tricky, covering the costs are one element of it, but there are risks. You know? When you're a landlord, you have to worry about things breaking, unexpected repairs, you have to think about tenants moving out in the middle of the night.

WILLIS: Yeah, and there's nobody to call in the middle of the night, right?

MCGINN: Absolutely.

WILLIS: OK, well let's go over some of the things you can expect when you become a landlord. What are the kinds of things you should be preparing for and how do you do it?

MCGINN: I think the first thing you need to realistically assess is how much could you rent the property for and is it enough to cover the mortgage?

WILLIS: How do you get those numbers, though?

MCGINN: I think, talking to local realtors, checking the newspaper, looking at Craig's List, it shouldn't be too hard to figure out what you could get.

WILLIS: You can kind of see what people charging for houses your particular size and similar amenities, is that what you do it?

MCGINN: Absolutely.

WILLIS: OK, well, you know, we mentioned before that things happen. As a landlord, what am I on the hook for and what is the tenant on the hook for?

MCGINN: Well, you should obviously expect to pay the remaining mortgage, assuming you owe on the property, you're going to have to pay the taxes, you're going to have to pay the property insurance, you probably have to pay the water bill. The tenants will pay the rent, of course, they'll pay the other kinds of utilities. But don't neglect the fact that the property could be vacant for a month or two or even more, that repairs come up. You may have to pay a property manager. So, this is not a cheap venture.

WILLIS: Now, you are actually an advocate of property managers. I think you use one yourself. What's the advantage there? Boy, it seems like I'm paying them a lot of dough just for services that I could probably render myself.

MCGINN: Well, some of the people that do this are actually moving far away from the home. In my case, I'm in Boston, the property I own is in Idaho, so I don't want to be dealing with the tenants directly. I don't want to worry about the repairs.

WILLIS: OK, how about a cash reserve? Now, it seems to me that you would need some money on hand just in case the worst happens. How do you figure out how much money to have on the sidelines?

MCGINN: The typical rule of thumb is at least six months. But, I would want to be more conservative of that. I mean, anybody who's owned a house has seen what a new hot water heater or a furnace costs, I think you want to have at least a year's worth of mortgage payments in the bank.

WILLIS: Wow. Holy cow, that's a lot of money. So complaints, obviously you're going to get a lot from tenants. How do you manage those? Obviously if you have a property manager, it might be easy, but if you're having to deal with the tenants themselves, how do you negotiate that very difficult position?

MCGINN: I mean, it's much like running any kind of small business. To a certain extent you want to keep your customers happy. You know, one of the worst things that can happen is for the property to go vacant if you have a hard time finding a new tenant. At the same time you have to be reasonable. You know, this isn't your apartment, you're not going to live there, you don't want to overinvest and over remodel it to the point that people won't be willing to pay for those improvements.

WILLIS: Can you get sample documents, rental documents from the Web? You know, if you want do get a lease, where do you go for that?

MCGINN: You can try to do that stuff yourself, you could also, short of using a property manager, you can just use a real estate agent to find that tenant and handle the initial paperwork and then do the property management yourself.

WILLIS: Well Dan, again we appreciate your help today. His book is called "House Lust." Thanks so much for your help, today.

MCGINN: Thank you.

WILLIS: Still ahead on OPEN HOUSE, sit back and take a deep breath and lean how to deal with your financial worries and your stress. Elizabeth Cohen with be here.

Plus, in this tough housing market, some folks are turning to a higher power to sell their home, but first your mortgage numbers.

(COMMERCIAL BREAK)

WILLIS: Foreclosures, credit card debt, financial hardship can cause a great deal of stress, physical and mental effects you just shouldn't ignore. CNN medical correspondent Elizabeth Cohen is here with more.

Good to see you.

ELIZABETH COHEN, CNN MEDICAL CORRESPONDENT: Good to see you.

WILLIS: Well, let's get started, here. What are your best ideas for dealing with this kind of situation?

COHEN: Well, we have lots of ideas for dealing with it. But first, I want to tell you what stress does to your body. Because people think of stress as all in your head and really it's a whole body experience. It does all sorts of terrible things.

Let's start off with your jaw. Stress can aggravate TMJ that is a painful condition. Also stress can have an affect on your heart because stress can raise your blood pressure. Stress can even affect your digestive system. Intuitively, we kind of know that.

You're worried about something you get a stomach ache. It can also cause, nausea, loss of appetite, all sorts of bad things. Also really when you think about it, stress, as I said, it affects the whole body because when you're stressed out, what's one of the first things that happens?

WILLIS: I eat.

COHEN: You eat. OK, so that's a whole body. Right? That can make you gain weight, although I don't really see it. But, also you can't sleep, right? You're up at night, you're spreaded out, you can't sleep and that affects everything, it affects your immune system, everything, and in fact some doctors have even linked stress to some types of cancer.

WILLIS: Wow. That's unbelievable. You know, it's easy to sit around and complain about what stress does to your body, but how do you stop stress?

COHEN: Right. There's some things to do on your own. So, let's talk about that. First of all what you can do is in some way, shape or form, you can express yourself. So, you can sit down and you can write about the stress you're feeling, you can call a friend, you can go to the living room and do a little stress dance and just start screaming. That could help. It might look weird, but it might help you.

WILLIS: You say relax on this list. How do you do that?

COHEN: You just have to carve out time to do that, go get yourself a massage if you can, go listen to your favorite music. You've got to carve out some time to do that. WILLIS: You know what I think is great is just distractions. Do you know what I mean? Things that make you think about something else other than the item that's really stressing you out.

COHEN: Right, exactly. Maybe someone else's stress. That could be good too.

WILLIS: So, anything else, though, that I can do to distress myself besides relaxing, obviously distracting myself? Anything else on your list?

COHEN: Yes, you know what? Talk -- be around positive people. If you have just been foreclosed upon, and your best friends have -- and you're in this sort of group, get some time away from them and spend time with people who are actually doing pretty well and you'll see exercise is on this list. I'm telling you a short brisk walk can go a long way.

WILLIS: That's a great idea, actually, and not eating like I suggested. OK, how do I know that my problem is so severe that I actually need some sort of help?

COHEN: Right, because there are some red flags that say, you know what, all the meditation and yoga and relaxing and listening to good music, all that in the world is not going to help us. We need to do better. So, let's talk about what some of the red flags are that let you know, time to move on.

If you start experiencing depression, in other words, you're not just blue for a couple of days, but it goes on and on and starts interfering with your work.

WILLIS: What is that line, though? I mean, you know, I think it's hard for people to really know. Because you can have a few bad days, but then that can culminate, domino effect, into several days and you sort of lose track of the fact that you're not...

COHEN: Usually, a loved one comes in handy. A husband or a wife or someone might say to you, you know what, you've been blue before and it's been a couple of days or maybe a week or two, but you know, this is been going on for months that you've been having trouble getting out of bed, it's been going on for months that you've been sobbing.

You know, I mean, I'm laughing, but it's true that someone else might point that out better to you than you could do on your own. So, those are some of the things that you want to look out for in terms of when to go get professional help.

WILLIS: That's great advice. Elizabeth, thanks for helping us out today. We appreciate it.

COHEN: Thanks.

WILLIS: As always, if you have an idea on how to save money, send us an e-mail to openhouse@cnn.com and if you want to check out this project savings again, check out our Web site, cnn.com/openhouse.

Up next on OPEN HOUSE, managing your money is all about facts and figures, but when all else fails, some folks are turning to a higher power. The story when we come right back.

(COMMERCIAL BREAK)

WILLIS: Are you trying to sell your home? Trying to get your finances in order? Well, you have two choices. You can watch OPEN HOUSE and learn all sorts of ways to manage your money or you can watch OPEN HOUSE and count on a little help from above.

CNN's Dan Simon reports.

(BEGIN VIDEOTAPE)

DAN SIMON, CNN CORRESPONDENT (voice-over): Seemed like a perfect first-time home. At least Steve Ochoa thought so. He bought this place in Modesto, California two years ago. Found himself in a mortgage mess and now has to sell it.

(on camera): What did you start it at? If you don't mind me asking.

STEVE OCHOA, HOME SELLER: Oh, $240,000.

SIMON: And now it's...

OCHOA: $145.

SIMON (voice-over): A hundred-thousand dollars less than what he paid for it. He's dropped the price six times in four months because of the slumping market.

OCHOA: I kind of almost kind of roll with the punches and pray and have faith.

SIMON: It's a situation repeating itself all throughout California, all throughout America.

(on camera): As they say, desperate times call for desperate measures and it seems a lot of folks are looking for any kind of help, including from a four-inch plastic statue.

(voice-over): A statue of Saint Joseph, known as the patron saint of home. If you think it's a joke, just ask this man.

PHIL CATES, ST JOSEPH STATUE SALESMAN: We are a statue selling machine, here.

SIMON: Phil Cates indicates has been selling them for nearly 20 years, but he says in the last two years he has seen his business explode. His Web site takes in thousands of orders every month from anxious home sellers all over the county.

(on camera): You got one going to Washington. CATES: Yes.

SIMON: Washington state, North Carolina.

CATES: Yes.

SIMON: California.

CATES: This one's a gift, if you notice.

We have people that have sold their home the next day after getting a Saint Joseph's statue. So, you can sit here and believe that it's a bunch of biology or you can say this thing really works.

SIMON (voice-over): It works, believers say, by burying Saint Joseph upside down in your yard. The tradition dates back centuries. Saint Joseph was married to the Virgin Mary and in Catholicism, is viewed as the protector of families. Bill Cates is not Catholic, he's actually...

CATES: Lutheran. And I tell you, you don't have to be a Catholic to rely on the powers of Saint Joseph. We refer to him as the non-denominational saint.

SIMON: A few days ago, Cates ran into Steve Ochoa at a Modesto car wash. Ochoa is the manager and told Cates he was having trouble selling his condo. Cates had just the thing for to give him.

OCHOA: Within a half hour that he's giving me this, is when I received an offer.

SIMON: And that before even burying the statue.

So, as as his witnesses, we watched him dig a whole and place Saint Joseph in the ground.

OCHOA: It says to bury this with a few feet of the for sale sign.

SIMON: According to the instructions, the last order of business calls for a prayer.

OCHOA: Please bring us an acceptable offer which when escrow closes, we will dig you up and display you in the honor of our new home. Amen.

SIMON: Dan Simon, CNN, Modesto, California.

(END VIDEOTAPE)

WILLIS: Whatever it takes, I guess. Well you don't have to seek out a higher power to manage your home as an investment wisely, but remember this, your investment, it's not the bricks and mortar, it's your equity, and that's the sum of your payments to principal, upgrades any and appreciation you may have. May you be home rich. And speaking of home rich, my new book called just that, is out this week. For more CNN "Financial Security Watch," check out YOUR MONEY with Christine Romans and Ali Velshi Saturdays at 1:00 p.m. Eastern and Sundays at 3:00.

As always, we thank you for spending part of your Saturday with us. Don't go anywhere, your top stories are next in the CNN NEWSROOM. Have a great weekend.

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