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Subprime Hearings on Capitol Hill; Predatory Lending; Lower Your Taxes
Aired March 24, 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: Good morning. I'm Gerri Willis, and this is OPEN HOUSE, the show that saves you money.
Coming up, raising your credit score and lowering your taxes. But first, I'm here in Washington, D.C., to cover the latest in the mortgage meltdown.
Finally, one Senate committee is getting down and dirty, putting industry executives and regulators in the hot seat. The big question -- why the subprime lending sector, the one that serves people with poor credit scores, is melting down and what can be done about it?
Who's to blame and what's the solution? It seems like everyone -- well, at least the politicians -- have an answer.
WILLIS (voice over): After months of meltdown in the subprime mortgage sector, finally Capitol Hill takes notice. The Senate Housing, Banking and Urban Affairs Committee summoned federal regulators and top executives from the mortgage industry to Washington today.
SEN. ROBERT MENENDEZ (D), NEW JERSEY: The size of this problem that we've heard defined here already leads me to question, regardless of everything that you're telling me, how could it be this big and you have done your job?
WILLIS: Their goal, find out why so many people with less than ideal credit could get their hands on mortgages they couldn't afford, subprime mortgages.
SEN. CHRISTOPHER DODD (D), CONNECTICUT: A study done by the Center for Responsible Lending estimates that up to 2.2 million families with subprime loans could lose their homes at a cost of some $164 billion in lost home equity.
WILLIS: Defaults have already forced one major lending company, New Century, to all but shut down. And the better known Countrywide Corporation says its subprime mortgage defaults this year may be the worst on record. But a Countrywide exec says his company is working on programs to avoid foreclosures, and he's concerned about being reined in.
SANDOR SAMUELS, COUNTRYWIDE FINANCIAL CORP.: What I'm asking is that this committee and our regulators be careful about an over- correction, because we want to make sure that we keep homeownership a viable opportunity for those Americans who can qualify for it.
WILLIS: Connecticut Senator Christopher Dodd chairs the committee, and he blames predatory lenders. Dodd says he's planning legislation on predatory lending.
DODD: The fact that any reputable banker or lender would make these kinds of loans so widely available to wage-earners, to elderly families on fixed incomes, or to lower-income, unsophisticated borrowers, strikes me as unconscionable and deceptive.
WILLIS: Dodd is running for president, and he's not the only candidate with a subprime plan. Hillary Clinton, Barack Obama and Dennis Kucinich all have Oval Office aspirations, and all have similar solutions for the mortgage meltdown.
WILLIS: Let's take a closer look at how or if hearings on Capitol Hill could make a difference to your own home.
Jaret Seiberg is a political analyst with the Stanford Group. Bill Schneider is CNN's senior political analyst.
Bill, I've got to start with you. It seems like every politician, particularly the ones running for president, have latched onto this issue as maybe a big one for them and their candidacy.
Is this real for them or is it just a political football?
WILLIAM SCHNEIDER, CNN SR. POLITICAL ANALYST: Well, it's a real issue, because these are Democrats. Chris Dodd, the senator who is chairing the hearings in the Senate, he is a Democratic candidate for president. Hillary Clinton is running for president.
Democrats, their core constituency consists of poorer people, a lot of whom have benefited from these subprime mortgages, but now feel abused by predatory lending practices. Many of them are facing foreclosure. Those are the Democrats' constituencies, so you're going to find all these presidential candidates falling all over themselves to speak up for this constituency.
WILLIS: We've had hearings before, no legislation has come out on it. Could we have legislation this year, in the next two months, three months? What's the outlook?
SCHNEIDER: Well, I think there could be legislation now that the Democrats control Congress. The question is, how far will it go, how effective will it be?
WILLIS: But it's a mortgage mess, a real mortgage meltdown.
Jaret, I want to turn to you.
OK, the lenders out there, what are they saying for themselves? I mean, you've got to think at the end of the day, you know, a lot of this has to do with their lending standards. Are they going to take action? Do they feel bad about what's going on?
JARET SEIBERG, STANFORD GROUP: That's a great question, because I think you need to separate the lenders into a couple different categories. You have the national banks that make sort of the best of the subprime loans for the most part, and I don't think they feel like they have much to apologize for at this point. But you have lots of very loosely-regulated non-bank lenders, which essentially originate mortgages and sell them directly to Wall Street, and we haven't really heard much from those companies yet.
WILLIS: You talk to them all the time, right? You're writing for them, you're developing information and putting it out for them.
WILLIS: Do you have a sense that they've already been thinking, wow, we have gone too far, our lending standards got too low, we've made a mistake?
SEIBERG: I think there's clearly institutions out there that recognize that they went too far. And there is no doubt that no documentation subprime mortgages, where people just said, "This is what my income is," that clearly crossed the line.
WILLIS: Bill, put this in perspective for us. I mean, come on, is this grandstanding going on? Are we really going to get legislation? And how good is Congress at getting the financial services industry to do anything at all?
SCHNEIDER: The money will find a way to do what it wants to do. That's been the rule.
They could pass all the regulations they want. They passed some regulations in the past, and Wall Street and some of these independent financial services sectors have found ways around it to get the money to people.
Remember, they have to strike a very careful balance here. A lot of lower-income people feel that they benefited from subprime lending because it enabled them to buy a home, and now they're faced with a sudden crisis. So they have to seek a balance between helping people who want to be able to afford a home, even if they can't afford it -- are there ways there could be safeguards -- and protecting them from predatory lending practices.
That's a balance that's very difficult to achieve.
WILLIS: Well, Bill, Jaret, I enjoyed hearing both of your comments. Thank you so much for coming in today.
We have more mortgage meltdown on the way.
Up next, what you can learn from one victim of predatory lending.
WILLIS: Welcome back to Washington, where we're talking about this week's hearings on the mortgage meltdown.
Predatory lending is often where the problems start. It's when rogue banks and brokers try to take advantage of consumers by talking them into loans that could double, or even triple their payments. And as you'll see in this story, any consumer can be fair game.
KARLENE GRANT, DAUGHTER OF LOAN VICTIM: "We're not interested, and we've told you that repeatedly. We've told you we're not interested every day you call. And you continue to call."
WILLIS (voice over): This is a familiar scene at Simian Ferguson's (ph) home, where mortgage brokers call as often as 50 times a day. His daughter, Karlene Grant, is just frustrated.
(on camera): It's just high-pressure sales techniques, right?
GRANT: And they do this to my dad every -- there must be a sign out there that says Simian Ferguson (ph), he took a bad loan. Keep trying, he'll do it again.
WILLIS (voice over): Ferguson (ph) signed up for a complicated adjustable rate loan more than a year ago, and now he's struggling to pay the bills and stay out of foreclosure.
GRANT: He's ill. And, you know, as we all know, when you get older, dementia sets in, and that's a very big part of his illness.
WILLIS (on camera): So he wasn't really in good enough condition to make this decision?
GRANT: He wasn't.
WILLIS (voice over): Grant says Ferguson (ph) was duped by a mortgage broker who cold-called him over the phone. Think of mortgage brokers as a third-party sales team for banks. They sell loans to borrowers, guiding them through the maze of options. When the real estate market boomed, their numbers swelled.
According to the National Association of Mortgage Brokers, there were 53,000 brokerage companies in the U.S. in 2004, and they represented 68 percent of new home loans. The critics of their industry say that brokers and lenders grew too aggressive, offering loan terms and interest rates that weren't affordable for clients, and brokers started selling some of the most complicated and riskiest loans to folks least prepared to understand them, like Simian Ferguson (ph).
The attorney working with Ferguson (ph) says it's not just the mortgage brokers who are at fault for what he calls predatory lending.
NAVID VAZIRE, SOUTH BROOKLYN LEGAL SERVICES: We find that the lenders are basically setting the parameters in the market. They're creating an environment in which brokers stand to gain a lot by engaging in very deceitful practices.
WILLIS: Karlene Grant says her father fell victim to deceitful practices and hopes legal action will help get him back into a loan that's right for him.
GRANT: If you're going to sit with a bank to get a loan, you shouldn't be worried that you're going to be robbed like you're walking out on the street. It has to be a different feel.
WILLIS: Well, as you might imagine, there's a lot of finger- pointing going around about who is to blame for the subprime mess.
Kurt Photenhauer is from the Mortgage Bankers Association and Roy DeLoach is with the National Association of Mortgage Brokers.
Welcome to both of you.
KURT PHOTENHAUER, MORTGAGE BANKERS ASSOC.: Thank you.
ROY DELOACH, EXEC. VP., NATIONAL ASSOCIATION OF MORTGAGE BROKERS: Thank you.
WILLIS: Now, we started by talking about predatory lending, but the hearings that were this week were actually broader. They were about the subprime market. And, in fact, there was just a prediction this week that as many as 2.2 million Americans could default on their subprime loans in the next year, next two years.
What happened? Kurt, how did this whole thing get so out of control?
PHOTENHAUER: Well, let me say, first of all, we don't think that it's that out of control. That number of defaults projected is awfully high. Our own numbers point to the number of defaults that we are anticipating somewhere around 300,000 to 400,000 loans in the next year.
WILLIS: And is that OK, 300,000 and 400,000 loans going bad?
PHOTENHAUER: It is absolutely not OK if you're one of the people who is losing their homes, and I think what policymakers are going to be asking is, how do we prevent this from happening going forward?
WILLIS: I think you've got to agree, though, that it's clear there are problems. Who is the problem actor here?
PHOTENHAUER: Well, as always, it's a combination of events that produce this kind of tragedy for individuals. It's -- it is capital markets in search of a lot of yield or higher interest rates...
WILLIS: Wall Street. You're saying Wall Street. PHOTENHAUER: Wall Street. It's lenders anxious to meet market demand. It's homeowners anxious to get in on appreciating housing rates. It's housing prices going up.
PHOTENHAUER: And in some cases, it's really bad information going to the individual borrowers who have made poor decisions.
WILLIS: And who gives people that bad information, Roy? It's their mortgage broker, right?
DELOACH: Well, let's go back in time first. Back about five or six years ago. We were told by the president we need to put 10.5 million people into homes, and that by 2010...
WILLIS: So it's the president's fault?
DELOACH: Well, let me finish. The industry did respond. We came up with innovative products, and, in fact, in 2002, Chairman Greenspan said, you know, adjustable-rate mortgages are great products. And so the explosion did take place.
WILLIS: Well, that was then. Let me get you to today. I think it's important to talk about the problems that are out there right now.
In the hearings this week, one of the regulators said 80 percent of the subprime mortgages were sold by mortgage brokers. Mortgage brokers don't have to be licensed in every state. There is no educational requirements, there is no testing requirements.
Is there a problem with your industry?
DELOACH: Well, I'm sorry, I have to correct you. You're actually completely wrong on that point. Most mortgage brokers are state licensed by...
WILLIS: Forty-four states.
DELOACH: No. Actually, I'm sorry, it's 49 states. The only state that does not have a licensing schematic is Alaska, which, you know, we're working with that state as well.
But most states have a requirement for mortgage brokers. The people that do get out of any kind of education, criminal background check, are the people that work for banks and lenders.
WILLIS: Is it the banks' fault?
PHOTENHAUER: Look, I think you're making a very good point. People made poor decisions. Most of the time when a lender makes a poor decision, it's because the lender -- the lender doesn't have the right information or assumes the wrong thing is going to happen.
WILLIS: Well... PHOTENHAUER: Sometimes borrowers make the wrong choices as well, and we've got to get them...
WILLIS: So we're going to blame the consumers here?
PHOTENHAUER: No, no, no. Consumers...
WILLIS: Is it important (ph) to blame the people who went out looking for loans and were advised to get into option ARMs? You've got to be kidding me.
PHOTENHAUER: Gerri, consumers need to get good information and understand the choices they're making.
WILLIS: Chris Dodd is saying this week that it's up to the industry to fix this problem, the industry should change what it's doing.
Roy, what should you change?
DELOACH: Well, I think the first thing that Congress could do -- and they could have done many years ago -- is first modernize the FHA program. And moving forward, we need that product. If the banking agencies...
WILLIS: So it's the government's fault. The government should have done -- I need to give you a last chance here to pile in on this question.
Is there some action you guys should take?
PHOTENHAUER: Well, the first thing we're going to have to do is figure out how to deal with people who are now trapped in bad loans, but there are going to still be some who need some new products in this market in order to be able to stay in their homes. And I think the industry's going to have to step up and develop those products so people can stay in their homes.
WILLIS: Well, we'll be following this issue, and we'll probably have both of you back.
Kurt and Roy, thank you for being with me today. I appreciate it.
PHOTENHAUER: Thank you, Gerri.
WILLIS: Up next, two important ways to save you money -- how to lower your taxes and how to raise your credit score. Grab a pen and paper. That important advice is next.
But first, your mortgage numbers.
WILLIS: Grab that pen and paper right now. You probably hear about your credit report the document lenders examine before approving or declining a loan. But lenders also look at your credit score. That's a number that could mean the difference in thousands of dollars in interest you could pay.
Improving your credit score is tough, but it can be done. And we're going to show you how to do it right now.
WILLIS (voice over): Your credit score is your financial DNA. It determines how much money you can borrow and what interest rate you'll pay.
(on camera): The first step towards improving your credit score is to know what it is in the first place, and the quickest and easiest way to do that is to log on to myfico.com or equifax.com. It will cost you about $16. Once you get your score, you'll know where you stand.
(voice over): If you have a score between 750 and 850, you'll get the best loan terms in town. If you're between 700 and 750, you'll get decent loan terms. But between 600 and 700, you'll probably pay more fees and a higher interest rate. Fall below 600 and you may be denied credit flat out.
UNIDENTIFIED MALE: You need to start to bring your debt down.
WILLIS: The best thing you can do to beef up your credit score is to pay your bills on time. Your payment history counts the most. Every time you miss a payment, it will more than likely show up on your credit report. Keep missing payments, and your credit score goes down big time.
Keeping your debt at a minimum is just as important. Paying down high balances on your credit card can raise your score by 70 points overnight.
Use credit cards sparingly, of course, and spread out those debts between a few cards to keep those balances low. Opening up new credit cards is a big mistake, according to credit counselor Money Management International.
CATHERINE WILLIAMS, MONEY MANAGEMENT INTERNATIONAL: A creditor's going to look at you and say, you've got a lot of available credit out there and I'm a little worried about that, that you could get in trouble. In fact, too much credit could give you a higher interest rate on the credit that you really need.
WILLIS: And while opening up new credit card accounts may not be such a good idea, don't be so quick to toss those cards that are over five years old. The longer you handle credit responsibly, the better it reflects on you.
WILLIS: As always, if you have an idea for a "Weekend Project," send us an e-mail to firstname.lastname@example.org. And to check out this "Weekend Project" again, well, just head to our Web site, cnn.com/openhouse.
Now that you know how to raise your credit score, it's time to lower your taxes, next.
But first, a new source of power for one of America's oldest pastimes in this week's "Local Lowdown".
WILLIS (voice over): When the San Francisco Giants take the field this summer at AT&T Park, the sun will be shining down on them even at night. California utility Pacific Gas & Electric announced this week it will install a solar energy system at the stadium. It's the first solar project for a Major League Baseball park.
Five hundred and ninety solar panels will produce 123 kilowatts of electricity, enough to light up a new scoreboard, or about 25 new homes. The new system will be ready to go live at just the appropriate time, Major League Baseball's all-star game on July 10th.
That's your "Local Lowdown".
WILLIS: OK, the tax deadline is less than 25 days away. Donna LeValley is a contributing editor with J.K. Lasser, and she's joining us now from New York. She's here to help.
Hi, Donna. Good to see you.
DONNA LEVALLEY, CONTRIBUTING EDITOR, J.K. LASSER: Hi. Nice to be back.
WILLIS: All right. We have to talk about the dreaded AMT, the alternative minimum tax. Let's start with the definition.
What is it?
LEVALLEY: Well, alternative minimum tax, or maximum tax, is basically a shadow tax system, and it's meant to make you pay some taxes if you're able to reduce your taxable regular income low enough to sort of get out of paying any taxes. It's a flat tax, 26 or 28 percent, depending on how much you earned that year, and it's really hard to plan around.
WILLIS: Really hard to plan around, and it scares people to death, because it's always more money.
Let's talk about the kinds of triggers that force people to pay AMT, starting with these high-tax states.
WILLIS: If you're in New York, California, who's at risk there? LEVALLEY: Anybody in a high-tax state or high-tax city, and that's because you have a large deduction for state and local income taxes. It's the same case for people who maybe took out a home equity loan and didn't use the proceeds for anything but using their home, have large minimum gains, have large miscellaneous itemized deductions.
WILLIS: All right. Let's take these on one by one, because it's really complicated, OK? So let's start with those deductions.
It doesn't have to be state tax deductions, right? It can be any deduction at all. If you just have a lot of kids, for example, you could be a victim of AMT.
LEVALLEY: Basically, the reason why personal exemptions, state and local income taxes, or large capital gains, the reasons why they push you in there because they're not treated the same way on the AMT. So, things you could deduct for regular income tax purposes aren't deductible for the AMT. And when you're able to lower your taxable income enough, that's what triggers the AMT.
WILLIS: OK. High medical expenses. I think you mentioned that.
You say something really interesting, though, about the alternative minimum tax. You say the kind of typical tax planning that goes on can actually push you into AMT.
LEVALLEY: It's true, because what people are generally advised to do is prepay certain expenses, like state and local income taxes, maybe prepay a home equity interest, a loan payment to get more deductible interest on your regular tax return. And basically lowering that regular tax burden too much is what brings you into the fold of the AMT.
So it's sort of -- it's sort of perverse. What you need to do is track how much you're paying and see how close you are to the line so you don't make any bad moves at the end of the year and wind up paying AMT.
WILLIS: You bet. You know, Donna, the fastest tax gun in the West.
Thank you for joining us today. I really appreciate it.
LEVALLEY: Thanks for having me.
WILLIS: And finally, those mortgage tips we promised you.
OK, I know a lot of folks are losing sleep over their mortgage. You're wondering, do I have a subprime loan, and will I be able to afford my mortgage?
You may have a problem if your lender gave you something called a 228 adjustable-rate loan or a 327 loan, or if they gave you what seemed like an impossibly low teaser rate. Now, if that's the case, it's time to consider refinancing. Look, getting a new loan, even one with a higher fixed interest rate, is better than being on the hook for rate hikes with no limit. Look, when your mortgage broker or lender sold you the loan, he had no obligation to give you a mortgage you could afford.
Now, if you want to refinance, get quotes from at least three lenders. Require that they give you a loan with no prepayment penalties and a competitive interest rate.
Read their goodwill faith estimate with care. That's the terms they're promising you.
As always, we'll continue to provide you with ideas, strategies and tips to save you money and protect your house.
We'll be back next week, right here on CNN. And you can catch us on "HEADLINE NEWS" every Saturday and Sunday at 5:30 p.m. Eastern Time.
We thank you for joining us from Washington for this special "Mortgage Meltdown" edition of OPEN HOUSE.
Don't go anywhere. Your top stories are next in the CNN NEWSROOM.
Have a great weekend.
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