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YOUR BOTTOM LINE
Obama's Effort To Fine-Tune HARP, Yet Again; Easing Student Loan Debt
Aired October 29, 2011 - 09:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
CHRISTINE ROMANS, HOST: Another housing rescue program, by our count, the 10th attempt to help struggling homeowners. And that doesn't even include the homebuyer tax credit. Will it work this time?
Good morning, everyone. I'm Christine Romans.
President Obama says he isn't waiting for lawmakers to make up their minds. Big changes coming to student loans, and how you refinance your underwater home. Who will it help? And how fast? We take a look at what really changes for you and your family.
Let's start with housing. President Obama this week announcing new efforts to help struggling homeowners, again. The revamped Home Affordable Refinance Program, or HARP, aims to make it easier for homeowners to refinance high-interest mortgages at these rock-bottom interest rates.
Who qualifies? Homeowners who have mortgages backed by Fannie Mae and Freddie Mac. You must be current on your payments. And you'll now be able to refinance no matter how much you are under water on that home. This lifts a previous limit of 125 percent loan-to-home value ratio. The program also aims to streamline the refinancing process-please-and reduce and eliminate fees.
I'm joined now by Lynnette Khalfani-Cox. She is the founder of Ask The Money Coach.com. Bob Moulton is the president of Americana Mortgage Group. And Rick Newman is the chief business correspondent for "U.S. News & World Report."
Lynnette, the White House says this could mean cheaper mortgage payments for more than 1 million homeowners. Are they right?
LYNNETTE KHALFANI-COX, ASK THE MONEY COACH.COM: The potential is for a million, some people say maybe as much as 1.7 million. But frankly, it probably in practical terms will help a fraction of that, maybe 20 percent, 30 percent or so.
If you look at the previous efforts, that's sort of the range, you know. We have high hopes and we want it to be able to help more. But frankly, even if it does help 1 million, we've got more than 5 million people who are out there either in foreclosure, or who are three months or more behind on their mortgages. So we've got a massive problem we're talking about. And this is just one little element that will help, but it will be a very, very modest impact. ROMANS: You know, Bob, we've been saying that if there were a silver bullet to fire, we would have fired the silver bullet already. The administration says this is going to increase competition among banks to refinance. Why would that be the case? Why would banks be more likely to go ahead with it now?
BOB MOULTON, PRESIDENT, AMERICANA MORTGAGE GROUP: We see a lot of the larger banks that are just clearly out of the market. Over the last year or two, we have a lot of smaller regional lenders that are stepping up to the plate, loosening their underwriting guidelines and being a lot more competitive on interest rates.
This program will help about 1 million borrowers. There's 11 million borrowers in this country that are under water. It's just a small portion to get the whole problem remedied. There's more to come.
ROMANS: Does it move the needle, Rick?
RICK NEWMAN, CHIEF BUSINESS CORRESPONDENT, "U.S. NEWS & WORLD REPORT": I'm a little more optimistic than Lynnette. I think this is a more coherent program than we've seen before.
First of all, there have been so many plastic bullets fired that it really accomplished nothing. I mean, we sort of know what doesn't work at this point. And when you look at the details of this program, it's very targeted. And it addresses a very real problem which is that the Fed has pushed interest rates very, very low. But so many people can't take advantage of those interest rates. So what they're trying to do is just back more refinancing so that more people can take advantage of lower loans.
ROMANS: Why are the banks more likely to go this time? Because they're not on the hook for the default of a property-
NEWMAN: Because the government is now taking more of the risk and saying, look, if you skip some of these steps that are really turning a lot of people off, such as multiple appraisals and a lot of the fees, we'll stand behind the loan, and you're not on the hook if that refinance goes bad.
KHALFANI-COX: I don't want to sound like oh, the pessimist of the group here --
ROMANS: I know, but it's been 10 mortgage-I mean it has been 10 attempts. We haven't quite gotten it right yet.
KHALFANI-COX: I started looking at some of the numbers of what's already happened in terms of the math. We've had about 900,000 homeowners be helped under the existing HARP program. But frankly, only 100,000 of those, less than 10 percent, have had mortgages that their loan-to-value ratio was not in that 80 percent to 100 percent range. So the people who have already gotten help, they weren't really severely under water. So that is why I'm not as-I know they've moved the cap, obviously, which has been a barrier. But it's yet to be seen whether or not competition is going to increase. I hope it does. You know, I want lenders to loosen the purse strings and to really, you know, to make a more competitive marketplace. That's a great thing for a homeowners.
MOULTON: One thing, with the key to this plan, too, you have to be on time with your mortgage payment the last six months. A lot of the big banks were recommending to homeowners not to be on time. Make a late mortgage payment. And then you'll be eligible for, you know, some of the HARP money.
KHALFANI-COX: The modification.
MOULTON: The modification. That doesn't make sense. So this plan that's coming out right now, there's really two tiers to it. One, is it's going to put more money into the economy. If the homeowner keeps it at a 30-year fixed. Or two, they're going to accelerate the term from a 30-year to a 25, 20 or 15-year term. That will accelerate the equity in the home. So the homeowner needs to make a decision before they sign up with the HARP plan.
NEWMAN: Those things make this a more realistic program. And I think part of the problem is a lot of people don't know -- they're so confused. They don't even know where to look for a program. I mean, we're seeing, I think, a little bit more of a good, like, promotional effort for this program. The details are on the web at the FHFA's website. So you can go and find-they're getting better at saying click here to find out if your loan qualifies and things like this. So I think they may actually be able to reach more people who would benefit from this program.
ROMANS: Here's a question for you. Do you have a recovering economy without a recovering housing market, or does it take a job market to recover before a housing market can recover?
NEWMAN: I think it takes housing to recover, jobs to follow that, and the whole economy is dependent on those two things.
ROMANS: Oh, Jeeze. Because a lot of the hope is that if you can get the housing market to start to have some signs of life that will help the overall economy.
MOULTON: It goes hand in hand. Because if you don't have a job, you can't get a mortgage. The rates at 30-year-fixed at 4 percent, if they don't have a two year employment history, they're not going to be able to qualify. If there are smudges in their employment history or smudges on their credit, they are not going to be able to take advantage of the low rates. It's got to go hand in hand.
KHALFANI-COX: And confidence about the job market is going to impact the housing market. Because folks who are thinking, oh, maybe my job isn't as secure as I'd like it to be. This isn't the time for me to trade up, buy a second home, get an investment property, move, relocate, if it's going to be a problem for me to qualify for that mortgage I need.
MOULTON: And people are nervous. They see the stock market go down. They don't want to buy a house. They have an inkling their job might not be stable. We're coming towards the end of the year when layoffs normally happen. They might not buy that house.
ROMANS: Rick, close this out for me. Because a lot of this starts to get political.
ROMANS: And there will be critics who say, oh, the White House has never gotten it right. Never gotten it right. It's going to take a little bit of this and that and to and fro. It was a catastrophic housing decline.
ROMANS: There isn't one thing that will fix it.
NEWMAN: I think we need to give up the idea that there's going to be some big program that gets through Congress that's going to solve the whole problem. Basically, what might make a difference is a bunch of baby steps, that might at some point add up to a bigger step. And we really want confidence to turn around. And we want people to start feeling, I have a little bit of recourse. I have a little bit of wiggle room, so maybe things aren't as bad as all these terrible headlines suggest. And it is just going to take a lot of baby steps.
ROMANS: Rick Newman, thanks for being here. You, two stick with us for a second.
Roughly 12 million people in this country don't refinance their mortgage even though they qualify for it. Are you one of them? We look at when refinancing makes sense to you and what you need to know to get the best terms. That's next.
ROMANS: All right. Not refinancing your mortgage could be costing you money. But how do you determine if refinancing makes sense for you? Bob and Lynnette are back.
Bob, you've got a formula for me. What's your refinancing formula?
MOULTON: It's very simple, Christine. You have to look at what it's going to cost you to refinance. If you have a $200,000 mortgage, and you are going from 6 percent to 4 percent, you're going to save about $200 a month. If it costs you $4,000 to close that refinance, you're going to be even at about 20 months.
So you have to ask yourself, are you going to be in the house for 20 months? If the answer is yes, you refinance. If the answer is no, don't refinance. Don't waste the money. Don't spend the money.
ROMANS: There you go. It also depends on how long you have on the term of the loan, right?
ROMANS: The more time you have on that loan, the longer you think you'll be in the property, the more sense it makes to refinance.
MOULTON: Right. A lot of people, too, are reducing their term. I mean, people who have 6 percent, 30-year fixed are coming down to a 3.25, 15-year fixed rate mortgage. They're knocking or 12, 13, 14 years off their mortgage. There's a lot to be said for that.
ROMANS: But this doesn't magically happen overnight. You have to do steps, Lynnette, to make yourself ready for this process.
KHALFANI-COX: That's right.
You've got to get that credit together. That's one of the key points right now. Check your FICO credit score. Myfico.com is the place to go for that. Get those credit reports. Go to annualcreditreport.com.
ROMANS: That's free.
KHALFANI-COX: That's free to do that there, obviously. Dispute any mistakes you have in the credit reports. Spruce that stuff up.
Saving money. This matters, too. Banks like to see cash reserves on hand. They don't want to feel like oh, we're going to lend to somebody who's cash strapped, living paycheck to paycheck, or if they happen to lose their job, won't be able to make the mortgage payment and float it for three months. You have to do some preparation there to get yourself ready.
ROMANS: What are some of the mistakes that people commonly make?
KHALFANI-COX: The biggest mistake, by far and away, is a failure to shop around. If I had one bit of advice.
KHALFANI-COX: Oh, absolutely.
ROMANS: See, I'm thinking of doing this. I just called up the person who's got my mortgage.
KHALFANI-COX: And I bet you were going to go with your existing lender, right?
ROMANS: That seemed easy.
KHALFANI-COX: See, and that's the path of least resistance and that is the path that is most expensive, as well.
KHALFANI-COX: Get online. Do some comparison shopping. Go to HSH.com. This is a great resource for your viewers. HSH.com. It's a free resource where you can mortgage comparison shop. You can find out the best rates and what's out there and available for you. You've got to make these banks compete for your business. Your existing lender, frankly, doesn't have much motivation to lower your interest rate from, say, X to X-minus 1 percent. They've already got you in a contract for 30 years or whatever, right? So make them compete. A mortgage broker is another option. Somebody who can help you to shop around. Do shop around.
ROMANS: What are the other big mistakes that people make?
MOULTON: When people do shop, and I agree, you should shop around. Don't shop around with the company that's not local to your area. A lot of times people will find a great rate that they think is going to be fantastic. It might be way out of state. It might be a company that's in the Midwest and the property is here in the Northeast. And when the company comes in to do the appraisal, they're not familiar with the area. And the appraisal comes in very short.
If you are going to shop around, try to stay with a lender that's local or get someone that's going to be referred to you. The best source to get a new mortgage is work with someone who's been in the business, understands the local market, and knows how to get the deal done. The rate's important, but qualifying is even more important.
KHALFANI-COX: And I should add also, when you're looking for a good rate, don't just look at the stated interest rate. Factor in the APR, of course, which is the interest rate plus the total cost of the loan, all the fees added in there. Because people just think, oh, I saw this commercial on TV. And they said I could get a no-cost, you know, refinancing. It's not true. Either it's going to be factored into your interest rate, but you're going to have some fees.
ROMANS: If it sounds too good to be true.
MOULTON: It's not true.
ROMANS: What are reasonable fees? Does it depend on the size of the loan?
MOULTON: It does correlate with the size of the loan. But a lot of the fees are state regulated such as title insurance. Then you have a bank attorney and you have an appraisal fee.
ROMANS: It's like buying the house all over again, folks.
MOULTON: Not really. Because in some states where you have New York state mortgage recording taxes, you won't have to pay that again. It should be a lot less expensive. You do have to go through the whole process like you did when you did buy the house.
The larger the loan, the larger the fees. So if you have a house that's over $1 million, the appraisal fee could be $1,000. Whereas if you have a house that's $400,000 or $500,000, the appraisal fee could be about $300.
KHALFANI-COX: In general, you should expect four different types of fees. Lender fees, title, escrow fees, and government fees. You know what? It's going to be everything from, like he said, the appraisal fee to the application fee.
ROMANS: You have to carefully do your math to make sure that you think you're going to be in this home. If you shorten the duration of the loan, if you go to a 15-year, you have to be able to make sure you can handle those monthly payments for the next 15 years.
KHALFANI-COX: That's right.
ROMANS: You've got a solid income, but you could be save tens, if not hundreds of thousands of dollars in interest depending on the size of that loan. So everyone should be looking into refinancing, you are both telling me.
MOULTON: That's right.
If you look at the HARP plan, people that have a $200,000 mortgage with $167,000 value, if they take out a 15-year fixed in three and a half years, they would have amortized enough principle to be down to $160,000. In five and a half years, if it is a 20-year fixed. And if you take out another 30-year fixed mortgage, you're not going to amortize down to $160,000 for 10 years. So it's something to think about.
ROMANS: The goal is, of course, to get all of that money working in the economy so there can be a housing market recovery and an economic recovery.
ROMANS: Your final thought, Lynnette?
KHALFANI-COX: Refinance when it's smart for you and when it makes sense. Yes, check the break-even, to make sure that the fees are going to pay off for you. But do it in accordance with your goals. If you're in your 50s, don't get another 30-year loan, and you've already paid down 10 years. Refinance to a 20-year or 15-year loan.
If you're trying to pay off credit card debt and that's the reason you're refinancing, maybe not a smart strategy actually if you haven't controlled your spending problem, or you don't know how to work a budget. So make sure that your refinance actually suits your long- term goals.
ROMANS: Very good advice. That's why we always have you on, Lynnette.
Lynnette Khalfani-Cox, also Bob Moulton, thank you so much. Nice to see you.
MOULTON: Thanks, Christine.
ROMANS: Epic student loan reform, but does it really address the rising cost of education? That's next.
ROMANS: Passed alongside health care reform, a couple of years ago, was the most sweeping revamp of student loans in a generation. The president, this week, moved to push up the start date for new student loan repayment rules. That means important help for graduates starting in 2012.
Kevin Carey is the policy director with Education Sector, a nonpartisan, independent think tank that looks at education issues. He joins us from Washington.
All right, Kevin, pay as you earn. An income-based repayment plan, loan payments now will be capped at 10 percent of discretionary income starting in 2012. That's instead of the current law which is at 15 percent. This is going to happen earlier than they had thought.
Income-based repayment, nothing new, but you know what? Many people don't take advantage of this. Give us a little idea of what the president is doing here and whether this will really help people.
KEVIN CAREY, POLICY DIRECTOR, EDUCATION SECTOR: Well, I think the president recognizes there are a lot of students out there who are graduating from college into a tough economy. And they can't find the jobs they need to pay their loans back. You see it on Occupy Wall Street with the signs of "Here's how much money I owe."
So the plan that the president proposed this week says that students starting next year, when they graduate from college, will be able to apply for this program. And if they qualify, if their income is low enough, their payments will be capped at 10 percent of their income. So they won't have to choose between paying their rent and paying their loans.
ROMANS: And that's something that's going to put money hopefully back into the economy. That's the point.
Carmen Wong Ulrich is the author of "The Real Cost of Living."
The other part is consolidating federal loans. That options starts in January. Borrowers who receive up to half a percentage interest rate reduction. The White House says, Carmen, about 5.8 million borrowers have both a direct loan and a federal family educational loan, requiring separate payments making it easier, frankly, to default. Both parts of these plan-you know, this is-is this something borrowers couldn't have done in the first place? The White House is really trying to put a spotlight on these programs.
CARMON WONG ULRICH, AUTHOR, "THE REAL COST OF LIVING": Well, here is the thing. The information just wasn't out there. And we know because we talk about this a lot.
ULRICH: But the information as to the income-based repayment program, as to even the difference between subsidized and unsubsidized, and private versus federal, it's not widely enough known. So a lot of this has existed. But in terms of how do you get the message out. You know, the Consumer Financial Protection Bureau just launched a Web site, which this is very useful. You can go to ConsumerFinance.gov and it has some useful tactics to compare financial aid packages. What to do if you can't pay.
But frankly, here is the trouble. We've got the cost of college shooting up, we have the need for the degree shooting up. And all of this demand just falls off the end, because the jobs aren't there.
ULRICH: And also, wages have gone so far down. So something is going to have to get give.
ROMANS: We don't address in any of this the rising cost of college.
ROMANS: I mean, this is about how to pay for something, Kevin, that is still the rising cost of college.
ROMANS: That's still a problem at its core. You have a lot of people who are asking me questions like, Christine, should I be saving money for college if my kid can take out loans and after 20 years they are going to forgiven anyway. Why am I bankrupting my family, or putting my own retirement in jeopardy? Shouldn't I just be pushing the kid off onto the loan market?
CAREY: Well, you need, particularly in this economy, more and more, you have to have some kind of college credential, a four-year degree, a two-year degree, a work force certificate, in order to have a fighting chance at a good job. So it's important for people to go to college. But they need to be able to afford college. We just found out from the College Board the average cost of a public four-year university went up by 8 percent last year.
Way, way higher than inflation. That has been the pattern for 30- years now. And so this is the elephant in the room, in this conversation, which is we can put more money into the Pell Grant program, as we have. You can make it easier for people to consolidate their loans, but if the price of college keeps going up, this will be a huge problem.
ROMANS: Yeah. And it does keep going up. And if you look at that same study, and it showed that even a public university, a state school, over the past 30 years, tuition has quadrupled. That's supposed to be your middle class family way out. You pay your taxes, you can send you kid to school for cheaper.
Now, Carmen, if you've got private loans, you are already in default you don't qualify. This week we saw President Obama try to tackle housing reform again. Past housing programs haven't worked the way they wanted. Will student loan reform really work? ULRICH: Here is the thing it only helps if you're a college student, if you are a recent college grad. What about the $1 trillion of outstanding student loan debt that already exists?
Here's the thing. How are these folks going to pay for it? We have a solid 10 years where you said, quadrupled these rates. Private schools, private school tuition is running at about $55,000 a year, for room and board and tuition? That's outrageous. That is what people make in a year. So, here's the thing. What are we going to do about this gap? This 10-year generation of folks who have this $1 trillion in outstanding loans? You cannot discharge them in bankruptcy. What is the plan for them? We can help the students coming in 2012, but what is the plan for dealing with the debt right now?
ROMANS: Is there an income-based payment option for kids right now?
ULRICH: Absolutely. It absolutely does exist. You can go to IBR info.gov-or .org, sorry. And you can go there and check if you qualify for this program. And it's 15 percent of your discretionary income. And don't forget, too, if you are in the non-profit sector, if you work for public institutions, teachers, nurses, hospitals, you get your loans forgiven after 10 years. Make sure you look into that.
ROMANS: All right. Great. Kevin and Carmen, thank you so much.
ULRICH: Thank you.
CAREY: Thank you.
ROMANS: Really incredibly important information from your student loans to your home, your budget, your retirement. If you can't speak money, you're los lost.
Move over Rosetta Stone. When it comes to the language of money, my good friend, Ali Velshi and I will have you fluent in no time. That's next.
ROMANS: Many of the money questions we cover on this show every week, you can also find on the pages of a new book I have written with my friend, Ali Velshi.
ALI VELSHI, CNN CHIEF BUSINESS CORRESPONDENT: That's what I have to do to get on this show.
ROMANS: We don't agree on very much, but we wanted to give you one example. It is savings. I hate to part with money. And if you have a middle of the road investment for me that I can't lose any money on that is what I love. But Ali likes to make money with his money. I'm the conservative one. You're the more aggressive one. And that is sort of what it is about, to speak money. Everyone is different. VELSHI: Yeah. And it's not like I have something against saving. People have to do this. But if this were 1982 and you could put your money in the bank and get 15 percent, that's one thing.
ROMANS: Or 18 percent, I know.
VELSHI: But people who are savers can't get anything for their money right now. And as much as you have been burned by the market, or you have been burned by the economy, you've got to do something to get prosperous.
ROMANS: That's right. Because we do know the economy isn't really favoring savers. There's no question about that. A lot of people need to have a discussion about what you want your money to do for you, and how the more aggressive person in the couple can help you grow your money. And the more cautious person in the couple can make sure you're not going to lose your money. There is a good balance to be found there.
VELSHI: There's a space in between. The idea of investing doesn't mean you're throwing it all out there and you're risking everything you have. And the idea of being cautious doesn't mean you go to your local bank and sign up for 0.2 percent in interest. There's a space in between us. And the book talks about that. Because I think most people kind of live in between.
ROMANS: I absolutely do feel that. I think also there are some things that are universal for everyone. You need to rebalance your 401(k). You need to be signed up for your 401(k). You need to be paying, investing in your retirement before your kids' college. But there's a lot of different things where you can find common ground no matter what you think about money or how you feel about money, and try and protect it.
VELSHI: But we both agree on one thing. If you're paying interest, if you're paying 10 percent or 15 percent or 20 percent or more on a credit card, forget the conversation about saving and investing. Your absolute best investment is aggressively paying down that debt. Then you have that conversation about what you're investing in.
ROMANS: And we agree, too. You have to dig out of debt first. Then you have to live below your means. I say 10 percent below your means, to start to grow that wealth. You can grow that wealth first through saving, but then by investing it in different ways. That is where Ali, sort of takes over. And he knows all the investing stuff. But it's all in there on how to speak money because we speak money on television every day. But we speak money very differently with different accents. I think we hear things differently from each other.
VELSHI: Really, we are able to understand each other.
ROMANS: That's really the point of our book. It's called "How To Speak Money: Your Personal Investment Style Is A Reflection of Who You Are". VELSHI: What our book tells you, by the way, is how to understand the language of money. Because it is a language you cannot afford not to know, particularly in this environment. The book comes out very soon, November 8th. But it's already available on Kindle, if you want to order it now. Or on Amazon.com. And I think you get a break if you order it early.
ROMANS: I know. Thanks for dropping by.
VELSHI: It's good to be here.
ROMANS: Nice to see you. Have a great weekend.
VELSHI: Maybe I'll write a book again and I'll come back.
ROMANS: There you go. I know that's going to be a lot of work for both of us.
All right. Let's keep the conversation going on line. Are you saving for college? Wondering if you qualify for the latest government housing rescue? Wondering whether the housing market deserves to be rescued? Weigh in, please, on Facebook or Twitter at CNNBottomLine and find me, @christineromans.
Back now to CNN SATURDAY for the latest stories making news. Have a great weekend.