What to Expect As New Rules on Credit Cards Take Effect

From the Wall Street Journal

Credit-card users get new protections this week, the first of a series of federal actions that constrain card issuers from changing terms on customers.

Starting Thursday, banks must comply with parts of the recently passed Credit Card Act of 2009 by mailing bills at least 21 days before their due dates and providing at least 45 days’ notice before making a significant change to their rates or fees. Currently, banks are generally required to mail billing statements at least 14 days in advance and provide a 15-day notice of altered fees or rates. The new rules also will bar banks from increasing fees and rates without warning when a consumer misses a payment or exceeds a credit limit.

Consumers also will be allowed to avoid future interest-rate increases and pay off any outstanding balance over time under the original rate terms. Currently, if a consumer gets hit with a penalty rate, for example, they aren’t given the option to reject the rates.

The bulk of the legislation’s key provisions will take effect in February 2010, including limits on interest-rate increases on existing balances. The following July will see the introduction of new disclosure rules, drafted and approved by the Federal Reserve Board and other banking regulators.

In anticipation of the legislation, major card issuers have been raising interest rates and fees, reducing credit lines and closing accounts. Banks say the changes also are being driven by the weak economy, which has resulted in higher losses and funding costs. Earlier this month, for example, American Express Co. notified its Blue, Optima and co-branded credit-card customers that it was raising interest rates by an average of two to four percentage points. Other changes to these cards, which take effect with customers’ October billing statements, include higher rates and fees for cash advances and late payments. American Express also eliminated fees for customers who exceed their credit limits, months before the legislation clamps down on a host of card fees.

Favoring Variable Rates

Other issuers, such as Bank of America Corp., J.P. Morgan Chase & Co.’s Chase Card Services and Discover Financial Services, recently converted customers’ fixed rates to variable ones. The changes will make it easier for issuers to bump up the rates they charge without notifying customers. By contrast, banks must currently notify fixed-rate card holders of any change in rates.

Banks are also paring back their rewards programs. Citigroup Inc., for example, has started adding annual fees to some of its rewards cards, such as the Citi Diamond Preferred Rewards card. Under the Discover More Card rewards program, customers can earn an additional 5% back on purchases in categories that rotate quarterly; for the third quarter, however, the cap on purchases that qualify for the cash-back bonus was lowered to $300 from $400. Meanwhile, Chase last fall scaled back the bonus opportunities on its no-fee Chase Freedom cards. For Chase Freedom card customers wanting to earn a fixed 3% bonus for spending in the grocery, gasoline and fast-food categories, Chase now levies a $30 annual fee.

While the new legislation will help eliminate sudden rate increases and force more disclosure, the banking industry has said the restrictions will reduce available credit. The cost of borrowing also will rise, companies say, since they will have to be more careful about giving credit. Average interest rates on credit cards rose slightly to 14.43% through May, according to the Federal Reserve, although rates are still below historical levels of 18% and 19% that were typical 20 years ago.

According to Consumer Action’s 2009 credit-card survey, which looked at 39 cards from 22 financial institutions, rates and fees began climbing this spring. The advocacy group said more credit cards now come with minimum cash-advance fees and higher balance-transfer and foreign-transaction fees.

“There’s no question that issuers are taking advantage of this window before it closes to make as many changes as freely as they’ve been accustomed to,” said Ruth Susswein, Consumer Action’s deputy director, national priorities.

Changes to card terms are causing some consumers to alter their spending patterns.

After Bank of America raised his 7.9% fixed rate to a 13.9% variable rate last spring, Mark Nilles paid off his remaining balance, shopped around for another card and canceled his BofA card. In the future, the Arvada, Colo., hydrologist said he plans to rely on savings or shorter-term, fixed-rate loans instead of credit cards to pay for one-time expenses.

“It made me reassess everything that I was doing credit-wise,” said Mr. Nilles.

More Fudge Room

For now, consumers should check their statement due dates to make sure they’re getting the required additional time to pay their bills. Some people may want to adjust any automatic debits coming out of their checking accounts to make sure they’re not paying their bills sooner than they need to, said John Ulzheimer of Credit.com, a consumer-education Web site. “This gives you a little more of a fudge period,” he said.

Consumers are likely to find better credit-card deals if they also have a checking account at the bank. Under Chase Card Services’ Chase Exclusives program, for example, Chase Freedom card holders who also have checking accounts at the bank can earn up to 10% more points on their spending.

The bank also rolled out a new credit card, “Slate From Chase,” that automatically refunds the 12th month’s interest charges each year if customers enroll in the bank’s AutoPay program from a Chase checking account.

Meanwhile, for a limited time, Citi is offering some customers an additional 2% cash-back bonus on qualified spending on Citi credit cards if customers also have a banking relationship at the company.

Write to Jane J. Kim at jane.kim@wsj.com

Cardholders Get Rude Surprise at the Register

From the Wall Street Journal

Reassessing Risk, Issuers Quietly Cancel Accounts, And It’s Perfectly Legal

In March, Mary Horowitz was trying to pay for a birthday spa treatment when she learned that American Express had canceled her card.

The Durham, N.C., lawyer spent the afternoon on the phone with AmEx customer service. Representatives told her that her card was canceled and that a letter was on its way that would tell her more. Ms. Horowitz had received no advanced notification of the cancellation and had successfully used the card two weeks before.

“The spa was great,” she says, “but it was a pitiful day.”

A few days after the spa incident, she received a letter confirming that the issuer had cut her off because of information contained in her credit report. She checked her credit report, and it was clean except for a late car payment in December 2005, she says.

More and more consumers are getting to the cash register to find that their credit cards have been canceled without their knowledge. Consumers say that it is often embarrassing to have a card declined in front of friends and other customers, and that it is frustrating when customer service is able to confirm only that the card was canceled, but not why.

But while it may seem to be bad form, in some cases, it is legal for a credit-card issuer to close an active account, like Ms. Horowitz’s, and notify the cardholder, or send out a letter, after the fact. Even when closure notifications are received before a consumer experiences card denial at a register, letters can be lost in mailboxes, as consumers shuffle through piles of junk mail. Those who have recently changed addresses or are traveling are often left in the dust.

Although the law governing notification of account closures is nothing new, its effects are increasingly being felt by consumers as card issuers try to curb their own risk in an uncertain economy. It is unclear how many consumers have been hit by instant card cancellation, but cardholders at AmEx, Bank of America Corp., Citigroup Inc. J.P. Morgan Chase & Co. and HSBC Holdings PLC also say they have recently had their active cards canceled before they received notice.

When Lane Gold’s HSBC Cash or Fly Platinum MasterCard was turned away at a Hoboken, N.J., sushi restaurant in April, he feared the worst. “You start thinking of everything bad that could have happened,” Mr. Gold says. “Was the number stolen? Is it fraud?”

It wasn’t fraud, he learned after calling customer service. He was told that the bank had canceled his card and that it was “reassessing risk,” he says. He has never missed a payment, monitors his credit score and doesn’t carry a balance on any of his credit cards, he says. He ended up paying with another credit card at the restaurant.

If an issuer cancels an account due to customer inactivity, default or delinquency, notification to the cardholder isn’t required, according to the Equal Credit Opportunity Act. However, an issuer is required to notify consumers about an account closure if the issuer terminates it based on other factors, such as information from a consumer’s credit report. In these cases, like Ms. Horowitz’s, written notification is provided within 30 days of—not necessarily prior to—the account’s being closed.

New regulations from the Federal Reserve, the first of which go into effect Aug. 20, and rules from Congress that unroll in February 2010 will still permit card issuers to cancel accounts without providing advance notice. The regulations will curb other controversial practices. They will prohibit card issuers from hitting borrowers with an additional fee if they go over the credit limit on their card. Cardholders will also receive 45 days notice in the change of terms, such as an interest rate increase or reduction in credit limit. But the 45 days’ notice won’t apply to account closures, regulators say.

In recent years, issuers have been closing inactive accounts, or accounts that haven’t been used in a year or more, to cut down on risk. If an account is closed because it is deemed “inactive,” many issuers, like Bank of America, won’t notify the cardholder at all, nor are they required to. BofA says open credit lines are a credit risk to the bank. Other large issuers, like Chase, are doing the same.

Chase says that it is managing potential exposure by evaluating active accounts and closing inactive accounts. “Inactive cards with large open credit lines present a real risk of fraudulent use and large potential liabilities for Chase,” the bank said in a statement.

There is new concern that active lines of credit, or lines that have been used within the past year, also pose potential risks to issuers, says John Ulzheimer, head of educational services for Credit.com, a credit-education Web site. Although cancellations aren’t directly affected by the new regulations, the reassessment of customers by issuers “is part of the pro-active housekeeping” before new regulations take effect, he says.

Mr. Ulzheimer says he thinks many card issuers are also worried about the unemployment rate, home values and overall tightening of consumer credit. “Issuers depended on these things going up, too,” he says.

Also troubling to issuers are rising delinquency rates on consumer credit cards. The credit-card delinquency rate, which measures the percentage of consumers who are 90 or more days delinquent on one or more credit cards, rose to 1.32% at the end of the first quarter of this year, according to credit reporting agency TransUnion, from 0.91% two years earlier.

The ultimate shakeout for consumers can be confusion.

Mallorie Schultz found out that both of her Chase credit cards had been canceled when she called to activate her new cards, bearing her new last name. (She was married in February.)

The accounting-firm office manager in San Diego, Calif., was shocked when Chase customer service told her the two cards, with limits of $1,000 and $2,500, would be closed. She carried a balance of $700 and $1,000 on the cards, respectively, and had used them regularly in the past year. She said she has never missed a payment on either of those cards, or any other. Ms. Schultz is one of 20 million former Washington Mutual credit-card holders who transitioned to Chase after WaMu was purchased last year. The letter she got from Chase listed reasons her account could have been canceled, she says. When she called customer service to find out which specific reason applied to her, she was referred to a credit-reporting agency, she says.

In addition to managing wedding expenses, Ms. Schultz says she has been helping her parents with their bills. Having her lines of credit gone has caused a financial scramble, she says.

American Express Co. doesn’t comment on specific cases but said it emails customers about credit-limit reductions. AmEx, Bank of America, Citigroup, J.P. Morgan Chase, HSBC all said that they are re-evaluating risk and comply with the current laws. They also said it is possible for consumers to have their cards canceled, and, consistent with the law, be notified within 30 days after cancellation.

“It’s extremely frustrating,” Ms. Schultz says. Chase “chopped me off when I was already down.”

Write to Mary Pilon at mary.pilon@wsj.com

Banks Get Picky In Doling Out Credit Cards

From the Wall Street Journal

When Edward Miller recently applied for a Charles Schwab Corp. credit card, a company representative asked him to fax in copies of his bank-account statements to verify his net worth.

It was “a bit of a hassle,” says the 64-year-old retired economics and finance professor from Bethesda, Md. He complied and was eventually approved for the card—with a $5,000 limit.

After years of mailing cards out to just about anybody, banks are suddenly freezing out all but the most creditworthy customers. Those who do get cards have to jump through more hoops, such as sending in copies of their pay stubs. And they’re being hit with higher rates and fees.

Banks always tighten credit standards in an economic slowdown. But the recently passed Credit Card Act of 2009 is forcing the industry to rewrite the play book it has used for years. The new legislation aims to limit fluctuating interest rates, ban some controversial practices and arm consumers with more information on their debts.

Banks have until February 2010 to comply with the act’s key provisions, although some parts of the law have earlier deadlines. Beginning in August, for example, issuers have to mail bills at least 21 days before the due date and provide at least 45 days’ notice before changing any significant terms on a card.

The result: Many banks are tightening things up now before many of the restrictions go into effect.

For consumers, the tougher underwriting standards by banks may seem like a pendulum shift back to an earlier era when credit cards sported annual fees and double-digit interest rates.

In recent years, issuers cast as wide a net as possible by offering credit to millions of customers, knowing they could always raise rates on those who turned out to be bad bets. That pricing flexibility helped firms rapidly expand their operations, as those with less-than-stellar credit—many of whom carried a balance or paid late fees and penalty rates—generated millions of dollars in revenue.

Now, the industry is scrambling to figure out who its new profitable customer is. “Without the ability to reprice customers, raise fees or rates, the old profitability calculation won’t apply,” says Alan Mattei, managing director at Novantas LLC, a bank consulting firm.

In recent months, banks including Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co., have raised interest rates and fees, switched customers with fixed rates to variable ones, and dropped credit lines and closed accounts. Credit Suisse Group’s Moshe Orenbuch expects credit-card balances could shrink by 10% to 15% through 2012 as banks drop their teaser-rate offers and cut back on offering credit to riskier customers.

Charles Crawford of Grand Prairie, Texas, says that Bank of America raised the interest rate on his $19,000 balance to 23.2% from 12.2% starting with his June statement, citing his high balances. Mr. Crawford says the move nearly doubled his monthly finance charges to about $420 from about $220. “I feel so upset with them that I was thinking about not paying them,” says the 58-year-old engineer.

Repricing Accounts

Although Betty Riess , a spokeswoman for Bank of America, declined to comment on an individual account, she noted that the bank periodically reviews individual accounts and may reprice an account for risk, based on the individual’s performance and external credit-risk factors.

In April, Bank of America also notified some customers who had interest rates below 10% that their rates would increase starting with their June statements, reflecting current economic conditions and the cost of providing credit, says Ms. Riess. In both cases, individuals could call and opt out of the new rate, and pay off any outstanding balances under the old rate, as long as they stopped using the cards.

“Prior to the Card Act, we were able to charge people for the risk they posed and, as a result, also allowed others to pay lower rates,” says Kenneth Clayton, senior vice president of card policy at the American Bankers Association, a trade group in Washington.

Banks are also facing higher losses due to the economy and higher funding costs, all of which make it harder for them to lend, he says.

For consumers, this means that not only will it be harder and more expensive to get credit, but the average credit line that gets assigned up front will be less generous, says Rich Tambor of Novantas. That would have been true in any economic slowdown, but the legislative changes are exacerbating those trends. For example, the percentage of credit applications that are getting a “human look” is increasing, he says. Discover Financial Services, for one, says it has been doing more manual underwriting of new applications due to the economic environment.

In the short term, banks will focus on making up for lost revenue by getting existing customers to spend more—mainly by offering targeted reward programs, says Gene Truono, managing director at BDO Seidman LLP’s BDO Consulting.

He expects that annual fees, including fees to redeem rewards points, will go up. In the meantime, loyalty offers—such as bonus cash-back incentives—to existing customers are up through the second quarter, in contrast to overall offer mailings, which are down sharply, according to Mintel Comperemedia, a market-research firm.

Two Flavors

Eventually, issuers’ products could boil down to two main flavors: no-fee, no-frills cards that can be offered to a broader group of customers, and “premium” rewards cards with annual fees, says Megan Bramlette of Auriemma Consulting Group.

Chase’s new rewards program, for example, features two cards: the Chase Freedom card, a no-fee card that earns 1% cash back on all purchases (with quarterly bonus opportunities), and a Sapphire Preferred card with enhanced rewards benefits for a $95 annual fee.

The Chase Freedom card also comes with an upgraded feature that lets customers earn a fixed 3% bonus for spending in grocery, gas and fast-food categories for a $30 annual fee.

Write to Jane J. Kim at jane.kim@wsj.com

Holders of delinquent loans under fire

From the Boston Globe

Bank of America Corp. and Wells Fargo Home Mortgage, two of the nation’s largest owners of delinquent mortgages, have reduced mortgage payments for only a small number of homeowners under the Obama administration’s plan to stem the foreclosure crisis, well below the performance of other banks.

The Treasury Department yesterday released its first monthly report card on the government program to help distressed homeowners reduce their mortgage payments. The report analyzed, lender by lender, the percentage of 2.7 million mortgage loans that have been renegotiated nationwide.

Bank of America, which holds nearly 800,000 of the loans, restructured only 4 percent of its share. Wells Fargo, with 330,000 such loans, has modified 6 percent of its loans.

Several big banks did better, according to the Treasury report.

JPMorgan Chase & Co. modified 20 percent of its share of the loans, and Citigroup Inc. modified 15 percent.

Other lenders approved payment reductions on up to 25 percent of their loans.

In March, the government launched the $50 billion program to help up to 4 million financially troubled borrowers, those who can’t afford to pay their mortgages because their interest rates spiked or they have lost income. The Treasury’s report card analyzed eligible loans that were delinquent for at least 60 days. It showed that only 235,247 of those borrowers, or 9 percent of the total, have been given a three-month trial modification, which becomes permanent if the borrower pays on time.

Boston-area housing advocates were not surprised by the government’s findings.

Bill Minkle, executive director of the nonprofit Ecumenical Social Action Committee in Jamaica Plain, said his counselors have had to send and resend documentation to lenders, and then wait a long time for a response. If loan modifications are approved, the new agreements often come with large balloon payments added to the end of the loan term.

Minkle said Bank of America and Wells Fargo – which have received billions in federal bailout money – have been especially difficult. “They look for reasons to not do modifications,’’ Minkle said. “There is no consistency.’’

Eloise Lawrence, a staff attorney at Greater Boston Legal Services, wondered whether government incentives are enough to get lenders to help struggling borrowers. She said Bank of America has been one of the most difficult when it comes to helping her clients avoid foreclosure. In one case, she’s been negotiating for more than a year, without a resolution.

“I can’t get an answer to basic questions in letters I’ve sent,’’ she said. “It’s so far from acceptable, it’s incredible.’’

Bank of America officials could not be reached for comment. Wells Fargo said it is helping distressed borrowers through other programs, and is accelerating its use of the Obama plan.

The government yesterday detailed big disparities among the 38 companies that have signed up for the program. According to the report, Saxon Mortgage Services Inc. had the best results among the large lenders, with one in four of its eligible borrowers getting a new deal. Aurora Loan Services LLC, GMAC Mortgage Inc., and JPMorgan Chase all had one in five qualified borrowers in a trial loan.

“We think they could have ramped up better, faster, more consistently, and done a better job serving borrowers and bringing stabilization to the broader mortgage markets and economy,’’ said Michael Barr, a Treasury Department assistant secretary. “We expect them to do more.’’

Meanwhile, several smaller companies – including PNC Financial Services Group Inc. in Pittsburgh – have yet to modify a single loan. PNC, which owns National City, was up and running in early July.

“National City is working with qualified customers to make mortgage modifications available. There are loan modifications in the process,’’ said PNC spokesman Fred Soloman.

Material from Globe wire services was used in this report. Jenifer B. McKim can be reached at jmckim@globe.com.

Rethinking Bankruptcy

From the Wall Street Journal

Bankruptcy is a key component of this country’s safety net. If you plan ahead, it doesn’t have to wipe you out.

There’s a surge in personal bankruptcy filings at the moment, for obvious reasons. Some 30,000 Americans are filing each week, and the figures could top 1.4 million for the year.

But too many people are talking about bankruptcy as if it’s a sign this country’s social safety net has failed.

It isn’t. Bankruptcy is part of the safety net. Other countries have welfare states, America has bankruptcy. And so long as you plan ahead, it doesn’t have to wipe you out.

If you are smart you could get through a bankruptcy filing and still keep your home, your retirement savings, the childrens’ college funds, your car and your personal effects. Amazingly, according to a recent study by the Federal Reserve Bank of Boston, you may even get your credit cards back pretty soon — whether that is a good thing is another matter.

I don’t want to encourage irresponsible behavior. But I don’t write the laws, and they are there for a reason.

Furthermore, although there is some dispute about the numbers (we’ll get to that in a minute), it is certainly the case that sheer bad luck lands a lot of people in bankruptcy court. Yes, some people spend themselves into oblivion on Jacuzzis and trips to Lake Tahoe. But many others are walloped when their job is eliminated or when a child gets very sick.

Every middle class family should be aware of the risks of bankruptcy, and how to protect their assets if the sky falls.

Bankruptcy laws are complex and vary from state to state – if you want to make substantial plans you should probably talk with a lawyer in your state who specializes in the subject.

Some basics: Money in pension plans, including a 401(k), should be secure from creditors. The same is true for money in an IRA in amounts up to $1 million. If you have children or grandchildren, money in 529 tax-sheltered college savings plans becomes secure two years after deposit. You can contribute $65,000 per child to your 529 plan this year without triggering gift taxes, or $130,000 if you’re a couple. You retain control of the money in the plan, too.

Life insurance products, including retirement annuities, may also be protected, though rules vary by state.

Many states have a homestead exemptions that shield your home from unsecured creditors (though your home’s mortgage isn’t shielded, of course). You usually have to file paperwork to obtain the exemption. Florida and Texas, famously, offer virtually unlimited homestead exemptions. “It’s irresponsible not to have a homestead exemption on your house,” says Frank Morrissey, who teaches bankruptcy law at Boston University.

Little known: In more than 20 states married couples can own their home as “tenants by the entirety,” which affords substantial protection against a creditor of one spouse (though not of both). “In effect, neither party owns the property, it’s owned by the marriage,” explains Richard Nemeth, a bankruptcy lawyer in Cleveland.

There are other exemptions that vary by state, from a car and working tools to some other personal effects. Iowa exempts a family shotgun: An enterprising bankrupt several years ago bought a $10,000 antique gun on the eve of filing for bankruptcy to claim the exemption. He got away with it, too.

Such boldness is usually a bad move, however, as courts frown on naked greed. “When it comes to bankruptcy,” says B.U.’s Mr. Morrissey, “the usual rule is, pigs get fat, but hogs get slaughtered.” The earlier you shelter assets, the safer they should be.

As long the economy stays grim, bankruptcy filings will become increasingly common – which may diminish the stigma that accompanies bankruptcy. It is, in a sense, surprising that so many Americans should still feel ashamed of bankruptcy when those in a far more comfortable situation feel no such chagrin. Corporate bankruptcies are an accepted part of doing business from Wall Street to Silicon Valley. Executives who collect $30 million from a bank in the years before it collapses are not expected to give it back.

Bankruptcy gives people a fresh start, but the long-term effects vary. A study last year by researchers at the Federal Reserve Board in Washington, D.C., found that people who filed for bankruptcy were more likely than others to fall back into debt arrears, even many years later. But there may be complex reasons for that, and every case is different. (Here’s a link to the study: http://www.federalreserve.gov/pubs/feds/2009/200917/200917pap.pdf)

As for the causes of bankruptcy: The widely reported statistic that nearly two-thirds of personal bankruptcies are caused by medical bills deserves a more skeptical eye. The number comes from a study by Dr. David Himmelstein, et. al, to be published next month in the American Journal of Medicine. Yet if you read the report you’ll discover only 29% of those interviewed for the study actually said their medical bills caused their bankruptcy. And while the “medically bankrupt” claimed average medical bills of $17,943, that group’s total net debt averaged $44,622, or more than twice as much.

Claire Ann Resop, a bankruptcy lawyer in Madison, Wisconsin, adds that medical debt may show up more in bankruptcy filings because it’s often the last bill you pay when you get into trouble. Hospitals may be lenient on repayment and charge no interest, while the landlords demand cash and the credit card company charges 30% interest. “Medical facilities may simply be the best creditors to have,” she says.

Write to Brett Arends at brett.arends@wsj.com

Many Locals are Falling Behind on Mortgages

From the Boston Globe:

Massachusetts foreclosure petitions in June jumped to 2,835 – more than eight times higher than the 350 petitions in June 2008 and 21.7 percent higher than the 2,329 filings in May, said the Warren Group, which added that the number of petitions to foreclose in June was the highest it’s been in the previous 13 months.

Petitions to foreclose are the first step in the foreclosure process, noted the Warren Group, a Boston firm that tracks real estate data and publishes Banker & Tradesman.

Foreclosure deeds are the final step in the foreclosure process, and in June, Massachusetts foreclosure deeds “plunged 45.1 percent to 621 from 1,131 in June 2008 but climbed 6.7 percent from 582 in May,” the Warren Group said.

“June’s foreclosure petitions were close to the historical highs we saw in the early part of 2008,” Warren Group chief executive Timothy M. Warren Jr. said in a statement. “We saw a big drop-off in foreclosure petitions in the middle of last year after the state passed a law requiring lenders intending to start foreclosure proceedings to give defaulting borrowers 90 days to catch up with missed payments. But in subsequent months, petitions to foreclose mounted.”

The Warren Group also examined foreclosure activity in Massachusetts for the first half of 2009.

Foreclosures in Massachusetts fell 29 percent during the first half of 2009 compared to a year earlier, the firm said, but petitions to foreclose rose 5.6 percent during the first six months of 2009 from the same period last year.

“There were 4,737 foreclosure deeds from January through June, a 29.4 percent drop from 6,707 during the same months in 2008,” the Warren Group said.

“Even though the number of foreclosure deeds has declined from a year ago, they crept up from the prior month, and we’re seeing more people in the initial stage of foreclosure. That’s troubling,” Timothy Warren said in his statement. “There are many incentives for lenders to complete loan modifications to help homeowners who can’t afford their current mortgage payments. But researchers have questioned whether these loan modifications are really sufficient to help homeowners.”

Warren added, “One area that remains a serious concern is unemployment. Many homeowners who lose their jobs won’t be able to make mortgage payments and pay off other bills even with a loan modification.”

The press release added, “While foreclosure deeds have declined year-over-year, the number of petitions to foreclose has increased. Lenders filed 13,813 petitions to foreclose during the first six months of 2009, up 5.6 percent from 13,076 last year.”

Foreclosures up in Salem, down a lot in Beverly

From the Salem Evening News

By Matthew K. Roy
Staff writer

PEABODY — As foreclosures continue to rise across the country, activity on the North Shore has fluctuated depending upon the community.

As it did last year, Peabody had 30 recorded foreclosures through the first five months of this year. Foreclosures also held steady in Danvers, increasing by just one to 10 during the same span in 2009, according to The Warren Group, an organization that tracks the performance of New England’s real estate market.

Foreclosures fell by more than 50 percent to eight in Beverly. Salem, meanwhile, saw a 30 percent increase, jumping from 27 last year to 35 in 2009.

“(Foreclosures) haven’t gone away,” Warren Group CEO Tim Warren said.

The statewide picture appears rosier than what has been happening on the North Shore. Foreclosures in Massachusetts fell by nearly 60 percent this May compared to last May. The number of foreclosure deeds recorded (582) in May, the last month for which the Warren Group has data, was the lowest since April 2007. Year-to-date foreclosure deeds fell 26.3 percent to 4,110 from 5,576.

Nationwide, however, the number of households on the verge of losing their homes increased by nearly 15 percent in the first half of the year.

Foreclosure filings rose more than 33 percent in June compared with the same month last year and were up nearly 5 percent from May, according to RealtyTrac, a foreclosure listing service. The increases offered evidence that the Obama administration’s plan to encourage the lending industry to prevent foreclosures by handing out $50 billion in subsidies has yet to put a dent in the problem.

But banks and lenders are taking some steps to mitigate the crisis locally because foreclosures have not been flooding the real estate market, said Julianna Tache of Tache Real Estate in Peabody. The volume of properties for sale has been kept down as a result, creating a favorable environment for sellers, Tache said.

The demand for properties, coupled with incentives such as low interest rates and tax credits for first-time buyers, has recently generated multiple bids on homes that would have previously sat on the market for months without an offer, Tache said.

She is optimistic about the market, but conscious of the unpredictability of the current economy.

“If anybody can tell you they know how the market is going to pan out, they’re lying,” Tache said, quoting an expert she heard at a recent real estate conference.

A harbinger of continued trouble is the rising unemployment rate.

In Massachusetts, it increased to 8.6 percent in June.

“I have to think,” Warren said, “that the problems people are having paying their mortgages aren’t going away.”

Material from The Associated Press was used in this report.

Mass. Unemployment Rate Rises to 8.6%

From the Boston Globe Business Team

The unemployment rate in Massachusetts rose to 8.6 percent with 2,300 jobs lost in June, the state’s Executive Office of Labor and Workforce Development reported.

Despite the losses for June, Massachusetts showed a net job gain of 3,300 over the past two months, the office said in a press release. May’s originally reported job gain of 4,900 has now been revised up to 5,600.

In May, the state’s unemployment rate was 8.2 percent, the executive office said in an earlier report.

For Some, the Downturn Keeps Divorce on Ice

From the Wall Street Journal

Rhonda Brewster and her husband have decided they don’t want to be married to each other anymore. But while they’re ready to move on, they still can’t move out.

They don’t want to sell their home, in Huntsville, Ala., in a down market. They can’t afford two households until Ms. Brewster finds steady work. So for now, they are living under the same roof but on separate floors.

The “kids are OK with it.” says Ms. Brewster, a 39-year-old freelance writer and stay-at-home mother. “They just know that mommy lives upstairs and daddy lives in the basement.”

Unwinding the ties of matrimony is rarely simple or inexpensive, but for many couples, the sour economy is complicating the process further.

Divorce lawyers say many couples are delaying the decision to dissolve marriages and are staying in unpleasant situations for fear of being on their own at a time of economic uncertainty. Others are being forced to live together after the divorce is final for financial convenience. That can strain the emotions and result in awkward negotiations about subjects like dating.

In Nashville, Tenn., Randy and Lori Word jointly filed for divorce in February, after 10 years of marriage, and expect to get a court date this summer. Meanwhile, they continue to share a house while Ms. Word — who had been a stay-at-home mother in recent years — tries to find work in marketing. “I don’t see jobs out there,” she says.

Things are getting a little cramped in the house. Mr. Word, a 36-year-old construction-project manager, keeps his clothes in boxes in the study and sleeps in the living room. “Luckily, we bought a very nice couch two years ago,” he says.

Ms. Word, who is 37, works part time as a waitress while she is searching for full-time work. Some nights she returns home from a shift to find Mr. Word in the bed complaining that his back can’t take another night on the couch — and asking her to please sleep in the living room, which she does.

Both say they are actually getting along better now that they are no longer in an emotional marital relationship.

“We’re a lot kinder to each other,” says Ms. Word, adding, “We’re not so offended and bothered by each other.” Mr. Word says, “We’ve actually developed or redeveloped a friendship that I think had gotten lost a little bit.”

A May survey by the Institute for Divorce Financial Analysts, a national organization for financial professionals who work on divorce cases, found that the recession was delaying divorces, and inspiring “creative divorce solutions” in living arrangements.

“People are saying, ‘I’ve put up with it for the last 10 years, I can put up with it for another year,'” says Gary Nickelson, president of the American Academy of Matrimonial Lawyers. In a poll of 1,600 of its members, the group says, respondents estimated that divorce cases in the six months through March were off 40% from normal levels.

It’s still unclear how the recession is affecting divorce rates overall, because of lags in government data. But courts in some major population centers say fewer people have been filing for divorce since the downturn began in late 2007. In New York County 9,349 couples filed for divorce in the first four months of 2009, off 14% from 10,848 in the same period in prerecessionary 2007, according to records from New York State Unified Court System.

In Los Angeles County, divorce filings in the first four months of this year dropped 3%, to 9,048, from the same period last year and are down 9% from the comparable span in 2007, according to records from the Los Angeles Superior Court.

A lull in divorce could be a silver lining in the recession, says Steve Grissom, president of Church Initiative, a Wake Forest, N.C., organization that runs DivorceCare, a national support group. Mr. Grissom says couples who postpone splits may be able to work through problems and reconcile.

Bonnie Hughes, a 51-year-old financial planner, says she developed stomach problems when the real-estate slump turned her marital split into “the divorce that never ends.”

She and her husband divorced in February 2007, but for financial reasons continued to live together in their house in Chattanooga, Tenn., until the following May. Ms. Hughes moved out, but the ordeal wasn’t over. They put the house up for sale, with each planning to use the proceeds to finance the next stages of their lives, Ms. Hughes says, but “it just wasn’t selling.”

They finally sold in August 2008, after dropping the price by $100,000 to $324,000, which was less than they had paid for the place four years earlier. She used her proceeds to move to Atlanta.

In Alabama, Ms. Brewster and her husband say they are avoiding complications by sticking together even as they plan to part.

The couple decided in March to split after 16 years of marriage. Ms. Brewster has hired a divorce lawyer and says she has been advised to have as little interaction as possible with her husband. Both say reconciliation isn’t in the cards.

But to afford two separate households, they either need to sell the house they bought four years ago — which they don’t want to do in a down market — or wait until Ms. Brewster has steady income.

In the meantime, Ms. Brewster lives on two floors of the house, residing with the couple’s two children, plus the family pets: a guinea pig, a squirrel, a dog, two rabbits, two gerbils, five cats and five lizards.

Her husband lives in the finished basement, formerly the family’s game room. “We had to take down the pool table so he’d have a place to sleep,” she says. He sleeps on an air mattress, and has his own entrance and a full bathroom, though his only cooking equipment is a microwave.

Each calls the other before entering their respective domains; they schedule use of the washer and dryer and negotiate evenings out, Ms. Brewster says.

“He still takes the garbage out and mows the lawn. Sometimes, I will call him and say, ‘I know you’re eating frozen dinners; I cooked extra, come up,'” Ms. Brewster says. “I try to take the high road in front of the kids. Goodness knows they’ve seen the bad side of marriage — the arguing.”

Both have resumed dating and have even given each other advice on how to get back into the singles world. Ms. Brewster took the photograph of her husband that he put on match.com, the online dating Web site. On some Saturday nights, she says, they hire a baby sitter so they can both go out, and they share their plans so they won’t run into each other.

Their living situation has scared away some potential suitors. “It freaks a lot of them out,” says Ms. Brewster. “I tell them upfront: Here’s my situation. Eventually I will move on, but I’m not going to do something to mess myself up financially.”

Write to Jennifer Levitz at jennifer.levitz@wsj.com

Debt-Relief Firms Attract Complaints

From the Wall Street Journal

Wally Bowman, a part-time security guard in Miamisburg, Ohio, had roughly $15,000 in credit-card debt when he signed up with a “debt settlement” firm last year. The company said it could resolve his debts for far less than the amount he owed and advised the 63-year-old to stop making payments to his creditors, according to Mr. Bowman.

Mr. Bowman paid hundreds of dollars in up-front fees and made regular monthly payments of $249 to Hess Kennedy, but the Coral Springs, Fla., firm never settled any of his debts, he says. By the time he dropped out of the program this summer, Mr. Bowman says, his debt had ballooned to about $20,000, due to interest and late fees, and creditors were threatening to garnish his wages. Finally, he filed for bankruptcy last month.

“I wish I had done that to begin with,” Mr. Bowman says. “I’d have been much better off.”

As the economy weakens, a growing number of consumers are paying big money for services from debt-settlement companies that purport to help them settle their debts for a fraction of what they owe. But as Mr. Bowman’s experience shows, customers can end up wishing they hadn’t sought such help.

At financial-services Web site Credit.com, the number of complaints about debt-settlement companies received so far this year is already double the number received in all of 2007, says John Ulzheimer, the site’s president of consumer education. The Federal Trade Commission, which has also seen an increase in consumer complaints, was concerned enough about the issue that it held a workshop late last month to examine debt-settlement business practices.

Dealing With Debt

Some tips for consumers who are buried in bills:

  • Consumers who can’t pay their bills on time should contact creditors immediately to try to work out a payment plan.
  • If you can’t manage your debt on your own, consider working with a nonprofit credit-counseling organization.
  • But beware: Some nonprofits have been linked to for-profit companies and offer little educational value to consumers.

The Florida attorney general’s office has received more than 1,400 complaints about debt-settlement and other debt-relief companies this year through early October, compared with fewer than 890 for all of last year, and Attorney General Bill McCollum plans a push for licensing requirements and to strengthen other rules governing the industry.

Some major creditors, including American Express Co., say they won’t even work with debt-settlement companies, though the companies dispute this. “There’s no service or benefit that a debt-settlement company can offer our card members that they don’t receive from working with us directly,” says Lisa Gonzalez, a spokeswoman for American Express.

Regulators, consumer advocates and industry groups are taking a closer look at debt-settlement firms. But even some nonprofit organizations that offer alternatives, such as credit counseling and education, have come under scrutiny, with the Internal Revenue Service examining their ties to for-profit outfits.

Hess Kennedy, the firm hired by Mr. Bowman, was sued by the Florida attorney general earlier this year for allegedly violating the state’s laws on unfair and deceptive trade practices. The firm was placed in receivership in July, and on Monday, a Florida Circuit Court judge entered an order to wind down the firm and approved a process for consumers to apply to get their money back. The firm referred questions to an attorney, who didn’t respond to requests for comment.

Hefty Up-Front Fees

Debt-settlement companies generally advise clients to make monthly payments into a special account instead of paying creditors. The firm promises to use the accumulated cash to settle debts for pennies on the dollar. They often charge hefty up-front fees, and their tactics can trash customers’ credit scores, boost their tax bills and leave them in greater debt than when they started.

Rules governing these firms vary by state, but a number of states have recently passed laws allowing for-profit credit-counseling and debt-settlement firms to do business within their borders. Membership in the Association of Settlement Companies, a debt-settlement industry trade group, has roughly doubled in the past year, to more than 150.

Because the industry has so many new people, “there’s a lot of misunderstanding about how a company should be run, what are good standards and business practices,” says Wesley Young, an executive board member at the trade group. In recent months the association has begun monitoring its members’ sales practices and Web sites to be sure they meet the group’s standards, he says. It hasn’t yet taken any action.

Regulators are concerned about misleading debt-settlement sales practices. In a string of recent cases against such companies, the FTC alleged that firms misled consumers about what services they could deliver, how long it would take and how much it would cost, says Alice Hrdy, an assistant director of the FTC’s division of financial practices. And though many debt-settlement companies are set up to look like legal services, “usually it’s a sham,” says Norman Googel, an assistant attorney general in West Virginia. Consumers often don’t receive any legitimate legal services, “and the lawyer is like the Wizard of Oz back there behind the curtain,” Mr. Googel says.

The high fees charged by debt-settlement firms can prolong the process of paying off debts. The companies often charge an up-front fee of 10% or 15% of the total amount owed. They may also charge monthly fees of about $50, and a back-end fee of about 20% or 30% of the amount “saved” for clients in a settlement.

Credit-Card Lawsuits

Meanwhile, creditors aren’t getting any payment, so interest and late fees accrue, debt rises and clients get a steady stream of calls from creditors and collection agencies. They may even be sued and have their wages garnished. Lawsuits against credit-card holders are becoming more common as card issuers increasingly sell delinquent accounts to debt purchasers, regulators say.

Debt-settlement companies often refuse refund requests, says West Virginia’s Mr. Googel. And though regulators may try to get money returned to customers, these companies are generally not well-capitalized, “and often the consumer harm vastly outstrips whatever assets the company would have,” says the FTC’s Ms. Hrdy.

Consumers in debt-settlement plans often see their credit scores tank. While they’re not making payments, of course, their scores will drop. But settling a debt for less than the amount owed is also “a serious negative on your credit score” and stays on your credit report for seven years, says Barry Paperno, consumer operations manager at Fair Isaac Corp., which developed the widely used FICO credit score. Debt settlement can also boost consumers’ tax bills, since they generally must pay income tax on the amount of debt forgiven in a settlement.

Even when companies deliver, many customers drop out of the programs early. David Gillson of Sherwood, Ark., a 38-year-old quality-control manager at a construction firm, signed up with debt-settlement firm Elite Financial Solutions of Fort Lauderdale, Fla., in 2006. He owed more than $71,000 in seven different credit-card accounts. Elite helped him reach two settlements within the first year or so.

‘Just Horrendous’

But the collection-agency calls were “just horrendous,” Mr. Gillson says, and his credit score was plummeting, two creditors sued him, and his wages were garnished. Given his reduced wages, he couldn’t afford to put anything in the debt-settlement account, and he dropped out of the program in June.

Elite’s contracts “clearly explain all the negatives, such as garnishment, that interest rates will accrue and that late fees will apply,” says a supervisor at the firm.

Consumers who can’t work out debt problems on their own do have alternatives. Many nonprofit credit-counseling organizations offer “debt-management plans,” in which consumers steadily pay the full balance owed but often get concessions from creditors such as lower interest charges and waived fees. Such nonprofit programs come with some consumer protections. For example, they must provide services tailored to the needs of individual clients and charge reasonable fees.

But even here, consumers must tread carefully. The IRS began examining nonprofit credit-counseling organizations several years ago and found that many were funneling fees to for-profit companies, or doing little or nothing to educate consumers. In its initial examination, the IRS looked at 63 organizations, and in 49 of those cases either the IRS issued proposed or final revocations of nonprofit status, or the organization went out of business or became a for-profit firm on its own.

Write to Eleanor Laise at eleanor.laise@wsj.com