BofA settlement pushes up home default notices (AP)

NEW YORK – It's no secret that Bank of America wants to put its mortgage-related woes behind it. But it appears that a key $8.5 billion settlement with large investors is playing a role in pushing many more people into foreclosures.

The number of homes across the country that received an initial default notice — the first step in the foreclosure process — jumped 33 percent in August from July, the foreclosure listing firm RealtyTrac reported last week. It was the largest monthly increase since August 2007, right after the housing bubble had burst.

Now a preliminary analysis reveals the largest escalation of foreclosures came from Bank of America. Just in California, default notices sent by Bank of America soared 96 percent in August from the previous month.

The dramatic rise is particularly evident in certain California towns and cities. For instance, notices surged 95 percent in Fresno and 76 percent in Sacramento.

Bank of America says that taking action on its foreclosure pipeline will set the stage for a housing market recovery. However, consumer advocates say Bank of America and the other lenders are ramping up foreclosures without cleaning up shoddy paperwork practices, which led to a moratorium in foreclosures last October.

"Bank of America has a ticking time bomb in its books and it needs to show investors that it is moving," said Ira Rheingold, an attorney and executive director of the National Association of Consumer Advocates.

" `Does that mean it has improved its practices?' No. But Bank of America is in a desperate place," said Rheingold.

On June 29 the Charlotte, N.C. bank struck an $8.5 billion settlement with a group of large investors_ including Pimco, the New York Fed and Blackrock_ who claimed the bank had sold them poor quality investments based on faulty mortgages. The settlement is still subject to court approval; a decision is expected in November. Several other investors and homeowners have also filed objections with the court to block the settlement.

Bank of America spokesman Richard Simon said the bank's increased foreclosure actions had nothing to do with the settlement. Instead it stems mainly from a return to more timely filings on new defaults. He also noted that the bank has improved quality controls and was moving homes into foreclosure "only after all other options with homeowners have been exhausted."

Clearing the backlog of foreclosures and defaulted loans is a key part of the terms of the settlement. Bank of America has to reduce the number of risky mortgage loans and find third-party companies that can help speed up the process. This includes helping homeowners modify loans or herding defaulted loans into foreclosure sales.

The bank's actions to start clearing the backlog started from the date the settlement was signed, said Scott Humphries, a partner at law firm Gibbs & Bruns, which represented investors in the settlement. "It does not have to wait for court approval," he said.

Bank of America is hopeful that the settlement will be approved, as it's a key part of the process to enable management to focus on other issues.

The bank's stock has been decimated this year — falling more than 50 percent since January. That's because Bank of America has been hit by a spate of lawsuits from large investors, the government and corporations who say the bank should either buy back the billions of dollars of faulty mortgages or pay damages. Most of the mortgages were written by Countrywide Financial Corp., the country's largest mortgage lender which Bank of America bought in 2008.

Last October, Bank of America and JPMorgan Chase were among a group of banks that temporarily halted foreclosures after problems surfaced with the way they were handling foreclosure paperwork. The concerns included shortcuts such as people signing legal affidavits without checking documents or forging signatures. The shoddy mortgage paperwork has led to a headache for the industry where lenders at times don't know how much homeowners owe on their loans and often can't prove what bank or investor legally owns the mortgage.

Foreclosures have continued to be stalled in some states because of court delays. In New Jersey last month a judge ruled that four major banks could resume uncontested foreclosures under court monitoring. This ruling led to a 42 percent increase in homes receiving a default notice in August from the previous month. In Atlantic City, N.J. alone default notices rose 68 percent.

On the national level, there wasn't any immediate reason, other than the Bank of America settlement, to explain the spike of defaults in such places as Tallahassee, Fla., where an additional 81 percent of homeowners received default notices. In Carson City, Nev., default notices rose by 185 percent.

Consumer advocates say there aren't any signs that the shoddy paperwork practices have been cleaned up even as foreclosures are being sped up.

"Bank of America will do the exact same thing now, except faster," said Don Barrett, partner at the Barrett Law Group, which is representing homeowners who seek to block the settlement. Barrett is a former tobacco lawyer who represented cases for attorneys general of several states against the tobacco industry.

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Mortgage default warnings surged in August (AP)

LOS ANGELES – Banks have stepped up their actions against homeowners who have fallen behind on their mortgage payments, setting the stage for a fresh wave of foreclosures.

The number of U.S. homes that received an initial default notice — the first step in the foreclosure process — jumped 33 percent in August from July, foreclosure listing firm RealtyTrac Inc. said Thursday.

The increase represents a nine-month high and the biggest monthly gain in four years. The spike signals banks are starting to take swifter action against homeowners, nearly a year after processing issues led to a sharp slowdown in foreclosures.

"This is really the first time we've seen a significant increase in the number of new foreclosure actions," said Rick Sharga, a senior vice president at RealtyTrac. "It's still possible this is a blip, but I think it's much more likely we're seeing the beginning of a trend here."

Foreclosure activity began to slow last fall after problems surfaced with the way many lenders were handling foreclosure paperwork, namely shoddy mortgage paperwork comprising several shortcuts known collectively as robo-signing.

Many of the nation's largest banks reacted by temporarily ceasing all foreclosures, re-filing previously filed foreclosure cases and revisiting pending cases to prevent errors.

Other factors have also worked to stall the pace of new foreclosures this year. The process has been held up by court delays in states where judges play a role in the foreclosure process, a possible settlement of government probes into the industry's mortgage-lending practices, and lenders' reluctance to take back properties amid slowing home sales.

A pickup in foreclosure activity also means a potentially faster turnaround for the U.S. housing market. Experts say a revival isn't likely to occur as long as there remains a glut of potential foreclosures hovering over the market.

Foreclosures weigh down home values and create uncertainty among would-be homebuyers who fret over prospects that prices may further decline as more foreclosures hit the market. There are about 3.7 million more homes in some stage of foreclosure now than there would be in a normal housing market, according to Citi analyst Josh Levin.

"This bloated foreclosure pipeline now presents the greatest obstacle to a housing market recovery," Levin said in a client note this week.

Banks have been working through a backlog of properties that first entered the foreclosure process months, if not years ago. But the August increase in homes entering that process sets the stage for a host of new properties being targeted for foreclosure.

That's bad news for homeowners who may have grown accustomed to missing payments for several months without the threat of foreclosure bearing down on them. In states such as New York and Florida, for instance, processing delays have helped some homeowners stay in their homes for more than two years before banks got around to taking back their properties.

In all, 78,880 properties received a default notice in August. Despite the sharp increase from July, last month's total was still down 18 percent versus August last year and 44 percent below the peak set in April 2009, RealtyTrac said.

Some states, however, saw a much larger increase.

California saw a 55 percent increase in homes receiving a default notice last month, while in Indiana they climbed 46 percent. In New Jersey, where last month a judged ruled that four major banks could resume uncontested foreclosure actions in the state under court monitoring, homes receiving a default notice increased 42 percent.

Despite the increase in new defaults, the number of homes scheduled for auction and those repossessed by banks slowed in August.

Scheduled foreclosure auctions declined 1 percent from July and fell 43 percent from a year earlier, RealtyTrac said.

Auctions increased from July levels in several states, including Colorado, where they rose 51 percent, and Arizona, where they grew 20 percent.

Lenders repossessed 64,813 properties last month, a drop of 4 percent from July and down 32 percent from a year earlier. Home repossessions peaked September last year at 102,134.

Banks are now on track to repossess some 800,000 homes this year, down from more than 1 million last year, Sharga said.

The firm had originally anticipated some 1.2 million homes would be repossessed by lenders this year.

In all, 228,098 U.S. homes received a foreclosure-related notice last month, a 7 percent increase from July, but a nearly 33 percent decline from August last year. That translates to one in every 570 U.S. households, said RealtyTrac.

Nevada still leads the nation, with one in every 118 households receiving a foreclosure-related notice last month.

Rounding out the top 10 states with the highest foreclosure rate in August are California, Arizona, Georgia, Idaho, Michigan, Florida, Illinois, Colorado and Utah.

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Student loan default rates jump (AP)

The number of borrowers defaulting on federal student loans has jumped sharply, the latest indication that rising college tuition costs, low graduation rates and poor job prospects are getting more and more students over their heads in debt.

The national two-year cohort default rate rose to 8.8 percent last year, from 7 percent in fiscal 2008, according to figures released Monday by the Department of Education.

Driving the overall increase was an especially sharp increase among students who borrow from the government to attend for-profit colleges.

Of the approximately 1 million student borrowers at for-profit schools whose first payments came due in the year starting Oct. 1, 2008 — at the peak of the financial crisis — 15 percent were already at least 270 days behind in their payments two years later. That was an increase from 11.6 percent last year.

At public institutions, the default rate increased from 6 percent to 7.2 percent and from 4 percent to 4.6 percent among students at private not-for-profit colleges.

"I think the jump over the last year has been pretty astonishing," said Debbi Cochrane, program director for the California-based Institute for College Access & Success.

Overall, 3.6 million borrowers entered repayment in fiscal 2009; more than 320,000 had already defaulted last fall, an increase of 80,000 over the previous year.

The federal default rate remains substantially below its peak of more than 20 percent in the early 1990s, before a series of reforms in government lending. But after years of steady declines it has now risen four straight years to its highest rate since 1997, and is nearly double its trough of 4.6 percent in 2005.

Troubling as the new figures are, they understate how many students will eventually default. Last year's two-year default rate increased to more than 12 percent when the government made preliminary calculations of how many defaulted within three years. Beginning next year, the department will begin using the figure for how many default within three years to determine which institutions will lose eligibility to enroll students receiving government financial aid.

The figures come as a stalled economy is hitting student borrowers from two sides — forcing cash-strapped state institutions to raise tuition, and making it harder for graduates to find jobs. The unemployment rate of 4.3 percent for college graduates remains substantially lower than for those without a degree. But many student borrowers don't finish the degree they borrow to pay for.

The Department of Education has begun an income-based repayment plan that caps federal loan payments at 15 percent of discretionary income. And new regulations the Obama administration has imposed on the for-profit sector have prompted those so-called proprietary colleges to close failing programs and tighten enrollment. Both developments could help lower default rates in the future.

Administration officials took pains to praise the for-profit sector for recent reforms, but also said flatly that those schools — along with the weak economy — are largely to blame for the current increases. Among some of the largest and better-known operators, the default rate at the University of Phoenix chain rose from 12.8 to 18.8 percent and at ITT Technical Institute it jumped from 10.9 percent to 22.6 percent.

"We are disappointed to see increases in the cohort default rates for our students, as well as students in other sectors of higher education," said Brian Moran, interim president and CEO of APSCU, the Association of Private Sector Colleges and Universities, which represents the for-profit sector. He said for-profit schools were taking remedial steps, including debt counseling for students, to bring down the rates.

"We believe that the default rates will go down when the economy improves and the unemployment rate drops," he said.

Officials for Phoenix, owned by Apollo Group, Inc., and ITT, owned by ITT Educational Services, did not immediately respond to requests for comment.

The department emphasized that it eventually manages to collect most of the money it's owed, even from defaulters. But that's part of the reason federal student loan defaults are so hard on borrowers — they can't be discharged in bankruptcy. Defaulting can also wreck students' credit and keep them from being able to return to school later with federal aid.

"There are very few avenues for escaping that," Cochrane said. Also, "many employers these days are starting to check credit so it can hurt your job prospects."

According to calculations by TICAS and using the latest available figures, in 2008 average debt for graduating seniors with student loans was $20,200 at public universities, $27,650 at private non-profits and $33,050 at private for-profits.

___

Justin Pope covers higher education for the AP. You can reach him at twitter.com/jnn_pope97

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The U.S. Debt Default Chaos Makes Banks Look Vulnerable (The Motley Fool)

Just when the sluggish economy had started to show some encouraging signs, the news of the U.S. hitting the debt ceiling of $14.29 trillion reared its head. There have been several debates on whether to raise the ceiling. But now the only way out seems to be a hike in the debt limit, or else what would follow would be "catastrophic economic consequences," as Treasury Secretary Timothy Geithner has warned.

The debt crisis has almost gobbled up economies such as Greece, Ireland, and Portugal. At the moment, it's staring us right in the face. And in case you think this debt demon would shy away from pouncing on the world's biggest economy -- you are being a bit too complacent. The U.S. budget deficit last year stood at 8.9% of gross domestic product. Standard & Poor's has already lowered its outlook for the U.S.' long-term credit rating to negative from stable, and the looming debt default poses a serious threat to its coveted AAA credit rating. While this is a huge concern, there are other problems gnawing at the edges.

The colossal debt burden is already projecting a negative image for the U.S., and this is prompting major foreign securities holders to trim their treasury holdings. China, the biggest foreign owner of U.S. debt, reduced its holdings by $9 billion in March, as compared to the previous month. This was a fifth consecutive monthly reduction.

Banks on the brink
Needless to say, almost all the industries would take a hit. One wrong move, and it could spell disaster. But at this point in time, the banking industry looks more vulnerable than others. The beleaguered American banks had somehow managed to keep themselves from collapsing during the ugly financial crisis. And now, when they are rebounding from the crisis, the possibility of the country defaulting on its debt raises an unavoidable question -- would the magnitude of the effects be a repeat of Lehman Brothers? Or something even worse?

U.S banks have been coming back strong after going through one of the worst phases in history. They are now focusing on declining provisions for loan losses. In fact, this has been a wide-ranging trend across the industry and has enabled both big banks such as Bank of America (NYSE: BAC - News) and Citigroup (NYSE: C - News) and regional banks such as BankAtlantic Bancorp (NYSE: BBX - News) and Hudson City Bancorp (Nasdaq: HCBK - News) to witness a significant improvement in their credit quality. Interest rates are at an all-time low at the moment and banks are reluctant to lend now.

If the U.S. defaults on its debts, interest rates will soar drastically and will hamper all commercial activities. Costs of credit ranging from business and consumer loans to home mortgages, auto financing, and credit cards would go through the roof. More importantly, a default would inevitably call for measures like cutting down on federal spending. Banks that buy bonds directly from the Federal Reserve, either to hold or resell to consumers, would take a severe hit, and this will subsequently cripple the whole economy.

The Foolish bottom line
But even if the U.S. manages to escape a default, which is more than likely to happen, the key question remains unanswered. How many times is the U.S. going to raise its ceiling? The massive public debt going out of control definitely remains a huge concern. In fact, as pointed out by JPMorgan, any delay in hiking the debt ceiling may have an adverse effect on the markets. Watch out, Fools.

Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article.The Fool owns shares of Bank of America and also holds a short position in the stock in a different portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Avoid Loan Delinquency and Default (U.S. News & World Report)

Caveat emptor! Your student loan documents probably do not explicitly state "let the buyer beware"--but maybe they should. A sobering report released this month by the Institute for Higher Education Policy, "Delinquency: The Untold Story of Student Loan Borrowing," suggests that a majority of students struggle to repay their loans.

As the cost of a higher education has exponentially increased over the last couple of decades, common sense and anecdotal evidence has suggested this is the case. Unfortunately, policymakers have relied solely on default rates as a measurement tool. Default rates alone paint an incomplete picture, because they exclude borrowers who have difficulty repaying their loans but avoid default.

The new report primarily focuses on the nearly 1.8 million borrowers who entered into repayment on loans obtained through the (now defunct) Federal Family Education Loan Program in 2005 during their first five years of repayment. It details the rates at which borrowers entered not only into default, but also into deferment (a temporary suspension of loan payments for specific situations such as re-enrollment in school, unemployment, or economic hardship); forbearance (temporary suspensions of a borrower's payments because of financial difficulty made at the discretion of the lender); and delinquency (late payment on a loan).

[Learn the 11 steps to relief from federal student loans.]

Overall, only 37 percent of the borrowers in the study managed to repay their student loans throughout the study period without postponing payments or becoming delinquent. Another 7 percent entered into deferment because they re-enrolled in school. A majority, 56 percent, apparently had difficulty making timely payments on their loans.

Examining that 56 percent more closely, the report reveals that 16 percent of the borrowers used deferment and forbearance to postpone their payments and avoid delinquency. More than a quarter, 26 percent, became delinquent but did not default. And about 15 percent became delinquent and defaulted. Overall, an incredible 41 percent of the student loan borrowers became delinquent or defaulted.

Delinquency and default have serious consequences for student loan borrowers. Delinquency can affect borrowers' credit scores and their ability to obtain loans, such as mortgages and auto loans, and the terms upon which those loans are offered. Borrowers who default face even more severe consequences, including wage garnishment, withholding of income tax refunds or Social Security benefits, the turning over of the defaulted loans to collection agencies, and liability for collection and court costs.

The report also reveals important distinctions between borrowers. Undergraduate and graduate borrowers who left without graduating were far more likely to become delinquent or default than those who graduated. Graduate students were far more likely to make timely payments without using deferment or forbearance and less likely to become delinquent or to default than undergraduates.

And students at public four-year and private, nonprofit four-year institutions were more likely to repay their loans on time without resorting to deferment or forbearance and less likely to default than students at public and for-profit two-year institutions and for-profit four-year institutions.

[Get advice from the U.S. News college loan center.]

It is clear that huge numbers of student borrowers struggle to pay back their federal student loans. And, since the study did not include private loans, it may even be understating the magnitude of the problem. A few lessons are clear:

-- Student loan servicers, guaranty agencies, financial aid offices, and other organizations should ensure student loan borrowers have the information and counseling they need to avoid repayment problems.

-- Students need to carefully consider the amount of debt they are able to take on in order to finance their education. They also need to understand and utilize repayment options--such as forbearance, deferral, income-based repayment, and public service loan forgivingness--to avoid delinquency and default.

-- We should all reconsider the effectiveness and the equity of relying on student loans to finance the cost of a higher education.

In the meantime, caveat emptor.

Isaac Bowers is the senior program manager for Educational Debt Relief and Outreach at Equal Justice Works. He was previously an attorney at Shute, Mihaly & Weinberger LLP in San Francisco, where he focused on environmental, land use, and planning issues. A graduate of the New York University School of Law, Bowers also has extensive experience in nonprofit advocacy and outreach.

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Avoid Loan Delinquency and Default (U.S. News & World Report)

Caveat emptor! Your student loan documents probably do not explicitly state "let the buyer beware"--but maybe they should. A sobering report released this month by the Institute for Higher Education Policy, "Delinquency: The Untold Story of Student Loan Borrowing," suggests that a majority of students struggle to repay their loans.

As the cost of a higher education has exponentially increased over the last couple of decades, common sense and anecdotal evidence has suggested this is the case. Unfortunately, policymakers have relied solely on default rates as a measurement tool. Default rates alone paint an incomplete picture, because they exclude borrowers who have difficulty repaying their loans but avoid default.

The new report primarily focuses on the nearly 1.8 million borrowers who entered into repayment on loans obtained through the (now defunct) Federal Family Education Loan Program in 2005 during their first five years of repayment. It details the rates at which borrowers entered not only into default, but also into deferment (a temporary suspension of loan payments for specific situations such as re-enrollment in school, unemployment, or economic hardship); forbearance (temporary suspensions of a borrower's payments because of financial difficulty made at the discretion of the lender); and delinquency (late payment on a loan).

[Learn the 11 steps to relief from federal student loans.]

Overall, only 37 percent of the borrowers in the study managed to repay their student loans throughout the study period without postponing payments or becoming delinquent. Another 7 percent entered into deferment because they re-enrolled in school. A majority, 56 percent, apparently had difficulty making timely payments on their loans.

Examining that 56 percent more closely, the report reveals that 16 percent of the borrowers used deferment and forbearance to postpone their payments and avoid delinquency. More than a quarter, 26 percent, became delinquent but did not default. And about 15 percent became delinquent and defaulted. Overall, an incredible 41 percent of the student loan borrowers became delinquent or defaulted.

Delinquency and default have serious consequences for student loan borrowers. Delinquency can affect borrowers' credit scores and their ability to obtain loans, such as mortgages and auto loans, and the terms upon which those loans are offered. Borrowers who default face even more severe consequences, including wage garnishment, withholding of income tax refunds or Social Security benefits, the turning over of the defaulted loans to collection agencies, and liability for collection and court costs.

The report also reveals important distinctions between borrowers. Undergraduate and graduate borrowers who left without graduating were far more likely to become delinquent or default than those who graduated. Graduate students were far more likely to make timely payments without using deferment or forbearance and less likely to become delinquent or to default than undergraduates.

And students at public four-year and private, nonprofit four-year institutions were more likely to repay their loans on time without resorting to deferment or forbearance and less likely to default than students at public and for-profit two-year institutions and for-profit four-year institutions.

[Get advice from the U.S. News college loan center.]

It is clear that huge numbers of student borrowers struggle to pay back their federal student loans. And, since the study did not include private loans, it may even be understating the magnitude of the problem. A few lessons are clear:

-- Student loan servicers, guaranty agencies, financial aid offices, and other organizations should ensure student loan borrowers have the information and counseling they need to avoid repayment problems.

-- Students need to carefully consider the amount of debt they are able to take on in order to finance their education. They also need to understand and utilize repayment options--such as forbearance, deferral, income-based repayment, and public service loan forgivingness--to avoid delinquency and default.

-- We should all reconsider the effectiveness and the equity of relying on student loans to finance the cost of a higher education.

In the meantime, caveat emptor.

Isaac Bowers is the senior program manager for Educational Debt Relief and Outreach at Equal Justice Works. He was previously an attorney at Shute, Mihaly & Weinberger LLP in San Francisco, where he focused on environmental, land use, and planning issues. A graduate of the New York University School of Law, Bowers also has extensive experience in nonprofit advocacy and outreach.

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