* Uncertainty threatens bank profits, housing recovery
* Analysts say document fiasco could drag on
* KBW bank shares index falls 2.6 pct
(Rewrites, adds BofA's Moynihan, updates shares to close)
By Dave Clarke and Steve Eder
WASHINGTON/NEW YORK, Oct 14 A growing crisis
over shoddy foreclosure documents deepened on Thursday as
investors dumped stock in some of the biggest U.S. banks on
fears their profits could be hit.
At risk is not just the health of the banks but also the
fragile housing market and the broader economy, which is still
struggling to emerge from the worst recession since the 1930s,
All 50 U.S. states have started a joint investigation of
the mortgage industry, focusing on allegations that for years
banks have not reviewed documents properly or have submitted
false statements to evict delinquent borrowers.
The investigation, one of the biggest legal probes of the
mortgage industry in decades, has alarmed investors who fear
cleaning up the foreclosure paperwork mess could take months,
The fiasco threatens to eat into bank profits by delaying
sales of bank-owned properties, drawing fines from regulators,
and spawning lawsuits from both homeowners and investors in
The KBW Banks index .BKX dropped 2.6 percent on Thursday
while the broad Standard & Poor's 500 .SPX index fell just
Take a Look-U.S. foreclosures under fire [ID:nN11106777]
Factbox-Foreclosure problems snowball [ID:nN06278011]
Graphic-Q3 foreclosures link.reuters.com/jud58p
Bank of America (BAC.N), the largest U.S. mortgage
servicer, has temporarily halted evictions nationwide. JPMorgan
Chase (JPM.N) and others have halted some foreclosures pending
reviews, while some have left foreclosure policies in place.
The moratoriums, combined with buyer wariness, could
suppress home sales. Nearly one-third of all homes sold in
September were in the foreclosure process, according to real
estate data company RealtyTrac.
"Banks could be dealing with this on a loan-by-loan basis
for years," warned Jefferson Harralson, a bank analyst at
Keefe, Bruyette & Woods in Atlanta.
Mindful of the dangers, federal regulators have pressed
banks to quickly complete internal reviews and not slow down
foreclosures where the paperwork is in order.
JPMorgan Chief Executive Jamie Dimon said a prolonged
investigation by the state attorneys general could slow down
the housing recovery. "But we're hoping it won't kill it," he
told Reuters on the sidelines of a Business Council meeting in
But Bank of America CEO Brian Moynihan played down the
impact of the foreclosure document inquiry, calling the housing
market "stable" and saying unemployment levels would have a
bigger impact. [ID:nN14141857]
JPMorgan shares closed down 2.8 percent, Bank of America
ended down 5.2 percent, Citigroup (C.N) fell 4.5 percent and
Wells Fargo (WFC.N) lost 4.2 percent. The banks are the top
four mortgage servicers in the United States.
Officials from Citigroup, BofA and Wells Fargo are likely
to face questions on the foreclosure issue when they host
conference calls on their quarterly earnings next week.
CALLS FOR MORATORIUM
Despite the White House rebuffing calls by some senior
Democratic lawmakers and others for a nationwide moratorium on
foreclosures, the issue has mushroomed in the runup to the Nov.
2 congressional elections.
The number of homes taken over by banks topped 100,000 in a
month for the first time in September but foreclosures are
likely to slow as lenders review their paperwork, RealtyTrac
The disclosures that lenders may have engaged in illegal
practices to evict delinquent homeowners has reignited
simmering public anger with banks, whose excessive risk-taking
is blamed for helping cause the financial crisis that plunged
the country into the 2007-2009 recession.
The Obama administration says it backs the attorneys
general investigation but at the same time it has signaled it
is wary of doing anything that could derail any recovery in the
housing market, usually a driver of economic rebounds.
Republicans are expected to make big gains in the November
elections on the back of growing disapproval over how President
Barack Obama and his Democrats are handling the economy.
"MASSIVE, MASSIVE PROBLEM"
Despite the White House's reluctance to get involved,
political pressure is mounting on the top mortgage servicers,
which took money from the government's $700 billion Troubled
Asset Relief Program to ride out the financial crisis.
Ted Kaufman, head of the panel that oversees TARP, told
Reuters Insider the watchdog is likely to probe the foreclosure
paperwork issue, along with the special investigator for TARP
and the Government Accountability Office.
"This is a massive, massive problem," Kaufman said, calling
it "a real concern to the economy."
FBR Capital Markets said the U.S. banking industry faces
foreclosure-related losses of $6 billion to $10 billion but is
ready to "comfortably" absorb them. Still, the analysts said,
mortgage servicers may be in trouble as they have never faced
such extensive investigations. [ID:nSGE69D0DN]
"The real cost to the industry is going to be the drag on
the foreclosure process, which could delay any recovery in the
housing market," FBR said. "While we had previously believed
that this was an election issue, we now think that this could
materialize into a longer-term concern."
At issue is the use of "robo-signers" -- people who sign
hundreds of affidavits a day -- by banks and companies that
collect monthly mortgage payments. It is alleged they did not
have time to review the foreclosure documents they signed.
James Barth, an economist at the Milken Institute, said the
issue was legal blip that was unlikely to lead to the entire
foreclosure process being called into question.
"It's apparently in many cases more of a legal technicality
than a matter in which you will find someone who borrowed money
doesn't really owe the money," he told Reuters.
(Additional reporting by James B. Kelleher in Chicago, Abhinav
Sharma in Bangalore, Julie Haviv and Elinor Comlay in New York,
Karey Wutkowski, Dave Clarke and Corbett B. Daly in Washington,
and Joe Rauch in Charlotte, N.C.; Writing by John O'Callaghan
and Ross Colvin; Editing by Tim Dobbyn)