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UPDATE 2-US bank stocks roiled by foreclosure concerns

* KBW Banks index off 3.8 percent

* Analysts say foreclosure crisis could weigh on earnings (Adds analyst comment, new details of concerns)

NEW YORK, Oct 14 (Reuters) - Shares of top U.S. banks slid on Thursday as investors grew increasingly concerned that the mortgage foreclosure crisis could make a dent in bank earnings.

Bank of America Corp BAC.N shares led the rout, dropping 5.8 percent. Credit derivatives began signaling distress for banks earlier this week as well.

A report on Thursday said a Wells Fargo employee had failed to review foreclosure documents before signing them, the latest in a series of reports suggesting that banks have failed to follow legal procedures to foreclose on homes.

On Wednesday, JPMorgan Chase & Co JPM.N said it was reviewing documents related to 115,000 foreclosures.

Stock investors have for weeks dismissed reports of foreclosure difficulties as simple procedural problems. [ID:nN13274438] But some analysts and legal experts are arguing that flawed foreclosure documentation could be a sign of a deeper problem with the way many mortgages were made and processed in the years leading up to the housing bust.

Many investors fear that banks will be forced to buy back home loans from investors because the documentation was improper. Banks would have to buy back bad loans at their face value, which is usually well above their market value, so losses could be massive.

As attorneys general of all 50 states investigate the foreclosure crisis, and legislators press for moratoriums, the paperwork has turned into a political mess and a potential threat to the financial system.

“The longer this is pushed further down the road and kicked by politicians, the worse the situation is going to be,” said Marshall Front, chairman of Front Barnett Associates, which has holdings in JPMorgan, Bank of America, Citigroup and Wells Fargo.

So far, the Obama Administration has rejected calls for a nationwide moratorium on foreclosures, but some banks are taking matters into their own hands. Bank of America has temporarily halted foreclosures nationwide while JPMorgan has stopped some foreclosures pending reviews.

Citigroup Inc C.N shares fell 4.7 percent to $4.05, and Wells Fargo & Co WFC.N was off 4.8 percent at $24.59.

Bank of America, Citi, and Wells Fargo are planning to report third-quarter results next week.

The broader KBW Bank Index .BKX fell 3.8 percent.

“ROBO-SIGNERS” AND “PUTBACKS”

Analysts are not sure just how serious the documentation issue is. Many agree that banks have less risk from improper foreclosure documentation, and more risk from home loans being sold back to them by mortgage bond investors, known as “putbacks.”

But assessing the size of potential losses is difficult.

“The bigger risk to banks remains mortgage putbacks (and they) will most likely end up delaying the foreclosure process, but will not present a systematic issue for the mortgage industry and the banks,” Citigroup analyst Keith Horowitz wrote.

JPMorgan, which reported third-quarter earnings on Wednesday, said it added $622 million to its reserves against repurchase costs. The bank reported $1.5 billion in repurchase losses in the third quarter.

There is also concern about banks having to set aside more cash for legal fees. JPMorgan on Wednesday said it set added $766 million for its litigation reserve.

“This is a potential cost to factor into long-term profitability for banks,” said Jefferson Harralson, Atlanta-based bank analyst with Keefe, Bruyette & Woods Inc. “We have to understand banks could be dealing with this on a loan-by-loan basis for years.”

Bank of America, the country’s largest mortgage servicer, could be forced to repurchase as much as $74 billion in mortgages, according to one estimate by Branch Hill Capital.

Branch Hill said that some companies, such as bond insurers MBIA Inc MBI.N could benefit by putting back loans to banks. MBIA's shares rose 10 percent to $12.35, and Ambac Financial Group Inc's ABK.N rose 14.6 percent to 92 cents.

Mortgage insurers' shares also rose. MGIC Investment Corp's MTG.N shares rose 3.9 percent to $10.42.

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] (Reporting by Steve Eder and Elinor Comlay; Additional reporting by Joe Rauch in Charlotte, North Carolina; Editing by Lisa Von Ahn, John Wallace, Dave Zimmerman)

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