October 15, 2010 / 8:25 PM / in 7 years

Bank stocks fall again on foreclosure mess

CHARLOTTE, North Carolina (Reuters) - Investors pummeled the biggest U.S. banks for a second straight day on Friday on fears the fallout from a growing foreclosure crisis could lead to big costs for banks.

There was also concern that delays in sales of foreclosed properties could depress the fragile housing market and damage the broader economy, still struggling to emerge from the worst recession since the 1930s.

The KBW Banks index closed down 2.4 percent on Friday, after falling 2.6 percent on Thursday. In another sign of investor nervousness, the cost to insure the debt of major banks also rose.

At issue are allegations that banks failed to review foreclosure documents properly or submitted false statements when they foreclosed on properties.

In addition to inquiries by attorneys general in all 50 U.S. states, the U.S. Justice Department and banking regulators, the U.S. Securities and Exchange Commission has begun a preliminary investigation.

SEC staff are looking at whether securities laws may have been broken, but have not targeted any particular institution, according to a person with knowledge of the matter.

Banks could face fines and lawsuits and may be forced to repurchase faulty loans. Some lenders have temporarily halted evictions or foreclosures because of the allegations.

But Barbara Desoer, loans chief at Bank of America, said in an interview with Bloomberg News that the potential costs from foreclosure problems have been ”grossly overstated.

Analysts tended to agree. “On the foreclosure front, while there will likely be some legal costs stemming from documentation issues, we don’t think ultimate losses will be impacted by foreclosure moratoriums,” said Glenn Schorr of Nomura Securities.

Analysts at Credit Suisse said in a note to investors that they expected Washington to step in to resolve the documentation issues.

The White House, which despite congressional election pressures has refrained from joining calls for a nationwide moratorium on foreclosures, said President Barack Obama “wants to make sure that these servicers live up to their obligations.”

Shares of Bank of America, down as much as 6.5 percent earlier on Friday, their lowest price since July 2009, closed at $11.98, down 4.9 percent.

The cost to insure $10 million of Bank of America’s debt for five years rose 3 basis points on Friday to $195,000 per year, according to Markit Intraday. The cost has jumped 40 basis points this week.

JPMorgan Chase shares ended down 4.1 percent, Citigroup Inc fell 2.7 percent, while Wells Fargo & Co shed 4.6 percent.

Bank of America, the biggest U.S. mortgage servicer, has temporarily halted evictions nationwide. JPMorgan Chase and others have halted some foreclosures pending reviews. Citi and Wells Fargo have not halted foreclosures.

The foreclosure fiasco, in which banks are accused of using “robo-signers” to sign hundreds of foreclosure documents a day, has reignited public anger with banks, blamed for helping cause the 2008 financial crisis and recession.

Angelo Mozilo, the former chief of Countrywide Financial, agreed on Friday to pay $67.5 million to settle charges that he hid risks about the firm’s mortgage loan portfolio.

Countrywide, once a titan in the mortgage industry, is now part of Bank of America.

Nearly one-third of all homes sold in September were in the foreclosure process, according to real estate data company RealtyTrac.

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 said.

Additional reporting by Karey Wutkowski and Rachelle Younglai in Washington, Karen Brettel in New York; Writing by Tim Dobbyn; Editing by Eddie Evans

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