Financial stocks fall as investors react to mortgage problems

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Financial stocks fell Thursday as investors weighed mortgage problems that could cost big banks billions.

Shares of Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. fell at least 4 percent and JPMorgan Chase & Co. fell nearly 3 percent. By comparison, the broad Standard & Poor’s 500 index declined 0.4 percent.

Investors fear that banks will pay dearly for mishandling foreclosure paperwork. Employees of top lenders admitted approving thousands of foreclosures per month. They swore in court papers that the foreclosure documents were accurate. But they never checked the documents.

The news led banks such as Bank of America and JPMorgan to suspend foreclosures. They want to review paperwork that might contain fraudulent claims. Most of the foreclosures will be deemed legal. But skipping the document review exposes banks to lawsuits. Wells Fargo said Thursday that it would not halt foreclosures despite an employee’s admission that she signed up to 500 foreclosure documents daily without reading them. Wells and Citigroup are the largest mortgage lenders not to declare a temporary freeze.

The market’s jitters made it more costly to insure investments in banks against the possibility that the banks will fail. Prices shot up for insurance-like coverage of investments in JPMorgan, Wells Fargo, Citigroup and Bank of America. The coverage cost more than it had in weeks.

JPMorgan said Wednesday that it set aside $1.3 billion in the third quarter to cover legal expenses, including for the foreclosure problem. In a conference call after the earnings announcement, CEO Jamie Dimon said the final price tag will depend on how soon banks can return to a normal schedule.

Dimon said it will take about a month for JPMorgan to check the documents and start seizing homes again. But he said the problem could keep dragging on the sluggish housing market.

“If it went on for a long period of time, it will have a lot of consequences, most of which would be adverse on everybody,” he said.

That should chill investors, NAB Research analyst Nancy Bush said. Dimon’s comments show that “nobody really knows how long this process will take or how much it will cost,” she said.

Another line on JPMorgan’s financial report will lead to even more headaches, said RBC Capital Markets analyst Gerard Cassidy.

Cassidy pointed to the bank’s setting aside $1 billion to cover losses on loans that it sold to mortgage giants Fannie Mae and Freddie Mac. The government-run companies have a legal right to return bad loans, especially if they discover fraudulent statements on applications.

The issue doesn’t threaten the banks’ survival, “but it’s going to hurt earnings and the near-term outlook,” especially for JPMorgan, Bank of America, Wells Fargo and Citigroup, Cassidy said.

Those losses, along with the foreclosure problem and investigations by state and federal law enforcement, convinced investors “that the residential mortgage problem has taken a new twist, and that could mean trouble for banks,” he said.

Fannie and Freddie play a crucial role in the mortgage industry. They buy loans from banks and resell them to investors. That’s why the government propped them up with a bailout that has cost taxpayers $148 billion so far.

Any money they recover by returning loans to banks will offset those losses. Fannie and Freddie imploded after guaranteeing bad mortgages during the housing boom.

Analysts are worried that the companies will try to minimize losses by pushing the costs back onto big banks. That could cost the four largest banks a total of $42 billion, Fitch Ratings said in an August report.

The two mortgage giants nearly collapsed two years ago when the housing market went bust. Their rescue is on track to be the most expensive part of stabilizing the financial system.

- Associated Press