Fears about depth of mortgage losses ripple through markets; no
one knows what loans are worth
Lurking mortgage problems left over from the collapse of the
housing market sent bank stocks tumbling for a second day Friday
and the cost of buying protection for bank debt, now perceived to
carry new risks, climbed steadily higher.
Bank of America Corp.'s stock hit a 52-week low and Wells Fargo
& Co. tumbled nearly 5 percent. Shares of JPMorgan Chase &
Co., Citigroup Inc. and other major mortgage players slid as
The big banks had recovered strongly from the crisis that ensued
when home loans began to sour during the real estate bust that
started in 2007.
But recent revelations about mortgage fraud and flawed foreclosure
paperwork fueled doubts about the health of major banks and the how
quickly they will be able to put the mortgage mess behind them.
Standard & Poor's downgraded Bank of America stock to "Hold"
from "Strong Buy" Friday. S&P analysts said the nation's
biggest bank may not have set aside enough cash to cover losses on
fraudulent loans that were resold to investors. They also are
concerned about costly legal bills after the bank agreed to review
paperwork for thousands of foreclosures that may have been done
The same issues drove higher the cost of insuring the debt issued
On Friday morning, it cost between about 10 percent more to insure
bonds issued by Bank of America, Wells Fargo, Citigroup Inc. and
JPMorgan than it had just two days earlier, according to financial
data firm Markit Group Ltd. The cost of insuring debt from Bank of
America was up 8 basis points, to 200 basis points, meaning that it
would cost $200,000 per year to insure $10 million for five
The swings reflect investors' view that the banks are weaker and
the chances are greater that they would be unable to repay
The mortgage problems at Bank of America, Wells Fargo and JPMorgan
are deeper because they took on billions in bad loans from
companies that failed during the crisis. Bank of America bought
Countrywide Financial Corp., Wells Fargo bought Wachovia and
JPMorgan bought Washington Mutual.
Banks hold trillions dollars worth of home loans on their books at
close to face value. Yet the loans may be worth far less. Many are
held by borrowers who can't afford to pay and secured by real
estate whose value has plummeted. The banks don't have to
acknowledge these losses as long as they don't plan to resell the
"You have a pile of loans that are being carried near face value,
but they're underwater," meaning borrowers owe more than the
properties are now worth, said Daniel Alpert, managing partner at
the New York investment bank Westwood Capital LLC. "There's a limit
to how far they can kick it down the road with a moratorium" on
foreclosures, he said.
Investors now are questioning whether the loans could cripple banks
and mortgage investors with years of drawn-out losses.
Bank of America's stock was trading lower than it had at any time
since June 4, 2009.
Documents surfaced this fall in which bank employees acknowledged
approving thousands of foreclosures per month. The employees swore
in court filings that the foreclosure paperwork was accurate,
though they had not even looked at the documents.
Bank of America, JPMorgan and others have suspended foreclosures as
they follow the paper trail backward to ensure the accuracy of
their records. At Wells Fargo and Citigroup foreclosures continue,
despite near-identical allegations.
Bank of America, JPMorgan, and Wells Fargo face the biggest hits
from the foreclosure do-overs, because they originated the most
loans. Those banks also face billions in losses on fraudulent loans
that were resold to the government-owned mortgage giants Fannie Mae
and Freddie Mac.
Fannie and Freddie can force banks to buy back loans that appear to
be fraudulent. JPMorgan set aside $1 billion in the last quarter to
cover such losses, the company said this week.
The foreclosure halts aren't all bad for banks. Seizing property
pushes banks closer to acknowledging that it lost value when the
real estate bubble burst. The slow foreclosure process allows them
to delay writing down loans in foreclosure -- not to mention the
600,000 slated for foreclosure that are backed up in the pipeline.
Those loans probably lost value, too.
Written by: AP Business Writer Pallavi Gogoi and AP Business Writer