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Revenge of the foreclosed: Bank stocks plunge

October 14, 2010 | 12:18 pm

Shares of financial companies are tumbling Thursday as some investors and traders bail out, fearing the potential short-term and long-term effects from the Foreclosure-Gate mess.

Bank of America was down 78 cents, or 5.9%, to $12.51 at about 12:15 p.m. PDT, nearing the 52-week low of $12.32 reached Aug. 30.

JPMorgan Chase was off $1.63, or 4.1%, to $38.21, Citigroup slid 21 cents, or 5.1%, to $4.04 and Wells Fargo & Co. lost $1.34, or 5.2%, to $24.47.

Financial issues are a drag on the market overall, which hit five-month highs on Wednesday. The Dow Jones industrial average, which includes BofA and JPMorgan, was off 53 points, or 0.5%, to 11,042.

At this point, investors have no real handle on what botched or fraudulent foreclosures may end up costing the banks in terms of bottom-line earnings. But there are some guesses, as Reuters notes:

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.

"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," they wrote in a client note. "While we had previously believed that this was an election issue, we now think that this could materialize into a longer-term concern."

JPMorgan said Wednesday that it was reviewing about 115,000 loan files that are in the foreclosure process.

On Thursday, the Financial Times said it had documents suggesting that Wells Fargo used the same kind of "robo-signers" that some of its rivals used to rush through foreclosure documents. Wells told the F.T. that its records showed that its “foreclosure affidavits are accurate”

State attorneys general are taking the lead in investigating the banks, while the Obama adminstration is resisting the idea of calling for a national moratorium on foreclosures.

Iowa Atty. Gen. Tom Miller said that the issue is "primarily a case of state law . . . so we think it's quite appropriate that the states play a very significant role in this."

As Jim Puzzanghera and Alejandro Lazo wrote Thursday in the L.A. Times:

If the investigation uncovers violations, [Miller] suggested that instead of seeking fines, the states might prod the banks to put money toward modifying mortgages for homeowners to reduce monthly payments.

Some bank investors must be figuring there’s no reason to wait around in the stocks and risk the kind of meltdown that devastated the shares in late 2008 and early 2009.

The mistake many investors made back then was trusting that bankers could manage their way through the housing collapse. (Remember how the subprime nightmare would be "contained"?)

The banking industry only survives today thanks to the massive short-term injection of taxpayers’ money via TARP.

-- Tom Petruno