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)

By Steve Eder and Elinor Comlay

NEW YORK, Oct 14 (BestGrowthStock) – 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.
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. Read More About Banking Sector Crisis.

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 (Read more about the banking industry recovery.) 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)

UPDATE 2-US bank stocks roiled by foreclosure concerns