Mini-Armagedon in Bank Shares

Oct. 15 2010 - 6:09 pm
By ROBERT LENZNER
The mortgage foreclosure scandal threatens the profits of the nation’s leading banks, Bank of America (BAC), JP Morgan (JPM), Citigroup(C) and Wells Fargo(WFC) and will delay the recovery of the housing market in the US.

In the market action today, the share prices of the major money center banks were hit badly; Bank of America fell 6.5% to $11.78 a share, the lowest price for the nation’s largest bank since July, 2009. Jp Morgan Chase fell 4% to $37.16. A major blow to all the major investors who were counting on a sterling recovery in bank shares.

The freeze on foreclosures threatens another $1 trillion of losses to the banking system if all these mortgages cannot be cleared out of the system. It means that pending sales of properties that were foreclosed are now of dubious legality, explains Charles Hugh Smith in his blog post yesterday, “The Coming Collapse of the Real Estate Market,” (asoftwominds.com) At the very least, this scandal over the paperwork on foreclosures is another serious black eye for banks in the eyes of the public. No doubt, investors will continue to dump shares because the future resolutionn of this mess is so uncertain.

Buyers who closed on foreclosed homes now face legal challenges to their ownership and may even face a clawback of the property. If all these homes enter a legal limbo, then the overhang of homes will be so troubling, home prices could continue to weaken, and the crisis in housing be extended.

The repercussions to the economy, to homeowners, to consumers, and the banking system will be even more devlish to unwind. This nightmarish scenario is bound to impact the stream of fees and interest that banks like Bank of America and JP Morgan Chase collect on their vast mortgage portfolios.

At the very minimum bank earnings will be effected negatively. But, in a larger sense, the imperative to stop home prices from falling nationwide must be delayed. Let’s hope that Smith’s prediction of a total collapse in the real estate market will be met boldly by the Obama administration.