Concern about recent foreclosure issues and possible adverse legal consequences have caused many investors to reconsider companies involved in the mortgage underwriting process, but some analysts argue the sell-off may be uncalled for.
Equity investors have dismissed reports that foreclosure difficulties are simple procedural problems, and some analysts say 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.
The central issue is the use of "robo-signers" — people who sign hundreds of affidavits a day — by banks and companies that collect monthly mortgage payments. It is alleged they did not have time to review the foreclosure documents they signed.
The attorneys general of all 50 states on Wednesday launched a joint investigation of the practices banks used in evicting delinquent borrowers from their homes.
Shares of banks have been weak over the past few days, with Bank of America Corp., the nation’s largest mortgage servicer, falling about 5 percent today to touch a 52-week low. The KBW Banks Index .BKX was down about 2 percent.
It is still unclear if the joint probe by the state attorneys general and other reviews by bank regulators will ultimately reveal evidence of widespread fraud.
"On the foreclosure front, while there will likely be some legal costs stemming from documentation issues, we don’t think ultimate losses will be impacted by foreclosure moratoriums," Nomura’s Glenn Schorr said.
Given the long timeline and earnings power of these firms, legal and servicing costs will be high, but the banks will earn their way through, he added.
So far, the Obama administration has rejected calls for a nationwide moratorium on foreclosures, but some banks are taking matters into their own hands.
Last Friday, Bank of America, said it would temporarily halt foreclosures nationwide — the first to do so in all 50 states — as it looks into reports of shoddy paperwork.
JPMorgan Chase & Co. and Ally Financial’s GMAC Mortgage have said they plan to suspend foreclosures in 23 states pending a review of foreclosure procedures.
Wells Fargo & CO. and PHH Corp. have said they will not halt foreclosures.
However, a national foreclosure moratorium or even extended state foreclosure moratoriums are unlikely, KBW analyst Bose George said.
"We think the most likely scenario is a series of temporary moratoriums by servicers in certain states," he added.
The market has also seen a sell-off in shares of mortgage-related companies such as mortgage servicers Ocwen Financial Corp., whose shares have dropped 10 percent since the beginning of the month, and PHH Corp.
"A temporary foreclosure moratorium is unlikely to have a meaningful impact on the earnings of these companies," KBW’s George said.
Many also fear that banks will be forced to buy back some home loans because the documentation was improper. This would have to be at the face value of the loans, which is usually well above the market value of the homes, which could lead to massive losses.
"Repurchase loan demands are likely to remain elevated leading to ongoing high costs," Credit Suisse analyst Moshe Orenbuch said.
JPMorgan, the first of the big banks to report quarterly results 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.
It also added $766 million for its litigation reserve.
Bank of America, Wells Fargo, and Citigroup are scheduled to report quarterly results next week. (Reuters)
