Bank of America Corp., Citigroup Inc. and H&R Block Inc. plunged, leading a drop in financial stocks, on escalating concerns that faulty handling of home loans and foreclosures will fuel costs.
H&R Block dropped $1.38, or 10 percent, to $12.31 at 4:15 p.m. in New York, the third-biggest decline among stocks in the S&P 500 Index. Bank of America slid 5.2 percent, Wells Fargo & Co. declined 4.2 percent, and Citigroup tumbled 4.5 percent. Charlotte, North Carolina-based Bank of America and New York-based JPMorgan Chase & Co., which fell 2.8 percent, were today’s worst performers in the 30-member Dow Jones Industrial Average.
“You have a new cloud forming on the horizon which could be anything from something minor to something that really slows down the process” of foreclosures, said Benjamin Wallace, an analyst at Grimes & Co. in Westborough, Massachusetts, which manages about $900 million and owns stock in JPMorgan and Wells Fargo. “There was some certainty coming back but this mortgage stuff has just reversed that.”
The declines reflect doubt about costs that banks might bear on so-called mortgage put-backs from investors or insurers who challenge the loans as well as uncertainty about the potential costs of legal fights over foreclosures, analysts said. Bank of America Chief Executive Officer Brian T. Moynihan, at a conference in Boston, said the market’s volatility is unprecedented.
“There’s nothing different about our company today than yesterday,” he said. “I’m not sure it is justified.”
The Association of Financial Guaranty Insurers, a trade group for bond insurers, said in a letter last month to Moynihan that his bank should repurchase as much as $20 billion in home loans that were based on wrong or missing information.
MBIA Inc., the world’s biggest bond insurer, surged 16 percent to $13, the highest level in more than two years, after climbing 4.6 percent yesterday. Ambac Financial Group Inc. jumped 19 percent today, and Assured Guaranty Ltd. rose 9 percent.
Armonk, New York-based MBIA has sued mortgage sellers including Countrywide Financial, now part of Bank of America, and Credit Suisse Group AG over loans that failed to meet their promised quality. The loans were packaged into bonds through a process known as securitization and the bonds were insured by MBIA.
Most losses that MBIA has paid or expects to pay on mortgage-related securitizations are linked to fraud or breaches of warranties or other representations, which originators are “contractually bound to remedy,” Kevin Brown, a spokesman for the insurer, said in an e-mailed statement today.
“Ineffective loan-transfer documentation would be another defect falling into this category,” he said. “We expect these repurchase obligations to be honored and therefore we anticipate substantial recoveries on these transactions.”
The declines come a day after JPMorgan, the second-biggest U.S. bank by assets, said it was adding $1 billion to reserves set aside for repurchasing mortgages and also expanded a review of foreclosures to about 115,000 files in 41 states, from at least 56,000 loans in 23 states on Sept. 23. JPMorgan CEO Jamie Dimon said the review will cost more money, though expenses will probably be “incremental.”
‘Will Have Legs’
“There is some realization that this is something that will have legs and will be an overhang well into next year,” said Jon Fisher, a portfolio manager at Fifth Third Asset Management in Minneapolis, which oversees more than $18 billion. “You don’t know how big it could be and at the end of the day government will determine the size of the issue.”
Attorneys general from all 50 states have joined to open an investigation into whether lenders and mortgage companies falsified documents in foreclosures proceedings. Lenders including Ally Financial Inc. and Bank of America have also suspended some foreclosures or evictions to review paperwork.
Paul Miller, an FBR Capital Markets analyst, estimated today that a three-month delay in seizures and other litigation expenses could cost U.S. lenders $10 billion. He estimated Sept. 20 that U.S. banks may lose $44 billion and as much as $91 billion buying back defective mortgages, saying repurchase losses are “more of an earnings issue rather than a capital issue.”
Matt McCormick, a banking-industry analyst and portfolio manager at Cincinnati-based Bahl & Gaynor Inc., said his firm is avoiding most U.S. bank stocks because the uncertainty is too great. He said he doesn’t think banks’ management teams know how bad the problems could turn out to be.
“I don’t think they truly know the depth of the exposure,” McCormick, whose firm manages $2.9 billion, said today. “There are more unknowns than knowns, and investors today are not going to tolerate that.”
Credit-default swaps protecting against losses on Bank of America bonds jumped 12 basis points to 194 basis points and earlier traded as high as 205 basis points, according to broker Phoenix Partners Group. A basis point is one-hundredth of a percentage point. The swaps are trading at the highest since July, according to data provider CMA.
Swaps on Citigroup jumped 6 basis points to 173 and contracts on Wells Fargo rose 10 to 130, Phoenix prices show.
The market’s reaction to questions about errors in mortgage securitizations and foreclosures show investors are having new doubts about the value of bank assets, said Michael Shinnick, a fund manager in South Bend, Indiana for Wasatch Advisors Inc., which has $8.5 billion under management. Investors’ confidence, which had been bolstered by a rebound in bank earnings, is eroding again, he said.
“There is enough circumstantial evidence to suggest that the marks may not be accurate,” said Shinnick, whose $305 million fund has owned bank stocks in the past. He has no position now. “When you analyze a bank, you have to start with book value and with the overhang from real estate. I just don’t have confidence in that book value,” he said.
H&R Block, the biggest U.S. tax preparer, originated mortgages through January 2008. Some of the mortgages were bundled into mortgage-backed securities
The tax preparer’s “exposure” to put-backs may range from $1.20 a share to $12.60 a share “depending on the frequency of claims and the severity of losses that are assumed,” said Bill Carcache, a Macquarie Research analyst, in a note to clients today.
The company, based in Kansas City, Missouri, told investors last month to ignore speculation that it may be forced to buy back faulty mortgages or that costs may swamp reserves.
The company is “highly susceptible to mortgage put-back headlines as they are smaller players, whereas the bigger banks are better able to absorb the potential losses,” Andrew Kuan, senior trader at Primus Asset Management in New York, said in an e-mail yesterday.
The crisis will worsen unless regulators move quickly to find a national solution, said Katherine Porter, a visiting professor at Harvard Law School who has studied banks’ foreclosure practices.
“If the delays drag on and the lawsuits ramp up, we’ll see a twin hit to the economy; banks are very large players in the overall stock market, for example, and if their stocks start falling, that is not good,” Porter said in a telephone interview yesterday. “There could be, in the worst-case scenario, a real downward hit to both the stock market and also to the overall housing economy.”