3:08 AM
By Al Yoon and Jeff Mason
NEW YORK/WASHINGTON | Wed Oct 20, 2010 5:19am EDT
NEW YORK/WASHINGTON (Reuters) - Investors threatened to seek redress over questionable mortgage bonds and the White House warned it would hold lenders accountable for any illegal foreclosure practices, sending the shares of major banks lower on Tuesday.
A group of eight investors accused Bank of America of inappropriately bundling some mortgages into more than $47 billion of bonds. The bank said it would fight being held responsible for the investors' losses.
With pressure mounting for a tougher response by the Obama administration just two weeks before congressional elections, a top Justice Department official was due to meet with housing industry regulators on Wednesday.
Bank of America and GMAC Mortgage, two of the largest mortgage servicers, also faced criticism they were acting too fast in announcing the lifting of foreclosure freezes they imposed in response to accusations of shoddy paperwork.
The foreclosure fiasco has drawn attention to mortgage-related problems at banks, including a trend toward these so-called "putbacks" by holders of mortgage securities.
Bank stocks had recovered some ground Monday after heavy losses last week on fears the foreclosure problems could curb bank earnings.
The putback threat, where investors accuse lenders of misrepresenting the loans that underpin mortgage securities, appeared to unnerve investors once more.
"This repurchase issue is now elevated from the undercard to the main event," said Jefferson Harralson, Atlanta-based bank analyst with Keefe, Bruyette & Woods Inc. "It makes you think the losses on these repurchases will be higher because the litigants have significant resources and are some of the most powerful institutions in the country."
Shares of Bank of America, the largest U.S. mortgage servicer, closed down 4.4 percent. Wells Fargo shares lost 1.3 percent, JP Morgan Chase ended 1.4 percent lower and Citigroup lost 2.6 percent.
Bloomberg News reported that the New York Federal Reserve and bond fund Pimco were among the investors taking action against Bank of America.
Dan Frahm, spokesman for Bank of America Home Loans told Reuters, "We believe we've complied with our obligations."
J.P. Morgan analysts have estimated the mortgage putback risk to the industry at $55 billion to $120 billion over five years.
NOT OFF THE HOOK
The foreclosure documents fiasco, in which banks are accused of using "robo-signers" to sign hundreds of foreclosure documents a day, has reignited public anger with banks, blamed for helping cause the recent financial crisis and recession.
The Wall Street Journal reported that a four-month probe into five top U.S. mortgage servicers showed some were significantly worse than others in how they handle home loans.
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