Investors pummeled the biggest U.S. banks for a second straight day on Friday, even as several industry analysts said fears of a crippling crisis over shoddy mortgage foreclosure documents were overblown.
Investors are worried the fallout from the growing crisis could lead to big costs for banks, which potentially face fines and lawsuits and may be forced to repurchase faulty loans.
There is also a persistent concern that the crisis could cast a pall over the fragile housing market, derailing any recovery and damaging the broader economy, still struggling to emerge from the worst recession since the 1930s.
The KBW Banks index was down 2 percent in early afternoon trading on Friday, after falling 2.6 percent on Thursday.
Attorneys general in all 50 U.S. states are looking at allegations that for years banks failed to review documents properly or submitted false statements in support of foreclosure applications.
Credit Suisse analysts said demands by investors for banks to repurchase loans was likely to remain elevated and lead to continuing high costs, but they expected Washington to step in to resolve the documentation issues.
"We find it difficult to believe that after all of the costs and efforts that have been brought to bear to help stabilize the housing market that there would not be action by the administration or Congress to 'fix' a procedural issue," they said in a note to investors.
The White House said on Friday that President Barack Obama is "engaged" on the issue of botched housing foreclosures and wants to make sure mortgage servicers live up to their obligations.
At 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.
Bank of America, the largest U.S. mortgage servicer, has temporarily halted evictions nationwide. JPMorgan Chase and others have halted some foreclosures pending reviews, while some have left foreclosure policies in place.
"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," said Nomura Securities analyst Glenn Schorr.
Shares of Bank of America declined as much as 6.5 percent early on Friday, down to their lowest price since July 2009, before paring those losses to be down 4.3 percent in afternoon trading.
JPMorgan shares were down 3 percent, Citigroup Inc fell 1.7 percent, while Wells Fargo & Co shed 2.9 percent. Citi and Wells Fargo have not halted foreclosures.
The shoddy paperwork issue has mushroomed in the run-up to the November congressional elections in which Republicans are expected to make big gains on the back of voter dissatisfaction over how President Barack Obama has handled the economy.
The White House says it backs the states' investigation but at the same time it has signaled it is wary of doing anything that could have "unintended consequences" for the housing market, usually a driver of economic recoveries.
It has resisted calls by senior Democratic lawmakers and others for a nationwide moratorium.
Nearly one-third of all homes sold in September were in the foreclosure process, according to real estate data company RealtyTrac.
The number of homes taken over by banks topped 100,000 in a month for the first time in September but foreclosures are likely to slow as lenders review their paperwork, RealtyTrac said.
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