Banks Could Lose $80 Billion From Mortgage Mess: Bove

Banks could face losses of over $80 billion from the foreclosure mess—not so much from the moratorium on home seizures but from the flood of homeowner and investor lawsuits likely to follow, analyst Dick Bove said Friday.


The lawsuits are likely to focus on "fraud at every level of the process"—from packaging mortgages into bonds to selling them to investors, the Rochdale Securities analyst said in a note to clients.

The legal fallout could cost the industry more than $80 billion, about 10 times the amount that Bove sees banks losing from the foreclosure halt itself.

"[H]uge amounts of monies have been lost and there are very angry participants at every level of the system seeking to recover the funds that they have lost," Bove wrote.

Financial stocks continued to get hammered Friday by growing worries about the fallout from the foreclosure mess. The KBW Bank Index was down 3.3 percent.

S&P Equity cut Bank of America to "hold" from "strong buy," saying the big bank is not as prepared for the fallout from the foreclosure crisis as JPMorgan Chase . S&P also cut its price target for BofA to $14 from $17 as shares of the bank hit a 52-week low.

Earlier this week, attorneys general from all 50 states launched a joint investigationinto allegations that mortgage companies mishandled documents and broke laws in foreclosing on hundreds of thousands of homeowners. The move deepened worries that the use of so-called "robo-signers" to stamp mortgage documents could backfire on banks and lead to fines. Many banks have already voluntarily halted foreclosures while they look into the problem.

The growing mess has sparked fears that U.S. banks' tenuous profitability will be wiped out as they repurchase billions in home loans held by investors in mortgage-backed securities.

"This is a potential cost to factor into long-term profitability," said Jefferson Harralson, Atlanta-based bank analyst with Keefe, Bruyette & Woods "We have to understand banks could be dealing with this on a loan-by-loan basis for years."

Bank of America, the country's largest mortgage servicer, could be forced to repurchase as much as $74 billion in mortgages, according to one estimate by Branch Hill Capital.

"The housing crisis is not over," Bove said. "It has been extended. If the extension is too long everyone will be harmed. The entity harmed the most will be the homeowner making payments on his/her mortgage."

Bove noted that the inability to foreclose will hurt banks somewhat, but will injure homeowners more through declines in property values. When those homes subject to the moratorium come back into the market, the overabundance of supply will cripple prices and send the already-beleaguered market into another tailspin, he said.

"The combination of the moratorium and the lawsuits are likely to cause the major mortgage originators to withdraw from the markets while they deal with their problems. There is no one to replace them," he wrote. "This could cause the rates on mortgages to rise, further depress home mortgage prices, and increase foreclosures."

Housing stocks were reacting to the foreclosure crisis Friday, losing more than 1.5 percent in morning trading.

—Reuters contributed to this report.