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Forclosure Crisis

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The stock broker question for today is, “Should investors stay away from bank stocks right now or trade as usual and ignore the foreclosure mess that may be going to cost banks billions?” The answer seems to vary depending upon whom one talks to. Certainly, the growing investigation by Attorneys General in all 50 states suggests a widely-spread problem. However, is it one of paperwork that can be repaired fairly easily and inexpensively, or will the effects of slowing down the foreclosure process on hundreds of thousands of homes have deeper and more long term ramifications? Is this a slight dip in the road for banks and the economy in general or is a cliff just around the corner?

The most prominent banks at the center of this investigation are Bank of America, Wells Fargo, City Group, and J.P. Morgan. All of them experienced a 3% – 5.5% drop market Thursday as they respond to allegations of misusing “robo-signers,” bank employees who sign hundreds of forms each day with very little time to carefully read each document, and of submitting false statements that adversely affected home owners facing foreclosure.

As the banks respond to these charges, time-consuming and costly investigations may stall or halt the foreclosure process. It is estimated that each month a home sits in the foreclosure “pipeline” costs the bank an additional $1000, and considering that an estimated 1.2 million homes may be foreclosed this year, the expense is significant. Because this is only one aspect of possible damage to the banking industry, the average stockbroker or portfolio manager may be steering clients toward more predictable investments.

In response to these allegations of impropriety, Bank of America has currently suspended its foreclosures in all 50 states. Wells Fargo and Citigroup are moving forward, announcing they are certain that all legalities have been met. J.P. Morgan is reviewing 115,000 home foreclosures that may be in question. The bank is also planning to add $1 billion to its reserves should it need to buy back some of these mortgages.

It is this possibility of forced buy-backs of defective mortgages that could eventually cost the banking industry as much as $41 billion – $91 billion according to Paul Miller, FBR capital analyst. The banks would be required to re-purchase or to re-write mortgages at a lower rate, causing them to absorb principal reductions. The entire process, by slowing successful foreclosures could, in turn, negatively affect the delicate recovery of the housing industry.

So, is this just a slight twitch in the credibility of banking stock, or is it a foreshadow of darker days ahead? There are those who think that this is an ideal time to invest because of the very uncertainty of the situation. They have determined that those in power will not suffer the banking industry to fall flat on its face. Then there is that cautious stock broker who suggests looking elsewhere right now until the most serious threat is past. Only time will tell.

Check out JP Morgan Stock for the past month and you can see that the stock market is reacting to this crisis.

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