Bank Stocks Drop on Foreclosure Ruling

NEW YORK (TheStreet) -- A court ruling against two large mortgage servicers on Friday appeared to threaten big banks' success in challenging lawsuits pertaining to the foreclosure-paperwork mess.

Massachusetts' highest court voided two foreclosures by Wells Fargo (WFC) and U.S. Bancorp (USB), with one judge saying the banks had "failed to make the required showing that they were the holders of the mortgages at the time of foreclosure," and another citing their "utter carelessness" in handling documents that would prove their right to seize the properties.

Though the ruling pertains to just two foreclosures out of millions pending around the country, it still helped to drag down large bank stocks on Friday. Wells Fargo was recently down 3.3% at $31.10, with U.S. Bancorp down 1.1% at $26. Bank of America (BAC), JPMorgan Chase (JPM) and Citigroup (C) - which are also among the top five servicers - were also trading 0.5% to 3% lower.

Big banks are facing a host of problems with foreclosure-related paperwork. In some cases, employees apparently signed off on thousands of affidavits in "judicial" states, which require court approval before foreclosures can proceed.

In other cases, documents related to mortgage ownership seem to have disappeared - largely because the ownership traded hands so many times on electronic systems that banks didn't carefully track the location of underlying paperwork.

In the worst cases, banks have foreclosed upon or destroyed property of new owners who were current on mortgages, because paperwork hadn't been updated.

In addition to federal regulators, attorneys general across the country have been investigating banks' foreclosure practices. Ohio State Attorney General Richard Cordray - who was recently named to head the new Consumer Protection Bureau's enforcement agency - has filed suit against one lender, Ally Financial, and indicated that Wells Fargo is also in the crosshairs.

Meanwhile, homeowners and private investors have taken banks to court, accusing them of seizing homes improperly. It's unclear what the outcome of all the foreclosure litigation will be, though large banks have begun reserving billions of dollars against court costs, settlements and potential rulings.

-- Written by Lauren Tara LaCapra in New York.

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