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TheStreet Open House

7 Reasons Bank Stocks May Keep Falling

Stocks in this article: C JPM BAC

Mortgages and Foreclosures. Foreclosures at the TBTF institutions are rising because moratoriums have expired and "robo" issues have been addressed. In addition, so called "Prime" loans in portfolios (usually "Jumbo" loans -- those that are larger than the FNMA limits) are becoming a big issue as there is a clear trend toward rising "strategic" foreclosures. In fact, Fitch recently downgraded many of these "prime" mortgage pools. This calls into question the quality of what may be on the TBTF balance sheets in the form of such jumbo loans. Furthermore, the fact that FNMA and FHLMC reduced their loan maximums on Oct. 1 is destined to have a huge negative impact in states like California and Florida, where the prices of higher-end properties will fall due to the unavailability of financing. So, expect "strategic" defaults to rise rapidly in these states.

Lawsuits. Half of America's mortgages are on MERS (Mortgage Electronic Registration System), but, in many states, MERS has no standing in foreclosure. Theoretically every owner of a securitized pool should sign off on each foreclosure in the pool. There could be hundreds, if not thousands, of owners in these pools. In addition, many jurisdictions require that title transfers be recorded in county recorder offices. Since that did not occur, lawsuits are now being developed against the major TBTF players for lost recording/title transfer fees. The Dallas DA recently sued MERS and Bank of America (BAC - Get Report) for $100 million of such fees. According to Mark Hanson, since MERS has been operating since 1995, there could be billions of dollars of such thwarted fees. Because nearly every local governmental entity is hungry for funds, this could catch on like wildfire.

Bank of America's $8.6 billion global services settlement is in trouble, as Attorney General Eric Schneiderman says it should be closer to $25 billion, and he is getting support from other states, like Californai. The rumor mill has circulated the theory that if lawsuit settlements become outsized, BAC appears to have the option of bankrupting the old Countrywide unit, which it has kept as a separate legal entity since its purchase in 2008. Imagine, though, the market reaction to such a move!

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