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5 Booming Bank Stocks Poised to Fall (Update 3)

Updated market close information and with comments on the possible mortgage settlement from real estate attorney and adjunct New York University law professor Adam Leitman Bailey.

NEW YORK ( TheStreet) -- It looks like a week for bank stocks -- and their investors -- to take a breather.

After the amazing year-to-date run for bank stocks through last Friday's strong employment report, which, according to Deutsche Bank analyst Greg Poole provided "further evidence the economy is entering into a self-sustaining, self-reinforcing expansion whereby rising job growth creates the requisite income to fuel consumer spending," the market's eyes this week will turn back to the dreadful mortgage mess.

After a year of difficult negotiations, the largest mortgage servicers, including Bank of America (BAC - Get Report), JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C - Get Report) and Ally Financial, are expected to enter into a $25 billion settlement over questionable foreclosure practices with federal regulators and attorneys general for most states, with the possible major exceptions of New York, California, and Nevada.

The settlement will include principal forgiveness and could help banks and their investors to better-gauge long-term mortgage putback risk, however, if the servicers are not granted sufficient immunity from a new round of putback lawsuits, or if one or more key states refuse to sign-on, the result will be more confusion, and major pressure on the large banks.

Just last Friday, New York State Attorney General Eric Schneiderman threw another mortgage monkey wrench into the mix, suing Bank of America, JPMorgan Chase, Wells Fargo and Mortgage Electronic Registration Systems, or MERS, which helps the industry to track mortgage ownership and servicing rights, in order to simplify securitization.. Schneiderman alleged that the mortgage industry's creation of MERS resulted in "myriad of fraudulent, deceptive, and illegal acts and practices."

If MERS is not included in the coming mortgage settlement, and/or if Schneiderman is not aboard -- which could reduce the political career boost he enjoys from mortgage-related press conferences -- the mortgage mess will just roll on.

Adam Leitman Bailey -- a real estate lawyer and adjunct professor at New York University -- is a mortgage settlement skeptic, saying that if the government is "trying to improve public sentiment because it is a political year, then this is a good idea," but that "while we know what the banks are giving up, we we don't know what they are getting," and the settlement "could severely set a bad precedent hampering the American way of building equity in homes."

Getting back to the bank stock pop, the The KBW Bank Index (I:BKX) has now risen 14% year-to-date through Monday's close at 44.70, after pulling back a painful 25% in 2011. Among the 24 index components, Bank of America has run away with the prize so far, with shares returning 45% year-to-date through Monday's close at $7.97, after last year's epic 58% slide.

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