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Bank Foreclosure Costs May Hit $10B

Banks could experience combined losses of $6 billion to $10 billion from foreclosure issues sweeping the industry, according to one analyst's estimate.

NEW YORK (

TheStreet

) -- Banks could experience combined losses of $6 billion to $10 billion from foreclosure issues sweeping the industry, according to one analyst's estimate.

FBR Capital Markets analyst Paul Miller says in an industry note to clients on Thursday, titled

Foreclosure Mania: Big Deal or Not?

that the loss estimate includes foreclosure costs and litigation expenses.

"We would note this is an earnings issue and not a capital problem, and although $6 billion-$10 billion is a large amount, we believe the industry could comfortably absorb these losses," Miller says in the note.

But investors are getting weary of the constant issues within the banking industry, between Basel capital requirements, regulatory reform, mortgage repurchase expenses and now the foreclosure issues, Miller notes.

"Investors are becoming exhausted hearing about one issue after another," Miller writes. "Even though we believe that this foreclosure issue could be overblown in the media, we have to wonder: what is the next shoe to drop for the industry?"

Large servicers including

Bank of America

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,

JPMorgan Chase

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,

TheStreet Recommends

PNC

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and

Ally Financial

have initiated foreclosure moratoriums and halted property sales as they review foreclosure practices and check for fraudulent documents. Under specific fire are the so-called robo-signers which approved thousands of documents without properly checking information and "being signed in front of a notary public," the FBR note adds.

Bank stocks were significantly falling on Thursday as new data from RealtyTrac came out that said

foreclosures were still on the rise

during the third quarter. Shares of the large banks including BofA

Citigroup

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, and

Wells Fargo

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were falling significantly on Thursday.

In a "best case" scenario, the robo-signing and documentation issues are isolated or common law is upheld. Miller says in that case, foreclosures are likely to be delayed for only three months, the equivalent of $6 billion cost to the industry.

Banks spend approximately $1,000 per month in any foreclosure delays. So a three month delay would equal about $6 billion based on roughly 2 million homes in foreclosure, according to Miller. Still, the banks are likely to have to pay a combined $3 billion to $4 billion in litigation expenses as well.

In a "worst case" scenario, "the anecdotal evidence is just the tip of the iceberg and there are extensive systemic problems relating to 'robo-signers' and documentation, Miller writes.

In this scenario, foreclosures would be delayed six to 12 months, which would cause mortgage titles to be called into question, increased politicization of the issue, increased litigation costs and an overall "severe drag" to the foreclosure process, Miller says.

"While we believe this scenario is unlikely, we address it as a tail risk," he says.

JPMorgan's Chairman and CEO Jamie Dimon

in the bank's third-quarter earnings call on Wednesday, said so long as the foreclosure issues are cleared up quickly they are not likely to dramatically add to expenses.

"Many of the servicers we have spoken to do not think that this issue is going to be debilitating for banks; however, the servicers may be in unchartered waters as they have never been challenged by the judicial system as extensively as they are now," the note says. "We believe that the foreclosure issue will likely come down to whether the judicial system will recognize common law or enforce code."

It is likely that courts will settle somewhere in-between accepting common law code and enforcing judicial code, Miller writes. He makes note that the foreclosure probes is likely part of a greater political agenda by state officials "to compel lenders to reduce principal loan balances, especially ahead of the mid-term elections."

"While we had previously believed that this was an election issue, we now think that this could materialize into a longer-term concern," the note says. "Overall, we believe that the real cost to the industry is going to be the drag on the foreclosure process, which could delay any recovery in the housing market that might be on the horizon."

See Related Items:

Foreclosures Still on the Rise -- For Now

Foreclosure Fear: Q&A Risk Analytics Chris Whalen

Foreclosure Crisis May Be a 'Blip': Dimon

--Written by Laurie Kulikowski in New York.

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Laurie Kulikowski

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