Foreclosure Crisis: Losses May Top $26B

Goldman Sachs says banks need to face mortgage buy-back risk.
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NEW YORK (

TheStreet

) -- Goldman Sachs says the largest U.S. banks face "potential losses of $26 billion spread across several years" as they are forced to buy back securitized mortgages or take other credit losses on loans going through the foreclosure process.

A report issued today by Goldman Sachs Investment Research says that better-than-expected third-quarter results for the largest banks were overshadowed by headline risk from private-label mortgage securitizations, according to a report issued today.

Between

JPMorgan Chase's

(JPM) - Get Report

release of third-quarter earnings results on October 13 and

Wells Fargo's

(WFC) - Get Report

third-quarter release on August 20, the largest four banks - which also include

Citigroup

(C) - Get Report

and

Bank of America

(BAC) - Get Report

-- lost $28 billion in market capitalization, according to Goldman.

Goldman's report focused on the six largest-cap U.S. banks, also including

PNC Financial Services

(PNC) - Get Report

and

U.S. Bancorp.

(USB) - Get Report

Although it has a larger market capitalization than PNC,

Bank of NewYork Mellon

(BK) - Get Report

, which derives most of its earnings from global custody and other processing services, was not included in the report.

Goldman said that U.S. Bancorp was the only one among the group of six not to release loan loss reserves during the quarter. According to data supplied by SNL Financial, Citigroup released the most during the third quarter, with loan losses reserves declining $2.5 billion from the end of the second quarter. Bank of America and JPMorgan Chase both released $1.7 billion in reserves, Wells Fargo released $645 million and PNC Financial released $105 million in reserves.

Goldman Sachs analyst Richard Ramsden said in the report that equity trading among the large-cap banks was strong and that "core mortgage banking was up 40%" quarter-over-quarter and that capital markets activity remained "robust in October."

U.S. Bancorp was the only large-cap bank among the group of six for which Goldman increased its 12-month price target. The target was increased 17% to $28, based on its earnings estimate for 2012, which increased to $2.65 a share. The new target would imply 18% upside potential from Tuesday's closing price of $23.80.

Goldman lowered its price target for Bank of America by 16% to $16, based on a 2012 earnings estimate of $2.15 a share. The target implies 40% upside potential from Tuesday's closing price of $11.40.

The price target for PNC Financial Services was lowered slightly to $60 based on an earnings estimate of $6.55 a share for 2012. The target implies upside potential of 13% upside potential based on Tuesday's closing price of $52.90.

For Wells Fargo, the price target was lowered 11% to $33, based on a 2012 earnings estimate of $3.80 a share. Based on Tuesday's closing price of $25.97, the target indicates upside potential of 27%.

Goldman says it continues to favor Citigroup and JPMorgan, which "continueto trade at a sizeable discount to some peers on earnings and tangible book value + after-tax reserves, which we view as too deep a discount relative to risk." Price targets for both companies were unchanged.

The price target for Citigroup is $5.50 based on estimate 2012 earnings of 55 cents a share. The target implies 32% upside to Tuesday's closing price of $4.17.

For JPMorgan, Goldman's price target is $51, based on an earnings estimate for 2012 of $6.10 a share. Based on Tuesday's closing price of $36.96, the target indicate 38% upside potential for the shares.

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--

Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.