NEW YORK ( TheStreet) - Bank stocks were tumbling once again on Friday, with all eyes on Bank of America ( BAC), but a more meaningful concern may be trends outlined in JPMorgan Chase's ( JPM) earnings report this week.
>>>Wall Street Whispers: The Big Worry for 3Q Mortgage problems continued to drag on the sector, with many observers pointing to escalating foreclosure issue as a reason for the sell-off. A damning report from a hedge fund on the West Coast regarding BofA also seemed to be having a big impact on bank stocks. An analysis by Branch Hill Capital found that Bank of America had $74 billion in exposure to mortgage-security buybacks from Fannie Mae ( FNMA.OB) and Freddie Mac ( FMCC.OB). The report was compiled in August, but began getting notice on Thursday. Branch Hill suggested selling bank stocks and buying shares of title insurers, which helps explain the movement in both. By late morning, banks with the biggest mortgage exposure were getting hit hard. Bank of America shares were down 5.8% at $11.88, while JPMorgan was shedding 4.7% at $36.92. Wells Fargo ( WFC) was dropping 4.9% at $23.52, with Citigroup ( C) down 2.7% at $3.95 - the second day it slid under the $4 mark. The KBW Index of large-cap bank stocks was down 2% at 45.42. Besides the four large money-center banks, other heavy losers were SunTrust ( STI), down 4.3% at $24.48 and Capital One ( COF), down 3.5% at $38.51. Fidelity National Financial ( FNF), the largest title insurer, was flat on Friday morning while other big title insurers First American ( FAF) and Old Republic ( ORI) were up marginally at $14.63 and $13.92, respectively. Those stocks had come under heavy pressure in earlier sessions due to their unknown exposure to foreclosure litigation. But Branch Hill's calculations seemed dubious on their face. As of mid-September federal regulators said there was just $4.5 billion worth of outstanding repurchase requests. Another analysis by Oppenheimer bank analyst Chris Kotowski shows that the entire industry may only be required to buy back $7.7 billion worth of Fannie-Freddie debt over the next year. Kotowski called Branch Hill's claims "exaggerated" in a report on Friday. "The most readily quantifiable component of the argument is demonstrably flawed," Kotowski said in a report Friday, "and this should cast doubt on the rest of the numbers, which we think were arbitrarily derived in any case." Apart from a hedge-fund boasting its stock thesis, uncertainty surrounding the "robosigning" issue continued to weigh on investor confidence. Big mortgage servicers have gotten much attention in recent days for their practice of "robosigning" documents without having properly vetted the information. This has caused several large banks to halt foreclosure proceedings and begin reviewing practices and potentially faulty documents. It has also brought up an array of potentially costly legal issues.
Finally, JPMorgan's lackluster third-quarter results seemed to provide several reasons for investors to take a step back from the banking sector. The New York-based banking behemoth was the first major firm to report results on Wednesday morning. JPMorgan beat Wall Street's earnings expectation by a wide margin, but came in shy of revenue targets. The bank also reported weak lending conditions in most areas and disappointing investment banking results. In terms of mortgages, the bank grew its reserves for Fannie-Freddie buybacks and said it's reviewing 115,000 foreclosure documents for potential errors, while halting foreclosure sales in 23 states. In fact, a healthy portion of JPMorgan's 23% profit upswing came from an accounting requirement called reserve releasing - letting go of capital held to cover bad loans that aren't going quite as bad as expected. Yet that requirement has been criticized for being "procyclical," or forcing banks to build reserves when times are bad, then forcing them to release reserves when times are good. With the foreclosure issue holding back the housing market and unemployment holding back economic growth, it's become more likely that big banks have let go of reserves too early. This has
caused concern among some bank regulators and may now be weighing on the minds of investors, who had been looking for revenue growth and dividend restoration as reasons to dive back into the banking sector. Citigroup will be the next major bank to report earnings on Monday, followed by Bank of America on Tuesday and Wells Fargo on Wednesday. -- Written by Lauren Tara LaCapra in New York. >To contact the writer of this article, click here: Lauren Tara LaCapra. >To follow the writer on Twitter, go to http://twitter.com/laurenlacapra. >To submit a news tip, send an email to: firstname.lastname@example.org.