Foreclosure Reviews Could Cost Banks In More Than One Way

The longer that U.S. banks place a moratorium on home foreclosures, the higher the risk they might suffer financial costs in addition to the political pain they already feel.

Bank of America Corp. (BAC) said Friday it would review its foreclosure documents in "all fifty states" and "stop foreclosure sales until our assessment has been satisfactorily completed." Brian Moynihan, the chief executive of Bank of America, the nation's biggest bank by assets and deposits, told the National Press Club Friday the Charlotte bank hasn't found problems in its foreclosure process, but wanted to "clear the air" with its halt to foreclosure sales.

Bank of America, J.P. Morgan Chase & Co. (JPM), and Ally Financial Inc. last week postponed foreclosures in 23 states because of foreclosure documents signed by staff who did not review those documents. PNC Financial Services Group Inc. (PNC) said it "is reviewing its mortgage servicing procedures to ensure these comply with applicable law," a spokesman said Friday.

Eventually the banks will foreclose on nearly all the properties. In many cases owners have already left their home or been evicted. But there are legal and administrative costs related to delayed foreclosures.

The delays probably won't hurt banks' mortgage originations, which are driven mainly by interest rates rather than service levels.

But for banks that have to publicly defend their foreclosure procedures, the issue is a political hot potato. To the public, already inflamed by government bailouts and a debate over bank fees, it's one more instance of banks treating their customers badly.

For some banks, the bad publicity, said David Trone, an analyst with JPM Securities LLC., might hurt "deposits and ongoing relationships with customers."

There may also be a broader economic impact from the slowdown in foreclosure sales: "It adds a level of uncertainty that prevents" the banks involved "from making new loans" until the banks hold the capital they hope to recover from foreclosure sales, Trone said.

However, the direct hit to the profit of the banks involved is unlikely to be material, "unless it drags on for 12 to 24 months," said Gerard Cassidy, an analyst with RBC Capital Markets.

Few of the reviews of foreclosure documents that banks have ordered will result in an actual reversals of the foreclosures.

"The banks should have already written down the credit," Mike Mayo of CLSA wrote in a research note Thursday--though the ratio of loans that are classified as unlikely to be paid back "will remain inflated for a significant period."

There is some legal risk. Judges might harden their position against banks once the foreclosure documents are resubmitted; lawyers have to be paid. Some judges might throw the foreclosures out, Mayo said.

There is also the cost to the bank that has to keep the house longer than expected--as a rule of thumb, those cost can be about 1% of the value of the house per month. There are the administrative costs of reviewing the foreclosure documents.

All this could shave "a few cents" off quarterly earnings, Trone estimated. But the longer the issue drags along, and the more severe the political backlash to foreclosure overall, the higher those costs will eventually be.

-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; matthias.rieker@dowjones.com

PNC Financial Services (NYSE:PNC)
Historical Stock Chart
From Jul 2024 to Aug 2024