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Wall Street takes notice of foreclosure troubles

The stock market hasn't reacted much to the growing furor over foreclosures -- until today, with Bank of America, Citigroup and Wells Fargo all dropping sharply more than 4 percent.

Problems in the foreclosure process have been brewing for weeks, and there weren't any big news developments today (for a change).

So why now?

Wall Street has so far been shrugging its shoulders, characterizing the issue as a series of technical slip-ups. As a former member of the Goldman Sachs management committee told the New York Observer: "I don't get it. It doesn't feel like this is fraud. Maybe there is sloppiness, but at the end of the day, people took out mortgages they can't pay back. Now I worry that if anything, the government is making something that is just a clerical error into something that would be nefarious or whatever."

To see the shrug in action, look at BofA's stock from the last month:

bofa stock chart.bmp

Even last Friday morning, after BofA announced it was halting foreclosure sales in all 50 states, the stock rose briefly before falling for the day just under 1 percent.

But this week, a realization is sinking in that this could go way beyond lost paperwork and some corners that were cut during foreclosure proceedings. Some on Wall Street -- not in Washington -- are acknowledging possible cracks in the whole securitization machinery if in fact mortgages weren't properly sold and resold. Citigroup hosted a conference call Monday with Adam Levitin, associate professor of law at Georgetown, that outlined a worst-case scenario in which the foreclosure mess morphs into a "systemic problem" and the mortgage market comes to a full stop. That kind of talk is harder to dismiss when it's not coming from lawmakers running for reelection. And even House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid haven't gone so far as to point out the potential for systemic risk here.

By Jia Lynn Yang  | October 14, 2010; 6:10 PM ET
 
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Comments

Do you think that banks are the ones that caused the current recession? You're right! They did!
Did you really think that "we need $700 billion tomorrow or we won't be able to loan" was true?

As far as I am concerned banks STOPPED loaning money to small businesses, individuals, and students right after they received the TARP money? Chase, for example, CLOSED the whole student loan department last year and Bank of America CEASED issuing Gold Option Line of Credits. is this reasonable? Or is this acceptable?

I am against over regulation, but it seems that private banks in the United States have become somewhat incapable to properly loan out to those who can afford having credit. I feel that there is no balance in banks anymore and we need it back. Banks were either issuing credits left and right prior to crisis or now they have simply STOPPED loaning. Please don't let anyone make you believe otherwise. Just look at the economy!

And let's stop blaming people for getting mortgages they could not handle! Bankers are the primary defense against suspicious activities conducted by customers and by making sure that all the information taken for credit application is valid. Anything less than that is simple FRAUD punishable by criminal law. We don't need more regulation, we need more enforcement of existing laws!

Shota
www.ranxem.com

Posted by: ranxem | October 16, 2010 11:37 PM | Report abuse

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