Lurking mortgage problems left over from the collapse of the housing market sent bank stocks tumbling for a second day Friday and the cost of buying protection for bank debt, now perceived to carry new risks, climbed steadily higher.
Bank of America Corp.'s stock hit a 52-week low and Wells Fargo & Co. tumbled nearly 5 percent. Shares of JPMorgan Chase & Co., Citigroup Inc. and other major mortgage players slid as well.
The big banks had recovered strongly from the crisis that ensued when home loans began to sour during the real estate bust that started in 2007.
But recent revelations about mortgage fraud and flawed foreclosure paperwork fueled doubts about the health of major banks and the how quickly they will be able to put the mortgage mess behind them.
Standard & Poor's downgraded Bank of America stock to "Hold" from "Strong Buy" Friday. S&P analysts said the nation's biggest bank may not have set aside enough cash to cover losses on fraudulent loans that were resold to investors. They also are concerned about costly legal bills after the bank agreed to review paperwork for thousands of foreclosures that may have been done improperly.
The same issues drove higher the cost of insuring the debt issued by banks.
On Friday morning, it cost between about 10 percent more to insure bonds issued by Bank of America, Wells Fargo, Citigroup Inc. and JPMorgan than it had just two days earlier, according to financial data firm Markit Group Ltd. The cost of insuring debt from Bank of America was up 8 basis points, to 200 basis points, meaning that it would cost $200,000 per year to insure $10 million for five years.
The swings reflect investors' view that the banks are weaker and the chances are greater that they would be unable to repay bondholders.
The mortgage problems at Bank of America, Wells Fargo and JPMorgan are deeper because they took on billions in bad loans from companies that failed during the crisis. Bank of America bought Countrywide Financial Corp., Wells Fargo bought Wachovia and JPMorgan bought Washington Mutual.
Banks hold trillions dollars worth of home loans on their books at close to face value. Yet the loans may be worth far less. Many are held by borrowers who can't afford to pay and secured by real estate whose value has plummeted. The banks don't have to acknowledge these losses as long as they don't plan to resell the loans.
"You have a pile of loans that are being carried near face value, but they're underwater," meaning borrowers owe more than the properties are now worth, said Daniel Alpert, managing partner at the New York investment bank Westwood Capital LLC. "There's a limit to how far they can kick it down the road with a moratorium" on foreclosures, he said.
Investors now are questioning whether the loans could cripple banks and mortgage investors with years of drawn-out losses.
Bank of America's stock was trading lower than it had at any time since June 4, 2009.
Documents surfaced this fall in which bank employees acknowledged approving thousands of foreclosures per month. The employees swore in court filings that the foreclosure paperwork was accurate, though they had not even looked at the documents.
Bank of America, JPMorgan and others have suspended foreclosures as they follow the paper trail backward to ensure the accuracy of their records. At Wells Fargo and Citigroup foreclosures continue, despite near-identical allegations.
Bank of America, JPMorgan, and Wells Fargo face the biggest hits from the foreclosure do-overs, because they originated the most loans. Those banks also face billions in losses on fraudulent loans that were resold to the government-owned mortgage giants Fannie Mae and Freddie Mac.
Fannie and Freddie can force banks to buy back loans that appear to be fraudulent. JPMorgan set aside $1 billion in the last quarter to cover such losses, the company said this week.
The foreclosure halts aren't all bad for banks. Seizing property pushes banks closer to acknowledging that it lost value when the real estate bubble burst. The slow foreclosure process allows them to delay writing down loans in foreclosure _ not to mention the 600,000 slated for foreclosure that are backed up in the pipeline. Those loans probably lost value, too.
AP Business Writer Pallavi Gogoi and AP Business Writer Matthew Craft in New York contributed to this report.