WRAPUP 4-Investors, White House press banks over mortgages

By Al Yoon and Jeff Mason

NEW YORK/WASHINGTON, Oct 19 (Reuters) - Investors threatened to seek redress over questionable mortgage bonds and the White House warned it would hold lenders accountable for any illegal foreclosure practices, sending the shares of major banks lower on Tuesday.

A group of eight investors accused Bank of America of inappropriately bundling some mortgages into more than $47 billion of bonds. The bank said it would fight being held responsible for the investors' losses.

With pressure mounting for a tougher response by the Obama administration just two weeks before congressional elections, a top Justice Department official was due to meet with housing industry regulators on Wednesday.

Bank of America and GMAC Mortgage, two of the largest mortgage servicers, also faced criticism they were acting too fast in announcing the lifting of foreclosure freezes they imposed in response to accusations of shoddy paperwork.

















The foreclosure fiasco has drawn attention to mortgage-related problems at banks, including a trend toward these so-called 'putbacks' by holders of mortgage securities.

Bank stocks had recovered some ground Monday after heavy losses last week on fears the foreclosure problems could curb bank earnings.

The putback threat, where investors accuse lenders of misrepresenting the loans that underpin mortgage securities, appeared to unnerve investors once more.

'This repurchase issue is now elevated from the undercard to the main event,' said Jefferson Harralson, Atlanta-based bank analyst with Keefe, Bruyette & Woods Inc. 'It makes you think the losses on these repurchases will be higher because the litigants have significant resources and are some of the most powerful institutions in the country.'

Shares of Bank of America, the largest U.S. mortgage servicer, closed down 4.4 percent. Wells Fargo shares lost 1.3 percent, JP Morgan Chase ended 1.4 percent lower and Citigroup lost 2.6 percent.

Bloomberg News reported that the New York Federal Reserve and bond fund Pimco were among the investors taking action against Bank of America.

Dan Frahm, spokesman for Bank of America Home Loans told Reuters, 'We believe we've complied with our obligations.'

J.P. Morgan analysts have estimated the mortgage putback risk to the industry at $55 billion to $120 billion over five years.



NOT OFF THE HOOK

The foreclosure documents fiasco, in which banks are accused of using 'robo-signers' to sign hundreds of foreclosure documents a day, has reignited public anger with banks, blamed for helping cause the recent financial crisis and recession.

The Wall Street Journal reported that a four-month probe into five top U.S. mortgage servicers showed some were significantly worse than others in how they handle home loans.

Housing and Urban Development Secretary Shaun Donovan declined to identify the laggards in an interview, the journal reported, but said the administration plans to make the results of its investigation public in the next few weeks.

The decision by Bank of America and GMAC Mortgage to resume foreclosures, coupled with their efforts to play down the severity of their problems, appeared aimed at sending a message that the crisis was easing.

The White House, which has performed a delicate balancing act over the crisis, signaled that President Barack Obama was not letting the big banks off the hook.

Obama's spokesman Robert Gibbs reminded banks that they faced federal fines and possible legal action from homeowners if investigators find irregularities in their practices.

With an eye to Nov. 2 midterm elections that threaten his Democrats' grip on Congress, Obama wants to avoid giving voters the impression he is caving in to financial firms whose risky lending is blamed for exacerbating the 2007-2009 meltdown that led to the deepest recession since the 1930s depression.

But the administration has resisted calls for a nationwide foreclosure moratorium, wary of doing anything that could further suppress housing sales and derail the nation's anemic economic recovery.

'As institutions are determining their next steps in addressing these issues, we remain committed to holding accountable any bank that has violated the law,' Gibbs said.

All 50 U.S. states have started a joint investigation of the mortgage industry, focusing on allegations that for years banks have not reviewed documents properly or have submitted false statements to evict delinquent borrowers.

Ohio Attorney General Richard Cordray said he was 'deeply concerned' about Bank of America's move to resume foreclosures, and that attorneys general will want to be very careful in reviewing their revised processes.

The sheriff for Cook County, Illinois, which includes the city of Chicago, said on Tuesday he will not enforce foreclosure evictions for Bank of America, JPMorgan and GMAC Mortgage until they prove those foreclosures were handled 'properly and legally.'

(Additional reporting by Joe Rauch in Charlotte, N.C., Elinor Comlay and Kristina Cooke in New York, Nick Carey in Chicago; Writing by Matt Spetalnick; Editing by Tim Dobbyn) Keywords: USA FORECLOSURES/ ([e-mail] ; [phone]; Reuters Messaging: [e-mail] ) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.