Why Bank of America May Be Stumbling for a While


Today is the longest day of the year for the Northern Hemisphere -- and it's looking like it will be a long day for Bank of America on the trading floor. The bank lost 4% just as the second hour of trading was getting under way, but it has since recovered slightly and sits at a loss of 1.39% as of 2:45 p.m. EDT. Some new allegations involving mortgages may be just the newest hurdle the bank and its investors are facing.

Yesterday's news
Of course yesterday was the first full day of trading since the market learned of the Fed's intentions for its current quantitative easing policy. And Mr. Market had a bit of a melt down. But we also learned yesterday that the housing market recovery is moving along quite nicely, with May sales of existing homes rising 4.2% since April and a staggering 12.9% since the previous year.

New home construction needs to pick up in order to meet the higher demand, which has reached levels the market hasn't seen since 2009, but it's all around good news for the economy and banks. With the top mortgage lenders, Wells Fargo and JPMorgan , likely to leverage their huge market share to gain new business, investors are showing their confidence in the banks, driving Wells 1.35% higher and giving JPMorgan a chance at breakeven this morning.

Bank of America and rival Citigroup aren't benefiting from the housing boost. Citi is the smallest player in the mortgage market of the Big Four, so there was little upside movement this morning. Bank of America, on the other hand, has been trying to capture a larger share of the mortgage pie, but new allegations may thwart its efforts and drive investors, customers, and others away.

The lying game?
We recently learned that Bank of America employees were allegedly incentivized to stall qualified foreclosure applications in order to generate more fee income. As that revelation came to light, the bank's reputation was once again in jeopardy of losing customer confidence, which could keep potential new mortgage customers from working with the bank. Now, a new investigation has revealed that mortgage servicers, such as B of A, were misrepresenting the underlying mortgages in mortgage-backed securities to the trustees holding the mortgage bonds.

It all boils down again to fee generation. The investigation alleges that the servicers were claiming the homes in question were still in the foreclosure process, while in fact they had been sold or paid off. Since the bond holders would have to pay fees while the homes were in foreclosure, this allowed the mortgage servicers to rake in the dough.

So now Bank of America faces not only customer discontent, but also that from investors and future business partners in the MBS world. With its goal of capturing more of the mortgage market, the bank is in serious trouble following the newest revelations. Not to mention potential lawsuits -- and we all know how those hurt the bank.

Bank of America's stock doubled in 2012. Is there more yet to come? With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, Financials bureau chief, lift the veil on the bank's operations, including detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.

The article Why Bank of America May Be Stumbling for a While originally appeared on Fool.com.

Fool contributor Jessica Alling has no position in any stocks mentioned -- you can contact her here. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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