The sell-off was one of the most vivid indications yet that the foreclosure problems could take a toll on banks that had been recovering from the financial crisis of recent years.

In early afternoon trading, share prices declined by 3.3 percent for J.P. Morgan, 4.5 percent for Citigroup, 4.9 percent for Wells Fargo, 5.6 percent for Bank of America and 6.1 percent for SunTrust Banks.

In contrast, the Dow Jones industrial average was down by 0.34 percent, and the Standard & Poor's 500-stock index, a broader market gauge, was down by 0.62 percent.

Some major lending institutions have frozen foreclosures in response to evidence that employees in what were essentially foreclosure mills signed the paperwork to seize homes without properly vetting it.

A similar but potentially broader concern has cast an additional cloud over the system.

Some analysts are concerned that huge pools of mortgages that are bought and sold like stocks might be defective. Court documents show that in many cases the paperwork transferring legal ownership over those loans to the pools was lost, ignored or even forged.

The mortgage securities were traded around the world and widely held by investors, including mortgage finance giants Fannie Mae and Freddie Mac, which are wards of the government.

It is not yet clear what the consequences would be if large quantities of mortgage-backed securities turn out to be defective - or how the trouble could be solved.

"If the basic principles of property law have been violated here . . . it may be extremely difficult to fix," said a source involved in government oversight of financial institutions, who spoke on condition of anonymity because of the uncertainties involved. "There is a chain of questions that no one seems to know the answer to."

Washington Post Staff Writer
Thursday, October 14, 2010; 3:10 PM

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