By Colin Barr
October 14, 2010

The bigger they are, the harder the big bank stocks are falling Thursday.

Bank of America

led a financial sector selloff as worries about the banks’ foreclosure problems intensified. BofA, the nation’s biggest lender and a major mortgage servicing company, dropped 6%, leaving it down 17% for the year and putting it within a dollar of a 52-week low.

The other banks tumbled as well, with No. 2 U.S. lender JPMorgan Chase

dropping 4% a day after CEO Jamie Dimon said the foreclosure mess might well prove to be a “blip.” Citi

dropped 5% and Wells Fargo

3%.

The damage wasn’t limited to the publicly traded banks. Ally Financial, the taxpayer-backed lender that owns GMAC, saw the cost of insuring against a default on its debt surge 16%, CMA said. The cost of credit default swaps tracking Ally, which owns the troubled Residential Capital home lender, surged to $456,000 annually for every $10 million worth of insurance.

Among the rare gainers Thursday were two mortgage insurers, PMI

and Radian

, perhaps on the notion that the banks’ paperwork problems will mean fewer claims for them to pay out on.

But that seems like a stretch, given that another idea gaining attention Thursday is that the government will have to do more soon to keep the country from being overwhelmed by the housing crisis. Amherst Securities estimates that under current policies, such as they are, more than 11 million home loans could go into default in coming years.

That means one mortgage in five could default – a costly problem that surely demands a new approach that will demand sacrifices from just about everyone.

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