Bank of America is still taking big risks

October 20, 2010, 9:28 PM UTC

Taking on too much risk got the banks in trouble. So why are Bank of America and GMAC taking on more by resuming foreclosures?

Earlier this week, Bank of America (BAC) and Ally Financial’s GMAC mortgage unit announced they would resume foreclosures in many states, even while government investigations into foreclosure procedures ramp up.

Their timing was curious — both banks went back in on the same day? But what’s really remarkable was just how poorly timed the move was, as it risks fueling anti-bank sentiment. And although the Obama administration last week declined to push a national moratorium on foreclosures, it’s significant that officials made a point to support investigations by 50 state attorneys general, the Federal Housing Administration and Financial Enforcement Task Force.

Bank of America, the country’s largest lender, said it was resuming foreclosures in 23 states less than three weeks after executives froze them following complaints of missing paperwork. The announcement came one day before the bank announced that it posted a massive loss of $7.3 billion during the third quarter, and it was clearly meant to convince shareholders that it is back to business as usual. “I don’t think the technical issue is as big a deal,” Bank of America CEO Brian Moynihan said on a conference call. “The issue of foreclosure is a big deal, and … we’ve got to get on with it to restore the health of the market.” A spokesperson for GMAC, which resumed foreclosures in the same states, told The New York Times “We have more training, more people and a more robust policy now.”

Whether or not the issue ends up being a “big deal,” it’s arguably a big risk to take at a precarious time. U.S. banks are still in a tough spot as the industry tries to recover its reputation following a financial crisis that helped send the U.S. into the longest recession since the Great Depression. The subprime mortgages mess is far from being over for the big banks, especially for Bank of America. Shares are down 3% today following news yesterday that Pimco, BlackRock, (BLK) and the New York Federal Reserve want the bank to buy back bad mortgages packaged into $47 billion of bonds by its Countrywide unit.

Certainly resuming foreclosures could help move the housing recovery forward by a few months. But it seems pretty bold to hear the lenders say that virtually no serious errors were found when officials just started looking into complaints that orders were being handed out too quickly by ill-trained staffers.

See also:

Wells Fargo: the least bad big bank

Morgan Stanley profit plunges

Goldman’s foreclosure freeze