Wall Street Journal

The water-contamination disaster in Flint, Mich., may have a new consequence: mortgage lenders appear ready to put a clamp on most home purchase loans. Lenders have started to require that home buyers must provide proof that a property they want to buy does not have contamination.

Nonbank lender Michigan Mutual and banks Wells Fargo and Bank of America have sent notices saying they won't make loans on a properties that don't have drinkable water. JPMorgan Chase is assessing the situation, a spokeswoman said. Flint's water source, the Flint River, was found last year to have been contaminated with lead; residents were told in October to not drink tap water.

The local chapter of the National Association of Realtors plans to meet with local lenders to discuss the issue of how water contamination is affecting lending decisions. Lenders may not have much wiggle room, and the Mortgage Bankers Association said it's not banks or nonbank lenders' fault. "This isn't a question of the lenders arbitrarily choosing not to do loans in Flint," MBA president David Stevens said. "It's a question of whether lenders are allowed to originate those loans based on government requirements."

A Federal Housing Administration policy requires that any property for which it provides a backstop must have a "sufficient supply of safe and potable water." Fannie Mae and Freddie Mac have, for now, not changed their lending requirements in Flint.

Investors aren't giving the banking sector the benefit of the doubt. The KBW Nasdaq Bank Index has fallen 16% this year, more than twice the rate of decline of the S&P 500 Index. Bank stocks were not included in the midday rally on Wednesday. Bank execs told the market during earnings season that the economy seemed strong to them; and even those banks with major exposure to the rotten energy sector tried to explain that things aren't that bad and that energy loans were only a minor portion of their total loan books. Their pleading fell on deaf ears, apparently. Almost half of the banks that Barclays track currently trade below tangible book value.

Shares of Bank of America are taking an especially tough beating. B of A shares are down about 24% this year, worse than the four largest banks except Citigroup. B of A currently trades at less than 60% of book value. Citigroup deserves the pounding that it's getting, "Heard on the Street" said. Not so for B of A. For one, B of A's exposure to the energy sector looks manageable. The market seems to think B of A is far more tied to the energy sector than it is.

Also, B of A doesn't have the extensive global exposure that Citigroup has. The U.S. economy isn't in as bad of shape as other world regions. Furthermore, B of A is in good condition when it comes to capital buffers. It currently has about three times more tangible common equity than it did at the end of 2006.

Financial Times

Wells Fargo agreed to pay $1.2 billion to settle allegations it was "reckless" in its mortgage practices, and intended to leave taxpayers with the bill if things got out of control. For the banking industry, Wells' decision to cave is a possible sign that other banks could be facing their own trip to the principal's office. PNC Financial Services Group in Pittsburgh; BB&T in Winston-Salem, N.C.; and Regions Financial in Birmingham, Ala., all are being investigated for the same sins committed by Wells: origination of shoddy loans insured by the Federal Housing Administration. Read American Banker's assessment of the situation here.

New York Times

If the problems with energy loans in the U.S. seems bad, they don't hold a candle to the bad loans in China. It's estimated that troubled credit in China could exceed $5 trillion; figures from December showed Chinese banks pulled back from lending, a likely sign borrowers are having a hard time paying down the debt they've already accumulated. Europe is a problem, too, and bad loans there could total more than $1 trillion. Brazil is also emerging as a trouble spot. The problem was caused by economic stimulus policies, which resulted in the extension of credit that now can't be repaid.

Elsewhere ...

Bloomberg: If Wells Fargo is in talks to buy investment banking and capital markets assets from Credit Suisse Group, that's news to Wells Fargo. A Wells spokesman denied the San Francisco company was in talks with Credit Suisse about such a deal. Wells CEO John Stumpf and Credit Suisse's CEO held talks about a deal, Hedge Fund Alert reported on Wednesday, citing no sources.

Wells has been coy for weeks about what, if anything, it's paying Credit Suisse for most-favored-nation status when it comes to recruiting the U.S. wealth-management advisers that Credit Suisse is shoving out the door. UBS has tried to insert itself into the mix, however, and the love triangle has gotten messy with Credit Suisse accusing UBS of unfairly raiding its broker ranks, according to an arbitration claim Credit Suisse filed.

Charlotte Observer: U.S. Bancorp plans to expand its anti-money laundering unit in Charlotte. The Minneapolis bank established an enterprise financial crimes compliance division in Charlotte last year after it hired former Bank of America executive Lisa Grigg. U.S. Bancorp then consolidated its related operations from across the country in Charlotte. U.S. Bancorp now plans to hire an additional 50 to 75 staff members to work in the group.

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