Mortgage missive

Stocks across the board hit the skids yesterday after investors grew concerned that banks would have to buy back tens of billions of dollars of toxic mortgages.

Among the hardest-hit shares were those of Bank of America, which cratered nearly 4.4 percent after a group of mortgage-backed bondholders urged the country’s No. 1 bank to repurchase as much as $47 billion in bad home loans.

The BofA mortgages, bundled into residential mortgage-backed securities, were originally issued by Angelo Mozilo’s Countrywide Financial Corp. — now owned by BofA — and are owned by a group of high-profile bondholders that includes the stodgy Federal Reserve Bank of New York.

On Monday, the bondholders, including Pacific Investment Management and BlackRock, sent a pointed letter to BofA and Bank of New York Mellon, the debt custodian, demanding the firms comb through various pools of mortgages to pinpoint and pull the loans that shouldn’t have been there in the first place.

The bondholders demanded that any loans originated “in violation of underwriting guidelines” be sent back to the banks that issued them. They also called for “sellers of ineligible or predatory mortgages” to pick up the costs of modifying the loans for homeowners or repurchasing them from the bondholders.

If the issues aren’t fixed in 60 days, the bondholders could declare Countrywide in default of its loans, said Kathy Patrick, the Gibbs & Bruns lawyer representing eight bondholders.

As word of the letter and its forceful tone swept across Wall Street, markets sank. The S&P 500 Index dropped sharply just before 2 p.m., finishing the day down 1.6 percent. The Dow Jones industrial average was off 1.5 percent, to below 11,000 at 10978.62.

“The market’s reaction reminds us that. . .the ultimate cost of the mortgage meltdown remains unknown,” said John Lonski, chief economist with rating agency Moody’s.

JPMorgan Chase Chief Economist Michael Feroli said the renewed haggling could lead to “tighter credit” as banks pull back on lending, and potentially hurt banks’ balance sheets if they are forced to buy back troubled loans.

Patrick said they sent the letter because they were ignored in August when they asked BNY, as the trustee, to investigate the existence of ineligible mortgages in the RMBS pools.

“We did receive correspondence from the law firm but it did not comply with multiple requirements for giving direction to BNY Mellon in its role as trustee,” said Kevin Heine, a BNY spokesman.

BofA, JPMorgan Chase, GMAC and other mortgage lenders stopped foreclosure proceedings recently after several court cases revealed that they used deficient and sometimes fraudulent paperwork to oust delinquent borrowers from their homes.

After securitizing hundreds of billions of dollars in mortgages, the banks were finding it difficult to prove they owned particular loans they were servicing. In response, some fudged paperwork.

Separately, the sheriff of Cook County, Ill., which includes Chicago, said he is halting foreclosure evictions by BofA, JPMorgan Chase and Ally Financial Inc.’s GMAC, until he’s assured they’re legal.