Exchange traded funds tracking the U.S. banking sector were down about 1% on Wednesday on reports Bank of America (NYSE: BAC), J.P. Morgan (NYSE: JPM) and other mortgage services have proposed paying $5 billion to settle an investigation related to foreclosures.

Some analysts predict Bank of America may pay as much as $3.7 billion to settle a probe of its mortgage practices, Bloomberg reported.

SPDR KBW Bank ETF (NYSEArca: KBE) was down 1% in recent trading following the reports. The sector ETF has nearly 9% in J.P. Morgan shares and 6.6% in Bank of America.

States are investigating the conduct of mortgage services in the housing boom and bust amid allegations of improper foreclosure practices. The group also includes Citigroup (NYSE: C) and Wells Fargo (NYSE: WFC), according to reports.

The bank ETF has a 7.2% stake in Citigroup and 6.5% in Wells Fargo, according to a list of its holdings.

The fund is sitting just above its 200-day moving average as bank stocks lag the overall market.

“While investor expectations have been scaled back since first-quarter earnings, the slow economic recovery will likely keep valuations in check at least over the near-term,” said Sterne Agee analysts. “Moreover, we believe that the legacy mortgage issues and investor sensitivity to persistent headline risk will continue to weigh.” [Citigroup, Mortgage Woes Drag Down Financial ETFs]


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