Stuck with a growing glut of foreclosed houses, banks and investors are shedding them at increasingly steep losses, potentially adding to the banking industry's red ink this year.

Banks are selling foreclosed homes in some cases for less than half the price they fetched two or three years ago. The cuts are coming as the U.S. banking sector, slogging through its worst crisis in decades, bites the bullet out of fear that prices will keep falling.

Financial stocks fell sharply Tuesday, following J.P. Morgan Chase & Co.'s warning late Monday that it expects "a continued decline in U.S. housing prices." The dour assessment included a roughly $1.5 billion trading loss related to the largest U.S. bank's holdings of mortgage-backed securities.

J.P. Morgan shares fell 9.5% Tuesday, while Lehman Brothers Holdings Inc. and Wachovia Corp. fell about 12%. The declines marked a reversal in sentiment from recent optimism among some investors that the worst of the credit crunch might be over.

J.P. Morgan's warning was notable because the bank has been ahead of the curve over the past year in sounding the alarm about emerging troubles, such as mounting defaults in home-equity loans and credit cards. The New York bank has sidestepped the worst of the problems that have forced many commercial and investment banks to slash their dividends and seek capital infusions in order to plug their leaky balance sheets.

The steep losses on sales of foreclosed homes are painful for banks and investors in the short run but should help clear the backlog. That would allow for an eventual recovery of the housing market and clean up the banks' balance sheets.

One example of the deep price cuts on foreclosures: A 1,230-square-foot home in Corona, Calif., was sold by a unit of investment bank Credit Suisse in June for $198,000, down from $450,000 when the property sold in a regular transaction in December 2006.

"I do not think this is the time to be holding onto [foreclosed homes] and hoping for a better day," Daniel Mudd, chief executive of Fannie Mae, said during a conference call Friday.

Banks and investors have grown more leery of the rising costs of holding onto vacant homes. Along with such expenses as insurance, lawn care and maintenance, banks are being hit with higher costs for complying with local regulations applying to vacant homes.

The price cutting may mean even deeper losses for banks, but in some areas price tags have fallen enough to entice bargain hunters back into the market. According to the S&P/Case-Shiller indexes, prices in Las Vegas, Miami and Los Angeles are back to 2004 levels, while those in San Diego have retreated to 2003 levels.

Losses to banks on foreclosed properties result from a variety of factors, including declines in the home value below the loan balance; missed payments by the owner before the foreclosure; real-estate commissions; and the costs of repairs, taxes, insurance and maintenance while the bank or loan investor owns the property. The sum of all these costs is called the "loss severity."

For subprime loans, those to people with relatively poor credit records, loss severities averaged 41% of the loan balance in 2005 and 54% in the 12 months ended in May, according to Fitch Ratings. For loans made in 2006 and 2007 that end up being foreclosed, severities are likely to average more than 60%, Fitch says. Analysts at Credit Suisse see a range of 63% to 71% on foreclosed subprime loans by late next year, depending on how far home prices fall.

Sparse Data

Comparable historical data are sparse. Chandrajit Bhattacharya, a Credit Suisse analyst, says severities were slightly higher after the housing slump of the early 1990s, but "current severities are rising much faster and in probability will be higher than the mid-1990s peak."

Losses on prime loans also are growing, particularly on option adjustable-rate mortgages, or option ARMs. These loans allow borrowers to start with very low monthly payments, then face steep increases several years later. Wachovia disclosed last month that loss severities on option ARM foreclosures averaged 36% in the second quarter, up from 32% in the first quarter. Fannie Mae says severities on prime and Alt-A loans (a category between prime and subprime) recently have reached 40% in California.

The pain may get worse before it starts to ease. A recent report from Barclays Capital estimates that there are 721,000 bank-owned homes nationwide, up from 112,000 two years ago. Barclays expects the total to rise 60% more before peaking in late 2009.

Financial institutions are acquiring homes through foreclosure much faster than they can sell them. Fannie Mae, a government-sponsored mortgage investor, disclosed last week that it acquired 44,071 homes through foreclosure during this year's first half but sold only 23,627, leaving a balance of 54,173 as of June 30.

Fannie said it is opening field offices in California and Florida to try to speed sales of such homes and is evaluating offers from unidentified parties interested in "bulk" purchases.

Multiple Offers

Corona, considered one of the most desirable places to live in Riverside County, east of Los Angeles, has begun working through a huge inventory of foreclosed homes, says Pete Nyiri of Top Producers Realty, which is based in the city. A four-bedroom, 3,213-square-foot home at 1065 Trailview Lane was sold in June for $479,900 after fetching $685,000 in October 2005.

"In the last five months, there has been a dramatic increase in sales, which correlates to the decline in prices," Mr. Nyiri says. "In the lower price range, many homes are getting multiple offers."

In the Anthem neighborhood of northeast Phoenix, a four-bedroom home was sold by a bank in February for $190,500. That compares with $275,000 paid by the former owners in November 2004. Using two mortgages, the former owners financed 100% of that purchase. Joseph Cohan of International Realty Services, who was the listing broker for the recent sale, says the home needed new carpeting and paint; ceiling fans and light fixtures had been ripped out.

Not all foreclosed homes go for a song -- even though the loss to the bank can be stiff. In the Las Vegas neighborhood of Summerlin, a foreclosed three-bedroom home, built in 1999, sold in May for $259,900, the original listing price, after just three days on the market. The same home sold for $215,000 in 2003; two years later, the owners refinanced the home for $408,500, apparently to extract cash from their home equity at a period when prices were soaring. William Jorgensen, the listing broker for the recent sale, said the Summerlin home sold quickly this year because it was in fairly good condition and in an attractive, upscale neighborhood.

Local governments are adding to the pressure on banks to sell foreclosed homes faster. Providence, R.I., recently imposed a property-tax surcharge on vacant properties to discourage banks and others from leaving them empty for long periods. Many cities now require banks to register the vacant homes they own and pay registration fees ranging from about $50 to $1,000.

--David Enrich contributed to this article.

Write to James R. Hagerty at bob.hagerty@wsj.com and Jonathan Karp at jonathan.karp@wsj.com

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