NEW YORK ( TheStreet) -- Getting a home loan is only going to be tougher, as banks tighten standards for Federal Housing Administration (FHA) loans amid rising legal claims.
Analysts at FBR Capital have long been worried that the
The FHA insures banks against defaults on loans and has seen its share of the mortgage origination market rise from 3% in 2005 to 24% in 2011 in the wake of the sub-prime crisis. But the high default rate during the crisis has drained its resources.
The latest budget plan found that the FHA might need as much as $688 million from the U.S. Treasury to bridge a shortfall in its reserves. That problem was quickly resolved by the recent $26-billion mortgage settlement between the nation's largest servicers and the 49 states.Under the settlement, the five banks would have to inject $1 billion into the agency's capital reserves to settle claims related to servicing. Still, not all legal concerns have been put to rest. Analyst Paul Miller notes that the settlement only covers servicing violations and not origination violations. He cites the example of Flagstar Bancorp (FBC - Get Report) which recently entered into a settlement with the Justice Department for $133 million related to fraudulent FHA lending practices. Bank of America (BAC - Get Report) also entered into a