Banks May Get Hit Again, This Time from FHA

Banks may soon take another blow if the Federal Housing Administration were to start denying banks’ insurance claims for money they lost in home foreclosures, Reuters reported Oct. 3. The FHA is under political and finance pressure to deny claims, which could cost banks $13.5 billion in mortgage-related losses.



Wells Fargo, Bank of America and JPMorgan Chase likely would face the greatest losses, Paul Smith, a bank analyst with FBR Capital Markets, told Reuters. Miller estimated potential losses for Wells Fargo at $3 billion and losses at Bank of America and JPMorgan Chase at $2 billion each.



At issue is the FHA’s resolve to deny claims from banks that have made mistakes in foreclosure processing or in lending processes. FHA also could seek punitive damages from banks by alleging that lenders made false claims for reimbursement of losses on foreclosures.



Currently, FHA insures about 10 percent of all mortgages.



Banks already are facing pressures from claims by government-sponsored enterprises Fannie Mae and Freddie Mac and from private investors. Reuters reported that if FHA were to deny claims, banks probably would further tighten lending standards, which would exacerbate an already troubled housing market.