Banks have faced mounting legal trouble and increased regulations following the 2008 financial crisis, which has sparked a tightening in lending that has kept many home buyers on the sidelines. But lending may even soon get tighter, some recent reports say. 

Late Friday, the Federal Housing Finance Agency (FHFA) filed a lawsuit against 17 of the nation’s largest banks over about $200 billion in mortgage losses that severely battered Fannie Me and Freddie Mac, which FHFA oversees.

Paul Miller with FBR Capital Markets argues in a report that FHFA’s lawsuit likely will drain capital from the banking system and could further delay a housing market recovery, keeping many borrowers out of the market. 

Lending at Its Lowest Point in 14 Years

The Mortgage Bankers Association recently reported that lending had reached its lowest point since 1997, due partially to the tightening of lending standards in response to the 2008 financial crisis. 

A recent study by the Institute of International Finance says that new regulations imposed on financial institutions in response to the downturn is hurting the global economy by restricting banks' ability to make loans, and in turn hurting the private sector's ability to expand and hire. As part of the new rules, banks are required to have more cash relative to debt. 

This presents a bit of a conundrum: Many observers say the financial crisis could have been avoided altogether if banks had stronger regulations in the first place, and that the crisis was triggered by weak oversight of mortgage lending standards and subprime loans issued in floods to risky borrowers. However, some economists say banks’ overly stringent standards today are keeping too many borrowers out. 

Source: “Bank Group Warns of Rules’ Costs,” The Wall Street Journal (Sept. 6, 2011) and“Big Banks Could Tighten Lending Following FHFA Lawsuit: FBR Capital,” HousingWire (Sept. 6, 2011)