A U.S. regulator will soon file lawsuits against major banks accusing them of bundling subprime home loans into bonds that never should have been sold to investors and causing mortgage giants Fannie Mae and Freddie Mac to lose billions, according to a source familiar with the matter.

The lawsuits by the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, will deepen the mortgage litigation morass for banks. A spokeswoman for the regulator declined to comment on the pending lawsuits.

The biggest banks are negotiating with all 50 state attorneys general to address mortgage abuses. The banks are looking for a comprehensive settlement that will protect them from future litigation.

Major banks including Bank of America Corp and JPMorgan Chase & Co already face potential payouts of tens of billions of dollars to settle regulatory charges of abusive mortgage lending and foreclosure practices, and other investor lawsuits over mortgage debt losses.

These payouts would reduce earnings and weaken capital levels, perhaps harming the ability of banks to lend money and provide much-needed life to a stalled housing market and weakened economy.

The source declined to name the banks to be sued by the FHFA, but The New York Times reported that they include Bank of America, JPMorgan, Deutsche Bank, Goldman Sachs Group Inc and others. Representatives of those banks declined to comment.

The banks have been walloped by mortgage losses, but so have Fannie Mae and Freddie Mac, which are under government conservatorship after having previously been owned by public shareholders. The two entities guarantee bonds backed by mortgages and are a crucial pillar for the U.S. housing finance system.

The FHFA is charged with protecting Fannie Mae and Freddie Mac's assets. The lawsuits are part of the efforts of the acting FHFA director, Edward DeMarco, to protect taxpayer funds and would aim to recover billions of dollars which the two government-sponsored enterprises have lost from subprime mortgage bonds, according to another source familiar with the matter.

A BLIZZARD

The blizzard of litigation against banks is hurting share prices in the sector because investors feel unable to estimate with any certainty the ultimate scope of a given bank's legal liabilities.

Bank of America, for example, had intended its proposed $8.5 billion settlement in June with investors in Countrywide mortgage securities to resolve most litigation tied to its disastrous 2008 takeover of that home loan provider.

But many parties are objecting to that settlement, and the deal didn't stop the insurer American International Group Inc from suing Bank of America for $10 billion over its own alleged mortgage securities losses.

Nor did it stop Nevada's attorney general from threatening to withdraw from an $8.4 billion nationwide settlement with the bank. The AG now wants to sue the bank, accusing it of reneging on promises to modify mortgages.

Other banks also face mortgage lawsuits. In May, for example, the U.S. Justice Department sued Deutsche Bank, accusing it of misleading a U.S. housing agency into believing loans it made qualified for federal insurance.

The FHFA's lawsuits would follow an initial lawsuit in July against UBS AG seeking to recover $900 million of losses incurred on $4.5 billion of debt.

The New York Times reported that the FHFA is set to file lawsuits against major banks by Tuesday, before a three-year deadline to file cases expires.

FHFA and various investors have alleged that banks packaged residential home loans into securities sold to investors, after having failed to conduct adequate due diligence, and hiding or misstating the quality of the underlying loans and underwriting, as well as borrowers' ability to make payments.

As more borrowers fell behind or went into foreclosure, the value of securities backed by their loans fell, causing losses for investors.

According to The New York Times, Fannie Mae and Freddie Mac lost more than $30 billion, in part as a result of these securities.

Banks have argued in other cases that it was the market rather than their own activity that was responsible for much of the investors' losses.

As in the AIG lawsuit, the banks have also sometimes claimed that the investors suing them were sophisticated enough to know the debt they bought had the risks that came to pass.

Losses stemming from the precipitous deterioration in subprime and other mortgages pushed the government to take over Fannie and Freddie on September 7, 2008. Since then, taxpayers have spent more than $140 billion to keep the firms afloat.

(Reporting by Margaret Chadbourn in Washington and Jonathan Stempel in New York; Editing by Dan Wilchins, Matthew Lewis and John Wallace)

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