The decision of the Federal Housing Finance Agency to sue major banks under representation and warranties clauses prompted Paul Miller with FBR Capital Markets to criticize the plan, saying it will likely further drain capital from the banking system. Miller’s criticism is pointed mostly to the unintended negative impact the lawsuit may have on the average American. As banks tighten purse strings further, for whatever reason, future qualified borrowers continue to stay on the sidelines. Miller’s analysis arrives days after FHFA announced it would sue 17 banks – including Bank of America (BAC), Citigroup, (C), Goldman Sachs (GS) and JPMorgan Chase (JPM) among others – for selling toxic mortgages that became part of the securitization process that eventually led to the housing market meltdown. Miller wrote: “Because there is no centralized housing policy coming out of Washington, housing agencies (Fannie Mae, Freddie Mac, and Federal Housing Authority) are acting in their own self interest as opposed to that of the broader U.S. economy. For Fannie Mae and Freddie Mac, this means minimizing losses by digging through their loan books and pushing back loans barely delinquent on their mortgages under reps and warrants clauses.” Miller said suing banks for securitization issues would further pressure the housing markets, delaying a recovery and draining capital from the banking system, keeping many borrowers out of the market. In his report, Miller claims “we believe the banks have developed overly cautious residential lending standards as a result of concerns over reps and warrants claims, even as they struggle to grow revenues.” His report estimates repurchase losses could reach as high as $121 billion, with 60% of those losses being incurred by the nation’s top four banks – Bank of America, JPMorgan Chase, Wells Fargo and Citibank. That is up from previous estimates which said the industry would see $54 billion to $106 billion in losses, with the nation’s top four banks facing 40% of those losses. Keefe, Bruyette & Woods estimated that a remedy to the claims could cost the defendants as much as $60 billion, but added it’s likely a settlement will be reached between mortgage originators and the FHFA for a smaller amount. Write to: Kerri Panchuk.