Image caption Freddie Mac and Fannie Mae are looking to recoup losses from the banks

The ultimate cost of rescuing Freddie Mac and Fannie Mae may double, their government regulator has said.

The US government has already given the two federal mortgage agencies $148bn (£94bn) in capital injections.

But because of continuing loan losses, that figure may increase to between $221bn-$363bn, according to the Federal Housing Finance Agency (FHFA).

Meanwhile, the FHFA has appointed a law firm to look at suing big US banks for mis-selling home loans to the agencies.

The regulator has hired the California-based litigation specialists Quinn Emanuel Urquhart & Sullivan, according to a report in the Wall Street Journal.

Ballooning costs

During the 2008 financial crisis, Washington put Freddie Mac and Fannie Mae into "conservatorship" - a quasi-nationalised status in which the federal government promised to maintain their solvency by injecting new equity on demand.

Originally, the two home loan agencies' total needs were estimated to be $200bn - of which three-quarters has already been provided - but the FHFA has now revised that figure upwards.

The regulator's upper estimate of $363bn would only happen if there is a second downturn in the US housing market - something that many economists believe has already begun since the expiry in April of a tax credit for homebuyers.

Litigation risk

Freddie Mac and Fannie Mae bought up billions of dollars of mortgages from the big banks, then repackaged them and sold them to investors with their own guarantee.

The FHFA now says that the banks may have breached promises they made in the original sale agreements about the quality of the loans they were selling.

The decision to hire a litigation firm follows the FHFA's decision to issue 64 subpoenas to banks in July, requiring them to provide documentation that would show what they knew about the loans they were selling.

If the regulator can prove its case, the banks would be forced to buy the loans back at their original face value.

JP Morgan has acknowledged it could be one target of any legal action, and set aside provisions of about $2bn against this kind of litigation risk in April.

The FHFA's action could also help other, private sector, investors to pursue their own lawsuits.

Unlike the FHFA, the private investors do not have the power to subpoena the banks.