WASHINGTON—The Federal Housing Finance Agency's lawsuits against 17 financial institutions over their mortgage practices could lead to billions in losses for the firms, but the ultimate hit to the directors and officers liability market is expected to be limited.

Observers say the litigation's impact on D&O coverage—where such coverage is even available—is likely to be restricted to the already tight D&O market for financial institutions and not affect the broader D&O market.

Meanwhile, an investigation by state attorneys general and state banking regulators into mortgage foreclosure practices, which reportedly is in negotiations for a settlement, so far has not involved individual directors, although that may not remain true, say observers.

The FHFA's suits, filed in state and federal courts as conservator for Fannie Mae and Freddie Mac, charge the defendants—the firms, certain officers and unaffiliated lead mortgage underwriters—with violating federal securities laws and common law in the sale of residential private-label mortgage-backed securities to Fannie Mae and Freddie Mac.

The complaints seek damages and civil penalties under the Securities Act of 1933 and compensatory damages for negligent misrepresentation, while some also charge state securities law violations or common law fraud, according to the FHFA.

Prominent financial institutions named as defendants include Bank of America Corp., Citigroup Inc., General Electric Co., Goldman Sachs & Co., JPMorgan Chase & Co. and Merrill Lynch & Co.

The complaints “reflect FHFA's conclusion that some portion of the losses that Fannie Mae and Freddie Mac incurred on private-label mortgage-backed securities are attributable to misrepresentations and other improper actions by the firms and individuals named in these filings,” said the FHFA in a statement.

“Discussions regarding these matters have taken place with several of the firms receiving complaints and, where constructive, they will continue,” the statement continued.

GE said in a statement, however, it was only notified of claims against it “for the first time, without any prior discussion” when the lawsuit was filed.

Other defendants that have provided detailed responses to queries about the lawsuits say, among other comments, they will vigorously defend them, they are meritless, and that Fannie Mae and Freddie Mac were sophisticated financial institutions.

Kevin LaCroix, executive vp at OakBridge Insurance Services L.L.C. in Beachwood, Ohio, said the amount of money involved runs into the billions of dollars. He noted, for instance, that Fannie Mae and Freddie Mac purchased more than $33 billion in residential mortgage-backed securities from New York-based JPMorgan and its affiliates, according to the FHFA lawsuit filed against it in federal court in New York. “All these amounts are recoverable. That's what good lawsuits are made of,” he said.

Based on the claims being made by the FHFA, these cases are going to be “very difficult” for the financial institutions and their directors and officers to defend, said Perry S. Granof, of counsel at law firm Williams Kastner in Chicago.

Thomas O. Gorman, a partner at Dorsey & Whitney L.L.P. in Washington, said, “In time, with complex cases like this, they tend to settle out, but that's not until the issues get more refined than they are at this point.”

Defendants “can't afford all these fines and penalties and litigation, and they're going to be looking for deep pockets,” said Peter Taffae, a D&O liability insurance expert at Los Angeles-based wholesale brokerage Executive Perils Inc.

But coverage may not necessarily be available, say observers. “These claims could be said to relate back to prior claims, under prior years, where the policies have generally been exhausted, or they could be later-year policies, where capacity was limited,” said Richard J. Bortnick, a member of Cozen O'Connor in West Conshohocken, Pa.

The litigation will not significantly impact the D&O market for financial institutions, observers say. “The marketplace for financial institutions, particularly large money center institutions, has been under pressure for a long time, to the point where it's so strained, I don't think this could make it worse,” said Mr. LaCroix.

Experts also generally say it will not affect the larger D&O market. “I don't see this significantly altering the whole (D&O) market,” said Mr. Gorman, noting the financial institutions market is only a small portion of the total market.