* UBS paying $415 mln to Fannie Mae; $470 mln to Freddie Mac
* Settlement raises concerns over exposure of other banks
* European banks could take $11 billion hit - Credit Suisse
* RBS shares down 3 percent on settlement fears
WASHINGTON/LONDON, July 26 (Reuters) - UBS willpay $885 million in a settlement with a U.S. regulator overallegations the Swiss bank misrepresented mortgage-backed bondsduring the housing bubble, paving the way for billions more tobe paid by other banks.
European and U.S. lenders such as Credit Suisse and Deutsche Bank have set aside money to cover thecost of any losses arising from the dispute with the FederalHousing Finance Agency but estimates vary widely.
Shares in Royal Bank of Scotland, which had risen by aquarter since July 3 having slumped following the ousting ofchief executive Stephen Hester in June, dropped over threepercent on Friday after the UBS settlement was revealed.
The FHFA said late on Thursday UBS will pay $415 million and$470 million respectively to government-sponsored housingenterprises Fannie Mae and Freddie Mac to resolve claims relatedto securities sold to the companies between 2004 and 2007.
UBS is just one of 18 banks the FHFA pursued in 2011 forallegedly misrepresenting the quality of the collateral backingsecurities during the run-up to the financial crisis.
The Swiss bank is the third to settle, after Citigroup and General Electric did so for undisclosed sums. UBSsaid on Monday that its second-quarter profit beat forecastseven after the settlement, which it said then had been agreed inprinciple without specifying the exact amount involved.
LITIGATION
The FHFA said it "remains committed to satisfactorilyresolving the remaining suits as well" and the deal may lay downa marker for how much it could cost rival banks.
Fears it will face a hefty settlement added to uncertaintyaround RBS, which is striving to attract a replacement forHester while the government conducts a review into whether itshould be broken up.
The bank has already paid out $612 million to settleseparate allegations that it manipulated benchmark interestrates and the government is anxious that the lender gets back ontrack so it can start to offload its 80 percent shareholding.
Ronnie Chopra, head of strategy at TradeNext, said fears RBScould face a multibillion-dollar payment in the U.S. "puts morenegativity on the bank and highlights concerns regarding thefinances of the behemoth".
Analysts at Credit Suisse earlier this year said Europeanbanks could take an $11 billion hit from a raft ofmortgage-related litigation costs in the United States.
They estimated RBS alone could face an FHFA litigation lossof $1.6 billion, Barclays a $1.1 billion loss and HSBC couldtake a $900 million loss.
But another London-based analyst, Joseph Dickerson atinvestment bank Jefferies, said he expected RBS's losses to be"sub-$1 billion".
Other banks have acknowledged they could incur losses fromthe suits but few have said how much it could cost.
Barclays said in its last annual report if it lost the casesagainst the FHFA and other civil actions it could incur a lossof up to the outstanding amount of the RMBS at the time ofjudgment and some additional interest and costs, less the marketvalue of the RMBS.
It said the outstanding amount was $2.7 billion at the endof 2012, and estimated the market value was $1.6 billion.
Deutsche Bank has set aside 2.4 billion euros for litigationcosts after topping that up in March by an additional 600million euros, mainly related to lawsuits over its role inselling bonds backed by U.S. sub-prime mortgages.
HSBC said in its annual report it was unable to estimatereliably the financial effect of any action or litigation, butany claims "could be significant."
Barclays (BARC)