Citigroup announced Monday it had agreed to pay mortgage-finance giant Fannie Mae $968 million to resolve claims on 3.7 million home loans that have soured or might go bad.
The bank is one of many institutions that sell home loans to the government-sponsored entity, which bundles them into mortgage-backed securities and guarantees the bonds. In the wake of the housing crash, many of the loans that underpinned those securities soured as millions of Americans defaulted on their mortgages.
Fannie, along with its twin Freddie Mac, was saddled with billions in losses from the loans it bought in the lead-up to the crash. The mortgage bundler began to question whether banks misrepresented the quality of their loans and pressed them to buy back mortgages not up to par.
The Citigroup agreement covers troubled loans and any potential future claims on mortgages made between 2000 and 2012 that were purchased by Fannie Mae. The bank said it will continue to service the mortgages included in the deal.
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A majority of the settlement amount is covered by Citigroup’s mortgage-repurchase reserves, but the bank said it will set aside an additional $245 million.
“We have a strong and productive relationship with Fannie Mae,” Jane Fraser, chief executive of CitiMortgage, said in a statement. “As we work to deepen and enhance financial relationships with our clients, we will continue to focus on the production of high-quality mortgage loans.”
As of the first quarter, Citigroup had $887 million in outstanding mortgage-repurchase requests from Fannie Mae, the highest balance on the mortgage-finance giant’s books, according to a public filing.
The bank will likely be knocked out of the top spot by Monday’s agreement, much like Bank of America when it resolved claims with Fannie at the start of the year.
In that deal, Bank of America agreed to spend $6.7 billion to buy back about 30,000 troubled mortgages from Fannie at a discount from their original value. The bank also made $3.6 billion in cash payments to the government-owned mortgage giant. A similar deal was struck in 2011 between the bank and Freddie Mac.
The mortgage twins have combed through millions of loans looking for shoddy underwriting to force mortgage lenders to buy them back. The pair have focused on mortgages made between 2005 and 2008, a boom time in the housing market and an origination period that has suffered high delinquencies and defaults.
As of the end of March, Fannie said it had reviewed about 80 percent of the loans acquired during that period and expects to complete the process by the end of this year, according to a quarterly filing. It plans to issue repurchase requests to any bank that did not live up to the terms of the purchase agreement.
“We continue to focus on making strong progress in resolving repurchase requests with lenders and remain committed to helping people to buy, refinance or rent a home,” said Fannie’s general counsel, Bradley Lerman, in a statement. The Citigroup agreement “resolves legacy repurchase issues, compensates taxpayers for losses, and allows Fannie Mae and Citi to move forward and strengthen our business relationship,” he said.
Since the government took control of Fannie and Freddie in 2008, the mortgage twins have been aggressively working to recoup losses, in part, to hand back the $188 billion they received in bailout funds. Last month, Fannie handed back $59.4 billion to the government.
Meanwhile, the Federal Housing Finance Agency has separately pushed for banks to compensate Fannie and Freddie for losses incurred from troubled securities. Nearly two years ago, that agency filed lawsuits against 17 large banks in a single day for selling $200 billion in bad mortgages to Fannie and Freddie. Many of those cases are still pending.