July 1 (Bloomberg) -- Citigroup Inc., the third-largest U.S. bank by assets, will pay Fannie Mae $968 million to compensate the taxpayer-backed mortgage buyer for more than a decade of claims tied to faulty home loans.
The agreement includes 3.7 million mortgages originated from 2000 to 2012 and sold to Fannie Mae, New York-based Citigroup said today in a statement. While payments are covered by existing reserves, the lender set aside an additional $245 million in the second quarter.
The biggest U.S. banks face pressure to resolve demands they buy back flawed mortgages sold to Fannie Mae and Freddie Mac, the U.S.-owned firms that took a $187.5 billion bailout after the financial crisis. While Citigroup and Bank of America Corp. paid lump sums to settle repurchase claims, others such as Wells Fargo & Co. haven’t announced deals with the firms.
“To see another party finalize a settlement with Fannie Mae is a step in a positive direction,” said Kevin Barker, an analyst at Washington-based Compass Point Research & Trading LLC. “There may be other settlements that Fannie and Freddie may be willing to finalize with other banks.”
The accord resolves “substantially all potential future repurchase claims” with Fannie Mae, Jane Fraser, head of Citigroup’s mortgage unit, said in the statement. The bank will focus on producing “high-quality mortgage loans,” said Fraser, named by Chief Executive Officer Michael Corbat, 53, to run the operation in May.
Citigroup rose 0.6 percent to $48.25 in New York, trailing the 0.9 percent advance for the 24-company KBW Bank Index.
The deal doesn’t release Citigroup from liability tied to servicing the loans. The agreement also excludes a group of fewer than 12,000 loans made from 2000 to 2012, the bank said. These loans were sold with “certain characteristics” such as performance guarantees or under special credit enhancement programs, the company said.
Citigroup had set aside $1.42 billion at the end of March to cover demands to buy back bad mortgages, according to an April 15 presentation. The bank didn’t say how much of those were tied to Fannie Mae. Litigation and repurchases tied to defective mortgages have cost Citigroup more than $4 billion since 2007, according to data compiled by Bloomberg.
The bank sold $231.3 billion of mortgages to Fannie Mae between 2005 and 2009, according to data provided by Compass. The settlement doesn’t resolve any claims from Freddie Mac, which purchased $62.4 billion of mortgages from Citigroup during the same period, the data show.
Citigroup still faces demands for refunds from private investors. The bank had unresolved private claims tied to $2.4 billion of mortgages at the end of March, according to the April presentation.
“That could be an even larger piece of the pie for Citi,” Barker said.
Regulators seized Fannie Mae and Freddie Mac in 2008 after their purchases of risky loans pushed them to the brink of collapse. The firms bought about $2.2 trillion of mortgages from the 15 biggest banks and Ally Financial Inc. between 2006 and 2009, according to Inside Mortgage Finance, a trade journal.
“Today’s agreement resolves legacy repurchase issues, compensates taxpayers for losses, and allows Fannie Mae and Citi to move forward and strengthen our business relationship,” Bradley Lerman, Fannie Mae’s general counsel, said in an e-mailed statement.
Investors have renewed their interest in Fannie Mae and Freddie Mac as the firms post bigger profits amid a housing-market rebound. Fannie Mae had a record year in 2012, reporting net income of $17.2 billion for 2012, spurring speculation that the companies might repay their debt to taxpayers and exit government control.
Bank of America, the second-largest U.S. lender by assets, agreed to an $11.7 billion settlement with Fannie Mae in January. Wells Fargo, the nation’s biggest mortgage lender, hasn’t announced a settlement that would cap its liability to Fannie Mae.
“The settlement is definitely a positive step” for banks facing such claims, Barker said. Lenders need to lower costs, and the more these claims are put to rest, “the less overhang there’ll be on the stocks,” he said.
Bank of America CEO Brian T. Moynihan, 53, has said his firm has paid the “lion’s share” of its costs tied to defective mortgages. He has spent $19.1 billion to resolve repurchase demands, signing deals with Fannie Mae and Freddie Mac, private investors and bond insurers, and set aside an additional $14.1 billion in reserves as of March 31.
About 80 percent of the Bank of America’s $17.1 billion in remaining claims are tied to private investors who weren’t included in an $8.5 billion deal awaiting court approval.
JPMorgan CEO Jamie Dimon, 57, told analysts in January 2011 that the bank reached a deal the year before on some of Fannie Mae and Freddie Mac’s claims on loans the bank acquired with its 2008 purchase of Washington Mutual Inc. JPMorgan hasn’t disclosed what it paid to resolve the claims or the outstanding principal on those loans, or whether it agreed to clear up repurchase demands on its other mortgage holdings.
Amy Bonitatibus, a spokeswoman for New York-based JPMorgan, declined to comment.
Corbat, who replaced Vikram Pandit as Citigroup CEO in October, also is grappling with the costs of the bank’s soured mortgage investments. The lender has sold about $10.6 billion of overdue residential first mortgages since the beginning of 2010 and has about $90 billion of home loans tagged for sale in the Citi Holdings division, according to a regulatory filing.
Ally Financial, the auto lender whose mortgage unit filed for bankruptcy, agreed to pay about $462 million to Fannie Mae in December 2010 to resolve most claims tied to faulty mortgages, according to a statement. The accord released the Detroit-based company from liability linked to $84 billion in outstanding mortgage principal.