Citigroup Inc (C.N) agreed to pay $968 million to settle claims that it left U.S.-owned mortgage guarantor Fannie Mae FNMA.OB on the hook for home loans the agency would not have knowingly guaranteed.
The settlement is the latest between a major bank and Fannie Mae, which like its smaller rival Freddie Mac FMCC.OB, is trying to recover money that it lost after the housing bust. Fannie Mae agreed to an $11.6 billion agreement with Bank of America in January.
Citigroup said on Monday that it previously set aside enough funds to cover almost all of the settlement.
The disputes between banks and the government-owned agencies are over who is at fault for home loans that wound up going bad.
Most residential mortgages in the United States are made by banks, packaged into bonds, and sold off to investors, with Fannie Mae and Freddie Mac guaranteeing that investors will get repaid their principal and interest. The two agencies, however, guarantee only loans that meet their specifications.
Fannie Mae and Freddie Mac learned after the housing crisis that many of the loans they had guaranteed did not meet their criteria. The two agencies pressed banks to take the loans back, but banks said Fannie Mae and Freddie Mac were penalizing them for technicalities rather than failing to adhere to substantive underwriting standards.
Three-quarters of senior bank loan officers responding in April to a Federal Reserve survey said the possibility of Fannie Mae and Freddie Mac forcing them to take back bad loans has restrained their ability or willingness to make loans. Regulators are crafting new rules regarding which loans can be pushed back to banks.
Citigroup's settlement covers repurchase claims for 3.7 million loans that the bank made between 2000 and 2012.
It does not cover 12,000 other loans with special characteristics, such as features to make them more creditworthy. Citigroup said it believes it has set aside enough funds for these loans, as well. When the bank posts second-quarter results later this month, it expects to set aside another $245 million to cover mortgage repurchases, a figure consistent with previous periods, it said. Citigroup's reserve for the issues was $1.42 billion at the end of March.
Even as banks have complained about Fannie Mae and Freddie Mac pressing them to buy back mortgages, they have kept working with the agencies on new loans.
Bradley Lerman, general counsel of Fannie Mae, said in a statement that the "agreement resolves legacy repurchase issues, compensates taxpayers for losses, and allows Fannie Mae and Citi to move forward and strengthen our business relationship."
In Bank of America Corp's BAC.n $11.6 billion settlement with Fannie Mae earlier this year, the bank agreed to pay $3.6 billion to the agency and buy back $6.75 million in loans. That deal covered mortgage-repurchase claims on loans that Countrywide Financial, which the bank bought, had sold to the government-sponsored enterprise between January 1, 2000, and December 31, 2008.
Citigroup shares gained 1.4 percent to $48.63 in late afternoon trading in New York, while the KBW Index .BKX of bank stocks rose 1.5 percent.
(Reporting by David Henry and Peter Rudegeair in New York and Tanya Agrawal in Bangalore; Editing by Dan Wilchins, Saumyadeb Chakrabarty, Lisa Von Ahn and Jan Paschal)