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Citigroup Required to Pay $968 Million to Fannie Mae

Citigroup Inc. is required to pay $968 million to compensate the taxpayer-backed mortgage buyer, Fannie Mae, for over a decade of claims linked to faulty home loans.  In a recent statement Citigroup said that the agreement includes 3.7 million mortgages originated from 2000 to 2012 that were sold to Fannie Mae.  Even though payments are covered by existing reserves, Citigroup set aside an additional $245 million in the second quarter.

Banks are facing pressure to resolve demands to buy back flawed mortgages sold to Fannie Mae and Freddie Mac.  Citigroup and Bank of America Corp. paid lump sums to settle repurchase claims.  However, others including Wells Fargo and Co. haven’t announced deals with the firms.

Kevin Barker, an analyst at Washington-based Compass Point Research and Trading LLC said, “To see another party finalize the settlement with Fannie Mae is a step in a positive direction. There may be other settlements that Fannie and Freddie may be willing to finalize with other banks.”

Jane Fraser, head of Citigroup’s mortgage unit, said in the statement, “The accord resolves substantially all potential future repurchase claims.  We will focus on producing high-quality mortgage loans.”  Chief Executive Officer Michael Corbat said Fraser will be running the operation in May.

This deal will not release Citigroup from the liability linked to servicing loans.  A group of less than 12,000 loans made from 2000 to 2012 are also excluded from the agreement.  Citigroup said that these lands were sold with certain characteristics, such as performance guarantees or under special credit enhancement programs.

In March, Citigroup set aside $1.42 billion to cover demands to buy back bad mortgages.  How many of those were linked to Fannie Mae was not revealed.  According to data compiled by Bloomberg, repurchases and litigation linked to defective mortgages have cost Citigroup more than $4 billion since 2007.

According to data provided by Compass, the bank sold $231.3 billion of mortgages to Fannie Mae between 2005 and 2009.  The settlement doesn’t resolve any claims from Freddie Mac.  Freddie Mac purchased $62.4 billion of mortgages from Citigroup during the same time period.

Private investors are also demanding refunds from Citigroup.  At the end of March the bank had unresolved private claims linked to $2.4 billion of mortgages.  Barker said, “That could be an even larger piece of the pie for Citi.”

What’s still not clear is why these companies did not verify income accurately.  Why would they want to sell homes to people who couldn’t afford them?

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