This Wednesday, September 25, Citigroup (NYSE:C) announced that it has reached a settlement with Freddie Mac over charges of mis-representing the quality of 3.7 million loans it sold to the government-sponsored enterprise over the period 2000-2012.  The diversified financial group will cough up $395 million to make good for all the losses Freddie Mac incurred over the years from the mis-selling – all of which will be covered by legal reserves already set aside by the bank. In return, Freddie Mac will quash all outstanding repurchase claims and will also not raise any such claims in the future pertaining to this loan portfolio.
With this agreement, Citigroup becomes the first among the banking giants to settle all mortgage-related differences with the triumvirate of FHFA, Fannie Mae and Freddie Mac. Citigroup was the first bank to settle with the FHFA this May for an undisclosed amount (see Citigroup Settles Mortgage-Related Lawsuit With FHFA) and the second to come to terms with Fannie Mae after Bank of America (NYSE:BAC) with a bill of $968 million (see Citigroup Settles Mortgage Repurchase Row With Fannie Mae). This highlights the importance Citigroup placed on clearing these major charges even as it continues to clean-up its operations to put all legacy issues to rest, and is without doubt progress for the bank in the right direction.
We maintain a $56 price estimate for Citigroup’s stock , which is roughly 15% ahead of its current market price.
The country’s largest banks have been under a lot of pressure over the recent years from Fannie Mae and Freddie Mac, to repurchase a large chunk of mortgages, most of which were originated during the housing boom witnessed between 2006 and 2008. The issue itself arose when mortgage insurers began tightening their purse-strings in 2011 and started rejecting many more claims than they had in previous years – forcing Fannie Mae and Freddie Mac to take billions in charges for all the mortgages which went bad (see BofA Feels the Heat From Fannie Mae Repurchase Demands). In turn, the government-sponsored enterprises began issuing repurchase requests to the banks to safeguard themselves against more losses from their mortgage portfolio.
The banks responded by setting aside notably more cash to cover repurchase requests in Q2 2012, than they did for any quarter since the economic downturn. But they remained locked in a tussle with Fannie Mae and Freddie Mac since then, with both sides haggling on how many of the failing mortgages each bank is actually liable to repurchase.
Citigroup’s settlement with Freddie Mac, which follows within months of similar settlements with Fannie Mae and the FHFA is important as it cleans the slate for the bank and will save millions in litigation expenses for everyone involved. As this settlement will be covered completely through existing reserves, there will thankfully not be any negative impact of the move on Citigroup’s performance figures for the quarter – especially since the bank’s statement on lower fixed-income trading figures this time around are already expected to result in much lower earnings for Q3 2013, compared to the same quarter last year. Notes:
- Citigroup Announces Agreement with Freddie Mac to Resolve Potential Future Mortgage Repurchase Claims, Citigroup Press Releases, Sept 25 2013 [↩]
- Citi Third Quarter 2013 Fixed Income Investor Review, Citigroup Press Releases, Sept 27 2013 [↩]