WSJ great news for FMCC: Citibank might settle with Freddie too.
Citi to Pay Fannie $968 Million to Settle Mortgage Claims
Bank Says It Won't Take Second-Quarter Charge for Pact
July 1, 2013, 1:57 p.m. ET
By
MATTHIAS RIEKER
And
ANDREW R. JOHNSON
Citigroup Inc. C -0.21% is paying Fannie Mae FNMA +11.26% $968 million to settle claims that Citi sold faulty mortgages to Fannie.
The agreement removes another area of contention in Citi's mortgage business, although additional issues remain. The bank also sold mortgages to Freddie Mac FMCC +11.27% and analysts said the bank might settle with Freddie too.
A spokesman for Citi declined to comment about a potential settlement with Freddie. A Freddie spokesman said other settlement discussions are under way but declined to discuss which banks are involved in those talks.
Citi said in a news release it won't take a second-quarter charge for Monday's agreement because its reserve covers the settlement. But the bank continues to set aside roughly as much cash as in previous quarters to reserve for non-Fannie related mortgage repurchase claims just when analysts had expected the cost of covering for losses from soured mortgages would decline.
Analysts said Monday's settlement was good news for Citi shareholders because the lack of a second-quarter charge suggests that Citi is adequately reserved for additional mortgage repurchase claims.
"This was a big test for the ... reserve," said Sandler O'Neill + Partners LP analyst Jeffery Harte.
At issue are mortgages originated largely before the financial crisis that Fannie, Freddie, and private investors have alleged weren't underwritten as prudently as required by agreements Citi struck with the buyers of the mortgages.
The mortgage buyers demanded Citi, and other banks, take back those allegedly faulty mortgages. Citi declined to say whether it is actually taking back the mortgages or simply compensating Fannie for its losses. A Fannie spokesman did not have an immediate comment Monday.
"This agreement resolves substantially all potential future repurchase claims" from Fannie, CitiMortgage Chief Executive Jane Fraser said in a statement. Fannie Mae General Counsel Bradley Lerman said in a statement that the settlement "compensates taxpayers for losses, and allows Fannie Mae and Citi to move forward."
The government seized control of Freddie and Fannie in September 2008 when mounting mortgage losses caused the firms' near collapse. They have since relied on several injections of taxpayer funds to stay afloat, though more recently the improving housing market has helped them avoid seeking additional financial support.
The agreement covers origination-related representation and warranty claims on 3.7 million residential first mortgages, Citi said. Neither Citi nor Fannie disclosed the principal unpaid balances on those mortgages.
Bank of America Corp. BAC -0.23% reached a settlement with Fannie worth $11.6 billion in January for loans made by Countrywide Financial, which Bank of America bought in 2008. In 2011, it settled for $1.5 billion related to mortgages made by Bank of America.
Bank of America also settled with Freddie Mac in 2011, for $1.3 billion. Bank of America had more issues with Fannie, because Countrywide sold more mortgages to Fannie than to Freddie.
Sandler's Mr. Harte said he expects Citi to settle with Freddie as well—and, since Citi sold roughly the same number of mortgages to Freddie as it sold to Fannie, the settlement amount could be similar, he said.
Citi had set aside $1.4 billion as of March 31 to cover repurchase demands, and that reserve is likely to drop to around $700 million with Monday's settlement, Mr. Harte said.
The bank said Monday it expects to add $245 million to its mortgage repurchase reserve in the second quarter, which is generally consistent with its repurchase reserve additions in recent quarters, Citi said.
Citi has been more conservative than other banks in reserving for mortgage-related losses. Chief Financial Officer John Gerspach has repeatedly said that the bank wants to see a sustainable improvement in the housing market and the economy before it starts reducing mortgage-related reserves.
Mr. Harte, however, had expected the repurchasing reserve growth in the second quarter to decline from the first quarter, to about $175 million, and Citi's decision to set aside another $245 million suggests it is building up for a Freddie settlement. He expects the reserve build to decline in the second half of the year.
Banks have long complained that the criteria that trigger a repurchase request by Fannie Mae or Freddie Mac were unclear, making it difficult for lenders to accurately gauge the potential costs they may face in having to buy back mortgages they sold to the government-controlled firms.
Executives at some large regional banks, including U.S. Bancorp USB -0.03% and PNC Financial Services Group Inc., PNC +0.49% last year said they were concerned that Fannie and Freddie have started to look at a broader range of loans that they may demand to be repurchased.
The Federal Housing Finance Agency, the regulator for Freddie and Fannie, last year announced new guidelines for representation-and-warranty requirements intended to give lenders more clarity around their obligations, as well as minimize potential repurchase requests on loans if borrowers make a certain number of on-time payments .
The new rules took effect in January for new loans sold to Freddie and Fannie.
Guggenheim Securities analyst Marty Mosby said he expects more banks will reach deals with the firms as they look to put outstanding mortgage liabilities behind them. "I think there's going to be a push this year and in to next year to try to get as much of this behind the industry as we can," Mr. Mosby said.
In May, Citi settled a lawsuit by the FHFA over unspecified damages tied to mortgage bonds Fannie and Freddie had bought. Terms of the settlement were not disclosed.
—Melodie Warner contributed to this article.
Write to Matthias Rieker at matthias.rieker@dowjones.com and Andrew R. Johnson at andrew.r.johnson@dowjones.com
Citi to Pay Fannie $968 Million to Settle Mortgage Claims
Bank Says It Won't Take Second-Quarter Charge for Pact
July 1, 2013, 1:57 p.m. ET
By
MATTHIAS RIEKER
And
ANDREW R. JOHNSON
Citigroup Inc. C -0.21% is paying Fannie Mae FNMA +11.26% $968 million to settle claims that Citi sold faulty mortgages to Fannie.
The agreement removes another area of contention in Citi's mortgage business, although additional issues remain. The bank also sold mortgages to Freddie Mac FMCC +11.27% and analysts said the bank might settle with Freddie too.
A spokesman for Citi declined to comment about a potential settlement with Freddie. A Freddie spokesman said other settlement discussions are under way but declined to discuss which banks are involved in those talks.
Citi said in a news release it won't take a second-quarter charge for Monday's agreement because its reserve covers the settlement. But the bank continues to set aside roughly as much cash as in previous quarters to reserve for non-Fannie related mortgage repurchase claims just when analysts had expected the cost of covering for losses from soured mortgages would decline.
Analysts said Monday's settlement was good news for Citi shareholders because the lack of a second-quarter charge suggests that Citi is adequately reserved for additional mortgage repurchase claims.
"This was a big test for the ... reserve," said Sandler O'Neill + Partners LP analyst Jeffery Harte.
At issue are mortgages originated largely before the financial crisis that Fannie, Freddie, and private investors have alleged weren't underwritten as prudently as required by agreements Citi struck with the buyers of the mortgages.
The mortgage buyers demanded Citi, and other banks, take back those allegedly faulty mortgages. Citi declined to say whether it is actually taking back the mortgages or simply compensating Fannie for its losses. A Fannie spokesman did not have an immediate comment Monday.
"This agreement resolves substantially all potential future repurchase claims" from Fannie, CitiMortgage Chief Executive Jane Fraser said in a statement. Fannie Mae General Counsel Bradley Lerman said in a statement that the settlement "compensates taxpayers for losses, and allows Fannie Mae and Citi to move forward."
The government seized control of Freddie and Fannie in September 2008 when mounting mortgage losses caused the firms' near collapse. They have since relied on several injections of taxpayer funds to stay afloat, though more recently the improving housing market has helped them avoid seeking additional financial support.
The agreement covers origination-related representation and warranty claims on 3.7 million residential first mortgages, Citi said. Neither Citi nor Fannie disclosed the principal unpaid balances on those mortgages.
Bank of America Corp. BAC -0.23% reached a settlement with Fannie worth $11.6 billion in January for loans made by Countrywide Financial, which Bank of America bought in 2008. In 2011, it settled for $1.5 billion related to mortgages made by Bank of America.
Bank of America also settled with Freddie Mac in 2011, for $1.3 billion. Bank of America had more issues with Fannie, because Countrywide sold more mortgages to Fannie than to Freddie.
Sandler's Mr. Harte said he expects Citi to settle with Freddie as well—and, since Citi sold roughly the same number of mortgages to Freddie as it sold to Fannie, the settlement amount could be similar, he said.
Citi had set aside $1.4 billion as of March 31 to cover repurchase demands, and that reserve is likely to drop to around $700 million with Monday's settlement, Mr. Harte said.
The bank said Monday it expects to add $245 million to its mortgage repurchase reserve in the second quarter, which is generally consistent with its repurchase reserve additions in recent quarters, Citi said.
Citi has been more conservative than other banks in reserving for mortgage-related losses. Chief Financial Officer John Gerspach has repeatedly said that the bank wants to see a sustainable improvement in the housing market and the economy before it starts reducing mortgage-related reserves.
Mr. Harte, however, had expected the repurchasing reserve growth in the second quarter to decline from the first quarter, to about $175 million, and Citi's decision to set aside another $245 million suggests it is building up for a Freddie settlement. He expects the reserve build to decline in the second half of the year.
Banks have long complained that the criteria that trigger a repurchase request by Fannie Mae or Freddie Mac were unclear, making it difficult for lenders to accurately gauge the potential costs they may face in having to buy back mortgages they sold to the government-controlled firms.
Executives at some large regional banks, including U.S. Bancorp USB -0.03% and PNC Financial Services Group Inc., PNC +0.49% last year said they were concerned that Fannie and Freddie have started to look at a broader range of loans that they may demand to be repurchased.
The Federal Housing Finance Agency, the regulator for Freddie and Fannie, last year announced new guidelines for representation-and-warranty requirements intended to give lenders more clarity around their obligations, as well as minimize potential repurchase requests on loans if borrowers make a certain number of on-time payments .
The new rules took effect in January for new loans sold to Freddie and Fannie.
Guggenheim Securities analyst Marty Mosby said he expects more banks will reach deals with the firms as they look to put outstanding mortgage liabilities behind them. "I think there's going to be a push this year and in to next year to try to get as much of this behind the industry as we can," Mr. Mosby said.
In May, Citi settled a lawsuit by the FHFA over unspecified damages tied to mortgage bonds Fannie and Freddie had bought. Terms of the settlement were not disclosed.
—Melodie Warner contributed to this article.
Write to Matthias Rieker at matthias.rieker@dowjones.com and Andrew R. Johnson at andrew.r.johnson@dowjones.com
