Citigroup Inc (NYSE:C) has reached a $395 million settlement with Freddie Mac/Federal Home Loan Mortgage Corp (OTCBB:FMCC) regarding 3.7 million mortgages that it sold to Freddie Mac through 2012. Citigroup Inc (NYSE:C) previously settled a similar claim with Fannie Mae/Federal National Mortgage Association (OTCBB:FNMA) for $968 million last July, reports Jonathan Stempel for Reuters.

Freddie Mac

Agreement with Freddie Mac marks another important milestone

“Today’s agreement with Freddie Mac/Federal Home Loan Mortgage Corp (OTCBB:FMCC) marks another important milestone in successfully resolving Citi’s remaining legacy mortgage issues,” said CitiMortgage CEO Jane Fraser.

When banks sell mortgages to Fannie Mae and Freddie Mac, they make guarantees about the quality of the loans, which are then securitized by Fannie and Freddie and re-sold. One aspect of the financial crisis was that many mortgages turned out to be far riskier than was represented when the banks sold them on. Both Citigroup and Freddie Mac received bailouts during the crisis to keep them from going under.

Although the fine is significant, Citigroup Inc (NYSE:C) got off relatively easy. Bank of America Corp (NYSE:BAC) ended up paying Fannie Mae $3.6 billion and will have to buy back $6.75 billion in loans that will certainly underperform as a group. Although no deal has been finalized, JPMorgan Chase & Co (NYSE:JPM) is reportedly going to settle for $11 billion, including $7 billion in cash and another $4 billion in relief to distressed homeowners. If those details are correct (we should know soon) the deal would dwarf every other settlement related to the crisis.

Freddie Mac’s spokesperson felt the deal was fair

Still, Freddie Mac’s spokesperson felt the deal was fair. “The agreement is an equitable one that resolves legacy repurchase issues, and allows both companies to move forward,” he said.

Citi is still liable for servicing the loans and the deal excludes hundreds of loans that have unique contractual obligations. Otherwise, this deal covers all future claims against the mortgages it sold to Freddie Mac during the period 2000 – 2012.

Freddie Mac and Fannie Mae have come under intense scrutiny

Freddie Mac/Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae/Federal National Mortgage Association (OTCBB:FNMA) have come under intense scrutiny in the aftermath of the financial crisis, with both political parties agreeing that they must be radically changed, if not eliminated. There are still competing pieces of legislation, but something could be passed as early as this year, and the organizations won’t exist as we know them this time next year.