On Monday, Fifth Third Bancorp (FITB – Analyst Report) announced a settlement with Freddie Mac (FMCC) worth about $25 million. The settlement includes the resolution of certain repurchase claims relating to misrepresentations of loans originated and sold directly to Freddie Mac by Fifth Third prior to Jan 1, 2009. The settlement amount will be paid from Fifth Third’s current reserves.
Freddie Mac, along with Fannie Mae (FNMA) can compel banks to buy back mortgages that do not abide by the prescribed guidelines. Notably, since 2009, both these Government-Sponsored Enterprises (GSEs) compelled many lenders to repurchase bad loans worth billions of dollars. Additionally, the Federal Housing Finance Agency (FHFA), the conservator for these two firms, has set a goal to complete review of all loan files for breaches of representations and warranties related to loan activity prior to 2008.
Fifth Third is not the first bank to pen such a settlement with these regulatory agencies. In Jan 2011, Bank of America Corporation (BAC – Analyst Report) reached a $3 billion agreement with Freddie Mac and Fannie Mae to resolve faulty mortgage loans sold by Countrywide Financial Corp. BofA had acquired Countrywide in 2008.
Moreover, earlier this year, BofA agreed to settle its mortgage dispute with Fannie Mae. The company paid $11.6 billion in total, which included $6.7 billion of loan repurchases.
Over the last several months, Freddie Mac reached settlements with Wells Fargo & Company, Citigroup Inc., JPMorgan Chase & Co. and SunTrust Banks, Inc. The compensation totaled approximately $2.4 billion.
Such moves by banks demonstrate their aim to resolve all mortgage related issues, thereby reducing costs over the upcoming period. Moreover, such settlements are anticipated to aid in the further revival of the economy. Alongside, these strategic decisions are expected to bode well for banks and help gain investors’ confidence.
Fifth Third currently carries a Zacks Rank #2 (Buy).