Wells Fargo & Co (NYSE:WFC) agreed with Freddie Mac/Federal Home Loan Mortgage Corp (OTCBB:FMCC) to settle $780 million to resolve the repurchase claims on faulty mortgage loans.
The largest U.S. home lender, Wells Fargo & Co (NYSE:WFC)’s settlement with the mortgage giant totaled $869 million before adjusting for credits related to prior loan repurchases.
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Similar Settlement Deal By Citi
Last week, Citigroup Inc (NYSE:C) 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 for $968 million last July.
When banks sell mortgages to Fannie Mae and Freddie Mac/Federal Home Loan Mortgage Corp (OTCBB:FMCC), they make guarantees about the quality of the loans, which are then securitized by Fannie Mae/Federal National Mortgage Association (OTCBB:FNMA) 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.
Loans Sold Before 2009
Wells Fargo’s settlement with Freddie Mac/Federal Home Loan Mortgage Corp (OTCBB:FMCC) relates to loans sold to Freddie Mac before 2009. The arrangement substantially resolves all these repurchase liabilities.
According to data compiled by Bloomberg, the fourth largest U.S. bank by assets had $2.2 billion reserves for buying back faulty mortgages at the end of the second quarter, besides adding $6.5 billion to its reserves since 2009.
The recent settlement with Freddie Mac is thus expected to be covered by existing reserves.
Bank Of America’s Settlement
As reported earlier, Bank of America Corp (NYSE:BAC) ended up paying Fannie Mae $3.6 billion and will have to pay 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, the deal would dwarf every other settlement related to the crisis.
Fannie Mae and the Federal National Mortgage Association, as well as Freddie Mac and the Federal Home Loan Mortgage Corp, currently guarantee mortgages with balances as much as $417,000 in many parts of the United States.
Last month, President Barack Obama expressed his support to limit the government’s role in the mortgage market and to end the business model of Fannie Mae/Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac/Federal Home Loan Mortgage Corp (OTCBB:FMCC). A bipartisan bill proposed in the Senate aims to establish a Federal Mortgage Insurance Corporation (FMIC) to replace FHFA.
Freddie Mac/Federal Home Loan Mortgage Corp (OTCBB:FMCC) and larger rival Fannie Mae both received federal bailouts in 2008. The GSEs have been pushing banks to buy back mortgages that soured during the nation’s housing downturn.