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Citigroup Inc. (C) Ponies up $968 Million to Fannie Mae, What’s Next?

Citigroup Inc. (NYSE:C) announced another multi-million dollar settlement with Fannie Mae over ongoing mortgage claims.

The too big to fail banking behemoth will fork over $968 million to cover pre-existing loans and any potential future claims on loans originated and sold to Fannie Mae between 2000 and 2012.

Head honcho of CitiMortgage, Jane Frazier reportedly said, “We have a strong and productive relationship with Fannie Mae.”

The Art of the Deal

Citigroup Inc (NYSE:C)

The settlement between Citigroup Inc. (NYSE:C) and Fannie involves 3.7 million mortgage loans already gone astray as well as others that may tank. Fannie Mae will continue to service the loans. The agreement is centered on so-called “legacy repurchase issues” and will also compensate taxpayers who financed the government takeover of Fannie Mae in 2008.

This agreement is separate from a previous deal earlier this year with Citigroup Inc. (NYSE:C) and other money center banks. While this payoff was apparently covered by the bank’s existing mortgage repurchase reserves, Citi will add another $245 million in the second quarter to that cash pile.

In other words, this deal will take a bite out of the bank’s profits. A small bite perhaps, but this is another serving to go along with other settlement agreements that have hit the bank in the pocket book. While fundamentals are a key for investors in the financial sector, these ongoing settlements are also important to consider, so caveat emptor.

What Settlement With Citi Means for Fannie Mae.

In general this deal allows Fannie Mae to cover another $1 billion or so in mortgage losses and shore up its balance sheet in the process. Moreover, the government-owned lender is currently negotiating other deals with the usual suspects involved in the mortgage market meltdown that triggered the financial crisis in 2008.

Citigroup Inc. (NYSE:C) and other big banks sold millions in mortgages to Fannie and Freddie Mac. The lenders then bundled the paper into tainted mortgage-backed securities. And this caused huge losses that ultimately were paid for by taxpayers.

In sum, this deal is good news for Fannie Mae as it continues to recover from the housing market collapse. Moreover this could be an opportunity for buyers interested in both common and preferred shares of both lenders.

Effect of Other Developments on Fannie and Freddie

As has previously been reported, the Federal Housing Finance Agency (FHFA) announced in the spring that it intends to consolidate the operations of Fannie Mae and Freddie Mac. FHFA is the federal regulator tasked with overseeing Fannie and Freddie.

The Agency plans to form a new corporate entity to combine certain operations of the two housing finance giants. The goal is to build a new securitization platform. And this will be the cornerstone of a new company that will eventually replace Fannie Mae and Freddie Mac. But this scheme will take years to implement. In the meantime, common shares of both lenders could offer investors a buying opportunity.

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