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Wells Fargo Inks Settlement with Fannie Mae

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Wells Fargo & Company (WFC - Free Report) announced a lawsuit settlement with Fannie Mae worth about $591 million. The settlement includes the resolution of all outstanding and potential repurchase claims relating to misrepresentation of loans originated and sold by Wells Fargo directly to Fannie Mae before Jan 2009.

The Calif.-based banking major will shell out $541 million in cash to Fannie Mae, inclusive of adjustments related to credits, coupled with previous buybacks. Freddie Mac and Fannie Mae, both of which received government bailouts in 2008, pushed banks to buy back mortgages that defaulted during the U.S. housing crisis.

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 breach of representations and warranties related to loan activity prior to 2008.

Wells Fargo also announced a similar lawsuit settlement with Freddie Mac in Oct 2013. The bank paid $780 million in cash to Freddie Mac, inclusive of adjustments related to credits, coupled with previous buybacks.

Wells Fargo is not the first bank to pen such a settlement with these regulatory agencies. In Jan 2011, Bank of America Corporation (BAC - Free 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 Fifth Third Bancorp, 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.

Wells Fargo currently carries a Zacks Rank #3 (Hold).

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