By Saabira Chaudhuri 
 

Fifth Third Bancorp (FITB) agreed to pay $25 million to Freddie Mac (FMCC) as part of a settlement over defective mortgages sold to the government-controlled home-loan financier.

Freddie Mac and its larger sibling, Fannie Mae (FNMA), can force banks to buy back mortgages that don't conform to agreed-upon guidelines, and both companies have demanded that lenders repurchase billions in soured loans over the past four years.

Monday's deal with Freddie involves mortgage loans originated and sold to Freddie Mac prior to Jan. 1, 2009, regardless of whether the agency has made any repurchase demands.

Fifth Third noted that as of the end of the third quarter, it was fully reserved to cover the payment amount.

The lender's agreement comes after SunTrust Banks Inc. (STI) last month agreed to pay more than $200 million to resolve claims with Freddie Mac and sister firm Fannie Mae.

Meanwhile, in September, Citigroup Inc. (C) agreed to pay $395 million to Freddie Mac to settle claims of defective mortgages sold to the home-loan financier.

The federal regulator for Fannie and Freddie has directed the firms to reduce repurchase demands outstanding by year-end.

Shares of Fifth Third closed Friday at $20.58 and were inactive premarket. The stock has risen 35% so far this year.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

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