Barclays Falls on FHFA Settlement News - Analyst Blog

ADRs of Barclays PLC BCS fell nearly 1% following the announcement of a mortgage settlement deal with the Federal Housing Finance Agency (FHFA), the conservator of Freddie Mac FMCC and Fannie Mae FNMA. The British banking multinational will pay $280 million to compensate for its faulty mortgage activities during the pre-crisis period.

Of the total settlement amount, Barclays will shell out $227 to Freddie Mac and $53 million to Fannie Mae. The deal resolves claims in two lawsuits pertaining to the same issue filed by the FHFA in the U.S. District Court for the Southern District of New York. Notably, the company assured that this would not affect its 2014 results.

Barclays had allegedly sold risky loans worth $4.9 billion to Freddie Mac and Fannie Mae during 2005-07, thereby resulting in huge losses for investors. However, with the tightening of regulations in 2011, Barclays was one of the 18 institutions sued by the FHFA for selling faulty mortgage-backed securities to Freddie Mac and Fannie Mae.

The FHFA continues with its endeavors to protect investors' interest and provide a secured investment environment for them. Since 2011, the agency has reached settlements with 13 financial organizations (including Barclays) and received nearly $16.0 billion as compensation. Additionally, in Nov 2013, Wells Fargo & Company WFC, which was not part of the above-mentioned litigation, agreed to pay $335.2 million to resolve similar charges.

Further, though the latest settlement removes a major legal headwind for Barclays, the company is still facing probes and investigations. This might lead to an increase in legal expenses, thereby weighing on the company's profitability in the quarters ahead.
 
Currently, Barclays carries a Zacks Rank #5 (Strong Sell).