Citigroup, the third-largest U.S. bank, said the settlement also covers potential future claims arising from the loans bought by Freddie Mac, a large purchaser and guarantor of home loans.

The deal follows an agreement by Citigroup in July to pay $968 million to settle similar claims by Fannie Mae, the largest U.S. mortgage finance company. Both Fannie Mae and Freddie Mac were bailed out by the federal government in 2008.

"Today's agreement with Freddie Mac marks another important milestone in successfully resolving Citi's remaining legacy mortgage issues," Jane Fraser, chief executive of CitiMortgage, said in a statement.

Freddie Mac also praised the settlement. "The agreement is an equitable one that resolves legacy repurchase issues, and allows both companies to move forward," Freddie Mac spokesman Tom Fitzgerald said.

Citigroup said the payment is covered by its existing mortgage repurchase reserves.

The New York-based bank received three federal bailouts in 2008 and 2009, and has since been shedding or scaling back in some of its higher-risk, slower-growing businesses.

Many banks including Citigroup sold millions of home loans to Freddie Mac and Fannie Mae, which in turn packaged them into securities that could be sold to investors.

In selling mortgages loans, banks make representations and warranties such as how well the loans were underwritten, and whether the borrowers can afford them. Banks can be forced to repurchase soured loans if those claims prove wrong.

Mounting losses from troubled loans were a key factor in the 2008 bailouts of Freddie Mac and Fannie Mae.

Wednesday's settlement does not free Citigroup from liability on servicing the loans, and excludes fewer than 1,000 loans that carry special contractual rights and obligations.

In January, Bank of America agreed to pay Fannie Mae $3.6 billion to compensate for troubled home loans and to buy back an additional $6.75 billion of loans.