NEW YORK ( TheStreet) -- Financial stocks kicked off the new year on a higher note Monday, after Bank of America ( BAC) agreed to a mortgage-buyback deal much less costly than some had expected. Shares of the Charlotte, N.C.-based banking giant were up 5.1%, at $14.02, in recent trading. Earlier in the day, Bank of America announced an agreement with government-sponsored enterprises (GSEs) Fannie Mae ( FNMA.OB) and Freddie Mac ( FMCC.OB) to buy back $3 billion worth of residential mortgages. As recently as Sept. 30,
Bank of America had outlined $6.8 billion worth of outstanding claims from GSEs. Tension has heated up between federal officials alleging that big banks improperly sold certain loans to the GSEs, but refused to repurchase them, as "representation and warranties" in purchase contracts dictate. Edward DeMarco, acting director of the agency that oversees the GSEs, hinted in September that the Federal Housing Finance Agency (FHFA) might take legal action against banks . Soon after, a group of Federal Home Loan Banks sued some brokerages over their sales of private-label mortgage securities. The news had a big effect on the shares of Fannie and Freddie, which trade on the pink sheets, as well as other publicly-traded mortgage insurers. Fannie Mae was up 7% in recent trading at 32 cents, while Freddie Mac was up 5.3% at 32 cents. PMI Group ( PMI), which insures mortgage lenders and investors against mortgage losses, was the biggest winner in the sector, up 9.1% at $3.60. Radian Group ( RDN), another mortgage insurer, was up 6.3% at $8.58, while MGIC Investment Corp. ( MTG) was up 5.2% at $10.72. The mortgage-buyback rally on Monday didn't occur in isolation, though: The KBW Bank Index was recently up 2.4% at 53.44 as the Dow Jones Industrial Average hit new two-year highs, with bank stocks making some of the biggest gains. Equities appeared to be gaining ground broadly on optimistic forecasts for the economy and financial markets in 2011. Citigroup ( C) was 2.2% higher at $4.84, after the company closed the sale of $31 billion worth of student-loan assets . JPMorgan Chase ( JPM) was gaining 3.5% at $43.89 and Wells Fargo ( WFC) was up 1.8% at $31.54 on no major company-specific news. American International Group ( AIG) was up 0.4% at $57.82, despite a Barron's report that its stock may come under pressure as the government begins selling portions of its 92% stake in the near-term. The stock has hit new highs in recent weeks, as investors have become more bullish on the company's prospects once the government exits its position.
Elsewhere on the AIG front, TheStreet featured
an exclusive report on the company's fractured relationship with one-time advisor Blackstone ( BX). AIG began selling its large equity stake in the company in November. Blackstone shares were up 4.4% at $14.77 in midday trading on Monday. Other large Wall Street firms were also trading higher. Morgan Stanley ( MS) was up 5% at $28.56, with Goldman Sachs ( GS) trading 3% higher at $173.16. -- Written by Lauren Tara LaCapra in New York. >To contact the writer of this article, click here: Lauren Tara LaCapra. >To follow the writer on Twitter, go to http://twitter.com/laurenlacapra. >To submit a news tip, send an email to: firstname.lastname@example.org.