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SunTrust earnings pinched by mortgage settlements, legal matters

Earnings plummet 83% from last year

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SunTrust Bank (STI) ended up taking a huge earnings hit after settling with Fannie Mae, Freddie Mac and other government agencies over legacy reps and warranties liabilities and lingering mortgage issues.

The bank reported a net profit of $179 million, or 33 cents a share, for the third quarter. If the firm had not been forced to settle legacy mortgage issues, SunTrust shareholders would have benefited from a much higher profit of 66 cents a share.

The company’s income is down 83% from last year when it recorded a $1.1 billion, or $1.99 a share, profit.

Mortgage issues took a huge slice out of the bank’s earnings, with SunTrust recording a noninterest expense of $323 million from a settlement with the FHA and the National Mortgage Servicing Settlement monitor over legacy mortgage issues.

In addition, the firm reached an agreement with Freddie Mac and Fannie Mae over mortgage purchase requests from the GSEs, resulting in a $63 million added charge to the company’s mortgage repurchase reserve.

SunTrust also increased its review of servicing advance practices, increasing its allowance for servicing advances — negatively impacting the firm’s noninterest expense by $96 million.

Overall, the mortgage settlements impacted net income available to common shareholders by $179 million, cutting out 33 cents a share, in potential earnings.

William Rogers, chairman and CEO of SunTrust, noted that it’s good for the firm to resolve legacy mortgage issues, allowing the bank to focus on current clients and new opportunities.

And this past month the mortgage resolutions kept coming.

SunTrust resolved lingering mortgage issues all at once, recently inking a $65 million deal with Freddie Mac to resolve legacy representations and warranties liabilities stemming from its previous sale of 312,000 loans to the enterprise.

The deals announced this past month effectively dissolve some of the bank's existing loan repurchase risk, while also settling FHA-insurance claims raised against SunTrust by the Department of Justice and the Department of Housing and Urban Development.

One of the major deals involves an agreement between SunTrust, HUD and the DOJ. The three parties agreed to settle government claims over SunTrust’s origination of FHA-insured mortgages.

In addition, the bank and government agencies resolved lingering servicing and origination issues raised under SunTrust’s portion of the National Mortgage Servicing Settlement. These two issues alone committed SunTrust to $500 million in total consumer relief and a cash payment of $468 million.

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