SunTrust 2011 Annual Report Download - page 31
Download and view the complete annual report
Please find page 31 of the 2011 SunTrust annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.15
of claims that we did not satisfy our obligations as a servicer or master servicer, or increased loss severity on such repurchases,
we may have to materially increase our repurchase reserve.
We may incur costs if we are required to, or if we elect to re-execute or re-file documents or take other action in our capacity as
a servicer in connection with pending or completed foreclosures. We may incur litigation costs if the validity of a foreclosure
action is challenged by a borrower. If a court were to overturn a foreclosure because of errors or deficiencies in the foreclosure
process, we may have liability to the borrower and/or to any title insurer of the property sold in foreclosure if the required process
was not followed. These costs and liabilities may not be legally or otherwise reimbursable to us, particularly to the extent they
relate to securitized mortgage loans. In addition, if certain documents required for a foreclosure action are missing or defective,
we could be obligated to cure the defect or repurchase the loan. We may incur a liability to securitization investors relating to
delays or deficiencies in our processing of mortgage assignments or other documents necessary to comply with state law governing
foreclosures. The fair value of our MSRs may be adversely affected to the extent our servicing costs increase because of higher
foreclosure costs. We may be subject to fines and other sanctions, including a foreclosure moratorium or suspension or a requirement
to forgive or modify the loan obligations of certain of our borrowers, imposed by Federal or state regulators as a result of actual
or perceived deficiencies in our foreclosure practices or in the foreclosure practices of other mortgage loan servicers. Any of these
actions may harm our reputation or adversely affect our residential mortgage origination or servicing business. In April of 2011,
we entered into a Consent Order with the FRB following a joint interagency horizontal examination of foreclosure processing at
large mortgage servicers, including us. The order incorporates remedial requirements for identified deficiencies and require us,
among other things, to take certain actions with respect to our mortgage servicing and foreclosure operations, including submitting
various action plans to ensure that our mortgage servicing and foreclosure operations comply with legal requirements, regulatory
guidance and the Consent Order. As noted above, any increase in our servicing costs from changes in our foreclosure and other
servicing practices, including resulting from the Consent Order, adversely affects the fair value of our MSRs. The Consent Order
did not provide for a civil money penalty but the FRB reserved the ability to seek such penalty. Other government agencies,
including state attorneys general and the U.S. Department of Justice, continue to investigate various mortgage related practices
of ours, and these investigations could result in material fines, penalties, equitable remedies (including requiring default servicing
or other process changes), or other enforcement actions and result in significant legal costs in responding to governmental
investigations and additional litigation.
We are subject to risks related to delays in the foreclosure process.
When we originate a mortgage loan, we do so with the expectation that if the borrower defaults then our ultimate loss is mitigated
by the value of the collateral which secures the mortgage loan. Our ability to mitigate our losses on such defaulted loans depends
upon our ability to promptly foreclose upon such collateral after an appropriate cure period. In some states, the large number of
foreclosures which have occurred has resulted in delays in foreclosing. In some instances, our practices or failures to adhere to
our policies has contributed to these delays (see “Management's Discussion and Analysis-Nonperforming Assets” in this Form
10-K). Any delay in the foreclosure process will adversely affect us by increasing our expenses related to carrying such assets,
such as taxes, insurance, and other carrying costs, and exposes us to losses as a result of potential additional declines in the value
of such collateral.
We may continue to suffer increased losses in our loan portfolio despite enhancement of our underwriting policies and
practices.
We seek to mitigate risks inherent in our loan portfolio by adhering to specific underwriting policies and practices, which often
include analysis of a borrower's credit history, financial statements, tax returns and cash flow projections; valuation of collateral
based on reports of independent appraisers; and verification of liquid assets. Our underwriting policies, practices and standards
are periodically reviewed and, if appropriate, enhanced in response to changing market conditions and/or corporate strategies.
Examples include: client eligibility requirements, documentation requirements, loan types, collateral types, LTV ratios, and
minimum credit scores. Prior reviews have resulted in more stringent documentation standards, lower maximum LTV ratios, and
channel and client type restrictions. These actions have contributed to a reduction in exposure since the fourth quarter of 2008 in
certain higher risk portfolio segments, such as higher risk mortgage, home equity, and commercial construction. These actions
have also contributed to declines in early stage delinquencies and non-performing loans. While these changes have resulted in
improving asset quality metrics, elevated losses may continue to occur due to economic factors, changes in borrower behavior, or
other factors.
Our mortgage production and servicing revenue can be volatile.
We earn revenue from fees we receive for originating mortgage loans and for servicing mortgage loans. When rates rise, the
demand for mortgage loans usually tends to fall, reducing the revenue we receive from loan originations. Under the same conditions,
revenue from our MSRs can increase through increases in fair value, although we may not realize some or all of this benefit due
to derivative hedges on our MSRs. When rates fall, mortgage originations usually tend to increase and the value of our MSRs
usually tends to decline, also with some offsetting revenue effect. Even though they can act as a “natural hedge,” the hedge is not
perfect, either in amount or timing. For example, the negative effect on revenue from a decrease in the fair value of residential