SunTrust 2014 Annual Report Download - page 34

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We are subject to certain risks related to originating and
selling mortgages. We may be required to repurchase
mortgage loans or indemnify mortgage loan purchasers as
a result of breaches of representations and warranties,
borrower fraud, or certain breaches of our servicing
agreements, and this could harm our liquidity, results of
operations, and financial condition.
We originate and often sell mortgage loans. When we sell
mortgage loans, whether as whole loans or pursuant to a
securitization, we are required to make customary
representations and warranties to the purchaser about the
mortgage loans and the manner in which they were originated.
Between 2006 and 2013, we received an elevated number of
repurchase and indemnity demands from purchasers. These
resulted in an increase in the amount of losses for repurchases.
In September 2013, we reached a settlement with Fannie
Mae and Freddie Mac to address outstanding and potential
repurchase obligations. However, the 2013 agreements with
Fannie Mae and Freddie Mac settling certain aspects of our
repurchase obligations preserve their right to require
repurchases arising from certain types of events, and that
preservation of rights can impact our future losses. While the
repurchase reserve includes the estimated cost of settling claims
related to required repurchases, our estimate of losses depends
on our assumptions regarding GSE and other counterparty
behavior, loan performance, home prices, and other factors. For
additional information, see Note 16, “Guarantees,” to the
Consolidated Financial Statements in this Form 10-K, and the
following sections of the MD&A in this Form 10-
K-”Noninterest Income” and “Critical Accounting Policies.”
In addition to repurchase claims from the GSEs, we have
received indemnification claims from, and in some cases, have
been sued by, non-GSE purchasers of our loans. These claims
allege that we sold loans that failed to conform to statements
regarding the quality of the mortgage loans sold, the manner in
which the loans were originated and underwritten, and the
compliance of the loans with state and federal law. See additional
discussion in Note 19, “Contingencies,” to the Consolidated
Financial Statements and “Critical Accounting Policies” of the
MD&A in this Form 10-K.
We also have received indemnification requests related to
our servicing of loans owned or insured by other parties,
primarily GSEs. Typically, such a claim seeks to impose a
compensatory fee on us for departures from GSE service levels.
In most cases, this is related to delays in the foreclosure process.
Additionally, we have received indemnification requests where
an investor or insurer has suffered a loss due to a breach of the
servicing agreement. While the number of such claims has been
small, these could increase in the future. See additional
discussion in Note 16, “Guarantees,” to the Consolidated
Financial Statements in this Form 10-K.
We face certain risks as a servicer of loans.
We act as servicer and/or master servicer for mortgage loans
included in securitizations and for unsecuritized mortgage loans
owned by investors. As a servicer or master servicer for those
loans, we have certain contractual obligations to the
securitization trusts, investors or other third parties, including,
in our capacity as a servicer, foreclosing on defaulted mortgage
loans or, to the extent consistent with the applicable
securitization or other investor agreement, considering
alternatives to foreclosure such as loan modifications or short
sales and, in our capacity as a master servicer, overseeing the
servicing of mortgage loans by the servicer. Generally, our
servicing obligations are set by contract, for which we receive
a contractual fee. However, the costs to perform contracted-for
services has increased, which reduces our profitability. As a
servicer, we advance expenses on behalf of investors which we
may be unable to collect. Further, GSEs can amend their
servicing guidelines, which can increase the scope or costs of
the services we are required to perform without any
corresponding increase in our servicing fee. Further, the CFPB
has implemented national servicing standards which have
increased the scope and costs of services which we are required
to perform. In addition, there has been a significant increase in
state laws that impose additional servicing requirements that
increase the scope and cost of our servicing obligations.
If we commit a material breach of our obligations as servicer
or master servicer, we may be subject to termination if the breach
is not cured within a specified period of time following notice,
which can generally be given by the securitization trustee or a
specified percentage of security holders, causing us to lose
servicing income. In addition, we may be required to indemnify
the securitization trustee against losses from any failure by us,
as a servicer or master servicer, to perform our servicing
obligations or any act or omission on our part that involves
willful misfeasance, bad faith, or gross negligence. For certain
investors and/or certain transactions, we may be contractually
obligated to repurchase a mortgage loan or reimburse the
investor for credit losses incurred on the loan as a remedy for
servicing errors with respect to the loan. If we experience
increased repurchase obligations because 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. Any of these
actions may harm our reputation or adversely affect our
residential mortgage origination or servicing business.