SunTrust 2015 Annual Report Download - page 149

Notes to Consolidated Financial Statements, continued
121
The Company monitors its credit exposure under standby
letters of credit in the same manner as it monitors other
extensions of credit in accordance with its credit policies. An
internal assessment of the PD and loss severity in the event of
default is performed, consistent with the methodologies used for
all commercial borrowers. The management of credit risk for
letters of credit leverages the risk rating process to focus greater
visibility on higher risk and/or higher dollar letters of credit. The
allowance for credit losses associated with letters of credit is a
component of the unfunded commitments reserve recorded in
other liabilities in the Consolidated Balance Sheets and is
included in the allowance for credit losses as disclosed in Note
7, “Allowance for Credit Losses.” Additionally, unearned fees
relating to letters of credit are recorded in other liabilities. The
net carrying amount of unearned fees was immaterial at
December 31, 2015 and 2014.
Loan Sales and Servicing
STM, a consolidated subsidiary of the Company, originates and
purchases residential mortgage loans, a portion of which are sold
to outside investors in the normal course of business, through a
combination of whole loan sales to GSEs, Ginnie Mae, and non-
agency investors. Prior to 2008, the Company also sold mortgage
loans through a limited number of Company-sponsored
securitizations. When mortgage loans are sold, representations
and warranties regarding certain attributes of the loans are made
to third party purchasers. Subsequent to the sale, if a material
underwriting deficiency or documentation defect is discovered,
STM may be obligated to repurchase the mortgage loan or to
reimburse an investor for losses incurred (make whole requests),
if such deficiency or defect cannot be cured by STM within the
specified period following discovery. Additionally, breaches of
underwriting and servicing representations and warranties can
result in loan repurchases, as well as adversely affect the
valuation of MSRs, servicing advances, or other mortgage loan-
related exposures, such as OREO. These representations and
warranties may extend through the life of the mortgage loan.
STM’s risk of loss under its representations and warranties is
partially driven by borrower payment performance since
investors will perform extensive reviews of delinquent loans as
a means of mitigating losses.
Non-agency loan sales include whole loan sales and loans
sold in private securitization transactions. While representations
and warranties have been made related to these sales, they differ
from those made in connection with loans sold to the GSEs in
that non-agency loans may not be required to meet the same
underwriting standards and non-agency investors may be
required to demonstrate that an alleged breach is material and
caused the investors' loss.
Loans sold to Ginnie Mae are insured by the FHA and
guaranteed by the VA. As servicer, the Company may elect to
repurchase delinquent loans in accordance with Ginnie Mae
guidelines, however, the loans continue to be insured. The
Company indemnifies the FHA and VA for losses related to loans
not originated in accordance with their guidelines.
See Note 19, "Contingencies," for additional information on
current legal matters related to loan sales.
The Company previously reached agreements in principle
with Freddie Mac and Fannie Mae that relieve the Company of
certain existing and future repurchase obligations related to loans
sold from 2000-2008 to Freddie Mac and loans sold from
2000-2012 to Fannie Mae. Repurchase requests have declined
significantly as a result of the settlements. Repurchase requests
from GSEs, Ginnie Mae, and non-agency investors, for all
vintages, are illustrated in the following table that summarizes
demand activity for the years ended December 31.
(Dollars in millions) 2015 2014 2013
Beginning pending repurchase
requests $47 $126 $655
Repurchase requests received 73 158 1,511
Repurchase requests resolved:
Repurchased (22) (28) (1,134)
Cured (81) (209) (906)
Total resolved (103) (237) (2,040)
Ending pending repurchase requests1$17 $47 $126
Percent from non-agency investors:
Pending repurchase requests 32.9% 6.7% 2.8%
Repurchase requests received 7.2% 0.9% 1.2%
1 Comprised of $11 million, $44 million, and $122 million from the GSEs, and $6
million, $3 million, and $4 million from non-agency investors at December 31, 2015,
2014, and 2013, respectively.
The repurchase and make whole requests received have been
primarily due to alleged material breaches of representations
related to compliance with the applicable underwriting
standards, including borrower misrepresentation and appraisal
issues. STM performs a loan-by-loan review of all requests and
contests demands to the extent they are not considered valid. The
following table summarizes the changes in the Company’s
reserve for mortgage loan repurchases for the years ended
December 31:
(Dollars in millions) 2015 2014 2013
Balance, at beginning of period $85 $78 $632
Repurchase (benefit)/provision (12) 12 114
Charge-offs, net of recoveries (16) (5) (668)
Balance, at end of period $57 $85 $78
A significant degree of judgment is used to estimate the mortgage
repurchase liability as the estimation process is inherently
uncertain and subject to imprecision. The Company believes that
its reserve appropriately estimates incurred losses based on its
current analysis and assumptions, inclusive of the Freddie Mac
and Fannie Mae settlement agreements, GSE owned loans
serviced by third party servicers, loans sold to private investors,
and other indemnifications.
Notwithstanding the aforementioned agreements with
Freddie Mac and Fannie Mae settling certain aspects of the
Company's repurchase obligations, those institutions preserve
their right to require repurchases arising from certain types of
events, and that preservation of rights can impact future losses
of the Company. While the repurchase reserve includes the
estimated cost of settling claims related to required repurchases,
the Company's estimate of losses depends on its assumptions
regarding GSE and other counterparty behavior, loan
performance, home prices, and other factors. The related liability
is recorded in other liabilities in the Consolidated Balance