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SunTrust & Freddie Mac in Settlement

Zacks Equity Research

SunTrust Banks, Inc. (STI) recently announced a settlement with Freddie Mac worth $65 million. The settlement includes the resolution of all outstanding and potential repurchase claims relating to misrepresentation of loans originated and sold by SunTrust directly to Freddie Mac, from 2000 to 2008.

As per the agreement, SunTrust is no longer obligated to repurchase approximately 312,000 shares that were funded by Freddie Mac. Further, the deal relieves SunTrust from further hassles as Freddie Mac will be reimbursed for existing and future losses related to denials, rescissions and cancellations of mortgage insurance.

Out of the total settlement claim, SunTrust will have to pay $40 million in cash as it has already repurchased loans worth $25 million. Though this legal expense is more or less covered by SunTrust’s existing reserves for mortgage repurchases, it is expected to increase the company’s mortgage provision expense by $15 million in third-quarter 2013.

The recent settlement reflects SunTrust’s efforts to resolve mortgage-related legal issues. Keeping aside the one-time compensation expense, the settlement will reduce the company’s legal headwinds in the coming quarters.

In the recent past, Wall Street biggies, Wells Fargo & Company (WFC), Citigroup, Inc. (C), Bank of America Corporation (BAC) resolved similar legal issues related to faulty mortgages sold to Fannie Mae and Freddie Mac.

Earlier this week, Wells Fargo announced a lawsuit settlement with Freddie Mac worth about $869 million. Similarly, last week, Citigroup announced a settlement with Freddie Mac worth about $395 million. In January this year, BofA announced an agreement with Fannie Mae worth about $10.3 billion.

SunTrust currently carries a Zacks Rank #3 (Hold).

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