Coverage: SunTrust settles with Justice Department on mortgages

The Justice Department reached an agreement with SunTrust Banks on its mortgage practices. Bank of America seems to be headed to court.

Bloomberg had these details in a story by Tom Schoenberg:

SunTrust Banks Inc. (STI) agreed to pay $968 million to resolve federal and state claims that a unit misrepresented the quality of mortgages the bank originated and deceived homeowners on loans it serviced.

The agreement covers loans SunTrust Mortgage made from January 2006 through March 2012 that were backed by the Federal Housing Administration even though they didn’t meet agency requirements, the Justice Department said in a statement today. Atlanta-based SunTrust disclosed the agreement in an October regulatory filing and has already accounted for the payment.

“SunTrust’s conduct is a prime example of the widespread underwriting failures that helped bring about the financial crisis,” Attorney General Eric Holder said in a statement. “We will continue to hold accountable financial institutions that, in the pursuit of their own financial interests, misuse public funds and cause harm to hardworking Americans.”

The agreement is the latest effort by the Justice Department to wrap up investigations stemming from shoddy mortgages that fueled the financial crisis. Prosecutors are preparing lawsuits against Bank of America Corp. and Citigroup Inc. after the banks didn’t produce acceptable offers during talks to resolves probes into their sales of mortgage-backed bonds, a person familiar with the matter has said.

The Wall Street Journal story by Alan Zibel and Andrew R. Johnson pointed out that SunTrust agreed it didn’t comply with lending standards. It’s a rare move for a financial institution to admit wrongdoing:

The bank agreed to pay a $418 million penalty and admitted it didn’t comply with lending standards mandated for loans insured by the Federal Housing Administration. The Justice Department cited internal SunTrust documents that show the bank’s managers were aware of poor internal controls on loan underwriting, as well as high rates of error in loans backed by the FHA, which insures loans against default.

The bank didn’t admit or deny the government’s other allegations.

The company also committed to provide $500 million in relief to consumers who owe more on their mortgages than their homes are worth over three years. It also committed to refund $40 million to around 48,000 consumers who lost their homes through foreclosures.

Michael Corkery and Jessica Silver-Greenberg reported in The New York Times that Bank of America’s talks were stalling:

The Justice Department is also in settlement discussions withBank of America. In those talks, which have also stalled in recent days, lawyers for Bank of America are balking at the proposed penalty related to mortgage investments that were sold by its Merrill Lynch unit, people briefed on the matter said.

“We will continue to hold accountable financial institutions that, in the pursuit of their own financial interests, misuse public funds and cause harm to hard-working Americans,” Eric H. Holder Jr., the attorney general, said in a statement accompanying the SunTrust settlement.

That settlement highlights some of the problems plaguing theFederal Housing Administration’s program to jump-start the housing market after home prices crashed.

With the government’s other mortgage backers, Fannie Mae and Freddie Mac, tightening their lending standards, banks turned to the F.H.A. to back their loans. As a result, the share of F.H.A. loans ballooned and so did the program’s losses.

Regulators say SunTrust, based in Atlanta, was one of the nation’s largest originators of mortgages insured by the F.H.A.

While many large banks were reducing their mortgage operations after the housing collapse, SunTrust’s share of the market was growing — the bank was the nation’s No. 8 mortgage originator in 2010, up from No. 14 in 2006, according to Inside Mortgage Finance, an industry publication.

Dustan Prial wrote for Fox Business that SunTrust would have to reform its mortgage operations:

SunTrust also admitted that numerous audits and other documents disseminated to its management between 2009 and 2012 described significant flaws and inadequacies in SunTrust’s origination, underwriting, and quality control processes, and notified SunTrust management that as many as 50% or more of SunTrust’s FHA-insured mortgages did not comply with FHA requirements.

“SunTrust’s conduct is a prime example of the widespread underwriting failures that helped bring about the financial crisis,” Attorney General Eric Holder said in a statement.

The agreement announced Tuesday requires SunTrust to reform is mortgage operations, including how it services mortgage loans, handles foreclosures, and ensures the accuracy of information provided in federal bankruptcy court.

The settlement, according to the DOJ, requires new servicing standards which will prevent past foreclosure abuses such as robo-signing, improper documentation and lost paperwork, and create dozens of new consumer protections.

It’s yet another fine for banks, but the good news is that some of the money has been earmarked for consumers. While SunTrust seems to be working to move forward past the financial crisis, its larger rival — Bank of America — has several more issues to solve before it can say the past is safely behind. At some point, investors are sure to get tired of the continuous trickle of bad news and fines.