SunTrust Mortgage Sees Rise in Problem Home Loans
SunTrust Banks Inc., the 7th-largest U.S. bank by assets, said its first-quarter profit fell 1.9 percent as problem home loans increased and its overall mortgage lending slowed.
SunTrust last year discontinued many of its home mortgage programs that involved granting loans to borrowers who made low down payments or didn’t document their income.
In January, the mortgage company announced a cost-cutting plan to save $400 million a year by 2010, in part by negotiating new contracts with suppliers and sending jobs overseas.
The program helped it realize $28.6 million in cost savings in the quarter.
“Expense control is an area they’re really emphasizing,” Kevin Fitzsimmons, an analyst at Sandler O’Neill & Partners who has a “hold” recommendation on the stock, said before the report.
“It’s good they’re taking these steps now but they were probably running the last year or so with a rather bloated expense base related to the revenues that were coming in.”
SunTrust’s profit increased $37 million due to early adoption of accounting changes that increased the value of some of its fixed-rate debt and home mortgage loans.
The company was expected to earn $1.41 a share, an average estimate of 22 analysts compiled by Bloomberg. Individual analysts’ estimates ranged from $1.35 to $1.50.
PROBLEMS IN THE ALT-A MORTGAGE SECTOR
Regional banks are reporting lower earnings after a five- year boom in home sales ended, reducing demand for mortgages and the fees lenders earn.
A rise in defaults and delinquencies on subprime mortgages to borrowers with poor credit also cut demand from investors for Alt-A loans.
These products are extended to U.S. borrowers with better credit who don’t meet the necessary standards outlined for a conventional mortgage.
At least 50 home loan providers have halted operations, gone bankrupt or sought buyers since the start of 2006, according to Bloomberg data.
SunTrust said its nonperforming loans rose to 0.57 percent of total loans, up from 0.25 percent a year earlier, in part because of deteriorating credit quality in the Alt-A mortgage portfolio.
The rise in bad home loans contributed to a 7 percent drop in earnings at its retail banking unit. Profit was also squeezed as customers transferred their money into higher-yielding accounts like certificates of deposit.
Earlier this month, M&T Bank Corp., the New York mortgage lender partly owned by Warren Buffett’s Berkshire Hathaway Inc., said its quarterly profit would be reduced by $7 million because Alt-A mortgages it tried to sell attracted lower bids than predicted.
SOURCE: Bloomberg Media