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SunTrust Sheds Piggyback Program

SunTrust Banks (STI) has become the latest financial institution that is shuttering aspects of its once-hot mortgage lender platform as the U.S. faces an unprecedented housing and capital markets downturn.

The Atlanta-based regional bank, which was downgraded on Thursday by Oppenheimer & Co., has opted to eliminate indefinitely its combo loan program, according to mortgage brokers that TheStreet.com has contacted.

Combo loans -- otherwise known as piggyback loans -- are a package of first and second mortgages offered to borrowers unwilling or unable to come up with at least a 20% down payment to purchase a home. Piggyback loans became popular during the housing boom in 2005, and may have fostered a wave of speculating in major housing markets because it allowed, in some cases, a borrower to put zero money down on a home and flip it in the near term, when housing prices escalated.

"All combo loans must be closed and funded by March 31. NO EXCEPTIONS," reads a memo distributed by John Annand, account executive at SunTrust Mortgage in Cranford, N.J. "SunTrust remains fully committed to providing products that are competitive and makes sense for our customers. Should market conditions change, we will review our policies and give consideration to introducing a new combo second mortgage product."

A call and an email message to Annand were not returned. A spokesman for SunTrust in Atlanta did not comment.

Along with many money center banks, brokerage firms and other financial institutions, SunTrust has been hard hit by the downturn in the mortgage market that has seeped into many corners of Wall Street, including bond insurance and auction rate securities.

During the housing boom, lenders began to widely use subprime and piggyback loans to get unlikely candidates -- and speculators -- into houses. According to SMR Research Corp., piggyback loans accounted for about 40% of new mortgages in 2006.

The housing market has since ground to a halt after the first half of 2007, and many banks, including Wachovia Bank (WB), Washington Mutual (WM) and other major lenders, have permanently or temporarily shuttered portions of their mortgage business, including loans made to lenders with questionable credit, as well as unconventional loans such as Alt-A and Alt-B mortgages, in an attempt to tighten lending standards that had gotten out of whack.

Reporting results in late January, SunTrust missed analysts' fourth-quarter profit estimates by earning just $3.3 million, or a penny a share. That's a 99% drop from a year ago, when it earned $498.6 million, or $1.39 a share. The bank attributed the loss to the declining value of asset-backed securities, losses tied to residential real estate loans, rising mortgage delinquencies and falling home prices.

SunTrust's losses were in part driven by a $555 million writedown to asset-backed paper, including collateralized debt obligations, or CDOs, and other assets once held off its balance sheet in structured investment vehicles.

The bank has significantly increased its provision for credit losses to $356.8 million in the fourth quarter -- representing a 68% increase from the $115.8 million provision it reported in the year-ago period.

On Thursday, Oppenheimer downgraded the bank from perform to underperform, saying that SunTrust does not deserve its price-to-earnings multiple. Oppenheimer added that the bank was not an acquisition target, despite rumors that suggested that firms including JPMorgan Chase (JPM) had an eye on it.

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