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Morgan Stanley Settles Mortgage Case for $3.2 Billion

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New York Attorney General Eric T. Schneiderman announced a $3.2 billion settlement with Morgan Stanley over the bank’s deceptive practices leading up to the financial crisis.

“Our focus in this area is really related to the harm done, the damage done by banks – including Morgan Stanley – that created, packaged and sold bad mortgage-backed securities with mortgages that they knew or should have known were going to fail and drained trillions of dollars of wealth from homeowners nearly destroying the American middle class,” Schneiderman said during a press briefing on Thursday afternoon in New York.

The settlement includes $550 million – $400 million worth of consumer relief and $150 million in cash – that will be allocated to New York state. As part of this resolution, Morgan Stanley is required to provide significant community-level relief to New Yorkers, including loan reductions to help residents avoid foreclosure, and funds to spur the construction of more affordable housing.

The settlement will also allow for additional resources to be dedicated to helping communities transform their code enforcement systems, invest in land banks, and purchase distressed properties to keep them out of the hands of predatory investors.

The settlement was negotiated through the Residential Mortgage-Backed Securities Working Group, a joint state and federal working group that Schneiderman co-chairs.

The group, which includes members of the Department of Justice, other federal entities, and several state law enforcement officials, was formed in 2012 and since then has brought settlements against JPMorgan Chase, Citigroup and Bank of America.

The settlement includes an agreed-upon statement of facts that describes how Morgan Stanley made multiple representations to residential mortgage-backed securities investors about the quality of the mortgage loans it securitized and sold to investors, and its process for screening out questionable loans. 

In the statement of facts, Morgan Stanley acknowledged that it increased the acceptable risk levels for loans in its securitized pools. This allowed Morgan Stanley to purchase various loans with loan-to-value (LTV) ratios over 100%, i.e. loans that were “underwater.” 

According to the settlement, the head of Morgan Stanley’s team tasked with doing due diligence on the value of properties underlying the mortgage loans asked a colleague in an email on May 31, 2006, “please do not mention the ‘slightly higher risk tolerance’ in these communications. We are running under the radar and do not want to document these types of things.”

The settlement describes another email on Nov. 21, 2006, where a member of the Morgan Stanley due diligence team forwarded a list of questionable loans, seeking review and approval to purchase them and adding “I assume you will want to do your ‘magic’ on this one?”

In another similar instance from July 2006, the head of Morgan Stanley’s valuation due diligence cleared dozens of risky loans for purchase after less than one minute of review per loan file, according to the settlement. 

In the settlement, Morgan Stanley also acknowledged that it securitized certain loans that neither complied with underwriting guidelines nor had adequate compensating factors.

Morgan Stanley also purchased and securitized many loans which its credit and compliance team recommended not be purchased, after its finance team decided that the loans had “acceptable risk,” the settlement says.  

Furthermore, Morgan Stanley allowed loans that it knew were risky to be purchased and securitized without a loan file review for credit and compliance.

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