Morgan Stanley Agrees to Pay $3.2B to Settle Mortgage Case
Real Estate In-Depth | February 2016
$550M Earmarked for New York State
NEW YORK—Financial services giant Morgan Stanley has agreed to pay $3.2 billion to settle charges it misled investors to purchase Residential Mortgage-Backed Securities it knew were flawed.
Federal and state regulators announced the settlement agreement on Feb. 11. New York State Attorney General Eric T. Schneiderman joined members of the state and federal working group he co-chairs to announce a the settlement with Morgan Stanley over the bank’s deceptive practices leading up to the financial crisis. The settlement includes $550 million–$400 million worth of consumer relief and $150 million in cash-that will be allocated to New York State.
According to a report by Reuters, $2.6 billion of the settlement funding will go toward resolving claims brought by the U.S. Justice Department and $22.5 million will settle a case brought in the State of Illinois.
The resolution requires Morgan Stanley 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. Additional resources will 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 formed in 2012 to share resources and continue investigating wrongdoing in the mortgage-backed securities market prior to the financial crisis.
“Today’s agreement is another victory in our efforts to help New Yorkers rebuild in the wake of the financial devastation caused by major banks,” said Attorney General Schneiderman. “Today’s settlement will deliver resources to the families and communities that need them the most, while helping New Yorkers avoid foreclosure, and spurring the construction of more affordable housing units statewide.”
The settlement includes an agreed-upon statement of facts that describes how Morgan Stanley made multiple representations to RMBS investors about the quality of the mortgage loans it securitized and sold to investors, and its process for screening out questionable loans. Contrary to those representations, Morgan Stanley securitized and sold RMBS with underlying mortgage loans that it knew had material defects, the Attorney General’s office reported.
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.” In a May 31, 2006 e-mail, the head of Morgan Stanley’s team tasked with doing due diligence on the value of properties underlying the mortgage loans asked a colleague, “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.”
In another e-mail on Nov. 21, 2006, the Attorney General’s office reported that a member of the Morgan Stanley due diligence team forwarded a list of questionable loans, seeking review and approval to purchase them and added, “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.
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 that its credit and compliance team recommended not be purchased, after its finance team decided that the loans had “acceptable risk.” Furthermore, Morgan Stanley allowed loans that it knew were risky to be purchased and securitized without a loan file review for credit and compliance.
Under the settlement, Morgan Stanley will be required to provide a minimum of $400 million in creditable consumer relief directly to struggling families and communities across New York State. The settlement includes a menu of options for consumer relief to be provided, and different categories of relief are credited at different rates toward the bank’s $400-million obligation. Creditable dollars will go toward the creation and preservation of affordable rental housing, land banks, code enforcement, communities purchasing distressed properties, and principal reductions for homeowners.
“Mayors across the state have been dealing with the impact of the financial crisis for years now. The settlement funds will have a huge impact, helping homeowners who continue to struggle and are in need of mortgage relief,” said Tom Roach, Mayor of the city of White Plains and vice president of the New York Conference of Mayors. “Applying the settlement proceeds to fund land banks, affordable housing and enhanced code enforcement will have a direct impact on the quality of life of those most affected by the financial meltdown and be of great assistance to our municipalities.”
“Attorney General Schneiderman’s use of these settlement dollars to investment in communities hardest hit by the foreclosure crisis, has significantly accelerated the recovery efforts of cities across New York who are still struggling to move past this crisis. Without these critical funds, our organization would not be able to make such broad revitalization impacts on such a short timeline,” said Madeline Fletcher, executive director of Newburgh Land Bank.
HSBC Settles for $470 Million
On Feb. 2, Attorney General Eric Schneiderman announced a $470-million joint state-federal settlement with mortgage lender and servicer HSBC to address mortgage origination, servicing, and foreclosure abuses.
The settlement provides direct payments to New York borrowers for past foreclosure abuses, loan modifications, and other relief for borrowers in need of assistance, rigorous mortgage servicing standards, and grants oversight authority to an independent monitor, according to the Attorney General’s office, which estimated that New York State has nearly 136,000 HSBC loans, nearly 31% of HSBC’s total portfolio.
The settlement includes New York, 48 other states, the District of Columbia, the U.S. Department of Justice, the U.S. Department of Housing and Urban Development and the Consumer Financial Protection Bureau.