Home Banking & Finance Morgan Stanley owes $3.2 billion in mortgage securities case

Morgan Stanley owes $3.2 billion in mortgage securities case

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A member of Morgan Stanley’s due diligence team made an unusual request in a 2006 email seeking approval of dubious residential loans.

“I assume you will want to do your ‘magic’ on this one,” the employee wrote.

In another instance, a Morgan Stanley due diligence official cleared dozens of risky loans for purchase after reviewing each loan for less than a minute.

That “magic” will cost the investment bank $3.2 billion to settle a state and federal investigation of irregularities that contributed to the 2008 financial crisis. New York will get $550 million from the settlement, according to a press release issued by Attorney General Eric T. Schneiderman.

The case stems from residential mortgage-backed securities that Morgan Stanley sold to investors in 2006 and 2007. An RMBS is a package of many home loans. Investors buy slices of the RMBS, based on the risks of homeowners defaulting on their mortgages, and then collect the homeowners’ mortgage payments.

Schneiderman said Morgan Stanley failed to screen out risky loans and misrepresented the quality of the loans to investors. Some of the home loans, for example, were “underwater,” meaning that the loans were valued higher than the homes.

Another 2006 email from the bank’s due diligence team urged a colleague to avoid mentioning the higher risk for such loans. “We are running under the radar and do not want to document these types of things,” the email said.

In 2012, President Obama announced the formation of the RMBS Working Group to investigate those responsible for misconduct contributing to the financial crisis through the pooling of loans and sale of residential mortgage-backed securities. Schneiderman co-chaired the group that investigated Morgan Stanley and negotiated the settlement

The settlement, announced on Wednesday, requires the bank to pay $150 million to New York state and to provide $400 million in consumer relief to New Yorkers.

Consumer relief could include loan reductions to help homeowners avoid foreclosure, funds for construction of affordable housing, purchase of distressed properties to keep them out of the hands of predatory investors, investment in land banks, and helping communities change their code enforcement systems.

“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,” Schneiderman said in the press release.

White Plains Mayor Thomas Roach said in the press release that the settlement “will have a direct impact on the quality of life of those most affected by the financial meltdown.”

Morgan Stanley has offices at 2000 Westchester Avenue in Purchase.

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