Morgan Stanley to Pay $102m in Subprime Settlement with Massachusetts AG

Morgan Stanley (MS) will pay $102m to the Commonwealth of Massachusetts and more than 1,000 homeowners in a settlement that brings to a close an investigation into the investment firm’s subprime mortgage securitization and financing practices, Massachusetts attorney general Martha Coakley’s office announced Thursday. According to the announcement, Morgan Stanley will pay $58m to more than 1,000 homeowners, $23m to the Massachusetts Pension Fund for investment losses and $19.5m to the commonwealth’s general fund and $2m to Massachusetts non-profit groups to help distressed subprime borrowers avoid foreclosure. The attorney general’s office opened an investigation into Morgan Stanley and Coakley alleged the firm backed loans for homeowners that they should have known were destined to fail. The AG’s office alleged that Morgan provided warehouse lines of credit to retail subprime lenders, notably New Century, which in turn targeted low-income borrowers to originate mortgages the borrowers couldn’t afford. The allegations further claim that Morgan Stanley investment bankers referred to New Century as Morgan’s “partner” in the subprime lending business. Morgan would underwrite and securitize these mortgages for sale on the secondary market. “This has become an all-too-familiar pattern in which the deceptive practices of Wall Street devastated homeowners and investors, and ultimately contributed to the collapse of our economy,” Coakley said in a press statement. In addition to the $102m settlement, Morgan agreed to change its business practices and will provide information and materials needed in the AG’s ongoing subprime mortgage securitization investigation. The AG’s investigation into Morgan’s due diligence processes uncovered allegations that many of the mortgages New Century originated violated the commonwealth’s “borrower best interest” regulations and borrower debt-to-income ratios for loan review were based on entry “teaser rates,” instead of the full rate that took effect later in the life of the loan. When using the full index rate, nearly 40% of the mortgages Morgan Stanley securitized failed the firm’s own internal underwriting standards, the AG alleged. In addition, the AG claims New Century used stated income mortgages “to the point of abuse.” It is a violation of Massachusetts law to originate loans without reasonably assessing a borrower’s ability to repay the loan. The investigation also led to allegations that the appraisals used to originate purchase loans differed greatly from the broker price opinion (BPO) Morgan used to verify valuations. Some of the securities Morgan Stanley issued were sold to the Massachusetts Pension Reserves Investment Trust (PRIT) and the Massachusetts Municipal Depository Trust (MMDT), both of which suffered losses, allegedly at the hands of the subprime mortgages. The settlement is similar to deals the AG’s office reached with Goldman Sachs (GS) and Fremont Investment & Loan. All told, the Massachusetts attorney general’s office has collected more than $440m in fines and settlement agreements for the commonwealth, investors and borrowers. Morgan Stanley did not immediately respond to HousingWire‘s request for comment. Write to Austin Kilgore. The author held no relevant investments.