Morgan Stanley has agreed to pay $1.25 billion to the Federal Housing Finance Agency to settle claims that it sold shoddy mortgage securities to Fannie Mae and Freddie Mac that resulted in big losses for the government-backed entities.
In a securities filing late Tuesday, Morgan Stanley said that it had reached the agreement “in principle†with the agency, which is the federal conservator for Fannie and Freddie.
The settlement is the latest agreement between a Wall Street firm and the agency, which sued 17 banks in 2011 seeking compensation for losses that were borne by taxpayers.
According to a lawsuit filed by the agency, Morgan Stanley sold $10.58 billion in mortgage-backed securities to Fannie and Freddie, while presenting “a false picture†of the riskiness of the loans.
The housing finance agency said the underwriting of the mortgage loans did not meet the standards stated in the securities offering documents.
If the Morgan Stanley settlement becomes final, it would be the third-largest monetary payment by a Wall Street firm to settle a Federal Housing Finance Agency lawsuit. The largest settlement thus far - for $4 billion - was paid by JPMorgan Chase. Deutsche Bank agreed to pay $1.92 billion, in the second-largest settlement. The agency still has pending mortgage securities cases against about a dozen other firms.
The payouts won by the housing finance agency are proportionately larger than the penalties that other entities have obtained when suing the banks over mortgages. Morgan Stanley’s $1.25 billion penalty is equivalent to more than 10 percent of the original value of the bonds that the Wall Street firm sold to Fannie Mae and Freddie Mac.
The housing finance agency has collected a similar payout rate on its other settlements. Mortgage litigation brought by private bond investors has sometimes secured payments that amount to around 2 percent of the original bonds’ value.
The latest agreement shows how the costs of the financial crisis are far from over for Wall Street. In the fourth quarter, Morgan Stanley set aside an unusually large $1.2 billion for litigation costs. The charge forced the bank’s institutional securities unit, which houses mortgage lending and trading operations, to report a $1.1 billion pretax loss.
On Tuesday, Morgan Stanley said those litigation costs had increased further because of the latest settlement. Morgan Stanley disclosed that it had set aside an additional $150 million in legal reserves, sapping even more money from its fourth-quarter earnings.
Morgan Stanley’s settlement follows the approval by a New York State Supreme Court judge on Friday of an $8.5 billion settlement between Bank of America and a group of investors that purchased mortgage securities that went sour during the credit crisis. That ruling, however, excluded some of the investors’ claims, leaving Bank of America open to potentially more legal costs in that case. Bank of America has not yet resolved the lawsuit brought by the Federal Housing Finance Agency.
Banks are not entirely forthcoming about their total litigation reserves, making it difficult for investors to gauge the full impact of legal costs.
The federal lawsuit against Morgan Stanley involved mortgage-backed securities issued near the top of the credit boom, from Sept. 12, 2005, to Sept. 27, 2007.
Peter Eavis contributed reporting.
