$1.25 Billion Settlement for Morgan Stanley to Resolve Mortgage Fraud Claims

Financial services corporation giant Morgan Stanley will pay $1.25 billion to resolve claims that it sold faulty mortgage securities to the taxpayer-backed mortgage finance agencies Freddie Mac and Fannie Mae.
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The company announced early this month that it had reached an agreement with the Federal Housing Finance Agency, which brought the action against the firm as the conservator for Fannie and Freddie.

Our Miami foreclosure defense lawyers know that this was the latest in a string of agreements wrangled by the FHFA from some of the largest Wall Street companies. In 2011, the agency sued 18 financial firms seeking relief on Fannie and Freddie’s behalf.

The lawsuit alleged that Morgan Stanley was responsible for selling some $11 billion worth of mortgage-backed securities to both Freddie and Fannie during the boom years. The problem was that the picture the firm painted regarding the riskiness of those loans was in fact a false one.

The underwritings of those loans failed to meet Fannie and Freddie’s outlined standards – and Morgan Stanley knew this, and sold them anyway. Most of the loans came from subprime lenders, such as IndyMac and New Century. The loans were then bundled into bonds and sold to either Freddie or Fannie. In some cases, these bundled loans had default rates that exceeded 7 out of 10.

The filing covers all securities that were issued between September 2005 through September 2007.

Once finalized, this settlement will be the third-largest FHFA lawsuit settlement in history. The biggest, $4 billion, was paid by JPMorgan Chase. The third, at nearly $2 billion, was paid by Deutsche Bank.

FHFA lawsuits are still pending against at least a half a dozen other firms.

While these amounts may seem substantial, they represent a small fraction of these corporations’ annual earnings. This is important to bear in mind, even when considering that proportionately speaking, the payment is equivalent to more than 10 percent of the original bond values that were sold. Other mortgage fraud lawsuits brought by private investors has usually amounted to approximately 2 percent of the original value.

Meanwhile, JPMorgan Chase was still wrestling with federal prosecutors over violations of the Federal Housing Administration’s mortgage insurance program. Prosecutors say that for more than 10 years, the country’s biggest bank cranked out thousands of shoddy mortgages, leaving the federal government with the tab when those loans went south. For this, the firm has agreed to pay $614 million and admitted that it green-lighted loans that didn’t meet basic federal standards. The firm also conceded that it kept this information hidden from federal regulators when internal reviews revealed these shortfalls.

Prosecutors say these reckless actions cost the federal government, and by proxy the taxpayers, millions of dollars.

Also still embroiled in mortgage securities litigation is Bank of America. A state supreme court judge in New York approved an $8.5 billion settlement agreement between the bank and a group of private investors who say they were sold sub-par mortgage securities when the economy was on the upswing.

However, that settlement agreement doesn’t cover all the investors who were allegedly swindled by these actions, which means some of those claims could continue to drag on for some time.

An FHFA lawsuit filed against Bank of America is one of those still pending.

If you’re battling foreclosure in Miami or the surrounding areas contact Jacobs Keeley for a confidential appointment to discuss your rights. Call (305) 358-7991. Also, don’t miss Miami Foreclosure Attorney Bruce Jacobs on 880AM/the Biz, every Wednesday from 5 p.m. to 6 p.m. on “Mortgage Wars,” discussing foreclosure topics that matter to YOU.

Additional Resources:
Morgan Stanley lawsuit settled for $1.25 billion, Feb. 5, 2014, Staff Report, The Associated Press
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Miami Foreclosure Recovery Not Nearly as Robust as Reported, Jan. 28, 2014, Miami Foreclosure Lawyer Blog