Morgan Stanley has now joined the ranks of JP Morgan Chase, Deutsche Bank, Bank of America and other big banks in agreeing to pay huge sums of money to the Federal Housing Finance Agency to resolve claims that it sold bad mortgage securities to Fannie Mae and Freddie Mac during the run-up to the housing market/mortgage crisis. Morgan Stanley recently agreed to pay $1.25 billion to the FHFA, which is the Federal conservator for Fannie Mae and Freddie Mac. The settlement resolved a lawsuit in which the Agency claimed that Morgan Stanley sold over $10.5 billion in mortgage-backed securities to Fannie and Freddie during the credit boom, while presenting a “false picture” of the riskiness of the loans. This is the same allegation that runs through all of these lawsuits against the big banks, but this lawsuit in particular involved securities issues between September 2005 and September 2007.
Many of the loans were originated by sub-prime lenders, like New Century and Indy Mac, and then bundled into bonds and sold to Fannie and Freddie. The lawsuit said that one group of these loans had default and delinquency rates as high as 70%. As was common in the industry, the big banks turned a blind eye to these default rates while continuing to serve as warehouse lending conduits to keep the train rolling on.
If the Morgan Stanley settlement becomes final, it will be the third-largest monetary payment by a Wall Street firm to settle an FHFA lawsuit. The largest was JP Morgan Chase at $4 billion, followed by Deutsche Bank at $1.2 billion. The FHFA still has some work to do, in that it still has approximately 12 other lawsuits filed against other financial institutions.
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