Morgan Stanley has settled for more than $100 million allegations that it helped put subprime borrowers in unaffordable mortgages and soaked investors in the process.
The settlement was announced today by the Massachusetts Attorney General’s office.
According to the state, the New York-based investment banker will payout $58 million to 1,000 borrowers. In addition, $20 million will be paid to the state and $23 million will be paid to the Massachusetts Pension Fund for investment losses. Another $2 million will be paid out to non-profit groups to assist borrowers.
The company will also change its business practices and provide more information and materials for the state’s ongoing investigation of the subprime securitization marketplace. It also agreed to not fund any subprime loans in Massachusetts.
An Assurance of Discontinuance was filed today in Suffolk County Superior Court.
Morgan Stanley, parent of Saxon Mortgage Services Inc., provided billions of dollars in warehouse funding to now defunct New Century Mortgage Corp. — which the state said targeted low-income borrowers for predatory loans. It then placed the loans into a securitization pool and acted as the underwriter.
The state claims that Morgan Stanley learned of New Century’s alleged unsavory practices during its due diligence process in 2005 and 2006. As it began rejecting a bigger share of the subprime lender’s loans, New Century threatened to take its business elsewhere — prompting Morgan Stanley to accept a wider spectrum of loans for the pools despite that its own due diligence department initially rejected the loans.
The company allegedly continued to lend New Century money even as “New Century finally spiraled towards bankruptcy” and “other banks would no longer provide New Century with cash.” But investors in the mortgage-backed securities included the Massachusetts Pension Reserves Investment Trust and the Massachusetts Municipal Depository Trust — both of which losses from the investments.
Some of Morgan Stanley’s investment bankers reportedly referred to New Century as its “partner” in subprime lending.
“Our extensive investigation revealed that Morgan Stanley not only backed loans for homeowners that they should have known were destined to fail, they also caused additional damage in the subprime marketplace,” Attorney General Martha said in the news release. “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.”
In today’s announcement, Coakley boasted that her office “secured more than $440 million in relief for investors and borrowers.”
Commonwealth of Massachusetts v. Morgan Stanley & Co. Inc.
Docket No. 10-2538 E (Trial Court of Massachusetts, Superior Court Dept., Suffolk County).
