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Morgan Stanley Unit Probed by U.S. on Military Foreclosures

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March 13 (Bloomberg) -- A unit of Morgan Stanley, the sixth-largest U.S. bank by assets, and other lenders are under investigation by the Justice Department for allegedly overcharging soldiers and foreclosing on their homes without court orders.

“The Civil Rights Division has an ongoing investigation into Saxon Mortgage and other lenders as well as authorized lawsuits against lenders for violations of the Servicemembers Civil Relief Act, specifically for overcharging and foreclosing against the homes of servicemembers without court orders,” Xochitl Hinojosa, a government spokeswoman, said yesterday in an e-mailed statement. Saxon is a subsidiary of Morgan Stanley.

The investigation was revealed in a court document filed last week in a lawsuit brought in federal court in Grand Rapids, Michigan, by U.S. Army Sergeant James Hurley. He served in Operation Iraqi Freedom starting in 2004, and lost his home through an eviction proceeding in 2005 while still in Iraq.

Saxon Mortgage Services Inc. and a unit of Deutsche Bank AG responded in court papers March 8 to an effort by Hurley’s lawyers to subpoena Saxon’s general counsel to learn more about the Justice Department probe.

“The Department of Justice investigation is merely a preliminary investigation based on unproven allegations, for which no liability or wrongdoing has been found,” the companies said in a court filing. Mark Lake, a spokesman for New York-based Morgan Stanley, declined to comment on the federal probe.

Return Money

JPMorgan Chase & Co., the second-biggest U.S. bank by assets, last month said it would return money and houses to families who were overcharged on mortgages or lost their homes after it was accused in a lawsuit of violating the Servicemembers Civil Relief Act.

The bank has begun paying back $2.4 million to about 4,500 service members after reviewing its compliance with the law, Stephanie Mudick, the bank’s head of consumer practices, told the House Veterans Affairs Committee Feb. 9.

The Servicemembers Civil Relief Act was enacted in 2003 to provide temporary suspension of legal proceedings that may adversely affect the civil rights of soldiers during their military service.

Morgan Stanley said in a regulatory filing last month it’s “responding to subpoenas and requests for information from certain regulatory and governmental entities concerning the origination, financing, purchase, securitization and servicing of subprime and non-subprime residential mortgages.”

‘Due Diligence’

“These matters include, but are not limited to, investigations related to the company’s due diligence on the loans that it purchased for securitization,” and its “compliance with the Servicemembers Civil Relief Act,” according to a Feb. 28 annual report filed with the U.S. Securities and Exchange Commission. The New York Times reported on Hurley’s lawsuit and the U.S. investigation March 11.

U.S. District Judge Gordon Quist in Grand Rapids found in 2009 that Saxon and Deutsche Bank Trust Company Americas violated the Servicemembers Civil Relief Act when it foreclosed on Hurley’s home in Hartford, Michigan, according to court filings. Hurley settled the case last week in the middle of a damages trial, according to a court filing which didn’t disclose terms of the accord.

“Sgt. Hurley learned his house was foreclosed upon and his family had been evicted from the premises while he was seven time zones away and there wasn’t a single thing he could do,” Shreveport, Louisiana, lawyer John Odom, who represented Hurley, said in an interview.

‘Very Pleased’

Asked about the settlement, Lake had said in an e-mailed statement that Morgan Stanley is “very pleased to have settled this matter with Sergeant Hurley.”

“As we have said previously, Saxon is always willing to make reasonable accommodations to amicably resolve a matter, especially for our servicemen and women,” according to the statement.

Morgan Stanley acquired Saxon in 2006 for $706 million. The lender used the Fort Worth, Texas-based company for mortgages that it packaged into securities.

Michele Allison, a Deutsche Bank spokeswoman, didn’t immediately return a call or e-mail seeking comment after regular business hours.

The case is Hurley v. Deutsche Bank Trust Company Americas, 08-cv-00361, U.S. District Court, Western District of Michigan (Grand Rapids).

To contact the reporter on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net and; Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net

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