Morgan Stanley Said to Near Mortgage-Bond Accord With U.S.

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Morgan Stanley is in talks with the U.S. to resolve an investigation into the bank’s creation and sale of mortgage-backed bonds, the latest in a string of Wall Street cases tied to the 2008 financial crisis, a person familiar with the matter said.

An agreement could be reached within the first few months of 2015, said the person, who asked not to be named because the negotiations are private. The amount of a possible settlement isn’t clear.

A settlement would add Morgan Stanley to a growing list of banks to face federal sanctions over mortgage practices in the run-up to the collapse in housing prices. In August, Bank of America Corp. agreed to pay $16.7 billion for misrepresenting the quality of bonds backed by home loans. Citigroup Inc. reached a $7 billion deal in July, while JPMorgan Chase & Co. struck a $13 billion accord last year.

Morgan Stanley has said for years that it faces government inquiries into how it handled home loans and related investment products. In a November regulatory filing, the firm said that some cases had reached “advanced stages.” The investigations focus in part on the firm’s due diligence on loans it bought and disclosures to investors.

The Justice Department’s case follows other regulatory actions against Morgan Stanley over similar allegations. The firm in February agreed to pay $1.25 billion after the Federal Housing Finance Agency accused it of selling faulty mortgage-backed securities to Fannie Mae and Freddie Mac. About six months later, Morgan Stanley reached a $275 million settlement with the Securities and Exchange Commission over claims it understated the number of delinquent loans backing subprime mortgage securities.

New Century

In its November disclosure, Morgan Stanley said the Illinois Attorney General’s Office has demanded $88 million, claiming the firm misled pension funds. Morgan Stanley said in the filing it disagrees with the office’s claims.

Mary Claire Delaney, a spokeswoman for New York-based Morgan Stanley, and Patrick Rodenbush, a Justice Department spokesman, declined to comment.

The negotiations with the Justice Department were reported earlier by the New York Times. The department has been examining the relationship between the bank and New Century Financial Corp., a subprime lender that collapsed in the housing bust, according to the newspaper. Morgan Stanley considered buying New Century before its bankruptcy as it searched for mortgages that could be packaged into securities.

2012 Lawsuit

In a 2012 lawsuit filed in Manhattan federal court, a group of borrowers from the Detroit area accused Morgan Stanley of discriminating against African Americans by helping New Century target their neighborhoods with predatory high-risk loans to satisfy the bank’s demand for mortgages it could pool and securitize.

E-mails included in court documents show close ties between Morgan Stanley and New Century, which filed for bankruptcy in 2007.

“New Century has been the most important client for all of SPG in the subprime space,” Morgan Stanley executive Andrew Neuberger said in an October 2006 e-mail, referring to the bank’s Securitized Products Group. “We are their biggest lender and biggest buyer of loans for over 3 years running.”

Craig Phillips, then a Morgan Stanley executive, said in a November 2004 email that New Century is “extremely open to our advice and involvement in all elements of their operation.”

One Morgan Stanley due diligence officer, Pamela Barrow, appeared to make light of distressed homebuyers, saying in an e-mail “we should call all their mommas. Betcha that would get some of them good old boys to pay that house bill.”

The case is Adkins v. Morgan Stanley, 12-cv-7667, U.S. District Court, Southern District of New York (Manhattan).

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