Boston, MA 02/05/2014 (wallstreetpr) – The recent settlement by Morgan Stanley (NYSE:MS) again brings to our notice the heavy costs associated with mis-selling. Very few people would have realized during 2007 that the profits they were eating then would require such a heavy pay-out.
The Fannie Mae and Freddie Mac Story:
During the credit boom of the 2005-2007, banks including Morgan Stanley (NYSE:MS) advanced mortgage loans to everyone. The economy was booming, the housing markets were on a roll and there was simply nothing that could go wrong. Such mortgage loans were then bundled together and sold to Fannie Mae and Freddie Mac. A win-win situation as the banks could get refinance and the companies would collect the mortgage payments. However, they failed to disclose that some of the loans were extended to subprime lenders. Morgan Stanley sold $10.58 billion in such mortgage backed securities. Some of the loans had high delinquency and default rates, sometimes as high as 70%. Both Freddie Mac and Fannie Mae folded up and the federal government had to step in to prevent their total collapse.
The Litigation:
With tax-payers money now supporting such companies, the Federal Housing Finance Agency sued 18 financial institutions in 2011, Morgan Stanley (NYSE:MS) was one of them. It alleged that the underwriting of the mortgage loans did not meet the standards and the riskiness of the loans was hidden from them. The lawsuit covered the two year period from 2005 to 2007. Many financial institutions are now coming forward to resolve these issues and are reaching out for a settlement. Morgan Stanley has agreed for a $1.25 billion settlement with F.H.F.A. (Federal Housing Finance Agency). It is yet to be finalized. If accepted, it will be the third largest settlement. The largest one is the $4 billion paid by JPMorgan Chase & Co. (NYSE:JPM) to the F.H.F.A. followed by $1.92 billion paid by Deutsche Bank AG (USA) (NYSE:DB).
If approved, Morgan Stanley (NYSE:MS) will be paying a little more than 10% of the value of the mortgages it sold. The other costs like legal costs are not yet known.
