According to the New York Times' the DealBook, Morgan Stanley has agreed to settle claims that the Wall Street bank allegedly sold second-rate mortgage securities to Fannie Mae and Freddie Mac. Fannie Mae, or the Federal National Mortgage Association, and Freddie Mac, or the Federal Home Loan Mortgage Corporation, are government-sponsored enterprises. DealBook said Morgan Stanley is poised to settle the claims with the Federal Housing Finance Agency for $1.25 billion. The FHFA is the state conservator for the mortgage finance giants.
Morgan Stanley said in a securities filing on late Tuesday that it was able to reach to an agreement with the agency in principle.
DealBook said the latest settlement is a series of agreements FHFA entered with a Wall Street firm. In 2011, the government agency has filed cases against 18 financial institutions for reportedly suffering massive losses stemming from the deals entered by the companies it is currently supervising. The lawsuit detailed the $10.58 billion auction of Morgan Stanley to Fannie and Freddie during a credit bubble. According to FHFA, Morgan Stanley presented a false picture of the loans' riskiness.
Moreover, the housing finance agency claimed in the lawsuit that the underwriting of the loans did not pass the standards that were detailed to the mortgage finance giants. The lawsuit is pertaining to the mortgage-backed securities that were issued between September 2005 and September 2007. DealBook said majority of the loans offered by Morgan Stanley came originally from subprime lenders and were packaged into bonds to be sold to Fannie and Freddie. FHFA claimed in the lawsuit that a cluster of loans had delinquency and default rates as high as 70%.
DealBook said that the latest agreement secured by the FHFA shows how Wall Street is paying for the cost of the financial crisis of 2008. As in the case of Morgan Stanley, it has announced on Tuesday that it will be increasing its litgation costs to cover expenses regarding similar cases to that of the FHFA case.
