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Mass. settles with Morgan Stanley for almost $103M

Bob Salsberg

Morgan Stanley agreed last week to a nearly $103 million settlement with Massachusetts investigators who alleged the investment bank backed sub-prime mortgage lending that it knew to be risky.

State Attorney General Martha Coakley, in announcing the settlement, said it called on Morgan Stanley to provide $60 million to borrowers and the rest to the state treasury and to state agencies that had invested in securities backed by the risky loans.

Coakley said the majority of the risky loans were made by New Century Financial Corp. and backed by Morgan Stanley. Irvine, California-based New Century, once the No. 2 U.S. provider of sub-prime mortgage loans, was dissolved in August 2008 after filing for bankruptcy protection.

Morgan Stanley funded and securitized New Century loans, Coakley said, and had “intimate knowledge” of the company’s loan portfolio. Morgan Stanley continued to back the loans despite signals as early as 2005 that New Century’s practices were unsound, including loans approved without documentation or supporting paperwork, she said.

“Morgan discovered that New Century was making loans that we allege were designed to fail,” Coakley said. “They started with low teaser rates but then they kicked to higher interest rates that borrowers predictably could not afford.”

Coakley alleged in the settlement that a senior Morgan Stanley banker purchased hundreds of loans that its own compliance team had initially rejected after New Century threatened to pull its business.

In a brief statement, Morgan Stanley said it was “pleased to resolve this matter in a way that will help many Massachusetts homeowners stay in their homes.” The company declined to make further comment.

In the settlement filed in Suffolk Superior Court in Boston, Morgan Stanley said it neither admits nor denies the allegations made by the attorney general.

Under the settlement, Morgan Stanley would provide $58 million in direct relief to about 1,000 Massachusetts borrowers struggling to repay sub-prime loans or facing foreclosure. Borrowers could receive up to a 35 percent reduction in their principal depending on their property values, Coakley said.

Morgan Stanley would also be required to pay $2 million to nonprofit agencies that assist foreclosure victims.

The company would pay $19.5 million to the Massachusetts general fund and $23.4 million to state entities, including the Massachusetts Municipal Depository Trust and the Pensions Reserve Investment Trust, which according to the settlement purchased securities through an intermediary from Morgan Stanley that were backed by New Century loans, resulting in “significant losses” for those agencies.

Morgan Stanley also agreed to make “structural changes” in the way it does business, Coakley said.

The attorney general announced a $60 million agreement in May 2009 with Goldman Sachs, requiring the investment bank to pay $10 million to the state and allow more than 700 Massachusetts homeowners rework their mortgages.

Associated Press