Morgan Stanley to pay $102 mn for settling loan probe

LONDON: Morgan Stanley has agreed to pay $ 102 million to settle a suit filed by the state of Massachusetts, charging that it had provided financing for predatory subprime loans, a media report said.

Morgan Stanley had provided billions of dollars to bankrupt subprime lender New Century, which used the funds to lure low-income borrowers into loans they could not afford, the Financial Times cited state attorney-general Martha Coakley as saying.

Morgan Stanley then packaged the loans and sold them to investors, including two Massachusetts pension funds, which suffered heavy losses, Coakley added.

The report said that the bank has agreed to pay a total of $ 58 million to 1,000 Massachusetts homeowners and return $ 19.5 million to taxpayers. Another $ 23 million will be placed in a trust to compensate pension funds for losses.

"This has become an all-too-familiar pattern in which the deceptive practices of Wall Street devastate homeowners and investors and ultimately contribute to the collapse of our economy," the report quoted Coakley as saying.

Citing a Morgan Stanley spokeswoman, the report said, "The bank was pleased to resolve this matter in a way that will help many people stay in their homes."

According to the publication, the suit alleged that New Century had calculated the debt-to-income ratio on loans at an initial teaser rate that adjusted upward after a trial period.

If the loans had been calculated using the fully indexed rate, almost 40 per cent of them would have failed Morgan Stanley's internal underwriting standards, the complaint reportedly alleged.

Further, a large number of the loans were based on 'stated' income, which did not require documentation to check if the borrower can afford mortgage payments.

As part of its own due diligence, Morgan Stanley learnt that New Century repeatedly violated a Massachusetts law, which makes it illegal to originate loans without reasonably assessing whether the borrower can pay back the money.

The settlement follows similar deals Coakley had struck with Goldman Sachs and Fremont Investment & Loan, whose portfolio was acquired by Litton Loan Servicing, a Goldman subsidiary.