Morgan Stanley Makes Bid to Have Two FHFA Suits Over RMBS Dismissed

Attorneys for investment firm Morgan Stanley made a motion in the New York Supreme Court Tuesday to dismiss two lawsuits filed by the Federal Housing Finance Agency (FHFA) accusing the firm of failing to buy back $2.5 billion worth of faulty residential mortgage-backed securities, according to media reports.

FHFA, which is suing on behalf of the RMBS pools' trustees, claims that Morgan Stanley committed a breach of contract by failing to buy back the poor performing loans, which were pooled into securities and sold to Freddie Mac in 2007, according to reports. A year later, both Freddie Mac and Fannie Mae required a government bailout of $188 billion and were taken under conservatorship of FHFA.

According to reports, Morgan Stanley's attorneys argued to Judge Marcy Friedman that the case should be dismissed because FHFA "had no standing" to file a complaint, since the statute of limitations had expired. The firm's attorneys cited precedent set with a New York appeals court ruling in a similar case, ACE Securities Corp. et al. v. DB Structured Products, in which the complaint was dismissed because the plaintiff did not file the complaint until after the statute of limitations had expired.

According to FHFA, Morgan Stanley knew the poor quality of the loans it sold to Freddie Mac but still failed to repurchase or cure them, which constituted a breach of contract. The FHFA's attorneys argued that a clause exists in the contract that was not present in the ACE Securities case and that that statute of limitations had not expired, since the clock for a breach of contract suit doesn't begin until the trustee is informed of the breach, according to reports.

"We believe these cases were timely brought and investors should be allowed to pursue their claims for the extraordinary losses that were suffered," said Steven Molo, an attorney for FHFA, in an email.

Attorneys for Morgan Stanley could not immediately be reached for comment.

The two cases are Federal Housing Finance Agency vs. Morgan Stanley ABS Capital and Federal Housing Finance Agency vs. Morgan Stanley Mortgage Capital Holdings, both in the New York Supreme Court.

Friedman did not issue a decision on dismissing the two FHFA lawsuits against Morgan Stanley. She did, however, rule against dismissing a similar suit for $281 million in April 2014 brought about by Israel's biggest bank, Bank Hapoalim BM, which accused Morgan Stanley of misrepresenting risky RMBS it sold to the Israeli bank.

Morgan Stanley, a worldwide firm that is headquartered in New York, has had ongoing legal troubles in the last year with regards to its sales of RMBS prior to the financial crisis, resulting in a series of settlements totaling hundreds of millions. In February 2014, the firm settled a separate lawsuit filed by FHFA for $1.25 billion over the selling of faulty RMBS to Fannie Mae and Freddie Mac during the run-up to the financial crisis. This suit was one of 18 that FHFA filed against financial institutions over packaging and selling of toxic RMBS; the only two institutions yet to settle with FHFA out of those 18 are Nomura Holding America and the Royal Bank of Scotland. The institutions that have settled have paid a combined total of about $24 billion.

In July 2014, Morgan Stanley agreed to pay $275 million to investors for allegedly misrepresenting the delinquency status of subprime mortgage loans in 2007. Then, in September 2014, Morgan Stanley settled for $95 million with the Public Employees' Retirement System of Mississippi (MissPERS), to resolve claims that the firm misled investors as to the quality of RMBS it sold before the financial crisis.