Investment giant ""Morgan Stanley"":http://www.morganstanley.com will pay $102 million to Massachusetts homeowners and taxpayers, following an investigation by state Attorney General Martha Coakley into the firm's securitization and financing of subprime loans.[IMAGE]
As part of the settlement agreement, Morgan Stanley will give $58 million to more than 1,000 Massachusetts homeowners affected by the investment firm's subprime dealings, $23 million to the Massachusetts Pension Fund for investment losses, and $19.5 million in taxpayer money to the commonwealth's general fund.
Coakley says the settlement provides ""substantial relief"" to help hundreds of Massachusetts homeowners keep their homes and return lost money to taxpayers.
""This has become an all-too-familiar pattern in which the deceptive practices of Wall Street devastated homeowners and investors, and ultimately contributed to the collapse of our economy,"" Coakley said. ""Our extensive investigation revealed that Morgan Stanley not only backed loans for homeowners that they should have known were destined to fail, they also caused additional damage in the subprime marketplace.""
Coakley's office alleged that Morgan Stanley entered the subprime arena in Massachusetts by offering funding to retail lenders that specialized in loans to less-qualified borrowers.[COLUMN_BREAK]
In particular, the attorney general says the firm provided billions of dollars to the now-defunct subprime lender New Century, which used Morgan Stanley funds to target lower-income borrowers and lure them into loans that they could not afford to pay.
According to a ""statement from Coakley's office"":http://www.mass.gov/?pageID=cagopressrelease&L=1&L0=Home&sid=Cago&b=pressrelease&f=2010_06_24_ms_settlement&csid=Cago, most of these loans were unsustainable for homeowners because of payment shock or poor underwriting, but were lucrative for subprime lenders, who generated fees and could expect that borrowers would have to refinance in the short term or face foreclosure.
Coakley said some Morgan Stanley investment bankers referred to New Century as the company's ""partner"" in the subprime lending business.
Included in the allegations is that Morgan Stanley provided warehouse lending services, to New Century to fund the subprime loans, and then placed the risky loans into a securitization pool, acting as the underwriter for the subprime investments.
As part of this securitization process, Morgan Stanley employed third party due diligence providers to review the quality of New Century's loans. Coakley says the investment firm continued to provide funding to New Century even after learning that: New Century repeatedly violated the Massachusetts Division of Banks' ""borrower best interest"" standard; the loans failed the basic test of Morgan Stanley's own underwriting guidelines and could only be approved as ""exception"" loans; appraisals used by New Century were often inflated and inaccurate; and a large number were ""stated income loans"" and lacked the basic supporting documentation.
In addition to the $102 million in financial compensation, the settlement also requires Morgan Stanley to change its business practices going forward and to provide information and materials needed in the attorney general's ongoing investigation of the subprime securitization marketplace.