Morgan Stanley, MetLife Settle Government Investigations into Mortgage Fraud


Morgan Stanley has announced an agreement in principle to settle the Justice Department investigation into its sales of mortgage-backed securities prior to the financial crisis. The $2.6 billion settlement comes only a few days after the Wall Street Journal published an article indicating that the talks were in an early stage. The deal has not been finalized.

The investigation related to Morgan Stanley’s involvement with subprime lender New Century Financial. New Century was the second largest subprime mortgage lender.

Yesterday, a unit of MetLife also settled allegations brought under the False Claims Act that it allowed the FHA to underwrite hundreds of home loans failing to meet federal standards. MetLife Home Loans will pay $123.5 million. The company admitted that it became aware of home loans failing to meet federal standards through its internal quality control practices and yet it still stuck the government with the bill when the loans defaulted.

In other news from the mortgage fraud front:

Goldman Sachs has also been notified by the federal government of potential charges coming in the future because of its mortgage-backed securities practices. The New York Times called Goldman Sachs the last major bank to have unresolved allegations with the DOJ over the subprime crisis. In a securities filing, Goldman expanded the top end of its potential losses to $3 billion. It called this amount “reasonably possible.”

Settlement discussions have fallen apart between Wells Fargo and the DOJ over a potential resolution to the FHA lawsuit over improper certification of certain mortgage loans. According to the Wall Street Journal, there was almost an agreement last summer but the DOJ has asked for additional information. The previous discussions put the amount at issue under $500 million.

Additionally, New York’s Attorney General Eric Schneiderman is building support for a state law that will reward whistleblowers providing information about securities fraud. The law hasn’t been formally introduced but a spokesman for the attorney general told Bloomberg that sponsors of the bill have been lined up. We’ll detail this in a separate blog post shortly.

In a prior year, New York had a bill introduced to reward whistleblowers in the financial industry. The legislation proposed by State Senators James Steward and Joseph Griffo then would have rewarded individuals for information provided to the Department of Financial Services. More details can be found in our previous blog post about the legislation.

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