Fed Targets Morgan Stanley Over Home Loans

The Federal Reserve on Tuesday said it would seek damages from Morgan Stanley due to "a pattern of misconduct and negligence" in the handling of home loans by one of the investment bank's mortgage servicing units.

The Fed wants Morgan Stanley to review foreclosures overseen by the mortgage-servicing unit to ensure documents were not mishandled and borrowers didn't wrongfully lose their homes as a result of improper documentation.

The Fed's action seeks unspecified monetary damages in addition to changes in mortgage-servicing practices. Morgan Stanley acknowledged it would be responsible for any monetary penalties assessed by the Fed.

The Morgan Stanley order is in line with a series of consent orders issued in April 2011 by federal regulators that led to a nationwide investigation of mortgage servicers that required them to change foreclosure practices. As a result of the probe, the five biggest U.S. banks agreed to a $25 billion settlement with the federal government in February.

A spokesman for Morgan Stanley declined to comment.

Morgan Stanley sold its mortgage servicing business Saxon Mortgage Services Inc. to Ocwen Financial Corp in October for $59.3 million. The sale of Saxon assets was completed yesterday.

Under the agreement, the Fed required Morgan Stanley to hire an outside consultant to comb through foreclosure actions that were pending in 2009 and 2010.

In cases where properties were seized and the mortgage servicer used shoddy documentation, the Fed required the firm to "provide appropriate remediation to the borrower for any...unreasonable penalties, fees or expenses, or for other financial injury."

The Fed said employees at Saxon completed foreclosures and bankruptcy cases "without always confirming that documentation of ownership was in order at the appropriate time."

The company also lacked the staff and resources need to handle an uptick in foreclosure activity, according to the Fed's order.