Nevada AG announce agreement with Morgan Stanley over mortgage practices

(press release) Las Vegas, NV – Nevada Attorney General Catherine Cortez Masto today announced that she filed an Assurance of Discontinuance with Morgan Stanley Mortgage Capital Holdings (“Morgan Stanley”) to resolve an investigation into the firm’s role in purchasing and securitizing roughly 3,000 subprime mortgages in Nevada.

The Assurance requires Morgan Stanley to: (1) commit to certain practices to securitize Nevada mortgages, (2) to refund and adjust interest rates for certain Nevada borrowers, and (3) to pay $7.2 million to prevent foreclosures and mortgage fraud in Nevada. The Assurance, filed in the Eighth Judicial District Court, will provide relief to between approximately 600 and 700 consumers and will provide relief valued at between $21 million and $40 million.

“Morgan Stanley’s deceptive practices hurt Nevada homeowners and played a role in our economy’s decline,” said Cortez Masto. “This is the first step in the right direction to protect consumers and put an end to this financial firm’s egregious behavior.”

The Nevada Attorney General’s investigation centered on potential misrepresentations by lenders, including New Century Financial Corporation, to Nevada consumers who took out subprime loans that were bought and securitized by Morgan Stanley. These include whether lenders deceived consumers about the actual interest rate and payments on their loans, the appraised value of their property, and the potential payment shock when an initial teaser rate expired. The investigation also examined whether lenders originated loans with multiple risk features that allowed them to lower borrowers’ payments, but not their debt. These layered risks included loans that were adjustable rate, stated income, interest-only, 100% financed, had extended amortization periods, and/or qualified borrowers at the initial teaser rate, not the adjusted rate that would be in effect for most of the loan’s term.

The Nevada Attorney General also examined the extent to which Morgan Stanley was aware of these subprime lenders’ allegedly deceptive practices through its due diligence process and whether Morgan Stanley substantially assisted these lenders by financing and purchasing their loans. Morgan Stanley neither admits nor denies any wrongdoing.

The Assurance includes the following elements:

Conduct Provisions

Going forward, Morgan Stanley will only finance, purchase, or securitize Nevada subprime mortgage loans if it has engaged in a “reasonable review” of such loans and determined that such loans comply with the Nevada Deceptive Trade Practices Act. This means Morgan Stanley will not securitize a loan where it has reason to believe that:

a. the lender has not adequately disclosed to the borrower the existence of an initial teaser rate, the maximum adjusted interest rate or payments, and the potential for payment shock if payments increase after a loan reset; or

b. the borrower’s stated income was intentionally overstated or that the stated income is not reasonable and that income was off by 10% or more; or

c. the appraisal provided by the lender was intentionally overstated by 10% or more.

Refunds and Interest Rate Caps for Nevada Consumers

Morgan Stanley will provide the following assistance to borrowers:

a. effectively cap the interest rates for eligible borrowers (whose interest rate has not already been adjusted) at a fixed interest rate that is no more than the initial teaser rate on those mortgages;

b. refund to eligible borrowers interest payments above the initial teaser rate;

c. make payments to eligible borrowers who defaulted on their loans after the interest rate reset; and

d. make payments to eligible borrowers for whom value of their properties, as determined by a broker price opinion, differed from the amount borrowed by more than 5%.

Borrowers eligible for relief will be notified by Morgan Stanley. No application or qualification process will be required. Borrowers with questions can call Morgan Stanley at 888-714-2404. Approximately 600 to 700 Nevada borrowers will be eligible for payments or interest rate adjustments (depending upon how many borrowers already received modifications). Only borrowers whose loans were financed or acquired by Morgan Stanley are covered by this Assurance.

The Attorney General's office will monitor Morgan Stanley’s compliance throughout this process. The settlement requires Morgan Stanley to make regular reports to the Attorney General’s Office to ascertain if future enforcement action by the Nevada Attorney General’s office is necessary.

Homeowners with questions about today’s filing should contact the Attorney General’s Office at 702-486-3132. When prompted, select option “9”.