Morgan Stanley (MS:US), the sixth-biggest U.S. bank, was ordered by the Federal Reserve to review foreclosures conducted by its Saxon mortgage servicer before the unit was sold and compensate injured borrowers.
The bank agreed to hire a consultant to review foreclosures pending in 2009 and 2010, correct errors and misrepresentations and reimburse borrowers for unreasonable penalties or impermissible costs, according to a consent order released today by the Fed. Morgan Stanley acknowledged it would be responsible for any penalty assessed against Saxon.
Regulators are targeting U.S. banks that engaged in shoddy foreclosure practices, including the use of faulty documents to seize homes. The five biggest mortgage servicers, including Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc., reached a $25 billion settlement with 49 states and the federal government in February. Some state attorneys general are conducting further probes into suspected misconduct.
Morgan Stanley “failed to respond in a sufficient and timely manner to the increased level of foreclosures by increasing financial, staffing and managerial resources to ensure that Saxon adequately handled the foreclosure process,” the Fed said. The New York-based bank “failed to have adequate internal controls, policies and procedures, compliance risk management, internal audit, training and oversight.”
Ocwen Financial Corp. (OCN:US) agreed in October to buy Saxon as Morgan Stanley exits the mortgage-servicing business it bought before the housing-market slump. The sale of Saxon assets was completed yesterday, the Fed said.
Mary Claire Delaney, a spokeswoman for Morgan Stanley, declined to comment. The bank fell 1.9 percent, or 38 cents, to $19.43 at 12:15 p.m. in New York trading. The shares gained 31 percent this year through yesterday after tumbling (MS:US) 44 percent in 2011.
Morgan Stanley bought Glen Allen, Virginia-based Saxon in 2006 for $706 million as the investment bank sought a mortgage issuer and servicer to provide home loans that it packaged into securities. The bank serviced a portfolio of more than 225,000 residential mortgage loans, many of which became delinquent during the financial crisis, the Fed said. During 2009 and 2010, Saxon initiated at least 60,313 foreclosure actions, according to the Fed.
The Saxon unit’s staff said in foreclosure-related documents that its assertions were based on “personal knowledge or based on a review,” when this was often not the case, the Fed said. Saxon pursued foreclosure proceedings without always confirming that the documentation was in order, according to the central bank.
The bank took a $700 million writedown in the fourth quarter of 2008 related to businesses it owned, with most of the charge coming from Saxon. Mortgage servicers do billing and collections on behalf of banks and investors that own the home loans, and handle foreclosures when borrowers default.
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