Federal Reserve probes Morgan Stanley for illegal foreclosures

Consent Order against Morgan Stanley

The Federal Reserve Board today announced a Consent Order¹ against Morgan Stanley and is seeking financial damages for what the agency is calling a “pattern of misconduct and negligence in residential mortgage loan servicing and foreclosure processing at its subsidiary, Saxon Mortgage Services, Inc.” which until yesterday was the 34th largest mortgage servicer in America.

On April 2, 2012, Morgan Stanley sold a large portion of the assets of Saxon to Ocwen Financial Corporation for $59.3 million, and has taken other various actions to end their residential mortgage servicing.

The Fed’s Consent Order forces Morgan Stanley to retain an independent consultant dedicated to reviewing foreclosures initiated by Saxon between 2009 and 2010. In a statement², the Fed said that the review “is intended to provide remediation to borrowers who suffered financial injury as a result of wrongful foreclosures or other deficiencies identified in a review of the foreclosure process.”

The review will be similar to those that the large mortgage servicers are currently undergoing that consented to enforcement actions brought in 2011 which resulted in the historic $25 billion mortgage settlement³.

Probing an understaffed servicer

The probe will be seeking any mishandled documents to determine which (if any) borrowers wrongfully lost their home due to improper documentation. The Fed notes that Saxon lacked the resources and staff to handle increased foreclosure volume and foreclosures were completed “without always confirming that documentation of ownership was in order at the appropriate time.”

Financial penalties are deemed “appropriate” by the Fed, but the amount has yet to be disclosed, and will accompany corrective actions, which Morgan Stanley has acknowledged they are responsible for.

According to the Fed, “If Morgan Stanley re-enters the mortgage servicing business while the Consent Order is in effect, it will be required to implement enhanced corporate governance, risk-management, compliance, borrower communication, servicing, and foreclosure practices comparable to what the mortgage servicers subject to the 2011 enforcement actions were required to implement.”

¹Consent order definition
²Federal Reserve statement
³Mortgage settlement breakdown