The US Securities and Exchange Commission (SEC) has charged Morgan Stanley, Morgan Stanley ABS Capital I, and Morgan Stanley Mortgage Capital for misstating the delinquency history of loans included in RMBS they underwrote, sponsored, and sold before financial crisis.
In an asset-backed securities offering, federal regulations under the securities laws seek the disclosure of delinquency information for the mortgage loans serving as collateral.
SEC Enforcement Division Complex Financial Instruments Unit chief Michael Osnato said: "The delinquency status of mortgage loans in an RMBS securitization is vital information to investors because those loans are the primary source of funds by which they potentially can recover and profit from their investments.
"Morgan Stanley understated the number of delinquent loans behind these securitizations during a critical juncture of the financial crisis and denied investors the full extent of the facts necessary to make informed investment decisions."
Morgan Stanley spokesman Mark Lake was quoted by Reuters as saying: "We’re pleased to settle the matter."
Called Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 and Morgan Capital I Inc. Trust 2007-HE7, the securitizations were believed to be collateralized by mortgage loans with an aggregate principal value balance of more than $2.5bn.
The two deals’ offering documents said less than 1%of their loan pools’ principal balances were delinquent as of each securitization’s cut-off date, but were much higher in reality.
SEC said in a statement: "With the exception of these loans, Morgan Stanley represented as of each securitization’s closing date that no payment under any mortgage loan was more than 30 days delinquent at any time since origination.
"On the contrary, approximately 17 percent of the loans in the HE7 securitization had been delinquent at some point since origination, and in the NC4 securitization approximately 4.5 percent of the loans were currently delinquent rather than the disclosed 1 percent."
Morgan Stanley has agreed to pay $160,6m in disgorgement, $17.9m in prejudgment interest, and a $96.3penalty, without admitting or denying the allegations.
Image: SEC has charged Morgan Stanley for mis-selling mortgage-backed securities. Photo: courtesy of Jenix89.
