(MS) Morgan Stanley Faces Federal Reserve Fury

Morgan Stanley (MS) is facing the Federal Reserve’s fury. According to a Reuters report, the Fed plans to fine Morgan Stanley on grounds of misconduct and negligence in handling foreclosures by one of its mortgage servicing units.

The mortgage servicing unit in question is Saxon Mortgage Services Inc. While Morgan Stanley agreed to sell this unit to Ocwen Financial Corp in October 2011 and closed the deal recently, the Fed pointed at this unit’s behavior with respect to foreclosures between 2009 and 2010.

According to Fed allegations, this particular unit of Morgan Stanley completed foreclosures without properly verifying the documents. Moreover, according to Fed, the company was also in dearth of adequate staff and resources for handling an increased flow of foreclosures during that period.

While Fed has not revealed the amount of damages that it is seeking from Morgan Stanley, it has ordered a probe into the foreclosure practices during that period so as to ensure that borrowers did not have to abandon their homes for improper documentation. However, if such cases appear where borrowers were wrongly forced to lose their homes, the company will have to reimburse their losses properly.

The foreclosure mess hit the headlines in the past few years. Faulty foreclosure practices adopted by the U.S. banks were brought to the forefront and many lenders were accused of using ‘robo-signers’. This is a practice of signing hundreds of documents without any verification of decisive information.

In October 2010, JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC) and Ally Financial had to temporarily suspend foreclosures across the country. A nationwide probe was launched by U.S. bank regulators and a task force of attorneys general of all 50 states. In February, the five large U.S. banks – JPMorgan, Bank of America, Citigroup Inc. (C), Ally Financial Inc. and Wells Fargo & Company (WFC) – accused of faulty foreclosure practices, finally reached a $25 billion settlement deal.

We believe such steps by the regulators and the banks will provide relief to the distressed homeowners and will also instill confidence in the business and revive the drooping housing market. Notably, the housing market is bearing the brunt of the foreclosure mess and dropping home prices and this in turn has impacted the overall economic scenario and led to a slower growth rate.

Morgan Stanley shares maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation.

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