The US Federal Reserve has issued a punishing court order to Morgan Stanley, as it prepares to fine the bank over the use of automated 'robo signing' of documents relating to foreclosures for struggling US mortgage payers. It ordered the bank to make significant process and systems improvements.
The issue relates to a troubled electronic mortgage registry created by a range of the largest banks, which is allegedly plagued with errors. Those that have brought claims against the banks have said access to the database was deliberately restricted, and that mortgage foreclosures were often based on incorrect data entered by the banks as they rushed to offload the loans.
The court order issued this week concerns the Saxon business, which Morgan Stanley has sold to mortgage servicing group Ocwen Financial. The Fed said Morgan Stanley retained responsibility for the impact of Saxon's actions. Saxon had issued over 225,000 residential mortgage loans.
Robo-signing typically involves employees of mortgage servicing companies automatically signing off foreclosure papers without checking them, in the interests of fast processing all the papers.
The practice was allegedly supported by the Mortgage Electronic Registration Systems (MERS), which opponents claim may have resulted in unfair foreclosures for many home buyers. The database was created in 1995 to simplify the recording of mortgage sales and to allow banks to more easily sell on loans.
According to recent complaints by New York State, as well as being used fraudulently, the database was also "plagued with inaccuracies and errors". New York State Attorney General Eric Schneidermann said that employees and agents of a number of banks had used the system to "repeatedly" submit court documents on mortgage holders, "containing false and misleading information that made it appear that the foreclosing party had the authority to bring a case when in fact it may not have [had]".
"The banks created the MERS system as an end-run around the property recording system, to facilitate the rapid securitisation and sale of mortgages," said Schneiderman in February.
"Once the mortgages went sour, these same banks brought foreclosure proceedings en masse based on deceptive and fraudulent court submissions, seeking to take homes away from people with little regard for basic legal requirements or the rule of law."
This week, the Federal Reserve issued its court order, known as a consent order, against Morgan Stanley. The order demands that the bank hire an independent consultant to review its foreclosures, and said the bank was required 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".
Should Morgan Stanley decide to re-enter 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" that were "comparable" to enforcement actions against other banks over the same issue.
The consent order against Morgan Stanley orders the bank to create a proper plan around acceptable usage of MERS, including strict processes around proper data entry on MERS and around the appointment of officers authorised by MERS.
Additionally, Morgan Stanley and Saxon were ordered to create a proper plan for the use of strong management information systems to inform correct decision making around mortgages and foreclosures. The systems also needed to monitor compliance with legal requirements, ensure the accuracy of records around money owed and any foreclosure proceedings, and provide all information officers need from borrowers.
High risk residential mortgages have remained a key focus of attention since the financial crisis, because many troubled and complex financial products were based on them.
Last year, the Federal Reserve issued a similar consent order against Goldman Sachs. The robo signing scandal has engulfed a swathe of the largest US banks, with others including Bank of America, Citi, JP Morgan and Wells Fargo also being investigated.
In the Morgan Stanley case, the Federal Reserve said that in 2009 and 2010 Saxon had begun 60,313 foreclosures on home buyers judged to be struggling to pay their mortgages. It accused the company of engaging in "a pattern of misconduct and negligence in residential mortgage loan servicing and foreclosure".
Morgan Stanley had not commented at the time of writing, but has agreed to pay whatever fine the Fed sets.