Morgan Stanley is the latest large servicing operation to be sanctioned, this time by the Federal Reserve.  The Fed announced this morning that it had issued a Consent Order against the bank to "address a pattern of misconduct and negligence in residential mortgage loan servicing and foreclosure processing."  Morgan Stanley was not a party to the February settlement among the largest bank servicers and the states' attorneys general.  The order announced today is specific to actions taken by Morgan Stanley's subsidiary Saxon Mortgage Servicers, Inc.

Morgan Stanley completed the sale of a substantial portion of the assets of Saxon to Ocwen Financial Corporation on Monday and has taken other actions to divest its loan servicing operations as a result of the Federal Reserve actions. Saxon had been the 34th largest mortgage servicer in the U.S.

In the Consent Order it is alleged that Saxon had filed affidavits in both state and federal courts making various assertions about ownership of notes and mortgages, the amounts of principal and interest due on the notes and fees and expenses which, despite assertions, were not based on personal knowledge or review of the documents and were not properly notarized.  It is also alleged that foreclosure and other legal actions were initiated without confirming that relevant documents were in order.  Morgan Stanley also failed to respond to the crisis by increasing financial, staffing, and managerial staffing to adequately handle the increased level of loss mitigation and foreclosure activities and failed to have adequate internal controls, training, and management oversight of these activities.  All of these, the Federal Reserve contended constituted unsafe or unsound business practices.

The Consent Order requires Morgan Stanley to retain an independent consultant to review foreclosure proceedings initiated by Saxon that were pending at any time in 2009 or 2010.  This 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. 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.

The Federal Reserve noted in an earlier announcement of enforcement actions that it believes that monetary sanctions in addition to the corrective actions announced today are also appropriate and the bank has acknowledged that it will be responsible for satisfying any civil money penalty that is assessed against Saxon for its conduct.