Initial Progress Report
from the Monitor of the 2016 Morgan Stanley Mortgage Settlement
August 9, 2016
CONTENTS
A Letter from Monitor Eric D. Green………………………………………………………………………………………………………..3
Executive Summary....................................................................................................................................... 5
Settlement Background, Particulars, and Consumer Relief .......................................................................... 8
Consumer Relief under the Settlement Agreement ................................................................................. 9
Modification—Forgiveness/Forbearance (Menu Items 1.A through 1.H) ........................................... 9
Rate Reduction/Refinancing (Menu Items 2.A and 2.B) .................................................................... 11
Community Reinvestment and Neighborhood Stabilization (Menu Items 3.A and 3.B) ................... 12
Affordable Rental Housing (Menu Item 4) ......................................................................................... 13
Morgan Stanley’s Incentives to Extend Consumer Relief Promptly ....................................................... 14
Early Incentive Credit ......................................................................................................................... 14
Credit for Lowering LTV Ratios below 100% ...................................................................................... 14
Additional Credit Is Cumulative.......................................................................................................... 15
Credit Minimums................................................................................................................................ 15
Compliance with Law and Other Conditions .......................................................................................... 18
The Monitor’s Role...................................................................................................................................... 19
The Appointment of Professor Green as Independent Monitor ............................................................ 19
The Monitor’s Role under the Settlement: To Certify That Morgan Stanley Has Provided Relief ......... 20
The Monitor’s Work to Date ....................................................................................................................... 22
How Morgan Stanley Earns Credit for Consumer Relief......................................................................... 22
Credit Sought to Date ............................................................................................................................. 23
The Monitor’s Review of Morgan Stanley’s Compliance........................................................................ 23
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Introduction ....................................................................................................................................... 23
Review of the Submission .................................................................................................................. 24
The Results of the Monitor’s Testing ................................................................................................. 25
Legal Compliance ............................................................................................................................... 28
The Monitor’s Additional Steps to Oversee Implementation of the Settlement So Far ........................ 28
Monitor Website ................................................................................................................................ 28
Call Center Hotline ............................................................................................................................. 29
Meetings with the New York Attorney General and Others .............................................................. 29
Conclusions and Timeline ........................................................................................................................... 30
Glossary ....................................................................................................................................................... 32
Other Mortgage Settlements ...................................................................................................................... 36
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A Letter from Monitor Eric D. Green
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EXECUTIVE SUMMARY
This is the initial 180-day Report of the independent Monitor who was appointed under the
February 11, 2016 Settlement Agreement between the State of New York, by Eric T.
Schneiderman, Attorney General of the State of New York, and Morgan Stanley, as well as its
current and former subsidiaries and affiliates including but not limited to Morgan Stanley & Co.
LLC, f/k/a “Morgan Stanley & Co. Incorporated,” Morgan Stanley Mortgage Capital Holdings
LLC, Morgan Stanley Mortgage Capital Inc., and Morgan Stanley ABS Capital I Inc. (collectively
referred to as “Morgan Stanley”). The Settlement Agreement settled claims that Morgan
Stanley had violated New York State law in connection with residential mortgage-backed
securities.
The Monitor is responsible for determining whether Morgan Stanley satisfies its obligation
under the Settlement Agreement to provide Consumer Relief valued at $400 million. Morgan
Stanley can earn “Credit” toward meeting this $400 million target by assisting New York
consumers in a number of ways:
•
Forgiving homeowners’ loan balances.
•
Reducing the homeowner’s interest rate.
•
Donating money toward community reinvestment and neighborhood stabilization.
•
Supporting affordable low-income rental housing.
The Settlement Agreement sets the rules for how Morgan Stanley can earn Credit for providing
Consumer Relief. These rules, which are described in more detail in this Report, specify such
things as how much Consumer Relief must be provided in the above categories and the types of
organizations to which donations must be made. The Settlement Agreement also provides that
Morgan Stanley shall endeavor to satisfy its Consumer Relief obligations by September 30,
2018, and Consumer Relief efforts will be eligible for Credit only if Morgan Stanley completes
those efforts by September 30, 2019. Within these rules and this timeframe, the Settlement
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Agreement gives Morgan Stanley discretion regarding when, how, and to whom it offers
Consumer Relief.
To confirm that the terms of the Settlement Agreement are being met and that Morgan
Stanley’s Consumer Relief efforts are properly credited, the parties to the Settlement
Agreement appointed Professor Eric D. Green as the independent Monitor. The Monitor’s job is
(a) to receive and review reports from Morgan Stanley that detail Morgan Stanley’s efforts to
provide Consumer Relief and the Credit Morgan Stanley is claiming for those efforts, (b) to
determine whether Morgan Stanley’s efforts satisfy the rules in the Settlement Agreement and
are thus entitled to Credit, and (c) to report periodically to the public about Morgan Stanley’s
progress toward meeting its obligations.
Because this is the Monitor’s first Report, it describes the background of the Settlement and
includes a detailed discussion of the Consumer Relief rules (“Appendix B” to the Settlement
Agreement). In particular, this Report sets forth the ways in which Morgan Stanley can earn
Credit under the Settlement Agreement by providing Consumer Relief. This Report also
describes the Monitor’s powers and duties under the Settlement Agreement. Finally, as will be
the case in future Reports, this Report describes Morgan Stanley’s progress toward completion
of Consumer Relief and Credit it has earned to date.
After the Settlement Agreement was signed, Morgan Stanley began working with the Monitor
and his professional advisers to develop a methodology for validating Credit that Morgan
Stanley claims to have earned for its Consumer Relief efforts. There are several layers of review
in this process.
On June 15, 2016, as an initial test of the appropriateness of this methodology, Morgan Stanley
submitted to the Monitor and his professionals a Credit Affidavit and Periodic Credit Report for
the period between February 1, 2015 and June 10, 2016. Morgan Stanley claimed $10,450,365
of Credit in connection with this submission. During testing by the Monitor’s professional
advisers, it was determined that Morgan Stanley used outdated valuations to determine Credit
for some of its incremental reductions in loan-to-value ratios. After recalculating Credit
amounts using more recent valuations, Morgan Stanley resubmitted its Credit Affidavit and
Periodic Credit Report on July 27, 2016, claiming $10,468,806 of Credit.
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Based on these results, and on the Monitor’s and his professionals’ ongoing review of Morgan
Stanley’s methodologies and approach, the Monitor believes that Morgan Stanley is employing
a logical and appropriate approach to seeking Credit for its Consumer Relief efforts.
The Settlement Agreement offers Early Incentive Credit of 115% for Consumer Relief efforts
offered or completed on or before February 10, 2017. Therefore, the Monitor expects that
Morgan Stanley will decide to expedite its Consumer Relief efforts, choosing to forgive loan
amounts and provide other kinds of Consumer Relief as quickly as possible. Accordingly, it is
likely that there will be more activity between now and February 2017 than in the rest of the
three years that Morgan Stanley has to complete its obligations under the Settlement
Agreement.
The Monitor’s job of scorekeeping—determining whether Morgan Stanley lives up to the terms
of the Settlement Agreement—will probably continue well after Morgan Stanley’s opportunity
to earn Early Incentive Credit ends. The Monitor’s job is to determine and verify whether
Morgan Stanley’s Consumer Relief qualifies under the Settlement Agreement. It is important to
remember that even if a Consumer Relief action does not ultimately qualify for Credit under the
Settlement Agreement, it will still help a homeowner by reducing his or her obligations. That
benefit to the homeowner does not go away, regardless of whether the Monitor gives Morgan
Stanley Credit for it.
The Monitor expects that his first quarterly Report on Morgan Stanley’s Consumer Relief efforts
and other activities will be issued in December 2016. That Report will reflect Morgan Stanley’s
next Credit Affidavit and Periodic Credit Report, which the Monitor expects to receive at the
beginning of October 2016.
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SETTLEMENT BACKGROUND, PARTICULARS, AND CONSUMER RELIEF
On February 11, 2016, Morgan Stanley entered into a Settlement Agreement with the State of
New York. The Settlement Agreement settled claims that Morgan Stanley violated New York
State laws in connection with the creation, packaging, marketing, underwriting, sale,
structuring, arrangement, and issuance of residential mortgage-backed securities (RMBS) by
Morgan Stanley in 2006 and 2007. Morgan Stanley has acknowledged a “Statement of Facts”
concerning these activities that is set forth in Appendix A to the Settlement Agreement. The
Settlement Agreement is one of several settlements between federal and state governments
and financial institutions to resolve claims relating to improper mortgage practices and to
provide relief to homeowners who have borrowed money from, or whose mortgage loans have
been serviced by, those financial institutions. To learn more about similar RMBS-related
settlements, please turn to the final section of this Report, “Other Mortgage Settlements.”
The Settlement Agreement was announced on February 11, 2016, and was effective
immediately. Under the Agreement, Morgan Stanley (a) has paid $150 million in direct
payments to the State of New York, and (b) is obligated to provide Consumer Relief valued at
$400 million. The same day the Settlement Agreement was announced, the United States
Department of Justice (DOJ) announced that Morgan Stanley had agreed to pay a $2.6 billion
penalty to resolve claims related to Morgan Stanley’s marketing, sale, and issuance of
residential mortgage-backed securities.
The Settlement Agreement and the settlement with the DOJ resolved certain claims that the
State of New York and the federal government had against Morgan Stanley. It did not resolve
claims that individual homeowners may have against Morgan Stanley. As a result, relief a
homeowner could receive under the Settlement Agreement might not affect other claims a
homeowner might have against Morgan Stanley.
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CONSUMER RELIEF UNDER THE SETTLEMENT AGREEMENT
Appendix B to the Settlement Agreement specifies, in four sets of “Menu Items,” various forms
of Consumer Relief for which Morgan Stanley can receive Credit. These Menu Items also set
forth the principles as to how different forms of Consumer Relief are valued. The following
subsections contain a general overview of those Menu Items and the amount of Credit that
Morgan Stanley can claim under them. Also explained in the following subsections are other
restrictions, limitations, and requirements that Morgan Stanley must meet pursuant to the
Settlement Agreement.
MODIFICATION—FORGIVENESS/FORBEARANCE (MENU ITEMS 1.A
THROUGH 1.H)
Under the Settlement Agreement, Morgan Stanley may receive Credit toward its $400 million
Consumer Relief obligation by providing different types of relief to its borrowers. A central
purpose of Consumer Relief is keeping families in their homes and making those homes more
affordable. Consumer Relief is designed to achieve these goals by providing mortgage
modifications that may result in reduction of (a) a homeowner’s monthly mortgage payment
and/or (b) the total amount a homeowner owes on his or her mortgage. Modifications that
Morgan Stanley may offer to borrowers under Appendix B include:
First Lien—Principal Forgiveness (Menu Item 1.A)— This type of relief involves a reduction of a
borrower’s unpaid principal balance. In other words, Morgan Stanley agrees that the borrower
is no longer responsible for paying all or part of the money the borrower owes on the loan. To
be eligible for Credit under this Menu Item, forgiveness must reduce the ratio between the
amount owed on the mortgage loan and the value of the home (known as “the loan-to-value
ratio” or LTV ratio) to 100% or lower. If the LTV ratio is reduced to less than 100%, the borrower
would then have equity in the home and would no longer be “underwater.” 1
When the LTV ratio is below 100%, the borrower is said to have “equity” in his or her home. If the borrower were
to sell the home, there could be money left over after paying off the mortgage loan that would belong to the
borrower. When the LTV ratio is greater than 100%, the amount the borrower still has to pay exceeds the value of
1
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The Settlement Agreement helps direct Consumer Relief to the borrowers most in need by
limiting the circumstances in which Morgan Stanley may claim Credit under Menu Items 1.A
and 1.E. Under those Menu Items, Credit can be earned only if the homeowner has an LTV ratio
at or above 100% or has missed two or more payments during the term of the loan, or if the
loan is non-performing, is at imminent risk of default, or has a rate substantially above Freddie
Mac’s Primary Mortgage Market Survey. These limitations do not exist with respect to other
categories of Consumer Relief, but other requirements may still limit what types of Consumer
Relief are eligible for Credit.
Principal Forgiveness of Forbearance (Menu Item 1.B)— Morgan Stanley may offer this type of
relief in situations where it has previously agreed to delay requiring a portion of the principal to
be paid until a later date. Morgan Stanley would now be agreeing to forgive that portion of the
principal. As with relief under Menu Item 1.A, this form of relief is eligible for Credit only if the
forgiveness reduces the homeowner’s LTV ratio to 100% or lower.
First Lien—Forbearance (Payment Forgiveness) (Menu Item 1.C)—This type of relief involves
Morgan Stanley agreeing to defer a borrower’s repayment of a portion of the principal until a
later date, which could be at the end of the loan, likely having the effect of reducing monthly
mortgage payments and forgiving the interest associated with such forborne principal.
Second Lien—Principal Forgiveness (Including Extinguishments) (Menu Item 1.D)—With this
type of relief, Morgan Stanley forgives some or all of the balance of a borrower’s second lien
mortgage (for example, a home equity line of credit on an already-mortgaged home). Second
Lien Principal Forgiveness may reduce the homeowner’s monthly payment and, in some cases,
create more homeowner equity in the home.
Balance Forgiveness—First Lien (Menu Item 1.E)— With this type of relief, Morgan Stanley
forgives a homeowner’s outstanding debt related to a first lien. This forgiveness may result in
the forgiveness of the homeowner’s entire outstanding loan balance, which may create more
homeowner equity in the home and result in a reduced monthly payment. A balance may also
be forgiven under this Menu Item in connection with a short sale of the mortgaged home or a
the home. Were the borrower to sell the home, the proceeds from the sale would not be enough to pay back the
loan. This is sometimes called being “underwater.”
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deed in lieu of foreclosure between the homeowner and Morgan Stanley. As with relief under
Menu Items 1.A and 1.B, this form of relief is eligible for Credit only if the forgiveness reduces
the homeowner’s LTV ratio to 100% or lower.
Balance Forgiveness—Second Liens (Including Extinguishments) (Menu Item 1.F)—Under this
Menu Item, Morgan Stanley forgives a homeowner’s outstanding debt related to a second lien.
The forgiveness may reduce the homeowner’s monthly payment(s) and, in some cases, create
more homeowner equity in the home.
Assistance for Borrowers to Refinance outside Morgan Stanley (Menu Item 1.G)—This form of
Consumer Relief involves payments to third parties by Morgan Stanley to assist homeowners
with refinancing their loans. The assistance may include payments to lenders other than
Morgan Stanley or payments for HUD-approved counseling that Morgan Stanley is not
otherwise obligated to provide. Refinancings under this Menu Item may also involve Morgan
Stanley’s forgiveness of debt similar to Consumer Relief activity under Menu Item 1.A.
Financing for Acquisition and Remediation of Non-Performing Loans (Menu Item 1.H)—Under
Menu Item 1.H, Morgan Stanley can earn Credit by donating or lending funds to assist New York
local government units and eligible organizations in certain consumer-relief efforts, including
the acquisition of non-performing loans. If Morgan Stanley’s assistance takes the form of a
secured loan, the interest rate must be below 1%, and the term of the loan must be at least
four years or until the disposition of the collateral securing the loan, whichever is earlier.
RATE REDUCTION/REFINANCING (MENU ITEMS 2.A AND 2.B)
The Settlement Agreement also encourages Morgan Stanley to modify loans by reducing the
borrowers’ interest rates.
Rate Reduction (Menu Item 2.A)—Under this Menu Item, Morgan Stanley can earn Credit by
reducing a borrower’s interest rate by more than 200 basis points (in other words, two
percentage points). In addition, Morgan Stanley can earn Credit under this Menu Item for
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payments to third parties, or forgiveness of amounts owed to Morgan Stanley, in each case to
facilitate refinancing.
Cross-Servicer HARP (Menu Item 2.B)—HARP is the Home Affordable Refinance Program,
established by the Federal Housing Finance Agency in March 2009. It assists homeowners who
have little or no equity in their homes in refinancing their mortgages. Under Menu Item 2.B,
Morgan Stanley can earn Credit for reducing the interest rates of HARP loans originated by
others.
COMMUNITY REINVESTMENT AND NEIGHBORHOOD STABILIZATION (MENU
ITEMS 3.A AND 3.B)
The Settlement Agreement also enables Morgan Stanley to receive Credit for certain activity
designed to improve the stability of neighborhoods and support community reinvestment.
Grants for Certified Land Banks (Menu Item 3.A)—Under this Menu Item, Morgan Stanley can
earn Credit by making grants to New York municipalities or counties to capitalize or support
certified Land Banks subject to state or local regulation. Morgan Stanley may use intermediary
nonprofit organizations to evaluate potential projects and administer grants under this Menu
Item.
Grants to Support Housing Quality Improvement and Enforcement Programs (Menu Item
3.B)—Morgan Stanley earns Credit under this Menu Item by making grants to New York
municipalities or their housing or finance agencies, for support of housing quality improvement
and enforcement programs. As under Menu Item 3.A, Morgan Stanley may work through
intermediary nonprofit organizations in meeting its obligation to provide Consumer Relief
under this Menu Item.
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AFFORDABLE RENTAL HOUSING (MENU ITEM 4)
Morgan Stanley must also provide financing or grants to New York municipalities or counties
(including housing or finance agencies) to fund Critical Need Housing Developments and
support services or programs for Critical Need Housing Developments. Financing for affordable
low-income rental housing projects often requires subordinated loans to be provided at a loss
by a governmental agency or nonprofit organization. Because Morgan Stanley will be providing
this financing or grants at a loss, public and nonprofit subordinated debt funding for lowincome housing projects may be available for other projects, and more affordable rental
housing may be made available than would be the case without Morgan Stanley’s support.
The Settlement Agreement provides additional requirements to ensure that the developments
selected to receive Consumer Relief under Menu Item 4 address critical areas and recipients.
Under the Settlement Agreement, Critical Need Housing Developments are new or existing
multifamily affordable rental housing developments that have been selected by the State of
New York, by one of its municipalities or counties, or by any of their housing or finance
agencies, and that are subject to a regulatory agreement with affordability restrictions
comparable to those under the federal government’s Low-Income Housing Tax Credits Program
(LIHTC). In addition, the developments must meet one of the following criteria: (i) they are
developed through LIHTC or are equivalent to multifamily affordable rental housing developed
through LIHTC, (ii) they provide multifamily affordable rental housing for senior citizens, (iii)
they provide multifamily affordable rental housing located near public transit hubs, or (iv) they
provide multifamily affordable rental housing located near or otherwise providing access to
health care professionals.
As long as they qualify under the requirements of the Settlement Agreement, Morgan Stanley
can choose the projects financed under Menu Item 4. Also, Morgan Stanley may use one or
more nonprofit organizations to evaluate potential projects and administer financing or grants
to municipalities or counties under this Menu Item.
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MORGAN STANLEY’S INCENTIVES TO EXTEND CONSUMER RELIEF
PROMPTLY
The Settlement Agreement gives Morgan Stanley considerable discretion in how it provides
Consumer Relief under the various Menu Items. The Settlement Agreement does not require
Morgan Stanley to provide any specific relief to any specific homeowner. Rather, Morgan
Stanley must provide relief that in the aggregate satisfies its total Consumer Relief commitment
and is consistent with minimums in the Settlement Agreement, and must not implement
Consumer Relief through any policy that violates the Fair Housing Act or the Equal Credit
Opportunity Act (see below). Through the use of Early Incentive Credit, the Settlement
Agreement gives Morgan Stanley incentives to provide Consumer Relief promptly. While these
provisions of the Settlement Agreement potentially allow Morgan Stanley to earn $400 million
of Credit without actually spending $400 million, they also encourage Morgan Stanley to offer
Consumer Relief to address borrower needs most effectively and as soon as possible for
homeowners currently struggling to remain in their homes.
EARLY INCENTIVE CREDIT
Appendix B of the Settlement Agreement incentivizes Morgan Stanley to provide relief as fast
as possible by giving Morgan Stanley extra Credit for Consumer Relief it provides by February
10, 2017. Morgan Stanley may earn 115% Early Incentive Credit for Consumer Relief offered or
completed by that date under any of the Menu Items.
CREDIT FOR LOWERING LTV RATIOS BELOW 100%
The LTV ratio measures to what extent the unpaid amount of a home loan is greater or less
than the value of the borrower’s home. Morgan Stanley can earn additional Credit to the extent
that certain actions reduce homeowners’ LTV ratios below 100%, meaning that after the action,
the amount remaining on the loan is less than the value of the home. For forgiveness under
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Menu Item 1.A, 1.B, 1.E, or 2.A that incrementally reduces a homeowner’s LTV ratio below
100%, Morgan Stanley will receive 115% Credit.
ADDITIONAL CREDIT IS CUMULATIVE
Morgan Stanley can earn Early Incentive Credit and other additional Credit cumulatively. For
example, for each $1.00 of principal forgiveness under Menu Item 1.E that incrementally
reduces a homeowner’s LTV ratio below 100% and is offered or completed by February 10,
2017, Morgan Stanley would be entitled to earn:
Credit for Incremental Reduction of LTV Ratio—115%, and
Early Incentive Credit—115%.
Thus, if both of these conditions are met, Morgan Stanley would receive $1.3225 (1.15 x 1.15)
of Credit for each $1.00 of principal reduction.
CREDIT MINIMUMS
In seeking Credit for Consumer Relief, Morgan Stanley is required to meet certain Credit
Minimums. These Credit Minimums incentivize Morgan Stanley to offer types of relief that, in
the eyes of the parties to the Settlement Agreement, are likely to be most beneficial to
borrowers. Under Appendix B, the Credit Minimums are as follows.
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Table 1: Credit Minimums
Menu Items Relief Type
Minimum
1.A-1.G
Modification—Forgiveness/Forbearance (aside from
Menu Item 1.H)
$70 Million Credit
(cumulative)
1.H, 3.A, and
3.B
Financing for Acquisition and Remediation of NonPerforming Loans (1.H), Grants for Certified Land
Banks (3.A), and Grants to Support Housing Quality
Improvement and Enforcement Programs (3.B)
$30 Million Credit for
3.A, $30 Million Credit
for 3.B, and $125
Million Credit
cumulatively
4
Affordable Rental Housing
$150 Million Credit
1-4
Total Credit Minimum
$400 Million Credit
Morgan Stanley must demonstrate to the Monitor that it has met these minimums. In instances
where the Credit minimum has not been met, Morgan Stanley must demonstrate (to be
confirmed by the Monitor) that it has used its “best efforts” to satisfy the relevant minimum.
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Table 2: Credit Minimums
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COMPLIANCE WITH LAW AND OTHER CONDITIONS
Morgan Stanley must not implement Consumer Relief through any policy that violates the Fair
Housing Act or the Equal Credit Opportunity Act. The Fair Housing Act makes it unlawful for
housing providers to discriminate based on race, color, national origin, religion, sex, familial
status, or handicap (disability) in all aspects of residential real estate transactions. Prohibited
activities include refusing to make mortgage loans, refusing to provide information regarding
loans, imposing different terms or conditions on a loan (such as different interest rates, points,
or fees), discriminating in appraising homes, and refusing to purchase a loan or setting different
terms or conditions for purchasing a loan—if done in a discriminatory manner. The Equal Credit
Opportunity Act likewise prohibits discrimination by creditors with respect to any aspect of a
credit transaction. Creditors may not discriminate against credit applicants on the basis of race,
color, religion, national origin, sex, marital status, or age; because an applicant receives income
from a public assistance program; or because an applicant has in good faith exercised any right
under the Consumer Credit Protection Act.
In addition, Morgan Stanley may not condition Consumer Relief on a waiver or release by a
borrower, although a waiver and release will be permitted in the case of a contested claim
where the borrower would not otherwise have received as favorable terms or consideration.
Morgan Stanley may also offer modifications under the Making Home Affordable Program
(including the Home Affordable Modification Program and the Housing Finance Agency Hardest
Hit Fund) and under any of its own proprietary or other modification programs.
Morgan Stanley may not receive Credit for Consumer Relief it provided before February 1,
2015. Morgan Stanley is currently evaluating what individuals and organizations are eligible
under the programs set forth in Appendix B of the Settlement Agreement. It has until
September 30, 2019 to complete all Consumer Relief obligations under the Settlement
Agreement. As discussed above, the Settlement Agreement offers incentives, in the form of
additional Credit, to provide Consumer Relief promptly.
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THE MONITOR’S ROLE
The Consumer Relief that Morgan Stanley has agreed to provide under the Settlement
Agreement is complex, may occur over several years, and is carried out in large part by Morgan
Stanley. The New York Attorney General and Morgan Stanley have appointed Professor Eric D.
Green as an independent Monitor to determine whether Morgan Stanley has satisfied its
Consumer Relief obligations under the Settlement Agreement.
THE APPOINTMENT OF PROFESSOR GREEN AS INDEPENDENT MONITOR
Professor Green has extensive experience in serving as an independent, neutral party in helping
businesses, government agencies, and individuals resolve their most difficult and complex
disputes. He has served as a neutral mediator or court-appointed Special Master in thousands
of cases, including the Enron securities class action and the Visa/MasterCard and Microsoft
anti-trust cases, as well as cases involving mortgage-backed securities and mortgage
modification programs.
Professor Green is also serving as the independent Monitor in connection with two other
settlements under which consumer relief is being provided to homeowners and communities.
These are the August 20, 2014 settlement between Bank of America and the DOJ and six
settling states, under which Bank of America is obligated to provide consumer relief valued at
$7 billion, and the April 11, 2016 settlement between Goldman Sachs and the DOJ and the
States of New York, California, and Illinois, under which Goldman Sachs is obligated to provide
consumer relief valued at $1.8 billion (including at least $280 million in New York).
Professor Green is a prolific author of books and articles. He has co-authored leading law-school
textbooks on evidence and dispute resolution, and numerous articles in each of these fields. In
his almost 40-year career in academia, he has taught negotiation, mediation, complex ADR
processes, resolution of mass torts, evidence, and constitutional law at Boston University
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School of Law, and evidence at Harvard Law School. He has also designed and led numerous
training programs on these subjects for the dispute-resolution firms he co-founded,
JAMS/Endispute and Resolutions, LLC.
The Settlement Agreement provides that the Monitor will be fully independent. In his capacity
as Monitor, Professor Green does not represent any of the settling parties and cannot
represent or provide legal or tax advice to individual homeowners. Even though he is paid by
Morgan Stanley for his services as Monitor, neither Morgan Stanley nor any of the other
settling parties has the power to direct or control the Monitor’s work or his exercise of
discretion.
THE MONITOR’S ROLE UNDER THE SETTLEMENT: TO CERTIFY THAT
MORGAN STANLEY HAS PROVIDED RELIEF
The Monitor’s duties and powers are defined by the Settlement Agreement. The Monitor is to
determine whether Morgan Stanley has complied with Appendix B to the Settlement
Agreement and is entitled to the Credit it claims for providing Consumer Relief. In addition, the
Monitor is required to publicly report on Morgan Stanley’s progress toward completion of
Consumer Relief, including reporting on overall progress on a quarterly basis, with the first
Report due on August 9, 2016. As part of his reporting obligation, the Monitor will discuss
Credit earned by Morgan Stanley for Consumer Relief, with reporting to be made as promptly
as practicable following the date the Monitor has confirmed the methodology for validating
Morgan Stanley’s entitlement to Credit.
In determining whether Morgan Stanley has earned Credit and complied with the Settlement
Agreement, the Monitor must determine whether Morgan Stanley has provided relief through
any policy that violates the Fair Housing Act or the Equal Credit Opportunity Act. The Monitor
must also perform calculations to determine whether Morgan Stanley has met the Credit
minimums set forth in Appendix B, and if those Credit minimums have not been met, the
amount of Liquidated Damages that Morgan Stanley owes.
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Under the Settlement Agreement, Morgan Stanley is obligated to provide the Monitor with
evidence of its Consumer Relief efforts. The Monitor also has the power to collect data from
Morgan Stanley. Through this Report and subsequent quarterly Reports, the Monitor will
inform the public how Morgan Stanley is earning Credit for providing Consumer Relief and
otherwise complying with the Settlement Agreement.
The Monitor’s determination of whether Morgan Stanley has complied with the Settlement
Agreement and has earned Credit will have a significant impact on Morgan Stanley’s
obligations. If the Monitor determines that as of September 30, 2019, Morgan Stanley has
fallen short in satisfying its Consumer Relief obligations, Morgan Stanley is required to make a
compensatory payment in cash to the State of New York in an amount equal to the shortfall
(the “Liquidated Damages”).
The Monitor was not involved in any way in the negotiation, mediation, or drafting of the
Settlement Agreement. The Settlement Agreement does not give the Monitor the power to act
or advocate on behalf of individual homeowners who may be eligible for Consumer Relief.
Homeowners considering seeking mortgage modifications or other relief from Morgan Stanley
under the Settlement Agreement may wish to obtain legal or tax advice from a lawyer or tax
adviser of their own selection. Homeowners who desire such assistance but who do not know
where to obtain it or cannot afford it may visit sites found on the Additional Resources page on
the Monitor’s website.
The Monitor has assembled a team of professionals, who are also independent from Morgan
Stanley, to assist him in carrying out his duties. To assist the Monitor in issues related to legal
compliance and implementation of the legal requirements of the Settlement Agreement, the
Monitor has retained Young Conaway Stargatt & Taylor, LLP of Wilmington, Delaware. The
Monitor has retained BDO Consulting (BDO), a division of BDO USA, LLP, to help him determine
whether Consumer Relief efforts that Morgan Stanley has undertaken are entitled to Credit
under the Settlement Agreement and to calculate the amount of such Credit. The Monitor also
has retained The Garden City Group, Inc. to administer the Monitor’s call center hotline. To
assist the Monitor in public reporting efforts contemplated by the Settlement Agreement, the
Monitor has retained Sitrick And Company as a communications consultant. Although the
Settlement Agreement requires the fees and expenses of these professionals and the Monitor
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to be paid by Morgan Stanley, Morgan Stanley may not count those payments toward its
obligation to provide Consumer Relief.
THE MONITOR’S WORK TO DATE
HOW MORGAN STANLEY EARNS CREDIT FOR CONSUMER RELIEF
The Settlement Agreement does not specify the procedures or methodologies required to
validate Morgan Stanley’s Consumer Relief efforts. Immediately after being appointed, the
Monitor and his professionals began working with Morgan Stanley to establish a testing
framework. This testing framework consists of, among other things, eligibility and Credit testing
criteria, subject to review of appropriate documentation or other evidence, that provide the
general methodology upon which the Monitor’s review and assessment of Consumer Relief are
being conducted.
Morgan Stanley provides the Consumer Relief and reports its efforts to the Monitor for testing
and validation, through a Credit Affidavit and Periodic Credit Report. The Monitor’s
professionals and the Monitor review the Credit Affidavit and Periodic Credit Report using
methods outlined in specified Testing Process Flow and Defined Terms, subject to various forms
of documentation and other evidence, to determine whether all or a portion of Morgan
Stanley’s Consumer Relief obligations has been performed or satisfied.
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CREDIT SOUGHT TO DATE
Morgan Stanley submitted a Credit Affidavit and Periodic Credit Report dated July 27, 2016, for
the period between February 1, 2015 and June 10, 2016, that seeks $10,468,806 in Credit for
Consumer Relief under Menu Item 1.E (Balance Forgiveness—First Lien).
THE MONITOR’S REVIEW OF MORGAN STANLEY’S COMPLIANCE
INTRODUCTION
The Monitor and his professionals met on multiple occasions with representatives of Morgan
Stanley to gain an understanding of its mortgage banking operations and its Fair Housing Act
and Equal Credit Opportunity Act compliance processes, among other things. During those
meetings, the Monitor conducted a detailed review of Morgan Stanley’s mortgage banking
operations, including Morgan Stanley’s loan servicing operations, to understand the loan
ownership and servicing roles and responsibilities for the Consumer Relief actions.
Through BDO, the Monitor conducted diligence of the mortgage servicing provider that services
the loans held by Morgan Stanley. BDO’s diligence included gaining an understanding of
Morgan Stanley’s internal policies for managing its mortgage servicing providers and reviewing
third-party reports on the servicing provider’s compliance with minimum servicing standards,
reports on controls, and rating agencies’ servicer reports and evaluations. Through this review,
BDO found no indications that would question the quality of the data Morgan Stanley received
from the mortgage servicing provider.
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Table 3: Credit Testing
REVIEW OF THE SUBMISSION
Morgan Stanley’s July 27, 2016 Credit Affidavit and Periodic Credit Report claimed Credit of
$10,468,806 under Menu Item 1.E in relation to 19 loans.
In conjunction with the Credit Affidavit and Periodic Credit Report, Morgan Stanley provided
BDO with evidence and other documentation and data via Morgan Stanley’s web portal
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application for digital document access and retrieval, for BDO’s use during the testing of the
submission against the terms of the Settlement Agreement.
THE RESULTS OF THE MONITOR’S TESTING
Under the Monitor’s direction and supervision, BDO performed an extensive review of the
Credit Affidavit and Periodic Credit Report to validate the Consumer Relief Credit claimed by
Morgan Stanley. BDO’s review of Consumer Relief crediting began June 15, 2016, and continued
until the filing of this Report.
The principal focus of BDO’s review was to perform an independent review of the amount
claimed by Morgan Stanley for Credit, following the processes and procedures set out in the
Testing Process Flow and applicable Defined Terms, subject to appropriate documentation and
other evidence. This review also included, among other due diligence, (a) an in-person
walkthrough of Morgan Stanley’s approach to test the type of Consumer Relief that was
reported in the Credit Affidavit and Periodic Credit Report, and (b) e-mail and telephone
communications between the Monitor’s professionals and Morgan Stanley through which the
professionals requested additional evidence and made inquiries concerning Morgan Stanley’s
testing methodologies and results.
BDO was given access to details for the 19 actions under Menu Item 1.E for which Credit was
claimed by Morgan Stanley. Morgan Stanley provided the data elements and evidence
necessary for validating Credit in accordance with Appendix B and the applicable Testing
Process Flow and Defined Terms. BDO, using the data elements and evidence, went through
each of the test steps and related analyses and calculations in the Testing Process Flow and
Defined Terms for each of the 19 actions. During this process, Morgan Stanley cooperated fully
with BDO.
25
Based on its testing of each of the 19 actions, BDO determined that for a portion of those
actions, Morgan Stanley used out-of-date property valuations to determine incremental LTVratio reduction Credit. In response to the Monitor’s comments, Morgan Stanley elected to
obtain updated property valuations, and on July 27, 2016, Morgan Stanley resubmitted its
Credit Affidavit and Periodic Credit Report for the 19 actions, claiming Credit in the amount of
$10,468,806. 2
BDO documented its findings in its work papers and reported them to the Monitor. The
Monitor then undertook an in-depth review of Morgan Stanley’s work papers with BDO, as well
as BDO’s work papers. Table 4 below summarizes the results of this review.
Table 4: Results of the Review
Creditable
Actions Reviewed
by Monitor
19
Amount of Loan
Balance
Forgiven
$8,313,979
Morgan Stanley
Reported Credit
Amount
$10,468,806
Monitor
Calculated Actual
Credit Amount
$10,468,806
Amount
Overstated
(Understated)
$0
The calculation of the $10,468,806 actual Credit amount for the 19 actions is shown in Table 5.
The July 27, 2016 Credit Affidavit and Periodic Credit Report also corrected a small calculation error found during
BDO’s review.
2
26
Table 5: Actual Credit Amount*
First lien balance forgiveness by Morgan Stanley
100% Credit because the loans were owned by Morgan Stanley
$8,313,979
100%
Equals
$8,313,979
Portion of forgiveness that resulted in incremental LTV-ratio reduction
below 100%
$5,262,200
115% Credit for incremental LTV-ratio reduction below 100%
115%
Equals
$6,051,530
Plus portion of forgiveness that did not result in incremental LTV-ratio
reduction below 100%
$3,051,779
Equals
$9,103,309
115% Early Incentive Credit
Credit amount equals
115%
$10,468,806
*Figures have been rounded to the nearest dollar. Rounding may cause totals not to equal the product
of the components.
The 19 items submitted by Morgan Stanley have the following characteristics:
•
4 of the 19 items were short sales, and the remaining 15 were extinguishments;
•
The average forgiveness for the 19 items was $437,578; and
•
11 of the 19 items were in Hardest Hit Areas.
Obviously, this initial Report covers only a very small percentage of Morgan Stanley’s Consumer
Relief obligations under the Settlement Agreement—less than 3%. The characteristics of the
items in the July 27, 2016 Credit Affidavit and Periodic Credit Report may not be predictive of
27
the characteristics of the loans that Morgan Stanley may offer to modify as part of its Consumer
Relief efforts going forward.
LEGAL COMPLIANCE
The Settlement Agreement provides that Consumer Relief will not be implemented through any
policy that violates the Fair Housing Act or the Equal Credit Opportunity Act. The Monitor has
initiated his review of Morgan Stanley’s compliance with the requirement that Consumer Relief
not be implemented through a policy that violates those Acts, and his review has not raised any
concerns to date.
THE MONITOR’S ADDITIONAL STEPS TO OVERSEE IMPLEMENTATION OF THE
SETTLEMENT SO FAR
The Monitor has undertaken the following community-outreach initiatives to date.
MONITOR WEBSITE
The Monitor has established a website in an effort to provide information about the Settlement
Agreement and available relief for both borrowers and community-relief organizations. The
website, http://morganstanley.mortgagesettlementmonitor.com, is completely independent
from Morgan Stanley and is managed by the Monitor’s staff and his professionals.
The website contains, among other things, information about the Settlement Agreement and
the role of the Monitor, and frequently asked questions for homeowners and community-relief
organizations. The website also contains copies of the Settlement Agreement and this Report.
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The Monitor encourages homeowners considering mortgage modifications or other relief from
Morgan Stanley under the Settlement Agreement to obtain legal or tax advice from a lawyer or
tax adviser. The Monitor is prohibited by the Settlement Agreement from giving such advice. On
his website, the Monitor provides contact information for legal and taxpayer clinics for
individual homeowners who desire assistance but do not know where to obtain it or cannot
afford it. The Monitor’s website also provides a list of additional resources, including contact
information for Morgan Stanley, the Attorney General of the State of New York, and the
Financial Fraud Enforcement Task Force.
The Monitor’s website also provides information for contacting the Monitor and his staff. The
website lists the mailing address for the Monitor (Monitor of the Morgan Stanley Mortgage
Settlement, P.O. Box 10300, Dublin, OH 43017-5900) and the e-mail address for the Monitor
([email protected]).
CALL CENTER HOTLINE
The Monitor’s website also includes information about the Monitor’s call center hotline, which
is maintained in Dublin, Ohio. The Monitor established a toll-free number, 866-487-1715, for
borrowers and community-relief organizations looking for more information about the
Settlement Agreement.
MEETINGS WITH THE NEW YORK ATTORNEY GENERAL AND OTHERS
The Monitor also has arranged meetings with the Office of the Attorney General of the State of
New York to discuss the Settlement Agreement and the Monitor’s role. The Monitor intends to
continue his dialog with the Attorney General’s office, and welcomes future meetings with
interested parties. The Monitor has instituted an “open door” policy with respect to any
interested party.
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CONCLUSIONS AND TIMELINE
On the basis of the information submitted to the Monitor and the work described in this
Report, and subject to his final determination and certification that Morgan Stanley’s Consumer
Relief efforts comply with each of the requirements of Appendix B to the Settlement
Agreement, the Monitor reports the following:
•
The Monitor has determined that $10,468,806 of Consumer Relief asserted in the July
27, 2016 Credit Affidavit and Periodic Credit Report for the period extending from
February 1, 2015 through June 10, 2016 is correct, subject to Morgan Stanley’s ultimate
compliance with all the terms and conditions of the Settlement Agreement.
•
The Monitor has no reason to believe that Morgan Stanley has failed to comply with the
requirements of Appendix B to the Settlement Agreement for the period extending from
February 1, 2015 through June 10, 2016.
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Table 6: Total Reported and Validated Credit to Date
Based on reports from Morgan Stanley, the Monitor expects his next two Reports will cover a
very substantial amount of Consumer Relief in the form of loan forgiveness and possibly
community reinvestment, neighborhood stabilization, and affordable rental housing. The
Monitor’s future Reports may also address other issues, as necessary, concerning Morgan
Stanley’s provision of Consumer Relief and compliance with the terms of the Settlement
Agreement.
Dated: August 9, 2016.
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GLOSSARY
Appendix B. Appendix B to the Settlement Agreement.
BDO. BDO Consulting, a division of BDO USA, LLP.
Census Tract. Small, relatively permanent subdivision of a county or equivalent entity that is
updated before each decennial U.S. census. The population in a Census Tract is generally
between 1,200 and 8,000 people.
Consumer Credit Protection Act. Federal law that protects consumers in credit transactions by,
among other things, requiring full disclosure of loan terms.
Consumer Relief. Any of the forms of relief that Morgan Stanley may deliver for Credit under
the Settlement Agreement.
Credit. Credit that may be earned by Morgan Stanley under the Settlement Agreement by
delivering Consumer Relief.
Credit Affidavit and Periodic Credit Report. Document in which Morgan Stanley reports to the
Monitor the Credit Morgan Stanley claims for Consumer Relief in the most-recent period and to
date.
Critical Need Housing Development. New or existing multifamily affordable rental housing
development that has been selected by the State of New York, by one of its municipalities or
counties, or by any of their housing or finance agencies; that is subject to a regulatory
agreement with affordability restrictions comparable to those under the federal government’s
Low-Income Housing Tax Credits Program (LIHTC); and that meets one of the following criteria:
(i) it is developed through LIHTC or is equivalent to multifamily affordable rental housing
developed through LIHTC, (ii) it provides multifamily affordable rental housing for senior
citizens, (iii) it provides multifamily affordable rental housing located near public transit hubs,
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or (iv) it provides multifamily affordable rental housing located near or otherwise providing
access to health care professionals.
Defined Terms. See Testing Process Flow below.
DOJ. United States Department of Justice.
Early Incentive Credit. Additional Credit available to Morgan Stanley for offering or completing
certain Consumer Relief by February 10, 2017.
Equal Credit Opportunity Act. Federal law that prohibits discrimination by creditors with
respect to any aspect of a credit transaction on the basis of race, color, religion, national origin,
sex, marital status, or age; because an applicant receives income from a public assistance
program; or because an applicant has in good faith exercised any right under the Consumer
Credit Protection Act.
Equity. The amount (if any) by which the value of a home exceeds the amount owed on any
mortgages on the home.
Fair Housing Act. Federal law that makes it unlawful for housing providers to discriminate
based on race, color, national origin, religion, sex, familial status, or handicap (disability) in all
aspects of residential real estate transactions.
Federal Housing Finance Agency. Independent regulatory agency created by the federal
Housing and Economic Recovery Act of 2008 and responsible for the oversight of components
of the secondary mortgage markets.
Financial Fraud Enforcement Task Force. Federal task force established in November 2009 to
investigate and prosecute financial fraud.
Freddie Mac. Federal Home Loan Mortgage Corporation, a private corporation chartered by the
federal government, providing a secondary market for mortgages.
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Hardest Hit Areas. Census Tracts identified by HUD containing large concentrations of vacantdistressed properties and foreclosure activities.
Hardest Hit Fund. Federal fund that provides assistance to the 18 states hit hardest by the
housing crisis, plus the District of Columbia, to develop locally tailored programs that assist
struggling homeowners in their communities.
HARP. Home Affordable Refinance Program, established by the Federal Housing Finance Agency
in March 2009 to assist homeowners who have little or no equity in their homes in refinancing
their mortgages.
Home Affordable Modification Program. Federal mortgage-modification program in
conjunction with participating loan servicers.
HUD. United States Department of Housing and Urban Development.
Land Bank. Entity formed under state law to return vacant, abandoned, or tax-delinquent
properties to productive use by acquiring, stabilizing, and selling such properties, and by
assembling projects for long-range redevelopment plans.
Liquidated Damages. Compensatory payment that Morgan Stanley is required to make to the
State of New York if the Monitor determines that as of September 30, 2019, Morgan Stanley
has fallen short in satisfying its Consumer Relief obligations.
Low-Income Housing Tax Credits Program. Federal program that offers tax credits for
investments in eligible low-income rental housing.
LTV Ratio. The ratio between the amount owed on a mortgage loan and the value of the home
subject to the mortgage.
Making Home Affordable Program. Federal program to help struggling homeowners avoid
foreclosure through such solutions as mortgage modification or refinancing, mortgage
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forbearance, short sales, and deed in lieu of foreclosure. The Home Affordable Modification
Program is part of the Making Home Affordable Program.
Menu Items. The categories of Consumer Relief specified in Appendix B to the Settlement
Agreement.
Monitor. Professor Eric D. Green, the independent Monitor under the Settlement Agreement.
Morgan Stanley. Morgan Stanley and its current and former subsidiaries and affiliates,
including but not limited to Morgan Stanley & Co. LLC, f/k/a “Morgan Stanley & Co.
Incorporated,” Morgan Stanley Mortgage Capital Holdings LLC, Morgan Stanley Mortgage
Capital Inc., and Morgan Stanley ABS Capital I Inc.
Primary Mortgage Market Survey. Weekly survey by Freddie Mac of lenders on the rates and
points for certain mortgage products.
RMBS. Residential mortgage-backed securities.
Settlement Agreement. February 11, 2016 Settlement Agreement between the State of New
York, by Eric T. Schneiderman, Attorney General of the State of New York, and Morgan Stanley.
Testing Process Flow. Methods used in conjunction with the Defined Terms and various forms
of documentation and other evidence to determine whether all or a portion of the Consumer
Relief obligations of Morgan Stanley have been performed or satisfied.
Underwater. When the amount owed on a mortgage loan exceeds the value of the home
subject to the mortgage.
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OTHER MORTGAGE SETTLEMENTS
The Morgan Stanley settlement follows a string of settlements related to the 2008 financial
crisis. The major settlements include:
February 9, 2012 — $25 billion settlement between the Department of Justice and 49 state
Attorneys General and the nation’s five largest mortgage servicers—Goldman Sachs, Citigroup,
JPMorgan Chase, Wells Fargo, and Ally Financial (formerly General Motors Acceptance Corp., or
GMAC)—resolving charges of mortgage-origination, mortgage-servicing, and foreclosure
abuses. This settlement is known as the National Mortgage Settlement.
July 12, 2012 — $293.5 million settlement between the Department of Justice and Wells Fargo
Bank, resolving charges of discrimination in wholesale mortgage lending.
November 19, 2013 — $13 billion settlement with JPMorgan Chase, the Department of Justice,
and five states, resolving charges arising from the issuance of residential mortgage-backed
securities by JPMorgan Chase and two formerly independent firms, Bear Stearns and
Washington Mutual, that had been acquired by JPMorgan Chase.
December 19, 2013 — $2.1 billion settlement between the Consumer Finance Protection
Bureau, 49 state Attorneys General, and the District of Columbia, and Ocwen Financial
Corporation and Ocwen Loan Servicing, LLC, resolving charges of mortgage-origination,
mortgage-servicing, and foreclosure abuses.
July 3, 2014 — $968 million settlement between the Department of Justice, certain federal
agencies, and 49 state Attorneys General, and SunTrust Mortgage, resolving charges of
mortgage-origination, mortgage-servicing, and foreclosure abuses.
July 14, 2014 — $7 billion settlement between the Department of Justice and five states and
Citigroup, resolving charges of abuses in the issuance of residential mortgage-backed securities.
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August 20, 2014 — $16.65 billion settlement between the Department of Justice and six states
and Bank of America, resolving charges in connection with the packaging, origination,
marketing, sale, structuring, arrangement, and issuance of residential mortgage-backed
securities and collateralized debt obligations.
April 11, 2016 — $5.06 billion settlement between the Department of Justice and three states
(including New York) and Goldman Sachs, resolving charges in connection with the marketing,
structuring, arrangement, underwriting, issuance, and sale of residential mortgage-backed
securities.
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