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Moving ahead with its aim to resolve all legacy mortgage issues, Morgan Stanley (MS - Analyst Report) announced a settlement with the Federal Housing Finance Agency (FHFA) – conservator of Freddie Mac and Fannie Mae – over the sale of home loans and mortgage backed securities (MBS). The company will pay $1.25 billion to settle the charges.

Notably, the settlement still requires the approval of by the FHFA.

The aforementioned settlement led Morgan Stanley to increase its legal reserve by $150 million, with $1.2 billion already set aside while reporting the fourth quarter and full-year 2013 results on Jan 17. Hence, the additional reserve will lower the company’s earnings per share from continuing operations by 5 cents for both the fourth quarter as well as full year.

In 2011, the FHFA sued Morgan Stanley and 17 other banks for the sale of risky MBS to Freddie Mac and Fannie Mae in 2005–2007. The banks were accused of misrepresenting facts related to the quality of the underlying loans.

Some other Wall Street biggies that have settled the charges include JPMorgan Chase & Co. (JPM - Analyst Report), USB AG (USB - Analyst Report) and Citigroup Inc. (C - Analyst Report). Hence, with this settlement, the FHFA has recovered more than $9 billion for taxpayers.

The next in line to settle the charges is expected to be Bank of America Corporation as a federal court in Manhattan will be hearing the case in Jun 2014. The FHFA is seeking roughly $6 billion from BofA along with Countrywide Financial Corp. and Merrill Lynch & Co. (these two acquired in 2008) to settle the charges.

For Morgan Stanley, though the settlement dampened the 2013 results, it has significantly reduced the burden of the bank’s legal hassles. The stock price has remained relatively unchanged following the announcement of the settlement on Feb 4.

Morgan Stanley has come a long way in reviving its profitability since the financial crisis. The company continues to realign its operations to adapt to the changing economic and regulatory landscape.

Currently, Morgan Stanley carries a Zacks Rank #3 (Hold).

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