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Claims related to mortgage backed-securities are far from over for Wells Fargo & Co. (WFC - Analyst Report) and Morgan Stanley (MS - Analyst Report). A group of bond investors including big names such as BlackRock Inc. (BLK - Analyst Report) and PIMCO are pursuing them in order to seek buyback of allegedly faulty mortgages associated with $73 billion of mortgage-backed securities, according to a Wall Street Journal report.

This group of investors, of which many reached an $8.5 billion settlement with Bank of America Corp. (BAC - Analyst Report) last year, has accused Wells Fargo and Morgan Stanley of nonperformance of duties related to buyback of loans in private-label residential mortgage-backed securities. This settlement with Bank of America still awaits court approval.

As a matter of fact, the loan repurchase requests coming from private investors and government-sponsored enterprises have been a matter of concern for a number of Wall Street biggies.

However, there are complicacies which bondholders need to counter before getting the loan servicers to implement the representations and warranties clause, which pledge that the loans have satisfied the requirements as publicized. In fact, prior to requesting the trustee for an enquiry, the bondholders or a group of bondholders need to exhibit that they hold 25% of each type of security.

In this latest issue, the bondholders own at least a minimum of 25% of voting rights on $15 billion and $5 billion of residential mortgage backed securities issued by Wells Fargo and Morgan Stanley, respectively. However, the settlement here will be applicable to $45 billion of Wells Fargo residential mortgage backed securities and $28 billion of Morgan Stanley bonds.

As a matter of fact, this issue of increased repurchase demands associated with faulty loans underlying the mortgage-backed securities is crippling the industry. Often, the settlements arrived by the banks are aimed at reducing the legal hassles as they include the involvement of both money and resources. However, the settlement amount leads to the exhaustion of the company’s fund.

Nevertheless, we believe that the wrongdoers should be penalized while the sufferers need to be compensated well. Otherwise, such faulty practices would continue and deliver irrepairable damage to the entire industry.

Both Wells Fargo and Morgan Stanley currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.

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