Zacks_Analysts' Blog : MS to Reform Foreclosure Practices - Analyst Blog

Morgan Stanley (MS) became the second largest bank after The Goldman Sachs Group Inc. (GS) to adopt new foreclosure procedures in an effort to stop unlawful and troublesome foreclosure practices. Morgan Stanley has reached an agreement with the New York’s Department of Financial Services about the new set of standards.

Morgan Stanley, along with two other mortgage servicers – American Home Mortgage Servicing Inc. and Vericrest Financial Inc. – have assented to the mortgage servicing changes, the Department of Financial Services said in a statement on Thursday. Morgan Stanley’s mortgage-servicing unit Saxon Mortgage Services Inc., which the company sold to Ocwen Financial Corp. (OCN) in October, is also a part of the deal.

This is definitely good news for the industry amid volatile economic conditions. However, the agreement does not reduce the chances of investigations and legal actions against these companies.

The mortgage servicing deal with Morgan Stanley eliminates use of ‘robo-signing’, providing single point of contact. This will also end the practice of referring a borrower to foreclosure while the request is for a loan modification. The deal also includes evaluation of borrowers' credentials more comprehensively, revise the way fees are charged, upgrade lenders’ employee-training programs and supervise lawyers involved in foreclosures.

It all started in October 2010, when JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC) and Ally Finance Inc. temporarily suspended foreclosures across the country, following the detection of faulty foreclosure paperwork. Due to this, the U.S. bank regulators, along with the state attorney generals (AGs), geared up to take actions against mortgage servicers.

Actually, the present settlement deal of Morgan Stanley will act as a guideline for other mortgage providers and set a standard for processing loans and foreclosures. The agreement would also help homeowners to protect their properties from wrongly foreclosed.

Furthermore, we expect that if the abovementioned corrective measures are implemented properly, it would surely save us from yet another foreclosure crisis.

Morgan Stanley currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.