Morgan Stanley has agreed to pay $1.25 billion to the Federal Housing Finance Agency to resolve claims that it sold shoddy mortgage securities to Fannie Mae and Freddie Mac.
In a securities filing late Tuesday, Morgan Stanley said that it had reached an agreement “in principle” with the agency, which is the federal conservator for the mortgage finance giants Fannie and Freddie.
The settlement is the latest agreement between a Wall Street firm and the F.H.F.A., which in 2011 sued 18 financial institutions seeking relief for some of the big losses suffered by the taxpayer-supported entities.
According to the agency’s lawsuit, Morgan Stanley sold $10.58 billion in mortgage-backed securities to Fannie and Freddie during the credit boom, while presenting “a false picture” of the riskiness of the loans.
The housing finance agency said the underwriting of the mortgage loans did not meet the standards detailed to Fannie and Freddie. The lawsuit involved mortgage-backed securities issued from Sept. 12, 2005, to Sept. 27, 2007.
Many of the loans involved were originated by subprime lenders, like New Century and IndyMac, bundled into bonds and sold to Fannie and Freddie. One group of loans had default and delinquency rates as high as 70 percent, according to the lawsuit.
The Morgan Stanley settlement, if it becomes final, would be the third-largest monetary payment by a Wall Street firm to settle an F.H.F.A. lawsuit.
The largest settlement thus far — for $4 billion — was paid by JPMorgan Chase. Deutsche Bank agreed to pay $1.92 billion in the second-largest settlement.
The F.H.F.A. still has pending mortgage securities cases against approximately a dozen other financial institutions.
The payouts won by the housing finance agency are proportionately larger than the penalties that other entities have obtained after suing the banks over soured mortgages. Morgan Stanley’s $1.25 billion payment is equivalent to more than 10 percent of the original value of the bonds that the Wall Street firm sold to Fannie Mae and Freddie Mac. The housing finance agency has collected a similar payout rate on its other settlements.
Mortgage litigation brought by private bond investors has sometimes secured payments that amount to about 2 percent of the bonds’ original value.
The agreement shows how the costs of the financial crisis are far from over for Wall Street. In the fourth quarter, Morgan Stanley set aside an unusually large $1.2 billion for litigation costs. The charge forced the bank’s institutional securities unit, which houses mortgage lending and trading operations, to report a $1.1 billion pretax loss.
On Tuesday, the investment firm said those litigation costs had increased further because of the latest settlement. Morgan Stanley disclosed that it had set aside an additional $150 million in legal reserves, sapping even more money from its fourth-quarter earnings.
The major banks have not been entirely forthcoming about their total litigation reserves, making it difficult for investors to gauge the full impact of legal costs.
In a separate action on Tuesday, JPMorgan took another step in resolving its own mortgage-related headaches, agreeing to a $614 million pact with federal prosecutors who accused the nation’s largest bank of violating the rules of the Federal Housing Administration’s mortgage insurance program.
For more than a decade, JPMorgan churned out thousands of flawed mortgages, ultimately leaving the federal government to cover the losses when the loans soured, prosecutors said.
Under the terms of the civil settlement on Tuesday, JPMorgan admitted to approving loans that fell short of federal insurance guidelines, and for failing to tell regulators when its own internal reviews turned up flaws.
“JPMorgan Chase put profits ahead of responsibility by recklessly churning out thousands of defective mortgage loans, failing to inform the government of known problems with those loans and leaving the government to cover the losses when the loans defaulted, said Preet Bharara, the United States attorney in Manhattan.
With the settlement on Tuesday, Mr. Bharara noted, JPMorgan took responsibility for those practices.
In a statement, JPMorgan, which said it had set aside reserves for the penalties, said the “settlement represents another significant step in the firm’s efforts to put historical mortgage-related issues behind it.”
The settlements on Tuesday follow approval by a New York State Supreme Court judge on Friday of an $8.5 billion settlement between Bank of America and a group of investors that purchased mortgage securities that went sour during the credit crisis.
That ruling, however, excluded some of the investors’ claims, leaving Bank of America open to potentially more legal costs in that case. Bank of America also has not yet resolved the lawsuit brought by the Federal Housing Finance Agency over mortgage-backed securities sold to Fannie Mae and Freddie Mac.
Peter Eavis contributed reporting.