Credit union regulator sues Morgan Stanley over mortgage losses

By Jonathan Stempel

(Reuters) - Morgan Stanley (MS) is being sued by a U.S. credit union regulator to recover losses on more than $566 million of residential mortgage-backed securities sold to two corporate credit unions that later failed.

The National Credit Union Administration said on Friday that Morgan Stanley made misrepresentations in offering documents for securities sold between 2004 and 2007 to the U.S. Central Federal Credit Union, once the largest federally chartered corporate credit union, and the Western Corporate Federal Credit Union.

"Originators had systematically abandoned the stated underwriting guidelines in the offering documents," according to an August 16 complaint filed in a Kansas federal court. "A material percentage of the loans were all but certain to become delinquent or default shortly after origination. As a result, the RMBS were destined from inception to perform poorly."

Morgan Stanley spokeswoman Mary Claire Delaney declined to comment. An NCUA spokesman said the regulator waited to issue a statement about the case until all defendants were served with the complaint.

The NCUA said it has 11 lawsuits pending against banks, including JPMorgan Chase & Co (JPM) on behalf of five credit unions it seized in 2009 and 2010 after the housing crisis caused losses on more than $14 billion of RMBS that they bought.

Roughly half of the securities at issue in these lawsuits were sold by JPMorgan, or Bear Stearns Cos or Washington Mutual Inc, both of which JPMorgan bought in 2008.

The NCUA got a boost on Tuesday when a federal appeals court in Denver said the regulator could use an "extender" provision in the Financial Institutions Reform, Recovery and Enforcement Act of 1989 to pursue some claims that would otherwise be deemed too late.

Based in Alexandria, Virginia, the NCUA has so far reached $335 million of settlements with Bank of America Corp (BAC), Citigroup Inc (NYS:C), Deutsche Bank AG (DBK.DE) and HSBC Holdings Plc (HSBA.L).

The case is National Credit Union Administration Board v. Morgan Stanley & Co et al, U.S. District Court, District of Kansas, No. 13-02418.