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Morgan Stanley v. Fremont

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Morgan Stanley Mortgage Capital Holdings has filed a lawsuit against Fremont Investment & Loan, charging the former subprime lender with failure to cure or repurchase 231 loans because of misrepresentations that drove down the value of the mortgages.

Among the items misrepresented by the Santa Monica, Calif.-based company were assets, income or employment of borrowers, as well as occupancy, condition and appraisal values, according to the lawsuit filed Oct. 23 in U.S. District Court in Manhattan.

Fremont allegedly also failed to obtain hazard insurance on the properties, to advance funds for payment of real estate taxes, and to meet its own underwriting guidelines, including regarding rent verification, credit history information and credit scores.

The breaches of the representations and warranties of those loans that it had made in four Mortgage Loan Purchase and Warranties agreements, the suit alleges, “materially and adversely affected the value of the applicable mortgage loans or the interest of” Morgan Stanley in those loans.

Fremont also has not indemnified Morgan Stanley for its losses resulting from the breaches of the agreements, which were entered into on May 1, 2005, and Aug. 1, 2005, Dec. 18, 2006, and Dec. 21, 2006, the suit alleges.

The Wall Street firm is seeking to recover “not less than $10 million” or to obtain an order that Fremont cure or repurchase the 231 loans that, according to the lawsuit, which was filed October 23 in U.S. District Court in Manhattan.

Noting that Fremont was required to indemnify Morgan Stanley for “any losses, damages, penalties, fines, forfeitures, legal fees and expenses” from a breach of “any representation or warranty,” Morgan Stanley said it incurred losses and expenses from, among other things, costs relating to the forced placement of new or expanded hazard insurance policies, costs that Fremont had agreed to be responsible for.

And it said that it “remains exposed to further loss and expense” in connection with the breaches of the loan purchase agreements.

The loans were purchased from Fremont from Aug. 30, 2005, to Dec. 28, 2006, and Fremont was notified of the defaults and asked to cure or repurchase the loans from Sept. 18, 2006, to Aug. 31, 2007, according to the suit.

“Fremont,” spokesman Daniel Hilley told the company “believes the suit is without merit and will vigorously oppose it.”

He declined to address the suit’s specific charges.

Since spring, Morgan Stanley has filed similar lawsuits regarding failure to repurchase or cure alleged breaches of mortgage purchase agreements against Fieldstone Mortgage Co., AmeriMortgage Bankers LLC and Baltimore American Mortgage Corp. However, those three suits all involved early loan defaults, an issue not mentioned in the suit against Fremont.

Last March, Fremont announced that it had ceased funding subprime loans and that it was terminating the jobs of “a portion” of its 2, subprime employees nationwide. It also announced that it was taking a pre-tax loss of around $140 million from the sale of a $4 billion subprime portfolio.

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