Martha Coakley, state attorney, announced that the financial services provider has agreed to pay $58 million to homeowners in the state affected by unfair lending practises.
The rest of the sum is to be distributed between tax payers and state pension funds as a means of compensation, the attorney explained.
Morgan Stanley is accused of providing financial backing to mortgage lender New Century, which then did not adhere to the appropriate standards when selling loans to borrowers.
Ms Coakley said: âThis has become an all-too-familiar pattern in which the deceptive practices of Wall Street devastated homeowners and investors, and ultimately contributed to the collapse of our economy.â
She added that the bank knew many of the loans were âdestined to failâ, which put unnecessary stress on an unstable market.
In a statement, Morgan Stanley said it was âpleased to resolve this matter in a way that will help many Massachusetts homeowners stay in their homesâ.
Ms Coakley reached a similar settlement with investment bank Goldman Sachs in June 2009.
By Jim Ottewill