Morgan Stanley [MS] announced a $1.25 billion settlement in principle to resolve its mortgage-backed securities litigation pending in the United States District Court for the Southern District of New York with the Federal Housing Finance Agency (FHFA).

The FHFA is acting on behalf of Freddie Mac and Fannie Mae and is subject to final approvals by the parties.  

"In connection with the settlement, the Company will record an addition to legal reserves of $150 million, which will have the impact of reducing income from continuing operations applicable to Morgan Stanley by $97 million," the filing stated.

Most lenders are settling with the FHFA, which accuses them of misrepresentation when selling mortgages to Fannie and Freddie before the housing crisis.