A mortgage servicing company's claims that would push responsibility for faulty mortgage loans onto Wall Street titan Morgan Stanley were dismissed by a Delaware court, according to a court filing.

The dismissal concerns Central Mortgage Co's assertion that Morgan Stanley Mortgage Capital Holdings repurchase loans it allegedly failed to screen properly before selling them to Fannie Mae and Freddie Mac.

After Fannie Mae and Freddie Mac demanded that CMC, the Little Rock, Arkansas-based servicer, repurchase mortgages, Morgan Stanley repurchased or repaid CMC for about half of the loans, the filing showed. Morgan Stanley refused further repurchases, and CMC sued for breach of contract.

The dispute is a vignette in the larger fight Fannie Mae and Freddie Mac are waging against mortgage lenders, servicing companies and insurers over loans that failed to meet strict underwriting requirements. As the two government-chartered companies have stepped up their efforts, banks and insurers have boosted defenses and increased reserves.

But the lawsuit also shows risks faced by the hundreds of servicing companies used by Fannie Mae and Freddie Mac. Between March 2006 and August 2007, CMC purchased servicing rights on six pools of loans, mostly between $232 million and $636 million, the filing showed.

The court, in its ruling last week, found that CMC failed to provide required notice to Morgan Stanley of breach of contract, among other things, the filing showed. But CMC appears to have otherwise viable breach of contract claims, so the servicer could replead the case if the proper protocols are followed, the ruling stated.

Steven Fineman, an attorney with Richards, Layton & Finger who is representing Morgan Stanley, did not return a call seeking comment. R. Judson Scaggs, a CMC attorney with the firm Morris, Nichols, Arsht & Tunnell, declined to comment.

(Editing by Dan Grebler)

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