Morgan Stanley
Morgan Stanley earlier reached tentative agreement with US Justice Department over mortgage bond case.Reuters

US banking major Morgan Stanley is in discussions with the New York attorney general to settle the state's probe against the bank over its sale of mortgage bonds during the 2008 financial crisis.

The bank is trying to reach a $500m (£334m, €463m) settlement with New York's top litigator, Eric Schneiderman, the Wall Street Journal reported, citing people familiar with the matter.

The settlement is expected to include some cash from Morgan Stanley as well as a chunk of consumer relief. More than half of the settlement amount will go as aid to struggling homeowners, according to the sources.

However, an agreement between the parties is not imminent, and the terms under discussion have fluctuated, the newspaper said.

The report also said it is not clear if the bank will need to boost its legal reserves to account for a likely settlement. In February, the bank noted it had set aside $2.8bn in added legal costs.

New York-based Morgan Stanley, which is slated to report its first quarter results on 20 April, is expected to update its legal situation in the release.

Schneiderman's office had earlier alleged that Morgan Stanley misrepresented and omitted key details on the health of the loans that were securitised and sold to investors.

A possible settlement would clear up another headache for the bank, which is already facing legal costs amounting to several billions of dollars over various cases.

The bank has already paid $4.5bn in costs related to the financial crisis and mortgages.

Earlier in 2015, Morgan Stanley reached a preliminary deal with the federal government, agreeing to pay $2.6bn to the Justice Department, over the same mortgage bond case. A final deal between the parties is still weeks, if not months, away, the sources added.

The bank is also facing lawsuits or potential actions from state officials in California, Virginia and Illinois.