“Goldman Sachs Group Inc. and Morgan Stanley agreed to pay a combined $560 million to settle allegations of foreclosures abuses, the latest setback in the two banks’ costly foray into subprime mortgages.

“The agreement with the Federal Reserve, announced Wednesday, underlines the problems faced by the two firms since their decision to assemble mortgage businesses just before the collapse of the U.S. housing market in 2007-2008.

“At the time, Goldman and Morgan Stanley purchased mortgage-servicing companies in an effort to create cradle-to-grave mortgage business that would collect debt from home-owners and learn valuable information on the state of the subprime mortgage markets that would then help their investment banking units to craft securities to be sold to investors.

“The agreement adds to an $8.5 billion settlement of regulators’ allegations that major banks didn’t follow proper foreclosure processes.”

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