US federal and state authorities have announced a $US3.2 billion settlement with Morgan Stanley over bank practices that contributed to the 2008 financial crisis, including misrepresentations about the value of mortgage-backed securities.

The nationwide settlement, negotiated by the working group appointed by President Barack Obama in 2012 and announced on Thursday, says the bank acknowledges that it increased the acceptable risk levels for mortgage loans pooled and sold to investors without telling them.

Loans with material defects were included, packaged into the securities and sold.

Morgan Stanley said it had previously reserved funds for all related amounts.

"We are pleased to have finalised these settlements involving legacy residential mortgage-backed securities matters," spokesman Mark Lake said on Thursday.

For New York state, the settlement includes $US400 million of mortgage reductions and other consumer and community relief, as well as $US150 million in cash.

"Today's settlement will bring money to the families and communities that need resources the most, while helping New Yorkers avoid foreclosure and spurring the construction of more affordable housing statewide," said State Attorney General Eric Schneiderman, who co-chairs the working group.

The $US400 million will go toward the creation and preservation of affordable rental housing, land banks, code enforcement, communities purchasing distressed properties, and principal reductions for homeowners, according to the attorney general's office.

The New York-based investment bank reported a fourth-quarter profit of $US908 million.

It recorded $US3.1 billion in legal expenses in 2014 for settlements with state and federal regulators over its role in the housing bubble and subsequent financial crisis.