IN THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS COUNTY DEPARTMENT, CHANCERY DIVISION
FEDERAL HOME LOAN BANK OF ) CHICAGO, ) Plaintiff, ) No. 10 CH 45033 ) v. ) CORRECTED AMENDED COMPLAINT ) FOR RESCISSION AND DAMAGES BANC OF AMERICA FUNDING ) CORPORATION; BANC OF AMERICA ) SECURITIES LLC; BANK OF AMERICA, ) JURY TRIAL DEMANDED NATIONAL ASSOCIATION; BANK OF ) AMERICA CORPORATION; ) SECURITIZED ASSET BACKED ) RECEIVABLES, LLC; BARCLAYS ) CAPITAL INC.; CITIGROUP MORTGAGE ) LOAN TRUST INC.; CITIGROUP ) GLOBAL MARKETS INC.; CITIGROUP ) FINANCIAL PRODUCTS, INC.; ) CITIGROUP INC.; COUNTRYWIDE ) SECURITIES CORPORATION; ) COUNTRYWIDE FINANCIAL ) CORPORATION; CREDIT SUISSE ) SECURITIES (USA) LLC F/K/A CREDIT ) SUISSE FIRST BOSTON LLC; FIRST ) HORIZON ASSET SECURITIES, INC.; ) FIRST TENNESSEE BANK, NATIONAL ) ASSOCIATION; RESIDENTIAL ASSET ) MORTGAGE PRODUCTS, INC.; ) RESIDENTIAL ASSET SECURITIES ) CORPORATION; RESIDENTIAL ) FUNDING MORTGAGE SECURITIES I, ) INC.; RESIDENTIAL FUNDING ) SECURITIES LLC F/K/A RESIDENTIAL ) FUNDING SECURITIES CORPORATION; ) RESIDENTIAL FUNDING ) CORPORATION; GMAC MORTGAGE ) GROUP LLC F/K/A GMAC MORTGAGE ) GROUP INC.; ALLY FINANCIAL INC. ) F/K/A GMAC INC.; GS MORTGAGE ) SECURITIES CORP.; GOLDMAN, SACHS ) & CO.; GOLDMAN SACHS MORTGAGE ) COMPANY; THE GOLDMAN SACHS ) GROUP INC.; FINANCIAL ASSET ) SECURITIES CORP.; RBS ACCEPTANCE ) INC. F/K/A GREENWICH CAPITAL ) ACCEPTANCE, INC.; RBS SECURITIES ) INC. F/K/A GREENWICH CAPITAL ) MARKETS, INC.; RBS HOLDINGS USA ) INC. F/K/A GREENWICH CAPITAL ) HOLDINGS, INC.; SAND CANYON ) ACCEPTANCE CORPORATION F/K/A ) OPTION ONE MORTGAGE ) ACCEPTANCE CORPORATION; ) AMERICAN ENTERPRISE INVESTMENT ) SERVICES, INC.; AMERIPRISE ) FINANCIAL SERVICES, INC.; ) AMERIPRISE ADVISOR SERVICES, INC. ) F/K/A H&R BLOCK FINANCIAL ) ADVISORS, INC.; SAND CANYON ) CORPORATION F/K/A OPTION ONE ) MORTGAGE CORPORATION; H&R ) BLOCK, INC.; HSBC SECURITIES (USA) ) INC.; INDYMAC MBS, INC.; J.P. ) MORGAN SECURITIES INC.; MERRILL ) LYNCH MORTGAGE INVESTORS, INC.; ) MERRILL LYNCH, PIERCE, FENNER & ) SMITH INCORPORATED; MORGAN ) STANLEY ABS CAPITAL I INC.; ) MORGAN STANLEY & CO. ) INCORPORATED; MORGAN STANLEY; ) PNC INVESTMENTS LLC; THE PNC ) FINANCIAL SERVICES GROUP, INC.; ) NOMURA HOME EQUITY LOAN, INC.; ) NOMURA SECURITIES ) INTERNATIONAL, INC.; NOMURA ) HOLDING AMERICA INC.; SEQUOIA ) RESIDENTIAL FUNDING, INC.; RWT ) HOLDINGS, INC.; REDWOOD TRUST, ) INC.; MORTGAGE ASSET ) SECURITIZATION TRANSACTIONS, ) INC.; UBS SECURITIES LLC; UBS ) AMERICAS INC.; WELLS FARGO ASSET ) SECURITIES CORPORATION; WELLS ) FARGO BANK, NATIONAL ) ASSOCIATION; WELLS FARGO & ) COMPANY; and JOHN DOE ) DEFENDANTS 1-50, ) ) Defendants. ) TABLE OF CONTENTS
I. NATURE OF THE ACTION ...... 1
II. JURISDICTION AND VENUE...... 9
III. THE PARTIES...... 10
A. Plaintiff ...... 10
B. Defendants ...... 12
C. Successor Liability Allegations Against Certain Defendants...... 32
1. Successor Defendant Bank of America Corporation...... 32
2. Successor Defendants American Enterprise Investment Services, Inc. and Ameriprise Financial Services, Inc...... 37
3. Successor Defendant The PNC Financial Services Group, Inc...... 38
D. Summary Charts of Defendants and Certificates...... 40
E. The John Doe Defendants...... 47
IV. FACTUAL BACKGROUND...... 48
A. Mechanics of Mortgage Backed Securities...... 48
1. The Securitization Process...... 48
2. The Rating Process for PLMBS...... 51
B. The Mortgage Originators Abandoned Underwriting and Appraisal Standards and Engaged in Predatory Lending...... 52
1. The Shift from “Originate to Hold” to “Originate to Distribute” Securitization Incentivized Mortgage Originators to Disregard Loan Quality...... 52
2. Mortgage Originators Abandoned Underwriting Guidelines in Order to Initiate High Cost Loans for Securitization...... 59
3. Mortgage Originators Manipulated Appraisals of Collateralized Real Estate in Order to Initiate High Cost Loans for Securitization...... 61
i 4. Mortgage Originators Engaged in Predatory Lending in Order to Initiate High Cost Loans for Securitization...... 67
5. Widespread Delinquencies Reflected the Inevitable Consequence of Loans Issued Without Regard to Meaningful Underwriting...... 72
C. Federal and State Investigations, Press Reports, Publicly Available Documents Produced in Other Civil Lawsuits, and Analysis of the Loan Pools Underlying the Certificates Identify Systematic Violation of Underwriting Guidelines, Appraisal Guidelines, and Predatory Lending by Mortgage Originators Whose Loans Back the PLMBS in this Case...... 74
1. Countrywide Home Loans, Inc. and Countrywide Home Loans Servicing LP...... 75
a. Government actions against Countrywide and documents produced therein demonstrate Countrywide’s failure to adhere to sound underwriting practices...... 76
b. Private actions against Countrywide demonstrate Countrywide’s failure to adhere to sound underwriting practices...... 87
c. Confidential witnesses provide further evidence of Countrywide’s failure to adhere to sound underwriting practices...... 94
d. The mortgages originated by Countrywide and securitized in the PLMBS purchased by the Bank provide further evidence of Countrywide’s failure to adhere to sound underwriting practices...... 99
e. Press reports, government investigations and related litigation, and confidential witnesses demonstrate that Countrywide engaged in predatory lending...... 100
f. Confidential witnesses provide further evidence of Countrywide’s predatory lending practices...... 102
2. New Century Mortgage Corp...... 103
a. Government actions and related lawsuits and investigations demonstrate New Century’s failure to adhere to sound underwriting practices...... 104
ii b. Confidential witnesses provide further evidence of New Century’s failure to adhere to sound underwriting practices...... 106
c. The mortgages originated by New Century and securitized in the PLMBS purchased by the Bank provide further evidence of New Century’s failure to adhere to sound underwriting practices...... 110
d. Confidential witnesses also provide evidence of predatory lending...... 111
3. IndyMac Bank, FSB...... 111
a. Government actions and related lawsuits and investigations demonstrate IndyMac’s failure to adhere to sound underwriting practices, applicable appraisal standards, and predatory lending...... 112
b. Private actions against IndyMac demonstrate IndyMac’s failure to adhere to sound underwriting practices...... 116
c. Confidential witnesses provide further evidence of IndyMac’s failure to adhere to sound underwriting practices...... 119
d. The mortgages originated by IndyMac and securitized in the PLMBS purchased by the Bank provide further evidence of IndyMac’s failure to adhere to sound underwriting practices...... 122
4. Fremont Investment & Loan...... 123
a. Government actions and related lawsuits and investigations demonstrate Fremont’s failure to adhere to sound underwriting practices and its predatory lending...... 123
b. The mortgages originated by Fremont and securitized in the PLMBS purchased by the Bank provide further evidence of Fremont’s failure to adhere to sound underwriting practices...... 127
5. GMAC and Residential Funding Corp...... 128
6. Wells Fargo...... 132
iii a. Other investigations and lawsuits and confidential witness testimony demonstrate that Wells Fargo abandoned underwriting guidelines and applicable appraisal standards...... 132
b. The mortgages originated by Wells Fargo and securitized in the PLMBS purchased by the Bank provide further evidence of Wells Fargo’s failure to adhere to sound underwriting practices...... 138
c. Other investigations and lawsuits and confidential witness testimony demonstrate that Wells Fargo engaged in predatory lending...... 139
7. Decision One Mortgage Company, LLC...... 142
8. Ameriquest and Argent...... 145
9. Downey Savings & Loan...... 150
10. Option One Mortgage...... 151
11. First Franklin...... 155
12. WMC Mortgage Corp...... 164
13. OwnIt Mortgage Solutions, Inc...... 168
14. First Horizon Home Loan Corporation...... 169
15. Bank of America, N.A...... 171
16. HomeComings Financial Network, Inc...... 174
17. Other Mortgage Originators Also Abandoned Sound Underwriting Practices and Engaged in Predatory Lending in Order to Issue Loans for Securitization...... 177
D. The Securitization Process Was Plagued by Conflicts of Interest and Misplaced Incentives...... 177
1. The Vertical Integration of Many of the Firms Involved in the Issuance of the PLMBS Purchased by the Bank Provided the Defendants with Access to Information Regarding the Abandonment of Underwriting Guidelines, the Manipulation of the Appraisal Process, and Predatory Lending Practices...... 178
iv 2. Financial Ties Between the Investment Banks and Non- Bank Lenders Provided the Defendants with Access to Information Regarding the Mortgage Originators’ Failure to Adhere to Underwriting Guidelines and Engagement in Predatory Lending Practices...... 182
3. Conflicts of Interest Undermined Adequate Due Diligence and Disclosure to Investors...... 185
4. Defendants Undermined and Misused Loan Pool Due Diligence Results Prepared by Third-Party Firms...... 188
a. The Defendants directed the due diligence process and were provided with detailed reports describing the results of the process...... 188
b. The Defendants manipulated and misused due diligence results...... 191
c. The Defendants should have known that the sponsors included defective loans in the pools...... 194
5. Defendants’ Own Due Diligence Identified a High Number of Defective Loans in the Mortgage Pools Backing PLMBS...... 196
E. The Vertical Integration of Many of the Firms Involved in the Issuance of the PLMBS Purchased by the Bank Enabled the Controlling Person Defendants to Control the Management and Policies of the Controlled Entities ...... 200
F. The Securitization Process Was Supported by Credit Ratings that Materially Misstated the Credit Risk of the PLMBS...... 202
1. The Credit Ratings Were Unreliable, Based As They Were on Underwriting Standards That the Rating Agencies Knew Had Been Abandoned...... 203
2. The Credit Ratings Were Compromised by Conflicts of Interest, Manipulation and Misinformation...... 204
3. The Credit Ratings Were Unreliable Due to the Use of Inaccurate, Outdated Models and Inadequate Resources...... 206
4. The Rating Agencies Knew, and the Defendants Should Have Known, That the PLMBS Ratings in This Case
v Fundamentally Differed from the Ratings of Corporate Bonds...... 209
5. Subsequent Downgrades Confirm that the Investment Grade Ratings Reported in the Offering Documents Were Unjustifiably High and Misstated the True Credit Risk of the PLMBS Purchased by the Bank...... 210
6. The Bank Reasonably Relied on the Credit Ratings Reported in the Prospectuses...... 212
G. The Proper Steps Were Not Taken To Ensure That The Mortgages Underlying The Trusts Were Enforceable...... 213
1. The PLMBS Have Value Only If the Mortgage Loans and Mortgages Have Been Validly Assigned and Transferred to the Issuing Trust Such That They Are Enforceable...... 213
2. Failure to Validly Assign and Transfer the Mortgages or Mortgage Loans to the Issuing Trust Has Been Systemic, Thus Materially Affecting the Value of the PLMBS Certificates ...... 215
V. DEFENDANTS’ MATERIAL UNTRUE STATEMENTS AND OMISSIONS IN CONNECTION WITH THE SALE OF PLMBS TO FHLBC...... 218
A. Defendants Misrepresented Underwriting Guidelines Utilized by Mortgage Lenders ...... 219
1. The Materiality of Underwriting Guidelines ...... 219
2. Misstatements Regarding Underwriting Guidelines...... 219
3. Evidence Demonstrating Misstatements in the Offering Documents Regarding the Originators’ Underwriting Practices...... 223
a. Government investigations, actions and settlements, confidential witnesses and evidence developed in other private lawsuits demonstrate systematic and pervasive abandonment of stated underwriting practices by the originators...... 223
b. Analysis of loans that backed the PLMBS purchased by the Bank demonstrates the
vi abandonment of stated underwriting practices by the originators...... 224
B. Defendants Misrepresented the Appraisal Process and Loan-to- Value Ratios (“LTV”) That Were Based Upon Those “Appraisals”...... 228
1. The Materiality of Representations Regarding Appraisals and LTVs ...... 228
2. Misstatements Regarding Appraisals and LTVs...... 232
a. The Offering Documents falsely state that the LTVs were based upon appraisals...... 232
b. Misstatements regarding the standards to which the purported “appraisals” conformed ...... 237
c. Misstatements regarding aggregate LTVs ...... 238
3. Evidence Demonstrating Misstatements about Appraisals and LTV Ratios in the Offering Documents...... 239
a. Government investigations, press reports, and confidential witnesses demonstrate systemic and pervasive appraisal manipulation by the mortgage originators ...... 239
b. Analysis of loans that backed the PMLBS purchased by the Bank demonstrate that appraisals were materially inflated and the LTV ratios were materially understated...... 241
C. Defendants Misrepresented the Occupancy Status Rates...... 250
1. The Materiality of Occupancy Status Rates...... 250
2. Evidence Demonstrating Misstatements about the Occupancy Status Rates...... 251
D. Defendants’ Statements Regarding the AAA Rating of the PLMBS Were False and Misleading...... 253
1. The Materiality of the Credit Rating Process and Ratings ...... 253
2. False Representations That the Certificates the Bank Purchased Would Not Be Issued Unless They Earned AAA Ratings ...... 254
vii 3. Misstatements about the Credit Rating Process and Ratings...... 254
4. Evidence Demonstrating Misstatements about the Ratings and Ratings Process ...... 256
E. Defendants Misrepresented the Mortgage Originators’ Compliance with Predatory Lending Restrictions...... 259
1. The Materiality of Predatory Lending Practices and the Issuance of Loans that Violate Other State and Federal Lending Statutes...... 259
2. Misstatements about Predatory Lending Compliance ...... 260
3. Evidence Demonstrating Misstatements about Predatory Lending Practices of the Mortgage Originators...... 261
a. Government investigations, actions and settlements, confidential witnesses and evidence developed in other private lawsuits demonstrate predatory lending by the mortgage originators...... 261
b. Analysis of loans that backed the PLMBS purchased by the Bank demonstrate that loans in the mortgage pools were the result of predatory lending...... 261
F. Defendants Misrepresented the Due Diligence Performed on the Mortgage Pools that Backed the PLMBS Purchased by the Bank...... 262
1. The Materiality of Due Diligence on the Mortgage Pools...... 262
2. Misstatements about Due Diligence ...... 263
3. Evidence of Misstatements about Due Diligence ...... 265
G. Defendants Misrepresented That Mortgages and Mortgage Loans Were Validly Assigned and Transferred to the Issuing Trusts...... 265
1. The Materiality of Valid Assignment and Transfer...... 265
2. Misstatements Regarding Procedures for Valid Assignment and Transfer ...... 265
3. A Material Number of Mortgages and Mortgage Notes Were Not Validly Transferred or Assigned to the Issuing Trusts in Accordance with the Offering Documents ...... 267
VI. COUNTS...... 268
viii VII. PRAYER FOR RELIEF ...... 304
VIII. JURY DEMAND...... 305
PLMBS CERTIFICATES PURCHASED BY FEDERAL HOME LOAN BANK OF CHICAGO AT ISSUE IN THIS ACTION...... APPX. I
PLMBS CERTIFICATES PURCHASED BY FEDERAL HOME LOAN BANK OF CHICAGO SUBJECT TO COUNT THREE UNDER NORTH CAROLINA’S BLUE SKY LAW...... APPX. IA
CLAYTON TESTIMONY AND SUPPORTING DOCUMENTS REGARDING DUE DILIGENCE REVIEWS A. CLAYTON SERVICES, INC. REPORT ON DUE DILIGENCE REJECTION AND WAIVER TRENDS B. TESTIMONY OF VICKI BEAL, SENIOR VICE PRESIDENT, CLAYTON HOLDINGS, BEFORE THE FINANCIAL CRISIS INQUIRY COMMISSION, SEPTEMBER 23, 2010 C. TESTIMONY OF KEITH JOHNSON, FORMER PRESIDENT, CLAYTON HOLDINGS, BEFORE THE FINANCIAL CRISIS INQUIRY COMMISSION, SEPTEMBER 23, 2010...... APPX. II
DEFENDANTS’ MATERIALLY MISLEADING STATEMENTS AND OMISSIONS REGARDING UNDERWRITING GUIDELINES UTILIZED BY MORTGAGE LENDERS ...... APPX. III
DEFENDANTS’ MATERIAL UNTRUE STATEMENTS AND OMISSIONS REGARDING THE CREDIT RATING PROCESS AND THE AAA RATING OF THE PLMBS ...... APPX. IV
DEFENDANTS’ MATERIAL UNTRUE STATEMENTS AND OMISSIONS REGARDING THE MORTGAGE ORIGINATORS’ COMPLIANCE WITH PREDATORY LENDING RESTRICTIONS ...... APPX. V
DEFENDANTS’ MATERIAL UNTRUE STATEMENTS AND OMISSIONS REGARDING THE DUE DILIGENCE PERFORMED ON THE MORTGAGE POOLS THAT BACKED THE PLMBS PURCHASED BY THE BANK ...... APPX. VI
LOAN-TO-VALUE RATIO DEFINITIONS AS REPRESENTED IN THE OFFERING DOCUMENTS ...... APPX. VII
ix Plaintiff, FEDERAL HOME LOAN BANK OF CHICAGO (hereinafter the “FHLBC” or the “Bank”) alleges the following based upon personal knowledge with regard to its own acts, and upon public information as well as information and belief as to all other matters. The Bank’s information and belief is based on, among other things, the investigation by its counsel. The investigation included but was not limited to: (1) review and analysis of the Offering Documents for the certificates that are the subject of this action; (2) interviews with individuals with first hand knowledge of the events alleged herein; (3) examination of relevant SEC filings, press releases and other public statements; (4) review and analysis of pleadings in other civil actions involving certain Defendants; (5) review and analysis of investigations of and complaints filed by state and federal authorities against certain Defendants; (6) published materials, media reports, congressional testimony, and additional related materials; and (7) analysis of the performance and composition of the loan pools underlying the certificates. Many of the facts related to Plaintiff’s allegations are known only by the Defendants, or are exclusively within their custody or control. Plaintiff believes that substantial additional evidentiary support for the allegations set forth below will be developed after a reasonable opportunity for discovery.
I. NATURE OF THE ACTION
1. This is an action for rescission and damages under: (a) Illinois State Securities
Law, 815 ILCS § 5, et seq.; (b) North Carolina State Securities Law, N.C.G.S.A. § 78A-1, et seq.; (c) New Jersey Uniform Securities Law, N.J.S.A. § 49:3-47 et seq.; and (d) applicable common law.
2. The certificates are “securities” within the meaning of 815 ILCS § 5/2.1,
N.C.G.S.A. § 78A-2(11) and N.J.S.A. § 49:3-49(m). Under these statutes, and as set forth in
1 Counts One through Four below, the Bank is entitled to rescind its purchase of the certificates
and/or to be paid damages for its losses on the certificates.
3. The action arises from the sale of over $3.3 billion in Private Label Mortgage
Backed Securities (“PLMBS”), a type of Residential Mortgage Backed Security (“RMBS”) by
the Defendants to the Bank. The Defendants include the depositors/issuers, underwriters/dealers,
and certain entities controlling these parties, who offered and sold the PLMBS to the Bank.
These Defendants’ roles are described in detail below.
4. Accompanying Defendants’ sales or offers of these PLMBS to the Bank were
registration statements, prospectuses, supplemental prospectuses, and other written offering
materials (collectively, “Offering Documents”) that Defendants wrote, signed, and/or circulated,
and which contained untrue statements of material facts and omitted to state material facts
necessary in order to make the Offering Documents not misleading. Attached as Appendix I is a list of the PLMBS certificates purchased by the Bank that are the subject of this Action due to
the Defendants’ material misstatements in and omissions from the Offering Documents
described herein.
5. PLMBS are mortgage pass-through certificate securities entitling the holder to
income payments from pools of mortgage loans.1 The securities are referred to as “private label”
because they are issued by private entities instead of the Federal National Mortgage Association
(“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), which are
U.S. government-sponsored enterprises (“GSEs”). Mortgage securities issued by Fannie Mae
and Freddie Mac are referred to as “agency” mortgage securities.
1 The terms “PLMBS” and “certificate(s)” are used interchangeably herein. Plaintiff identifies the PLMBS certificates herein using the ticker symbols for each certificate as created by Bloomberg.
2 6. Traditionally, the GSEs provided liquidity for the residential mortgage market by
buying loans that conformed to their underwriting standards and dollar limits. In the early
2000s, PLMBS became an increasingly important adjunct to the GSEs, forming a capital market
for mortgages that could not be sold to the GSEs. Certain PLMBS were secured by “prime/alt-a”
mortgages. These were mortgages that allegedly met the credit score and other underwriting
criteria of the GSEs, but were ineligible for GSE purchase either because the mortgages
exceeded the applicable GSE dollar limit, were supported by reduced documentation, or
contained disqualifying terms, such as certain types of adjustable rates. Other PLMBS were
secured by “subprime” mortgages. These were mortgages that did not meet the GSE criteria for
creditworthiness of the borrower but purportedly satisfied loan underwriting criteria developed by their originators.
7. Fundamentally, the value of a mortgage pass-through certificate depends on the ability of borrowers to repay the principal and interest on the underlying loans and the adequacy of the collateral the borrowers provide in the event of default. In the event that borrowers fall behind or default, the investor is exposed to loss. For this reason, rigorous and effective loan
underwriting by the mortgage originators, performed in accordance with stated underwriting
criteria, is of paramount importance; the absence of it – as demonstrated by this case – renders unreliable any credit rating or other attempt to assess the credit risk of the certificates.
8. PLMBS are segmented into “tranches” with laddered payment priority and varying return potential for certificate holders. Interests in each tranche are issued in the form of certificates identified by a CUSIP code unique to that tranche. Mortgage payments are collected by the servicing agent and provided to a trustee, who then distributes payments to the investors who hold the certificates in accordance with the priority scheme among the various tranches.
3 The most senior tranches enjoy the highest payment priority and lowest risk of default. Thus, if mortgage payments are not made, the losses are allocated first to the most junior tranches and move upward as the junior tranches are wiped out.
9. By policy, and in order to minimize the risk of loss, for the certificates at issue the
Bank purchased only the most senior, triple-A rated PLMBS tranches. These tranches were backed by pools of prime/alt-a as well as subprime mortgage loans. Unfortunately, as detailed herein, the Offering Documents contained material misstatements and omitted to disclose material information with respect to the mortgage pools, the creditworthiness of the borrowers, and quality of the collateral. As a result, despite their original AAA ratings and the abundant representations and warranties regarding the underlying mortgage pools, the Bank has incurred massive losses on these securities.
10. In general, each senior tranche of a PLMBS is primarily secured by an interest in a particular pool of mortgages, although other tranches of that PLMBS may be primarily secured by interests in separate pools of mortgages. Often, however, PLMBS trusts provide for cross- collateralization, in which a mortgage pool that is not the primary security for a particular senior tranche may provide additional security for that senior tranche under certain circumstances. As a result, the holders of certificates in a senior tranche may be adversely affected by defaults in mortgages in pools that, while not the primary collateral for the senior tranche, provide additional security for that tranche. In fact, the failure of mortgages in one segment of a collateral pool often results in a ratings downgrade for many, if not all, of the certificates that were part of the offering.
11. Though the securities themselves are complex, the abuses by the Defendants can be put in simple terms. The Defendants’ Offering Documents did not provide truthful, accurate
4 and complete information about the loans that comprised the mortgage pools securing the
PLMBS. The Bank believed it was buying safe and secure securities with an extremely low risk
of default – equivalent, from an investment quality standpoint, to other AAA rated investments –
but in fact, the Bank purchased a toxic stew of doomed mortgage loans.
12. It is not happenstance that the PLMBS failed to perform, plunged in value, and
were ultimately severely downgraded. To the contrary, the PLMBS purchased by the Bank
collapsed because they are not what the Defendants’ Offering Documents claimed they were.
Contrary to what Offering Documents represented, the PLMBS at issue in this case are simply not pools of loans issued to borrowers based on the application of stated underwriting standards or considerations and the performance of a valid appraisal. The ability of the borrowers to pay
was not genuinely taken into account by the mortgage originators for loans that were to be
securitized. Instead, the primary motivation was the desire to issue and securitize as many loans
as possible in order to receive substantial fees. As a result, exceptions to underwriting standards
became the norm, and, contrary to Defendants’ representations, were not based on the presence
of “compensating circumstances.” Likewise, legitimate efforts to appraise the value of homes
that served as collateral for the loans in the pools through application of governing appraisal
standards were abandoned, and, instead, appraisers provided values that they knew to be inflated.
In sum, Defendants packaged and sold these certificates without regard to whether the
underlying mortgage pools comported with the detailed descriptions contained in the Offering
Documents.
13. The sale of each PLMBS purchased by the Bank was effected through the
Offering Documents which include a registration statement, prospectus, prospectus supplement,
and other documents that were provided to the Bank in connection with the offer and sale of the
5 PLMBS that are the subject of this action. The Offering Documents contained extensive
statements regarding underwriting guidelines purportedly used by the mortgage originators, and
extensive data supporting the credit quality of the mortgage loans. However, the statements and
data and the omissions pertaining to them were materially false and misleading. Had the Bank
been provided with truthful, complete and accurate information, it would not have purchased the
PLMBS, and would not have suffered hundreds of millions of dollars of losses.
14. Defendants’ untrue statements and omissions of material fact went to the heart of
the risk of the mortgage pools underlying the PLMBS. Specifically, Defendants failed to accurately describe key characteristics of the mortgages and the securitization of the mortgages, including, but not limited to:
a. The Mortgage Originators’ Underwriting Guidelines. The Offering Documents contained material misstatements and omitted to disclose material information regarding the underwriting guidelines purportedly utilized by the mortgage originators. The Defendants represented that the mortgage originators applied their stated underwriting guidelines and standards when issuing loans to borrowers. However, as set forth in more detail below, in pursuit of their goal to securitize as many loans as possible, mortgage originators routinely disregarded their own guidelines and granted exceptions without proper justification. Consequently, the statements in and omissions from the Offering Documents regarding the mortgage originators’ underwriting guidelines rendered the Offering Documents materially false and misleading.
b. The Loan-to-Value Ratios of the Mortgage Loans and the Appraisal Standards Used to Determine the Ratios. The Offering Documents contained material misstatements and omitted to disclose material information regarding the loan-to-value (“LTV”) ratios of the loans in the mortgage pools underlying PLMBS, and the appraisal standards that were purportedly applied to determine the home values. The LTV ratios were purportedly based on appraisals but in fact were based on valuations of collateral that were inflated as a result of conflicts of interest and inappropriate influence by the mortgage originators who sought to ensure that the valuations came back at a high enough level to support the loan amount. But the severe flaws in the collateral valuation process were not disclosed in the Offering Documents. Consequently, the statements in and omissions from the Offering Documents regarding the LTV ratios, the use of appraisals, and standards applied in conducting the purported appraisals rendered the Offering Documents materially false and misleading.
6 c. Primary Residency. The Offering Documents contained material misstatements and omitted to disclose material information regarding the primary residency status of the mortgage properties – another key characteristic of the risk of the mortgage loans. The Defendants represented that certain specified percentages of the mortgage loan properties were primary residences of the borrower, instead of “second homes” or “investment properties,” which carry more risk. However, in truth, the data provided by Defendants overstated the percentage of homes that were primary residences. Consequently, the statements in and omissions from the Offering Documents regarding the occupancy rates of the homes in the mortgage pools rendered the Offering Documents materially false and misleading.
d. The Ratings Process. Many of the Offering Documents contained material misstatements and omitted to disclose material information regarding the bases for the bonds’ triple-A ratings and the ratings processes. The Defendants represented that the Credit Rating Agencies conducted analysis that was designed to assess the likelihood of delinquency and defaults in the underlying mortgage pools. However, in truth, the Ratings Agencies knew, and the Defendants should have known, that the ratings were based on unreliable data and faulty assumptions—all which caused the ratings to vastly understate the true risk of the PLMBS and overstate their creditworthiness. Consequently, the statements in and omissions from the Offering Documents regarding the PLMBS ratings rendered the Offering Documents materially false and misleading.
e. Predatory Lending Representations and Warranties. The Offering Documents contained material misstatements and omitted to disclose material information regarding the mortgage originators’ compliance with state and federal predatory lending prohibitions. By policy, the Bank, was not permitted to purchase any mortgage backed securities that were secured by mortgage loans that violated these prohibitions. The Defendants represented that the mortgage pools did not contain any mortgage loans that violated state and federal predatory lending prohibitions. However, in truth, the mortgage originators engaged in predatory lending, and, thus, the mortgage pools contained many loans that violated state and federal predatory lending restrictions. Consequently, the statements in and omissions from the Offering Documents regarding predatory lending rendered the Offering Documents materially false and misleading.
f. Due Diligence. Many of the Offering Documents contained material misstatements and omitted to disclose material information regarding the due diligence on the mortgage loans in the PLMBS mortgage pools. The Offering Documents stated that the underlying mortgage loans were inspected for compliance with the mortgage originators’ underwriting and appraisal guidelines, and documentation requirements. However, the Offering Documents omit to state that the third-party due diligence firms retained to conduct the due diligence were pressured to ignore deviations from the applicable underwriting criteria, and that
7 even with regard to loan defects identified through the due diligence process, the sponsors nonetheless waived the defects as to a substantial percentage of these loans and, in many cases, used this information about defective loans to negotiate lower prices for the loan pools. Consequently, the statements in and omissions from the Offering Documents regarding the due diligence performed on the mortgage loans in the PLMBS mortgage pools rendered the Offering Documents materially false and misleading.
g. Enforceability of Mortgages. Many of the Offering Documents contained material misstatements regarding the measures taken to ensure the enforceability of the mortgages and mortgage loans transferred to the trusts. In order for a mortgage to be enforced, basic steps need to be taken to validly assign the mortgage and mortgage loan to the trust and ensure that the trustee has the proper papers. These basic steps, and the representations made about these steps, were critical to investors (including the Bank), because if a mortgage cannot be enforced, then the mortgage loans, and the certificates dependent on these loans, are ultimately worthless. The Offering Documents fail to disclose that in fact basic steps regarding the transfer of mortgages and mortgage loans were not followed – mortgage loans were not validly assigned, and papers necessary to ensure enforceability of the mortgages were never transferred to the trustee.
15. The untrue, incomplete and materially misleading statements summarized above and discussed in detail below were made with respect to the certificates purchased by the Bank that are the subject of this lawsuit. The Bank reasonably relied on these statements and was misled by the omissions when deciding to purchase the certificates, and the statements and omissions have caused them significant losses.
16. As a result of these untrue statements in and omissions from the Offering
Documents, the Bank purchased certificates that were far riskier than represented by the
Defendants, and that were not in truth “highest investment grade” as stated in the Offering
Documents, but, instead, were low-quality, high-risk certificates. All but three of the certificates at issue in this case have been downgraded to below investment grade, i.e., “junk,” indicating a high probability of default. Furthermore, the Bank has already experienced losses on all certificates in this action, including the three certificates which the Credit Rating Agencies, for whatever reason, have not yet downgraded below investment grade.
8 17. The value of these certificates has declined dramatically. Moreover, as a result of
the current and anticipated future poor performance of the mortgages underlying these certificates, the Bank has had to impair the value of these assets, which has caused the Bank’s earnings performance to decline. The Bank has taken significant write-downs on these certificates in the form of “other than temporary impairment” or OTTI charges, on these bonds.
II. JURISDICTION AND VENUE
18. This Court has jurisdiction over the claims alleged in this action.
19. This is an action for rescission and damages in an amount exceeding $30,000.
20. The Illinois Securities Law of 1953, 815 ILCS §§ 5/12 and 5/13 applies because the Bank’s claims arise from its transaction of business with Defendants within this State. The offer and sale to the Bank of the Certificates that are the subject of this action, including certain
Defendants’ making of materially false and misleading statements and omission of material facts alleged herein, took place in Illinois when the Bank, from its offices in Illinois, accepted
Defendants’ offer to purchase these securities.
21. In addition to the Illinois Securities Law and the applicable common law, the
North Carolina Securities Act, N.C.G.S.A. § 78A-1 et seq., also applies to the ten certificates identified in Appendix IA because the offer of sale for these certificates took place in North
Carolina in that the offers originated from North Carolina. The acceptance of the offer of sale
took place in North Carolina in that the Bank (based in Illinois) communicated its acceptance to
a dealer in North Carolina, reasonably believing the dealer to be in North Carolina, and the
Bank’s acceptance was received in North Carolina.
22. In addition to the Illinois Securities Law and the applicable common law, the New
Jersey Uniform Securities Law, N.J.S.A. § 49:3-47 et seq., also applies to Certificate CBASS
9 2006-CB4 because the offer of sale for this certificate and its acceptance occurred in New Jersey.
The offer of sale took place in New Jersey in that the offer originated from New Jersey. Under the New Jersey Uniform Securities Law, the acceptance of the offer of sale took place in New
Jersey in that the Bank (based in Illinois) communicated its acceptance to a dealer in New Jersey, reasonably believing the dealer to be in New Jersey, and the Bank’s acceptance was received in
New Jersey.
23. The Defendants are subject to personal jurisdiction in this State pursuant to the
Illinois Long-Arm Statute, 735 ILCS § 5/2-209, because the Bank’s claims arise from the transaction of business with Defendants within this State.
24. Venue is proper in this County pursuant to 735 ILCS § 5/2-101 and 815 ILCS §
5/13G(1). The Bank resides and has its principal office in this County, and the transactions that are the subject of this action took place in this County, including certain Defendants’ making of materially false and misleading statements and omission of material facts alleged herein.
25. The Bank asserts no claims against any entity that has filed for bankruptcy protection.
III. THE PARTIES
A. Plaintiff
26. Plaintiff is a bank created by the Federal Home Loan Bank Act. The headquarters of the Bank are in the city of Chicago, County of Cook. Under its Organization Certificate, the
Bank is to operate in Federal Home Loan Bank District 7, which comprises the states of Illinois and Wisconsin. The Bank does conduct business in each of those states. From time to time, the
Bank also conducts business with the other 11 Federal Home Loan Banks. It also operates the
Mortgage Partnership Finance Program®, a national mortgage purchase program.
10 27. The public policy mission of the Federal Home Loan Bank system is to support
residential mortgage lending and related community investment. The individual Federal Home
Loan Banks fulfill this role in housing finance by providing their member financial institutions
with access to reliable, economical funding, technical assistance, and special affordable housing
programs so that they can provide affordable housing and economic development in their
communities.
28. The Bank’s operations are funded solely by its earnings and funds raised by
issuing debt instruments (bonds and notes) in the capital markets through the Office of Finance, a
joint Federal Home Loan Bank Office located in Virginia.
29. The Bank is capitalized solely by the capital-stock investments of its members
and by its retained earnings.
30. The Bank’s members are all private financial institutions, including savings
banks, savings and loan associations, cooperative banks, credit unions, and insurance companies.
31. The Bank is not a federal agency, and the Bank is not a citizen of any state. The
Bank is federally chartered, but privately capitalized and independently managed. The federal
government is not involved in the day-to-day management of the Bank’s operations.
Management of the Bank is vested by law in the Bank’s board of directors, all of whom are
either elected by the Bank’s shareholder members or appointed by the board of directors. No tax
dollars are involved in the operation of the Bank, and the federal government does not own any of the Bank's stock.
32. Members of the Bank’s board of directors reside in both Wisconsin and Illinois.
33. Employees of the Bank routinely travel to the offices of the Bank's members. In
2009, employees of the Bank made more than 110 business trips to members outside of Illinois.
11 B. Defendants
34. The Banc of America Entities
A. Depositor Defendant Banc of America Funding Corporation is a Delaware corporation that was and is registered to do business in North Carolina. On information and belief, Banc of America Funding Corporation was formed and exists solely for the purpose of receiving and depositing loans into trusts for PLMBS securitization. Banc of America Funding
Corporation was the depositor for Certificates BAFC 2006-C 2A1, BAFC 2006-E 2A2, BAFC
2006-E 3A1, BAFC 2006-F 2A1, and BAFC 2006-F 3A1.
B. Underwriter Defendant Banc of America Securities LLC was a Delaware limited liability company that maintained a securities broker-dealer FINRA registration in Illinois during the relevant period and that was registered to do business in Illinois. Banc of America Securities
LLC also maintained a securities broker-dealer FINRA registration in North Carolina during the relevant period and was registered to do business in North Carolina. Banc of America Securities
LLC underwrote the following Certificates that the Bank purchased: ARSI 2005-W5 A2C,
BAFC 2006-C 2A1, BAFC 2006-E 2A2, BAFC 2006-E 3A1, BAFC 2006-F 2A1, BAFC 2006-F
3A1, FHASI 2006-AR1 2A1, OOMLT 2005-5 A3, OOMLT 2006-2 2A3, RASC 2005-KS12 A2,
SEMT 2006-1 2A1, and SEMT 2006-1 3A1, and sold Certificates BAFC 2006-C 2A1, BAFC
2006-E 2A2, BAFC 2006-E 3A1, BAFC 2006-F 2A1, BAFC 2006-F 3A1, OOMLT 2005-5 A3,
OOMLT 2006-2 2A3, RASC 2005-KS12 A2, SEMT 2006-1 2A1, and SEMT 2006-1 3A1 directly to the Bank. Effective November 1, 2010, Banc of America Securities LLC merged with and into Successor Defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation. All references herein to Banc of America Securities LLC are also to Merrill Lynch,
Pierce, Fenner & Smith Incorporated, which is liable as a matter of law as successor to Banc of
12 America Securities LLC by virtue of its status as the surviving entity in its merger with Banc of
America Securities LLC.
C. Sponsor Defendant Bank of America, National Association is a nationally
chartered bank, regulated by the Office of the Comptroller of the Currency, Department of the
Treasury that operates branches throughout Illinois and North Carolina. Bank of America,
National Association was the sponsor of Certificates BAFC 2006-C 2A1, BAFC 2006-E 2A2,
BAFC 2006-E 3A1, BAFC 2006-F 2A1, and BAFC 2006-F 3A1, and also originated loans for
the offerings in which the Bank purchased Certificates BAFC 2006-C 2A1, BAFC 2006-E 2A2, and BAFC 2006-E 3A1.
D. Controlling Person Defendant Bank of America Corporation is a Delaware corporation that was and is registered to do business in Illinois. Additionally, Bank of America
Corporation was and is registered to do business in North Carolina. Bank of America
Corporation is the parent company, with 100% direct or indirect ownership, and a controlling
entity of Banc of America Funding Corporation. Bank of America Corporation is also the parent
company, with at least 75% indirect ownership, and a controlling entity, under at least North
Carolina law, of Banc of America Securities LLC. Bank of America Corporation is also the
parent company, with at least 100% indirect ownership, and a controlling entity under at least
North Carolina law, of Bank of America, National Association.
E. Defendant Bank of America Corporation is also named as a Successor Defendant
to Underwriter Defendant Countrywide Securities Corporation and Controlling Person
Defendant Countrywide Financial Corporation. See infra § III.C. As set forth below, on or
about July 1, 2008, Successor Defendant Bank of America Corporation acquired Countrywide
13 Financial Corporation and all of its subsidiaries, including Underwriter Defendant Countrywide
Securities Corporation.
F. Defendant Bank of America Corporation is also named as a Successor Defendant to Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Mortgage Investors,
Inc. See infra § III.C. As set forth below, on or about January 1, 2009, Successor Defendant
Bank of America Corporation acquired Merrill Lynch & Co., Inc and all of its subsidiaries, including, including Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch
Mortgage Investors, Inc.
35. The Barclays Entities
A. Depositor Defendant Securitized Asset Backed Receivables, LLC is a Delaware
Limited Liability Company. On information and belief, Securitized Asset Backed Receivables,
LLC was formed and exists solely for the purpose of receiving and depositing loans into trusts for PLMBS securitization. Securitized Asset Backed Receivables, LLC was the depositor for
Certificates SABR 2006-FR3 A2 and SABR 2006-NC3 A2B.
B. Underwriter Defendant Barclays Capital Inc. is a Connecticut corporation which, at all relevant times, has maintained a securities broker-dealer FINRA registration in Illinois and was and is registered to do business in Illinois. Barclays Capital Inc. underwrote the following
Certificates: AMSI 2005-R10 A2B, ARSI 2005-W5 A2C, FHLT 2005-E 2A3, SABR 2006-FR3
A2, SABR 2006-NC3 A2B, and WFHET 2006-3 A2, and sold Certificates ARSI 2005-W5 A2C,
SABR 2006-FR3 A2, SABR 2006-NC3 A2B, and WFHET 2006-3 A2 directly to the Bank.
36. The Citigroup Entities
A. Depositor Defendant Citigroup Mortgage Loan Trust Inc. is a Delaware corporation. On information and belief, Citigroup Mortgage Loan Trust Inc. was formed and
14 exists solely for the purpose of receiving and depositing loans into trusts for PLMBS securitization. Citigroup Mortgage Loan Trust Inc. was the depositor for Certificates CMLTI
2006-NC1 A2C, CMLTI 2006-WFH2 A2B, CMLTI 2006-WFH4 A3, and CMLTI 2006-NC2
A2B.
B. Underwriter Defendant Citigroup Global Markets Inc. is a New York corporation which, at all relevant times, has maintained a securities broker-dealer FINRA registration in
Illinois and was and is registered to do business in Illinois. Citigroup Global Markets Inc. has also, at all relevant times, maintained a securities broker-dealer FINRA registration in North
Carolina and was and is registered to do business in North Carolina. Citigroup Global Markets
Inc. underwrote the following Certificates: CMLTI 2006-NC1 A2C, CMLTI 2006-WFH2 A2B,
CMLTI 2006-WFH4 A3, CMLTI 2006-NC2 A2B, NHELI 2006-WF1 A3, and OOMLT 2005-5
A3, and sold Certificates CMLTI 2006-NC1 A2C, CMLTI 2006-WFH2 A2B, CMLTI 2006-
WFH4 A3, CMLTI 2006-NC2 A2B, and FHASI 2006-AR1 2A1 directly to the Bank.
C. Controlling Person Defendant Citigroup Financial Products, Inc. is a Delaware corporation. Citigroup Financial Products, Inc. is the parent company, with 100% direct ownership, and a controlling entity of Citigroup Mortgage Loan Trust Inc. Citigroup Financial
Products, Inc. is also the parent company and a controlling entity, under at least North Carolina law, of Citigroup Global Markets Inc. Citigroup Financial Products, Inc., is also the parent company of Citigroup Global Markets Realty Corp. (sponsor of Certificates CMLTI 2006-NC1
A2C, CMLTI 2006-WFH2 A2B, CMLTI 2006-WFH4 A3, and CMLTI 2006-NC2 A2B).
D. Controlling Person Defendant Citigroup Inc. is a Delaware corporation that was and is registered to do business in Illinois. Citigroup Inc. is the parent company, with 100% direct or indirect ownership, and a controlling entity of Citigroup Mortgage Loan Trust Inc., as
15 well as Citigroup Financial Products, Inc. Citigroup Inc. is also the parent company and a
controlling entity, under at least North Carolina law, of Citigroup Global Markets Inc. Citigroup
Inc. is also the parent company of Citigroup Global Markets Realty Corp. (sponsor of
Certificates CMLTI 2006-NC1 A2C, CMLTI 2006-WFH2 A2B, CMLTI 2006-WFH4 A3, and
CMLTI 2006-NC2 A2B).
37. The Countrywide Entities
A. Underwriter Defendant Countrywide Securities Corporation is a California
corporation that was registered to do business in Illinois at the time of the transactions at issue.
Countrywide Securities Corporation underwrote the Certificates: HVMLT 2006-2 2A1A,
HVMLT 2006-2 3A1A, MSAC 2006-HE6 A2C, SEMT 2006-1 2A1, and SEMT 2006-1 3A1.
B. Controlling Person Defendant Countrywide Financial Corporation is a Delaware
corporation and is the parent company, with 75% or more indirect ownership, and controlling
entity under at least North Carolina law, of Countrywide Securities Corporation. At the time the
Bank acquired the relevant Certificates, Countrywide Financial Corporation was a holding
company which, through its subsidiaries, was engaged in mortgage lending and other real estate finance-related businesses, including mortgage banking, banking and mortgage warehouse
lending, dealing in securities and insurance underwriting.
C. Defendant Bank of America Corporation is named as a Successor Defendant to
Countrywide Securities Corporation and Countrywide Financial Corporation. See infra § III.C.
As set forth below, on or about July 1, 2008, Successor Defendant Bank of America Corporation acquired Countrywide Financial Corporation and all of its subsidiaries, including Underwriter
Defendant Countrywide Securities Corporation.
16 38. Underwriter Defendant Credit Suisse First Boston LLC is a Delaware limited
liability company which, at all relevant times, has maintained a securities broker-dealer FINRA registration in Illinois and was and is registered to do business in Illinois. Credit Suisse First
Boston LLC underwrote the following two Certificates: FHLT 2005-E 2A3 and INABS 2005-D
AII3, and sold Certificate FHLT 2005-E 2A3 directly to the Bank. On January 23, 2006, Credit
Suisse First Boston LLC changed its name to Credit Suisse Securities (USA) LLC, effective
January 16, 2006. All references herein to Underwriter Credit Suisse First Boston LLC are also
to Credit Suisse Securities (USA) LLC.
39. The First Horizon Entities
A. Depositor Defendant First Horizon Asset Securities, Inc. is a Delaware
corporation. On information and belief, First Horizon Asset Securities, Inc. was formed and
exists solely for the purpose of receiving and depositing loans into trusts for PLMBS
securitization. First Horizon Asset Securities, Inc. was the depositor for Certificate FHASI
2006-AR1 2A1.
B. Controlling Person First Horizon Home Loan Corporation, a Kansas corporation,
was the parent company, with 100% direct ownership, and a controlling entity of First Horizon
Asset Securities, Inc., as well as sponsor of, and an originator of loans for, the offering in which
the Bank purchased Certificate FHASI 2006-AR1 2A1. During 2001, First Horizon Home Loan
Corporation merged with and into its parent corporation First Tennessee Bank National
Association, a nationally chartered bank, and continues, through its divisions, to do business as
divisions of First Tennessee Bank National Association. First Tennessee Bank National
Association is therefore named herein as a Controlling Person Defendant, controlling both First
Horizon Asset Securities, Inc. and First Horizon Home Loan Corporation.
17 C. First Tennessee Bank National Association, d/b/a FTN Financial Capital Markets
(hereafter “First Tennessee Bank National Association”) also underwrote Certificate FHASI
2006-AR1 2A1 and is therefore named as an Underwriter Defendant herein.
40. The GMAC Entities
A. Depositor Defendant Residential Asset Mortgage Products, Inc. is a Delaware
corporation. On information and belief, Residential Asset Mortgage Products, Inc. was formed
and exists solely for the purpose of receiving and depositing loans into trusts for PLMBS
securitization. Residential Asset Mortgage Products, Inc. was the depositor for Certificates
GMACM 2006-AR2 2A1 and GMACM 2006-AR2 4A1.
B. Depositor Defendant Residential Asset Securities Corporation is a Delaware
corporation. On information and belief, Residential Asset Securities Corporation was formed
and exists solely for the purpose of receiving and depositing loans into trusts for PLMBS
securitization. Residential Asset Securities Corporation was the depositor for Certificate RASC
2005-KS12 A2.
C. Depositor Defendant Residential Funding Mortgage Securities I, Inc. is a
Delaware corporation. On information and belief, Residential Funding Mortgage Securities I,
Inc. was formed and exists solely for the purpose of receiving and depositing loans into trusts for
PLMBS securitization. Residential Funding Mortgage Securities I, Inc. was the depositor for
Certificate RFMSI 2006-SA2 2A1.
D. Underwriter Defendant Residential Funding Securities Corporation, now known
as Residential Funding Securities, LLC and also known at times relevant hereto as GMAC RFC
Securities (hereafter together referred to as “Residential Funding Securities Corporation”) is a
Delaware corporation or limited liability company, respectively. Residential Funding Securities
18 Corporation underwrote Certificates GMACM 2006-AR2 2A1, GMACM 2006-AR2 4A1, and
RASC 2005-KS12 A2, and sold Certificates GMACM 2006-AR2 2A1 and GMACM 2006-AR2
4A1 directly to the Bank.
E. Sponsor and Controlling Person Defendant Residential Funding Corporation, now known as Residential Funding Company, LLC (hereafter, together referred to as “Residential
Funding Corporation”) is a Delaware corporation that was and is registered to do business in both Illinois and North Carolina. Residential Funding Corporation was the sponsor of
Certificates RFMSI 2006-SA2 2A1 and RASC 2005-KS12 A2 and originated loans for the offering in which the Bank acquired Certificate RASC 2005-KS12 A2. Residential Funding
Corporation is also the parent company, with at least 100% indirect ownership, and a controlling entity under at least North Carolina law, of Residential Funding Securities Corporation.
F. Controlling Person Defendant GMAC Mortgage Group, Inc., now known as
GMAC Mortgage Group LLC (hereafter, together referred to as “GMAC Mortgage Group,
Inc.”), is a Delaware corporation or limited liability company, respectively, that was and is registered to do business in Illinois. Additionally, GMAC Mortgage Group, Inc. was and is registered to do business in North Carolina. GMAC Mortgage Group, Inc. was the parent corporation, with 100% direct or indirect ownership, and controlling entity of Residential Asset
Mortgage Products, Inc., Residential Asset Securities Corporation, and Residential Funding
Mortgage Securities I, Inc. GMAC Mortgage Group, Inc. was also the parent corporation of, and a controlling entity under at least North Carolina law of, Residential Funding Corporation and
Residential Funding Securities Corporation. GMAC Mortgage Group, Inc. was also the parent corporation of GMAC Mortgage Corporation (an originator of loans for the offering in which the
Bank purchased Certificates GMACM 2006-AR2 2A1, GMACM 2006-AR2 4A1, and RFMSI
19 2006-SA2 2A1 and sponsor of Certificates GMACM 2006-AR2 2A1 and GMACM 2006-AR2
4A1), and HomeComings Financial Network, Inc. (originator of loans for the offering in which the Bank purchased Certificate RFMSI 2006-SA2 2A1).
G. Controlling Person Defendant GMAC Inc., also known at times relevant hereto as
GMAC LLC (hereafter, together referred to as “GMAC Inc.”), is a Delaware corporation or limited liability company, respectively, that was and is registered to do business in Illinois.
Additionally, GMAC Inc. was and is registered to do business in North Carolina. In addition to automobile financing, GMAC Inc. offers mortgage services, including originating, purchasing, selling, and securitizing residential mortgage loans; servicing residential mortgage loans; and providing collateralized lines of credit to other mortgage originators. GMAC Inc. is the parent corporation and controlling entity of Residential Asset Mortgage Products, Inc., Residential
Asset Securities Corporation, Residential Funding Mortgage Securities I, Inc., and GMAC
Mortgage Group, Inc. GMAC Inc. is also the parent corporation and a controlling entity, under at least North Carolina law, of Residential Funding Corporation and Residential Funding
Securities Corporation. GMAC Inc. is also the parent corporation of GMAC Mortgage
Corporation (an originator of loans for the offering in which the Bank purchased Certificates
GMACM 2006-AR2 2A1, GMACM 2006-AR2 4A1, and RFMSI 2006-SA2 2A1 and sponsor of
Certificate GMACM 2006-AR2 2A1 and GMACM 2006-AR2 4A1), and HomeComings
Financial Network, Inc. (originator of loans for the offering in which the Bank purchased
Certificate RFMSI 2006-SA2 2A1).
H. On May 10, 2010, GMAC Inc. changed its corporate name to Ally Financial Inc.
All references herein to GMAC Inc. are also to Ally Financial Inc.
20 41. The Goldman, Sachs Entities
A. Depositor Defendant GS Mortgage Securities Corp. is a Delaware corporation.
On information and belief, GS Mortgage Securities Corp. was formed and exists solely for the purpose of receiving and depositing loans into trusts for PLMBS securitization. GS Mortgage
Securities Corp. was the depositor for Certificates FFML 2006-FF13 A2C and GSAMP 2006-
NC2 A2C.
B. Underwriter Defendant Goldman, Sachs & Co. is a New York corporation which, at all relevant times, has maintained a securities broker-dealer FINRA registration in Illinois and was and is registered to do business in Illinois. Goldman, Sachs & Co., underwrote the following three Certificates: FFML 2006-FF13 A2C, GSAMP 2006-NC2 A2C, and RFMSI
2006-SA2 2A1, and sold Certificates FFML 2006-FF13 A2C, GSAMP 2006-NC2 A2C, and
RFMSI 2006-SA2 2A1 directly to the Bank.
C. Controlling Person Defendant Goldman Sachs Mortgage Company, a New York limited partnership, was the parent company, with 100% direct ownership, and a controlling entity of GS Mortgage Securities Corp. at the time the Bank purchased the Certificates, as well as the sponsor of Certificates FFML 2006-FF13 A2C and GSAMP 2006-NC2 A2C.
D. Controlling Person Defendant The Goldman Sachs Group Inc. is a Delaware corporation that was and is registered to do business in Illinois. The Goldman Sachs Group Inc. is the parent company, with at least 99% direct or indirect ownership, and a controlling entity of
Goldman Sachs Mortgage Company and GS Mortgage Securities Corp. The Goldman Sachs
Group Inc. is also the parent corporation of Goldman, Sachs & Co.
21 42. The Greenwich Entities
A. Depositor Defendant Financial Asset Securities Corp., is a Delaware corporation.
On information and belief, Financial Asset Securities Corp. was formed and exists solely for the purpose of receiving and depositing loans into trusts for PLMBS securitization. Financial Asset
Securities Corp. was the depositor for Certificate FFML 2006-FF8 IIA3.
B. Depositor Defendant Greenwich Capital Acceptance, Inc. is a Delaware corporation. On information and belief, Greenwich Capital Acceptance, Inc. was formed and exists solely for the purpose of receiving and depositing loans into trusts for PLMBS securitization. Greenwich Capital Acceptance, Inc. was the depositor for Certificates HVMLT
2006-2 2A1A and HVMLT 2006-2 3A1A. Pursuant to its Restated Certificate of Incorporation, dated July 8, 2009, Greenwich Capital Acceptance, Inc. legally changed its name to RBS
Acceptance Inc. All references herein to Greenwich Capital Acceptance, Inc. are also to RBS
Acceptance Inc.
C. Underwriter Defendant Greenwich Capital Markets, Inc. is a Delaware corporation which, at all relevant times, has maintained a securities broker-dealer FINRA registration in Illinois and was and is registered to do business in Illinois. Greenwich Capital
Markets, Inc. has also, at all relevant times, maintained a securities broker-dealer FINRA registration in North Carolina. Greenwich Capital Markets, Inc is a registered broker-dealer engaged in the U.S. government securities market and related capital markets business, and underwrote the following Certificates: AMSI 2005-R10 A2B, ARSI 2005-W5 A2C, FFML
2006-FF8 IIA3, FHLT 2005-E 2A3, HVMLT 2006-2 2A1A, HVMLT 2006-2 3A1A, INABS
2005-D AII3, OOMLT 2005-5 A3, OOMLT 2006-2 2A3, and RASC 2005-KS12 A2, and sold
Certificates FFML 2006-FF8 IIA3, HVMLT 2006-2 2A1A, and HVMLT 2006-2 3A1A directly
22 to the Bank. Pursuant to its Restated Certificate of Incorporation, dated April 1, 2009,
Greenwich Capital Markets, Inc. legally changed its name to RBS Securities Inc. All references herein to Greenwich Capital Markets, Inc. are also to RBS Securities Inc.
D. Controlling Person Defendant Greenwich Capital Holdings, Inc., a Delaware corporation, is the parent company, with 100% direct or indirect ownership, and a controlling entity of Financial Asset Securities Corp. and Greenwich Capital Acceptance, Inc. Greenwich
Capital Holdings, Inc. is also the parent company, with 100% direct ownership, and a controlling entity, under at least North Carolina law, of Greenwich Capital Markets, Inc. Greenwich Capital
Holdings, Inc., is also the parent company, with 100% direct ownership, of Greenwich Capital
Financial Products, Inc. (sponsor of Certificates FFML 2006-FF8 IIA3, HVMLT 2006-2 2A1A, and HVMLT 2006-2 3A1A; now known as RBS Financial Products, Inc.). Greenwich Capital
Holdings, Inc. legally changed its name to RBS Holdings USA Inc. All references herein to
Greenwich Capital Holdings, Inc. are also to RBS Holdings USA Inc.
43. The H&R Block Companies
A. Depositor Defendant Option One Mortgage Acceptance Corporation is a
Delaware corporation. On or about July 24, 2008, Option One Mortgage Acceptance
Corporation legally changed its name to Sand Canyon Acceptance Corporation. All references herein to Option One Mortgage Acceptance Corporation are also to Sand Canyon Acceptance
Corporation. On information and belief, Option One Mortgage Acceptance Corporation was formed and exists solely for the purpose of receiving and depositing loans into trusts for PLMBS securitization. Option One Mortgage Acceptance Corporation was the depositor for Certificates
OOMLT 2005-5 A3 and OOMLT 2006-2 2A3.
23 B. Underwriter Defendant H&R Block Financial Advisors, Inc. was a Michigan corporation that was registered to do business in Illinois at the time of the transactions at issue.
Additionally, H&R Block Financial Advisors, Inc. was registered to do business in North
Carolina at the time of the transactions at issue. H&R Block Financial Advisors, Inc. underwrote
Certificates OOMLT 2005-5 A3 and OOMLT 2006-2 2A3. H&R Block Financial Advisors, Inc. was acquired by Ameriprise Financial, Inc. during 2008 as a wholly-owned subsidiary. That same year, H&R Block Financial Advisors, Inc. legally changed its name to Ameriprise Advisor
Services, Inc. Thereafter, in October 2009, portions of Ameriprise Advisor Services, Inc. were combined with Ameriprise Financial, Inc.’s subsidiaries Successor Defendant American
Enterprise Investment Services, Inc., a Minnesota corporation that, at all relevant times, has maintained securities broker-dealer FINRA registrations in both Illinois and North Carolina, and
Successor Defendant Ameriprise Financial Services, Inc., a Delaware corporation that, at all relevant times, has maintained securities broker-dealer FINRA registration in both Illinois and
North Carolina and was and is registered to do business in both Illinois and North Carolina, which are jointly liable as successors in interest to Ameriprise Advisor Services, Inc. (f/k/a H&R
Block Financial Advisors, Inc.). All references herein to H&R Block Financial Advisors, Inc. are also to Ameriprise Advisor Services, Inc., American Enterprise Investment Services, Inc. and
Ameriprise Financial Services, Inc.
C. Sponsor and Controlling Person Defendant Option One Mortgage Corporation is a
California corporation that was and is registered to do business in Illinois. Additionally, Option
One Mortgage Corporation was registered to do business in North Carolina at the time of the transactions at issue. Option One Mortgage Corporation is the parent corporation, 100% direct or indirect owner, and controlling entity of Option One Mortgage Acceptance Corporation.
24 Option One Mortgage Corporation was also the sponsor of Certificates OOMLT 2005-5 A3 and
OOMLT 2006-2 2A3 and an originator of loans for the offerings in which the Bank purchased
Certificates OOMLT 2005-5 A3 and OOMLT 2006-2 2A3. During 2008, Option One Mortgage
Corporation legally changed its name to Sand Canyon Corporation. All references herein to
Option One Mortgage Corporation are also to Sand Canyon Corporation.
D. Controlling Person Defendant H&R Block, Inc. is a Missouri corporation that was and is registered to do business in Illinois. Additionally, H&R Block, Inc. operates branches throughout North Carolina. H&R Block, Inc., through its subsidiaries, provides tax, retail banking, accounting, and business consulting services and products. H&R Block, Inc. is the parent corporation, with 100% direct or indirect ownership, and controlling entity of Option One
Mortgage Corporation and Option One Mortgage Acceptance Corp. At the time the Bank purchased the relevant securities, H&R Block, Inc. was also the parent and a controlling entity, under at least North Carolina law, of H&R Block Financial Advisors, Inc.
44. Underwriter Defendant HSBC Securities (USA) Inc. is a Delaware corporation which, at all relevant times, has maintained a securities broker-dealer FINRA registration in
Illinois and was and is registered to do business in Illinois. HSBC Securities (USA) Inc. has also, at all relevant times, maintained a securities broker-dealer FINRA registration in North
Carolina and was and is registered to do business in North Carolina. HSBC Securities (USA)
Inc. is a registered broker-dealer that leads or participates as underwriter of all domestic issuances of the company’s corporate and asset-backed securities. HSBC Securities (USA) Inc. underwrote the following two certificates: OOMLT 2005-5 A3 and OOMLT 2006-2 2A3.
45. Depositor Defendant IndyMac MBS, Inc. is a Delaware corporation. On information and belief, IndyMac MBS, Inc. was formed and exists solely for the purpose of
25 receiving and depositing loans into trusts for PLMBS securitization. IndyMac MBS, Inc. was the depositor for Certificate INDX 2006-AR15 A2.
46. Underwriter Defendant J.P. Morgan Securities Inc., now known as J.P. Morgan
Securities LLC, following its name change on or about September 1, 2010 (referred to hereafter as “J.P. Morgan Securities Inc.”), is a Delaware corporation or limited liability company, respectively, which, at all relevant times, has maintained a securities broker-dealer FINRA registration in Illinois and was and is registered to do business in Illinois. J.P. Morgan Securities
Inc. has also, at all relevant times, maintained a securities broker-dealer FINRA registration in
New Jersey. J.P. Morgan Securities Inc. underwrote the following Certificates: AMSI 2005-R10
A2B, CBASS 2006-CB4 AV3, and OOMLT 2005-5 A3, and sold Certificate AMSI 2005-R10
A2B directly to the Bank.
47. The Merrill Lynch Entities
A. Depositor Defendant Merrill Lynch Mortgage Investors, Inc., is a Delaware corporation. On information and belief, Merrill Lynch Mortgage Investors, Inc., was formed and exists solely for the purpose of receiving an depositing loans into trusts for PLMBS securitization. Merrill Lynch Mortgage Investors, Inc., was the depositor for Certificate CBASS
2006-CB4 AV3.
B. Underwriter Defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated is a
Delaware corporation which, at all relevant times, has maintained a securities broker-dealer
FINRA registration in Illinois and was and is registered to do business in Illinois. Merrill Lynch,
Pierce, Fenner & Smith Incorporated has also, at all relevant times, maintained securities broker- dealer FINRA registrations in both North Carolina and New Jersey and was registered to do business in North Carolina at the time of the transactions at issue. Merrill Lynch, Pierce, Fenner
26 & Smith Incorporated is a U.S.-based broker-dealer in securities and futures commission
merchant, and underwrote the following certificates: CBASS 2006-CB4 AV3 and OOMLT
2006-2 2A3, and sold Certificate CBASS 2006-CB4 AV3 directly to the Bank. Effective
November 1, 2010, Banc of America Securities LLC merged with and into Successor Defendant
Merrill Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation. All references
herein to Banc of America Securities LLC are also to Merrill Lynch, Pierce, Fenner & Smith
Incorporated, which is liable as a matter of law as successor to Banc of America Securities LLC by virtue of its status as the surviving entity in its merger with Banc of America Securities LLC.
48. The Morgan Stanley Entities
A. Depositor Defendant Morgan Stanley ABS Capital I Inc. is a Delaware
corporation. On information and belief, Morgan Stanley ABS Capital I Inc. was formed and
exists solely for the purpose of receiving and depositing loans into trusts for PLMBS
securitization. Morgan Stanley ABS Capital I Inc. was the depositor for Certificates MSAC
2006-WMC2 A2C, MSAC 2006-HE5 A2C, and MSAC 2006-HE6 A2C.
B. Underwriter Defendant Morgan Stanley & Co. Incorporated is a Delaware
corporation which, at all relevant times, has maintained a securities broker-dealer FINRA
registration in Illinois and was and is registered to do business in Illinois. Morgan Stanley & Co.
Incorporated underwrote the following Certificates: INABS 2005-D AII3, MSAC 2006-WMC2
A2C, MSAC 2006-HE5 A2C, MSAC 2006-HE6 A2C, and WFMBS 2006-AR3 A4, and sold
Certificates MSAC 2006-WMC2 A2C, MSAC 2006-HE5 A2C, MSAC 2006-HE6 A2C, and
WFMBS 2006-AR3 A4 directly to the Bank.
C. Controlling Person Defendant Morgan Stanley is a financial holding company
organized under the laws of Delaware that was and is registered with the Illinois Department of
27 Revenue. Morgan Stanley is the parent company, with 100% direct ownership, and controlling entity of Morgan Stanley ABS Capital I Inc. Morgan Stanley is also the parent corporation of
Morgan Stanley Mortgage Capital Inc. (sponsor of Certificates MSAC 2006-WMC2 A2C,
MSAC 2006-HE5 A2C, and MSAC 2006-HE6 A2C) and Morgan Stanley & Co. Incorporated.
49. The National City Entities
A. At all relevant times, Underwriter Defendant NatCity Investments, Inc. was an
Indiana corporation. NatCity Investments, Inc. underwrote the following five certificates: FFML
2006-FF13 A2C, FFML 2006-FF12 A3, FFML 2006-FF12 A4, FFML 2006-FF14 A5, and
FFML 2006-FF10 A7. On November 7, 2009, NatCity Investments, Inc. merged with and into
Successor Defendant PNC Investments LLC, a Delaware limited liability company which, at all relevant times, has maintained a securities broker-dealer FINRA registration in Illinois. All references herein to NatCity Investments, Inc. are also to PNC Investments LLC, which is liable as the successor in interest to NatCity Investments, Inc.
B. National City Capital Markets was a trade name under which corporate and investment banking services of National City Corporation, a Delaware corporation, operated.
National City Capital Markets was not a separate legal entity from National City Corporation.
National City Capital Markets underwrote Certificate FFML 2006-FF8 IIA3. National City
Corporation was also the parent corporation of NatCity Investments Inc.
C. Defendant PNC Financial Services Group, Inc., a Pennsylvania corporation that was and is registered to do business in Illinois, is named as a Successor Defendant to National
City Corporation, including National City Corporation d/b/a National City Capital Markets, and those that National City Corporation controlled, including Underwriter Defendant NatCity
Investments, Inc. See infra § III.C. Defendant PNC Financial Services Group, Inc. is a
28 Pennsylvania corporation that was and is registered to do business in Illinois. As set forth below,
pursuant to an Agreement and Plan of Merger dated October 24, 2008, on or about December 31,
2008, National City Corporation and all of its subsidiaries, including NatCity Investments, Inc., merged with and into Successor Defendant The PNC Financial Services Group, Inc.
50. The Nomura Entities
A. Depositor Defendant Nomura Home Equity Loan, Inc. is a Delaware corporation.
On information and belief, Nomura Home Equity Loan, Inc. was formed and exists solely for the
purpose of receiving and depositing loans into trusts for PLMBS securitization. Nomura Home
Equity Loan, Inc. was the depositor for Certificate NHELI 2006-WF1 A3.
B. Underwriter Defendant Nomura Securities International, Inc. is a Delaware
corporation which, at all relevant times, has maintained a securities broker-dealer FINRA
registration in Illinois and was and is registered to do business in Illinois. Nomura Securities
International, Inc. underwrote and sold Certificate NHELI 2006-WF1 A3 directly to the Bank.
C. Controlling Person Defendant Nomura Holding America, Inc., a Delaware
corporation, is the parent company, with 100% direct ownership, and controlling entity of
Nomura Home Equity Loan, Inc. Nomura Holding America, Inc. is also the parent corporation
of Nomura Securities International, Inc., and Nomura Credit & Capital, Inc. (sponsor of
Certificate NHELI 2006-WF1 A3).
51. The Sequoia Entities
A. Depositor Defendant Sequoia Residential Funding, Inc. is a Delaware corporation.
On information and belief, Sequoia Residential Funding, Inc. was formed and exists solely for
the purpose of receiving and depositing loans into trusts for PLMBS securitization. Sequoia
29 Residential Funding, Inc. was the depositor for Certificates SEMT 2006-1 2A1 and SEMT 2006-
1 3A1.
B. Sponsor Defendant RWT Holdings, Inc. is a Delaware Corporation. RWT
Holdings, Inc. was the sponsor for the offerings in which the Bank acquired Certificates SEMT
2006-1 2A1 and SEMT 2006-1 3A1.
C. Controlling Person Defendant Redwood Trust, Inc., a Maryland corporation, is
the parent company, with 100% indirect ownership, and a controlling entity of Sequoia
Residential Funding, Inc. Defendant Redwood Trust, Inc. is also the parent company, with
100% indirect ownership, and a controlling entity under at least North Carolina law of RWT
Holdings, Inc.
52. The UBS Entities
A. Depositor Defendant Mortgage Asset Securitization Transactions, Inc. is a
Delaware corporation. On information and belief, Mortgage Asset Securitization Transactions,
Inc. was formed and exists solely for the purpose of receiving and depositing loans into trusts for
PLMBS securitization. Mortgage Asset Securitization Transactions, Inc. was the depositor for
Certificate MABS 2006-NC1 A3.
B. Underwriter Defendant UBS Securities LLC is a Connecticut limited liability
company which, at all relevant times, has maintained a securities broker-dealer FINRA
registration in Illinois and was and is registered to do business in Illinois. UBS Securities LLC
underwrote the following four Certificates: FHLT 2005-E 2A3, INABS 2005-D AII3, MABS
2006-NC1 A3, and SARM 2005-21 3A1, and sold INABS 2005-D AII3, MABS 2006-NC1 A3,
and SARM 2005-21 3A1 directly to the Bank.
30 C. Controlling Person Defendant UBS Americas Inc. is a Delaware corporation that was and is registered to do business in Illinois. UBS Americas Inc. is the parent company, with
100% direct ownership, and controlling entity of Mortgage Asset Securitization Transactions,
Inc. UBS Americas Inc. is also the parent of UBS Real Estate Securities Inc. (sponsor of
Certificate MABS 2006-NC1 A3) and the parent company (owner of the preferred members’ interest) of UBS Securities LLC.
53. The Wells Fargo Entities
A. Depositor Defendant Wells Fargo Asset Securities Corporation is a Delaware corporation. On information and belief, Wells Fargo Asset Securities Corporation was formed and exists solely for the purpose of receiving and depositing loans into trusts for PLMBS securitization. Wells Fargo Asset Securities Corp. was the depositor for Certificates WFHET
2006-3 A2 and WFMBS 2006-AR3 A4.
B. Controlling Person Defendant Wells Fargo Bank, National Association, a nationally chartered bank that was and is registered to do business in Illinois, is the parent corporation and controlling entity of Wells Fargo Asset Securities Corporation. Wells Fargo
Bank, National Association was also the sponsor of Certificates WFHET 2006-3 A2 and
WFMBS 2006-AR3 A4 and an originator of loans for the offering in which the Bank purchased
Certificates BAFC 2006-F 2A1, BAFC 2006-F 3A1, CMLTI 2006-WFH2 A2B, CMLTI 2006-
WFH4 A3, NHELI 2006-WF1 A3, WFHET 2006-3 A2, and WFMBS 2006-AR3 A4.
C. Controlling Person Defendant Wells Fargo & Company, a Delaware corporation that was and is registered to do business in Illinois, is the parent corporation, with 100% direct or indirect ownership, and controlling entity of Wells Fargo Asset Securities Corporation and Wells
Fargo Bank, National Association. Wells Fargo & Company is a financial services company that
31 provides retail, commercial and corporate banking services. It has banking stores located in 39
states and the District of Columbia. Wells Fargo & Company provides additional financial
services through subsidiaries that are engaged in various businesses, including: wholesale
banking, mortgage banking, consumer finance, commercial finance, securities brokerage and
investment banking, and mortgage-backed securities servicing.
C. Successor Liability Allegations Against Certain Defendants
1. Successor Defendant Bank of America Corporation
54. On July 1, 2008, Successor Defendant Bank of America Corporation acquired
Countrywide Financial Corporation and those it controlled, including Countrywide Securities
Corporation, through an all-stock merger. In this transaction, Countrywide Financial
Corporation merged with and into Bank of America Corporation, which acquired substantially
all Countrywide Financial Corporation assets and responsibility for all pre-merger liabilities. As consideration for the merger, Countrywide Financial’s shareholders received stock in Bank of
America. See Agreement and Plan of Merger, dated as of January 11, 2008, by and among
Countrywide Financial Corporation (the “Company”), Bank of America Corporation, and Red
Oak Merger Corporation.
55. At the time of the transaction, Bank of America announced that it intended to
combine Countrywide’s operations with its own and re-brand those combined operations with
the Bank of America name. Bank of America further announced that Barbara Desoer would run
the combined mortgage and consumer real estate operations from Calabasas, California, where
Countrywide Financial had its headquarters, and that Countrywide Financial’s incumbent
president, David Sambol, would remain for at least some time to work on the transition.
32 56. On October 16, 2008, Bank of America announced that Countrywide Financial would no longer publicly report its own financial results and that Bank of America was transferring “substantially all of the assets and operations of Countrywide Financial Corporation and Countrywide Home Loans, Inc. to other subsidiaries of Bank of America.”
57. On November 10, 2008, Bank of America publicly filed an 8-K announcing the
integration of Countrywide Financial (and it subsidiaries) with Bank of America’s other
businesses and operations. That filing once again disclosed that Bank of America had transferred
substantially all of Countrywide Financial’s assets to Bank of America.
58. On April 27, 2009, Bank of America announced that it was retiring the
Countrywide name and that the combined operations of Countrywide and Bank of America
would do business as Bank of America Home Loans. Many former Countrywide locations,
employees, assets, and business operations now continue under the Bank of America Home
Loans name. Upon information and belief, Bank of America Home Loans is a brand name that
Bank of America now uses for the Countrywide Financial mortgage origination and
securitization operations that Bank of America has absorbed and consolidated with its own
operations. The Form 10-K that Bank of America filed on February 26, 2010 lists both
Underwriter Defendant Countrywide Securities and its direct parent corporation Countrywide
Capital Markets, LLC as Bank of America subsidiaries.
59. Bank of America entered into this transaction with full knowledge that it was
assuming substantial Countrywide liabilities. In a February 22, 2008 interview, Bank of
America spokesman Scott Silvestri told Corporate Counsel that Bank of America had not
overlooked Countrywide’s legal expenses and liabilities when it decided to merge with
Countrywide:
33 Handling all this litigation won’t be cheap, even for Bank of America, the soon-to-be largest mortgage lender in the country. Nevertheless, the banking giant says that Countrywide’s legal expenses were not overlooked during negotiations. “We bought the company and all of its assets and liabilities,” spokesman Scott Silvestri says. “We are aware of the claims and potential claims against the company and have factored these into the purchase.”
60. A January 23, 2008 New York Times article similarly quotes former Bank of
America Chairman and CEO Kenneth D. Lewis acknowledging that Bank of America had thought long and hard about acquiring Countrywide’s liabilities:
We did extensive due diligence. We had 60 people inside the company for almost a month. It was the most extensive due diligence we have ever done. So we feel comfortable with the valuation. We looked at every aspect of the deal, from their assets to potential lawsuits and we think we have a price that is a good price.
61. On November 16, 2010, Bank of America’s Chief Executive Officer, Brian
Moynihan, publicly admitted that Bank of America had accepted liability for investors’ claims concerning Countrywide’s mortgage-backed securities: “There’s a lot of people out there with a lot of thoughts about how we should solve this [investor demands for refunds over faulty mortgages], but at the end of the day, we’ll pay for the things that Countrywide did.”
62. And in a December 12, 2010 New York Times profile, Moynihan again publicly admitted that Bank of America would be responsible for Countrywide’s liabilities:
But what about Countrywide?
“A decision was made; I wasn’t running the company,” Mr. Moynihan says, although he was obviously a top bank official at the time. “Our company bought it and we’ll stand up; we’ll clean it up.”
63. Bank of America’s securities filings echo this position. In addition to significantly increased revenues due to Countrywide’s contributions, Bank of America has reported its
34 payment on claims for defective legacy Countrywide mortgages and announced a $4.4 billion
reserve fund to pay for similar claims in the future.
64. In October 2008, Bank of America agreed to pay $8.4 billion to settle predatory
lending lawsuits that various state Attorneys General had filed against Countrywide. Although
Countrywide originated the mortgages and was alleged to have committed the misconduct in
question long before Bank of America’s acquisition, Bank of America assumed financial
responsibility for the settlement.
65. On January 3, 2011, Bank of America similarly announced that it had agreed to
pay $2.8 billion to settle claims to repurchase mortgage loans that Fannie Mae and Freddie Mac
had purchased from Countrywide Financial or its subsidiaries. In its press releases and
presentation concerning the settlement, Bank of America admitted that it was paying to resolve
claims concerning “alleged breaches of selling representations and warranties related to loans
sold by legacy Countrywide.”
66. Bank of America has completed a de facto merger with Controlling Person
Defendant Countrywide Financial Corporation and its subsidiaries, including Underwriter
Defendant Countrywide Securities, by absorbing Countrywide Financial and those entities controlled by it into Bank of America’s own operations. Bank of America Corporation is the
successor in liability to Countrywide Financial Corporation and Countrywide Securities
Corporation, and is jointly and severally or otherwise vicariously liable for the misstatements,
omissions, and other wrongful conduct of these Defendants alleged herein, including the liability with respect to the Certificates at issue in this case. Accordingly, the Bank seeks to recover any damages it recovers against Countrywide Financial Corporation and Countrywide Securities
Corporation from Bank of America.
35 67. On January 1, 2009, Successor Defendant Bank of America Corporation, through
a wholly owned subsidiary formed solely for the purpose of the merger, acquired Merrill Lynch
& Co., Inc. and those it controlled, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Merrill Lynch Mortgage Investors, Inc., through an all-stock merger. In this
transaction, Merrill Lynch & Co., Inc. merged with and into Bank of America Corporation, and
Bank of America Corporation acquired substantially all Merrill Lynch & Co., Inc. assets and
responsibility for all pre-merger liabilities. See Agreement and Plan of Merger by and between
Merrill Lynch & Co., Inc. and Bank of America Corporation dated as of September 15, 2008; see
also Bank of America Proxy Statement, Schedule 14A (describing the terms of the “strategic
business combination”). The merger was intended to qualify as a “reorganization” within the
meaning of Section 368(a) of the Internal Revenue Code of 1986.
68. Bank of America has completed a de facto merger with Merrill Lynch & Co., Inc. and its subsidiaries, including Underwriter Defendant Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Depositor Defendant Merrill Lynch Mortgage Investors, Inc. by absorbing
Merrill Lynch & Co., Inc. and those entities controlled by it into Bank of America’s own
operations. Bank of America Corporation is the successor in liability to Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Merrill Lynch Mortgage Investors, Inc., and is jointly and
severally or otherwise vicariously liable for the misstatements, omissions, and other wrongful
conduct of these Defendants alleged herein, including the liability with respect to the Certificates
at issue in this case. Accordingly, the Bank seeks to recover any damages it recovers against
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Mortgage Investors, Inc.
from Bank of America.
36 2. Successor Defendants American Enterprise Investment Services, Inc. and Ameriprise Financial Services, Inc.
69. Defendants American Enterprise Investment Services, Inc. and Ameriprise
Financial Services, Inc., also referred to herein as “Successor Defendants,” are liable as the
successors in liability to H&R Block Financial Advisors, Inc., as set forth below.
70. On August 12, 2008, H&R Block, Inc. entered into a Stock Purchase Agreement
with Ameriprise Financial, Inc., to sell all of the outstanding shares of capital stock of HRB
Financial Corporation, which included ownership of HRB Financial Corporation subsidiary
H&R Block Financial Advisors, Inc., to Ameriprise Financial, Inc., a Michigan corporation. The sale was completed and became effective November 1, 2008.
71. According to a Form 8-K filed with the SEC by H&R Block, Inc., on November
6, 2008, H&R Block, Inc.:
completed the sale of all the outstanding shares of capital stock of HRB Financial Corporation (“HRB Financial”) to Ameriprise Financial, Inc. pursuant to a Stock Purchase Agreement dated August 12, 2008. HRB Financial owns H&R Block Financial Advisors, Inc., the Company’s former securities brokerage business. Pursuant to the terms of the sale, Block Financial received sales proceeds of approximately $312 million in cash and repayment of approximately $48 million in intercompany liabilities, subject to post-closing adjustments.
72. By virtue of this agreement, HRB Financial Corporation, including subsidiary
H&R Block Financial Advisors, Inc. merged into Ameriprise Financial, Inc. and HRB Financial
Corporation and H&R Block Financial Advisors, Inc. were wholly owned subsidiaries of
Ameriprise Financial, Inc. H&R Block Financial Advisors, Inc. thereafter did business as
Ameriprise Advisor Services, Inc. As noted in Section III.B, above, in October 2009, portions of
Ameriprise Advisor Services, Inc. were combined with Ameriprise Financial, Inc.’s subsidiaries
Successor Defendants American Enterprise Investment Services, Inc. and Ameriprise Financial
Services, Inc., which are jointly liable as successors in interest to Ameriprise Advisor Services,
37 Inc. (f/k/a H&R Block Financial Advisors, Inc.). Ameriprise Advisor Services, Inc. filed a
certificate of dissolution with the Michigan Department of Energy, Labor & Economic Growth
on January 5, 2011, and withdrew its active status from the Illinois Secretary of State on January
7, 2011.
73. American Enterprise Investment Services, Inc. and Ameriprise Financial Services,
Inc., are the successors in liability to H&R Block Financial Advisors, Inc., including with respect
to activities alleged herein involving H&R Block Financial Advisors, Inc., and are jointly and
severally or otherwise vicariously liable for the misstatements, omissions, and other wrongful
conduct of these Defendants alleged herein, including the liability with respect to the Certificates
at issue in this case. American Enterprise Investment Services, Inc. and Ameriprise Financial
Services, Inc. are named as a successors-in-interest to H&R Block Financial Advisors, Inc.
3. Successor Defendant The PNC Financial Services Group, Inc.
74. Defendant PNC Financial Services Group, Inc., is liable as the successor in liability to National City Corporation, as set forth below.
75. Pursuant to an Agreement and Plan of Merger dated October 24, 2008, on or
about December 31, 2008, National City Corporation and its subsidiaries, including National
City Capital Markets and NatCity Investments, Inc., merged with and into The PNC Financial
Services Group, Inc., (also referred to herein as “PNC”) a Pennsylvania corporation with its principal executive offices located at One PNC Plaza, 249 Fifth Avenue, Pittsburgh,
Pennsylvania.
76. Under the terms of the agreement, PNC acquired all outstanding shares of common stock in a stock-for-stock merger transaction. PNC also advised its shareholders and the public that “PNC [was] to acquire 100% of National City resulting in 5th largest U.S. deposit
38 franchise.” See The PNC Financial Services Group, Inc. Form 8-K, dated October 24, 2008, and
exhibits thereto. The PNC Financial Services Group, Inc., thus acquired National City
Corporation’s assets, responsibilities, and liabilities, including those relating to the Certificates at
issue in this case.
77. The merger also resulted in combined company leadership. For example, upon
closing, the chairman, president and chief executive officer of National City Corporation was to
be appointed as a PNC Financial Services Group, Inc. vice chairman, and one National City
Corporation director was to “join the board of the combined company.” Id. To its shareholders
and the public, the PNC Financial Services Group, Inc. also touted the synergies to be obtained
from the transaction, estimated at $1.2 billion in annual expense reduction, and its success in
integrating National City Corporation’s balance sheets into its business model. Id. The PNC
Financial Services Group, Inc. Chairman and chief executive officer stated that “[w]e believe
this strategic combination will continue PNC’s efforts to build capital strength and shareholder
value.” Id.
78. The merger became effective December 31, 2008. National City Corporation
ceased filing its own financial statements in 2008. The merger was intended to qualify, and on
information and belief, qualified as a “reorganization” within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, and its assets and liabilities are now set forth in the financial
statements of The PNC Financial Services Group, Inc.
79. As the successor to National City Corporation, PNC Financial Services Group,
Inc. assumed the obligations of National City’s outstanding securities. The transaction included the integration of National City Corporation’s business and operations (including those of its divisions and subsidiaries, including National City Capital Markets, which now does business as
39 the PNC Financial Services Group, Inc.), which includes the assets, responsibilities, and
liabilities with respect to the Certificates at issue in this case. Therefore, The PNC Financial
Services Group, Inc. is the successor in liability to National City Corporation, and is jointly and
severally or otherwise vicariously liable for the misstatements, omissions, and other wrongful
conduct of these Defendants alleged herein, including the liability with respect to the Certificates
at issue in this case. PNC Financial Services Group Inc. is named as a successor-in-interest to
National City Corporation, including with respect to activities alleged herein involving National
City Corporation, NatCity Investments, Inc., and National City Capital Markets.
D. Summary Charts of Defendants and Certificates
80. In sum, the “Depositor/Issuer Defendants,” listed below, received or purchased
and transferred or sold pools of assets to the issuing trusts identified below, and securitized in the
bonds listed below, and were the “issuers” of the securities:2
Depositor/Issuer Defendants Issuing Trust Securities Banc of America Funding Banc of America Funding 2006-C Trust BAFC 2006-C 2A1 Corporation BAFC 2006-E 2A2 Banc of America Funding 2006-E Trust BAFC 2006-E 3A1 BAFC 2006-F 2A1 Banc of America Funding 2006-F Trust BAFC 2006-F 3A1 Citigroup Mortgage Loan Citigroup Mortgage Loan Trust 2006- CMLTI 2006-NC1 Trust Inc. NC1 A2C Citigroup Mortgage Loan Trust 2006- CMLTI 2006-NC2 NC2 A2B Citigroup Mortgage Loan Trust 2006- CMLTI 2006- WFHE2 WFH2 A2B Citigroup Mortgage Loan Trust 2006- CMLTI 2006- WFHE4 WFH4 A3 Financial Asset Securities First Franklin Mortgage Loan Trust FFML 2006-FF8 Corp. 2006-FF8 IIA3
2 See 17 C.F.R. § 230.191 (“The depositor for the asset-backed securities acting solely in its capacity as depositor to the issuing entity is the issuer for purposes of the asset-backed securities of that issuing entity.”).
40 Depositor/Issuer Defendants Issuing Trust Securities First Horizon Asset Securities, First Horizon Mortgage Pass-Through FHASI 2006-AR1 Inc. Trust 2006-AR1 2A1 Greenwich Capital HVMLT 2006-2 Acceptance, Inc. 2A1A Harborview Mortgage Loan Trust 2006-2 HVMLT 2006-2 3A1A GS Mortgage Securities Corp. FFML 2006-FF13 FFMLT Trust 2006-Ff13 A2C GSAMP 2006-NC2 GSAMP Trust 2006-NC2 A2C IndyMac MBS, Inc. Indymac Indx Mortgage Loan Trust INDX 2006-AR15 2006-AR15 A2 Merrill Lynch Mortgage CBASS 2006-CB4 2006-CB4 Trust Investors, Inc. AV3 Morgan Stanley ABS Capital I Morgan Stanley ABS Capital I Inc. Trust MSAC 2006-HE5 Inc. 2006-HE5 A2C Morgan Stanley ABS Capital I Inc. Trust MSAC 2006-HE6 2006-HE6 A2C Morgan Stanley ABS Capital I Inc. Trust MSAC 2006- 2006-WMC2 WMC2 A2C Mortgage Asset Securitization Mastr Asset Backed Securities Trust MABS 2006-NC1 Transactions, Inc. 2006-NC1 A3 Nomura Home Equity Loan, Nomura Home Equity Loan, Inc., Home NHELI 2006-WF1 Inc. Equity Loan Trust, Series 2006-WF1 A3 Option One Mortgage Option One Mortgage Loan Trust 2005-5 OOMLT 2005-5 A3 Acceptance Corp. OOMLT 2006-2 Option One Mortgage Loan Trust 2006-2 2A3 Residential Asset Mortgage GMACM 2006- Products, Inc. GMACM Mortgage Loan Trust 2006- AR2 2A1 AR2 GMACM 2006- AR2 4A1 Residential Asset Securities RASC 2005-KS12 RASC Series 2005-Ks12 Trust Corporation A2 Residential Funding Mortgage RFMSI 2006-SA2 RFMSI Series 2006-Sa2 Trust Securities I, Inc. 2A1 Securitized Asset Backed Securitized Asset Backed Receivables SABR 2006-FR3 Receivables, LLC LLC Trust 2006-FR3 A2 Securitized Asset Backed Receivables SABR 2006-NC3 LLC Trust 2006-NC3 A2B Sequoia Residential Funding, SEMT 2006-1 2A1 Sequoia Mortgage Trust 2006-1 Inc. SEMT 2006-1 3A1 Wells Fargo Asset Securities Wells Fargo Home Equity Asset-Backed WFHET 2006-3 A2 Corporation Securities 2006-3 Trust
41 Depositor/Issuer Defendants Issuing Trust Securities Wells Fargo Mortgage Backed Securities WFMBS 2006-AR3 2006-AR3 Trust A4
81. In sum, the “Underwriter Defendants,” listed below, purchased the securities identified herein from the Depositor/Issuer Defendants (defined and identified above) and offered or sold the securities to the Bank. Together with the Depositor/Issuer Defendants, the
Underwriter Defendants prepared the Offering Documents for the securities and provided them to the Bank:
Underwriter Defendants Securities Banc of America Securities LLC ARSI 2005-W5 A2C BAFC 2006-C 2A1 BAFC 2006-E 2A2 BAFC 2006-E 3A1 BAFC 2006-F 2A1 BAFC 2006-F 3A1 FHASI 2006-AR1 2A1 OOMLT 2005-5 A3 OOMLT 2006-2 2A3 RASC 2005-KS12 A2 SEMT 2006-1 2A1 SEMT 2006-1 3A1 Barclays Capital Inc. AMSI 2005-R10 A2B ARSI 2005-W5 A2C FHLT 2005-E 2A3 SABR 2006-FR3 A2 SABR 2006-NC3 A2B WFHET 2006-3 A2 Citigroup Global Markets Inc. CMLTI 2006-NC1 A2C CMLTI 2006-WFH2 A2B CMLTI 2006-WFH4 A3 CMLTI 2006-NC2 A2B NHELI 2006-WF1 A3 OOMLT 2005-5 A3 Countrywide Securities Corporation HVMLT 2006-2 2A1A HVMLT 2006-2 3A1A MSAC 2006-HE6 A2C SEMT 2006-1 2A1 SEMT 2006-1 3A1
42 Underwriter Defendants Securities Credit Suisse First Boston LLC FHLT 2005-E 2A3 INABS 2005-D AII3 First Tennessee Bank, National Association FHASI 2006-AR1 2A1 Goldman, Sachs & Co. FFML 2006-FF13 A2C GSAMP 2006-NC2 A2C RFMSI 2006-SA2 2A1 Greenwich Capital Markets, Inc. AMSI 2005-R10 A2B ARSI 2005-W5 A2C FFML 2006-FF8 IIA3 FHLT 2005-E 2A3 HVMLT 2006-2 2A1A HVMLT 2006-2 3A1A INABS 2005-D AII3 OOMLT 2005-5 A3 OOMLT 2006-2 2A3 RASC 2005-KS12 A2 H&R Block Financial Advisors, Inc. OOMLT 2005-5 A3 OOMLT 2006-2 2A3 HSBC Securities (USA) Inc. OOMLT 2005-5 A3 OOMLT 2006-2 2A3 J.P. Morgan Securities Inc. AMSI 2005-R10 A2B CBASS 2006-CB4 AV3 OOMLT 2005-5 A3 Merrill Lynch, Pierce, Fenner & Smith CBASS 2006-CB4 AV3 Incorporated OOMLT 2006-2 2A3 Morgan Stanley & Co. Incorporated INABS 2005-D AII3 MSAC 2006-WMC2 A2C MSAC 2006-HE5 A2C MSAC 2006-HE6 A2C WFMBS 2006-AR3 A4 NatCity Investments, Inc. FFML 2006-FF13 A2C FFML 2006-FF12 A3 FFML 2006-FF12 A4 FFML 2006-FF14 A5 FFML 2006-FF10 A7 National City Corporation FFML 200-FF8 IIA3 Nomura Securities International, Inc. NHELI 2006-WF1 A3 Residential Funding Securities Corporation GMACM 2006-AR2 2A1 GMACM 2006-AR2 4A1 RASC 2005-KS12 A2
43 Underwriter Defendants Securities UBS Securities LLC FHLT 2005-E 2A3 INABS 2005-D AII3 MABS 2006-NC1 A3 SARM 2005-21 3A1
In sum, the “Sponsor Defendants,” listed below, organized and initiated these PLMBS transactions by acquiring the loans either from their own origination unit or from one or more third-party originators, and then offered and sold these securities to the Bank:
Sponsor Defendant Securities Bank of America, N.A. BAFC 2006-C 2A1 BAFC 2006-E 2A2 BAFC 2006-E 3A1 BAFC 2006-F 2A1 BAFC 2006-F 3A1 Option One Mortgage OOMLT 2005-5 A3 Corporation OOMLT 2006-2 2A3 Residential Funding Corporation RASC 2005-KS12 A2
RWT Holdings, Inc. SEMT 2006-1 2A1 SEMT 2006-1 3A1
82. In sum, the following Defendants, collectively referred to as the “Controlling
Person Defendants,” controlled the Sponsor, Depositor/Issuer, and Underwriter Defendants:
Controlling Person Defendant Controlled Defendant Defendants Banc of America Funding Corporation Depositor/Issuer Bank of America Banc of America Securities LLC Underwriter Corporation Bank of America, National Association. Sponsor Citigroup Financial Citigroup Global Markets Inc. Underwriter Products, Inc. Citigroup Mortgage Loan Trust Inc. Depositor/Issuer Citigroup Global Markets Inc. Underwriter Citigroup Inc. Citigroup Mortgage Loan Trust Inc. Depositor/Issuer Citigroup Financial Products, Inc. Controlling Person Countrywide Financial Corporation Countrywide Securities Corporation Underwriter First Tennessee Bank, National Association First Horizon Asset Securities, Inc. Depositor/Issuer
44 Controlling Person Defendant Controlled Defendant Defendants Residential Asset Mortgage Products, Inc. Depositor/Issuer Residential Asset Securities Corporation Depositor/Issuer Residential Funding Corporation Sponsor/Controlling GMAC Inc. Person Residential Funding Mortgage Securities I, Inc. Depositor/Issuer Residential Funding Securities Corporation Underwriter GMAC Mortgage Group, Inc. Controlling Person Residential Asset Mortgage Products, Inc. Depositor/Issuer Residential Asset Securities Corporation Depositor/Issuer GMAC Mortgage Sponsor/Controlling Group Inc. Residential Funding Corporation Person Residential Funding Mortgage Securities I, Inc. Depositor/Issuer Residential Funding Securities Corporation Underwriter Goldman Sachs Mortgage Company GS Mortgage Securities Corp. Depositor/Issuer Financial Asset Securities Corp. Depositor/Issuer Greenwich Capital Holdings, Inc. Greenwich Capital Acceptance, Inc. Depositor/Issuer Greenwich Capital Markets, Inc. Underwriter H&R Block Financial Advisors, Inc. Underwriter Option One Mortgage Acceptance H&R Block, Inc. Corp. Depositor/Issuer Sponsor/Controlling Option One Mortgage Corporation Person Morgan Stanley Morgan Stanley ABS Capital I Inc. Depositor/Issuer Nomura Holding America Inc. Nomura Home Equity Loan, Inc. Depositor/Issuer Option One Mortgage Option One Mortgage Acceptance Corporation Corp. Depositor/Issuer RWT Holdings, Inc. Sponsor Redwood Trust, Inc. Sequoia Residential Funding, Inc. Depositor/Issuer Residential Funding Residential Funding Securities Corporation Corporation Underwriter The Goldman Sachs GS Mortgage Securities Corp. Depositor/Issuer Group Inc. Goldman Sachs Mortgage Company Controlling Person Mortgage Asset Securitization UBS Americas Inc. Transactions, Inc. Depositor/Issuer Wells Fargo Asset Securities Wells Fargo & Corporation Depositor/Issuer Company Wells Fargo Bank, National Association Controlling Person
45 Controlling Person Defendant Controlled Defendant Defendants Wells Fargo Bank, Wells Fargo Asset Securities National Association Corporation Depositor/Issuer
83. In sum, the following Defendants, collectively referred to as the “Successor
Liability Defendants,” are liable as successors to the Succeeded Parties, as set forth above, and all references herein to the Suceeded Parties are also to their respective Successor:
Successor Defendant Succeeded Parties Securities American Enterprise H&R Block Financial OOMLT 2005-5 A3 Investment Services, Inc. Advisors, Inc. OOMLT 2006-2 2A3 Ameriprise Financial H&R Block Financial OOMLT 2005-5 A3 Services, Inc. Advisors, Inc. OOMLT 2006-2 2A3 Bank of America Corporation Countrywide Financial SEMT 2006-1 2A1 Corporation SEMT 2006-1 3A1 Countrywide Securities HVMLT 2006-2 2A1A Corporation HVMLT 2006-2 3A1A MSAC 2006-HE6 A2C SEMT 2006-1 2A1 SEMT 2006-1 3A1 Merrill Lynch, Pierce, Fenner ARSI 2005-W5 A2C & Smith Incorporated BAFC 2006-C 2A1 BAFC 2006-E 2A2 BAFC 2006-E 3A1 BAFC 2006-F 2A1 BAFC 2006-F 3A1 CBASS 2006-CB4 AV3 FHASI 2006-AR1 2A1 OOMLT 2005-5 A3OOMLT 2006-2 2A3 RASC 2005-KS12 A2 SEMT 2006-1 2A1 SEMT 2006-1 3A1 Merrill Lynch Mortgage CBAS 2006-CB4 AV3 Investors, Inc.
46 Successor Defendant Succeeded Parties Securities Merrill Lynch, Pierce, Fenner Banc of America Securities ARSI 2005-W5 A2C & Smith Incorporated LLC BAFC 2006-C 2A1 BAFC 2006-E 2A2 BAFC 2006-E 3A1 BAFC 2006-F 2A1 BAFC 2006-F 3A1 FHASI 2006-AR1 2A1 OOMLT 2005-5 A3 OOMLT 2006-2 2A3 RASC 2005-KS12 A2 SEMT 2006-1 2A1 SEMT 2006-1 3A1 PNC Investments LLC NatCity Investments, Inc. FFML 2006-FF10 A7 FFML 2006-FF12 A3 FFML 2006-FF12 A4 FFML 2006-FF13 A2C FFML 2006-FF14 A5 The PNC Financial Services NatCity Investments, Inc. FFML 2006-FF10 A7 Group, Inc. FFML 2006-FF12 A3 FFML 2006-FF12 A4 FFML 2006-FF13 A2C FFML 2006-FF14 A5
National City Corporation, FFML 2006-FF8 IIA3 d/b/a National City Capital Markets
E. The John Doe Defendants
84. Defendants John Doe 1-50 are other Depositor/Issuers, Underwriters, Controlling
Persons, Successor Liability Defendants, and/or others who are jointly and severally or otherwise liable for the misstatements, omissions, and other wrongful conduct alleged herein, including the liability with respect to the Certificates at issue in this case. The John Doe Defendants may
include persons or entities that are not named as Defendants at this time because Plaintiff has
insufficient information as to the extent, if any, of their involvement in and liability for the
matters alleged herein. Plaintiff will amend this Complaint to allege the true names and
capacities of these Defendants when ascertained.
47 IV. FACTUAL BACKGROUND
A. Mechanics of Mortgage Backed Securities
1. The Securitization Process
85. The PLMBS purchased by the Bank were created in a process known as
“mortgage securitization.” Mortgage securitization is a process by which mortgage loans are acquired from “mortgage originators,” pooled together, and certificates constituting interests in the cash flow from the mortgage pools are then sold to investors. The certificates are referred to as “mortgage pass-through certificates” because the cash flow from the pool of mortgages is
“passed through” to the securities holders when payments are made by the underlying mortgage borrowers.
86. The following graphic illustrates the securitization process:
87. Securitization involves several entities who perform distinct tasks, though, as was the case here, many or all of the entities in a securitization may be subsidiaries or affiliates of a single parent or holding company. The first step in creating a mortgage pass-through security such as the PLMBS purchased by the Bank is the acquisition by the “depositor” (referred to
48 herein as “depositor” or “depositor/issuer”) of an inventory of loans from a “sponsor” or “seller” which either originates the loans or acquires the loans from other mortgage originators in
exchange for cash. The depositor/issuer is often a subsidiary or other affiliate of the sponsor.
88. The depositor then securitizes the pool of loans by forming one or more mortgage pools with the inventory of loans, and creating tranches of interests in the mortgage pools with various levels of seniority. Interests in these tranches are then issued by the depositor (who then serves as the “issuer”) through a trust in the form of bonds or certificates.
89. Each tranche has a different level of purported risk and reward, and, often, a different rating. The most senior tranches often receive the highest investment grade rating, triple-A. Junior tranches, which usually have lower ratings, are more exposed to risk, but offer
higher potential returns. The most senior tranches of certificates are entitled to payment in full
before the junior tranches. Conversely, losses on the underlying loans in the asset pool –
whether due to default, delinquency, or otherwise – are allocated first to the most subordinate or
junior tranche of certificates, then to the tranche above that. This hierarchy in the division of
cash flows is referred to as the “flow of funds” or “waterfall.”
90. The depositor/issuer works with one or more of the nationally recognized credit
rating agencies – Fitch Ratings, Standard & Poor’s Rating Services (S&P), and Moody’s
Investor Services, Inc. (collectively, the “Credit Rating Agencies” or “Rating Agencies”) – to
ensure that each tranche of the mortgage pass-through certificate receives the rating desired by
the depositor/issuer (and underwriter). For PLMBS, this meant a triple-A rating for the senior
tranche, and lower ratings for the subordinated tranches Once the asset pool is securitized, the
certificates are issued to one or more “underwriters” (typically Wall Street banks or other large
financial institutions), who resell them to investors, such as the Bank.
49 91. Because the cash flow from the loans in the mortgage pool of a securitization is
the source of funds to pay the holders of the certificates issued by the trust, the credit quality of
the certificates depends largely on the credit quality of the loans in the mortgage pool. The
collateral pool for PLMBS often includes thousands of loans. Detailed information about the
credit quality of the loans is contained in the “loan files” developed and maintained by the mortgage originators when making the loans. For residential mortgage loans, such as the loans that backed the PLMBS purchased by the Bank, each loan file normally contains documents
including the borrower’s application for the loan, verification of income, assets, and
employment, references, credit reports, an appraisal of the property that will secure the loan and provide the basis for other measures of credit quality, such as loan-to-value ratios, and occupancy status. The loan file also generally includes notes from the person who underwrote the loan describing the loan’s purported compliance with underwriting guidelines and documentation of “compensating factors” that justified any departure from those standards.
92. Investors in RMBS, such as the Bank, do not have access to the loan files.
Instead, the sponsors, depositors/issuers, and the underwriters are responsible for gathering and verifying information about the credit quality and characteristics of the loans that are deposited into the trust and presenting summaries of this information in prospectuses or other offering documents that are prepared for potential investors. This due diligence process is a critical safeguard for investors and a fundamental legal obligation of the sponsors, the depositor/issuers, and the underwriters. Accordingly, the due diligence process supposedly performed by
Defendants was critical to the Bank’s decision to purchase the certificates at issue.
50 2. The Rating Process for PLMBS
93. Because, like many institutional investors, the Bank was permitted to buy only triple-A rated tranches of these certificates, the credit rating of the tranches of PLMBS it purchased was also material to its investment decision.
94. In any PLMBS, the credit rating of each tranche is negotiated between the depositor/issuer of the certificates and the credit rating agencies. In this process, the depositor/issuer and/or the sponsor and underwriters provide the credit rating agency with information about the credit quality and characteristics of the loans that are deposited into the trust. The credit rating agency is then supposed to evaluate, among other things:
a. The credit quality of the collateral – i.e., the underlying obligor’s ability to
pay and the obligor’s equity in the asset;
b. The experience and underwriting standards of the originators of the
underlying loans;
c. The loan characteristics reported by the depositor/issuer as underlying a
particular transaction;
d. The default rates, historic recovery rates, and concentration of the loans;
e. The ability of the servicer to perform all the activities for which the
servicer will be responsible; and
f. The extent to which the cash flow from the collateral can satisfy all of the
obligations of the PLMBS transaction. The cash flow payments which must be
made from the asset pool are interest and principal to investors, servicing fees,
and any other expenses for which the depositor/issuer is responsible. The rating
agencies are supposed to stress-test the flow of funds to determine whether the
51 cash flows match the payments that are required to be made to satisfy the
depositor/issuer’s obligations.
95. After evaluating these objective and verifiable factors, the credit rating agency issues a rating for the security. This rating is not a subjective opinion; rather it constitutes a
factual representation regarding the risk of the security with reference to the above objective factors, and should therefore be a reflection of both the riskiness of the loans in the asset pool and the seniority of the tranche. If the rating that the credit rating agency assigns to the tranche is not in accord with the issuer’s target, then the depositor/issuer may “credit enhance” the structure. Such credit enhancement may include overcollateralization (i.e., including in the pool
mortgages whose aggregate principal balance exceeds the aggregate principal balances of the certificates secured thereby), cash reserve accounts, excess spread (scheduled cash inflows from the mortgages in excess of the interest service requirements of the secured certificates), or third- party contracts (whereby losses suffered by the asset pool are absorbed by an insurer or other counter party). By using credit enhancement, a depositor/issuer may be able to elevate a bond to the highest credit rating.
96. All of the certificates that the Bank purchased were senior certificates that were rated triple-A when the Bank purchased them.
B. The Mortgage Originators Abandoned Underwriting and Appraisal Standards and Engaged in Predatory Lending.
1. The Shift from “Originate to Hold” to “Originate to Distribute” Securitization Incentivized Mortgage Originators to Disregard Loan Quality.
97. As noted above, the fundamental basis upon which mortgage pass-through certificates are valued is the ability of the borrowers to repay the principal and interest on the underlying loans and the adequacy of the collateral for those loans. If the borrowers cannot pay,
52 and the collateral is insufficient, the cash flow from the certificate diminishes, and the investors
are exposed to losses. For this reason, the underwriting standards and practices of the mortgage originators who issued loans that back MBS, and the representations in the Offering Documents regarding those standards, are critically important to the value of the certificates and the
investors’ decisions to purchase the certificates.
98. Yet, unbeknownst to the Bank, during the time frame that the Bank purchased the
PLMBS at issue in this case, mortgage originators: (a) effectively abandoned their stated
underwriting standards as part of the securitization process; (b) allowed pervasive and systematic
exceptions to their stated underwriting standards without proper justification; (c) adopted
practices such that variance from their stated underwriting practices was the norm; (d)
disregarded credit risk and quality controls in favor of generating loan volume; (e) pressured and
coerced appraisers to inflate their collateral valuations in order to permit loans to close; and (f)
engaged in predatory lending practices. As has become clear recently, this was the result of a
fundamental shift in the mortgage securitization markets.
99. In the 1980s and 1990s, under the traditional model, mortgage originators held the
mortgage loans they provided to borrowers through the term of the loan. They would therefore
profit from the obligor’s payment of interest and repayment of principal, but also bear the risk of
loss if the obligor defaulted and the property value was insufficient to repay the loan. As a
consequence of this arrangement, the originator was economically vested in establishing the
creditworthiness of the obligor and the true value of the underlying property by appraising it
before issuing the mortgage loans.
100. Additionally, the mortgage securitizations that took place in the 1980s and 1990s
generally fell within the domain of GSEs Fannie Mae and Freddie Mac. These GSEs purchased
53 the loans from the originators, securitized them, and sold them to investors. Investors in the early GSE securitizations were provided protection because the underlying loans were originated pursuant to strict underwriting guidelines, and the GSEs guaranteed that the investors would receive timely payments of principal and interest. Because the GSEs were perceived as being backed by the federal government, investors viewed the guarantees as diminishing credit risk, if not removing it altogether.
101. Between 2001 and 2006, however, Wall Street banks moved aggressively into the securitization markets, taking market share away from the GSEs. Unlike the GSEs, the Wall
Street banks focused primarily on Alt-A, subprime, and jumbo prime mortgage pools because of the higher fees that were available. Likewise, investors sought higher returns offered by non- agency MBS. As a result, non-agency loan originations and securitizations grew dramatically as shown by the following table:
2001 2006
GSE Loan Originations $1.433 trillion $1.040 trillion
GSE Securitizations $1.087 trillion $904 billion
Non-GSE Loan $680 billion $1.480 trillion Originations
Non-GSE Securitizations $240 billion $1.033 trillion (including $87 billion of (including $449 billion of subprime and $11 billion subprime and $366 of Alt- of Alt-A securitizations) A securitizations)
Source: Inside Mortgage Finance (2007).
102. Thus, from 2001 to 2006, non-GSE loan originations more than doubled and non-
GSE securitizations more than quadrupled, while GSE loan originations and securitizations
54 contracted. Moreover, during this time the non-GSE Alt-A and subprime securitization activity
skyrocketed, increasing eight-fold during the period from $98 billion to $815 billion.
103. As the Financial Crisis Inquiry Commission (often “FCIC”) reported in April
2010, “[t]he amount of all outstanding mortgages held in non[Agency] MBS rose notably from
only $670 billion in 2004 to over $2,000 billion in 2006.” This statistic demonstrates the
dramatic growth of the PLMBS market during this time. FCIC, “Preliminary Staff Report:
Securitization and the Mortgage Crisis,” April 7, 2010.
104. This enormous increase in PLMBS securitization is reflected in the securitization volume of the sponsors of the PLMBS purchased by the Bank. For example, between 2003 and
2006, Citigroup reported that its Prime/Alt-A securitization nearly quintupled, from $2.2 billion to $10.9 billion, and its subprime securitization increased from $306 million to $10.3 billion (an over 3000% increase). Other sponsors – primarily Wall Street banks – similarly expanded their securitization business during the same time period.
105. This shift was fueled by the complex interaction between record-high global savings, referred to by Federal Reserve Chairman Ben Bernanke as the “global savings glut,” and
exceedingly low interest rates. Low interest rates made it easier and more appealing for
consumers to take out home mortgage loans. But the low Federal Reserve rate also meant that the global pool of investors received only marginal returns on traditional low-risk investments, in particular, U.S. Government Bonds. This created an incentive for Wall Street banks to create
seemingly low-risk investment options that produced returns in excess of those of government
bonds. PLMBS securitization was their answer. Thus, following the model created by the
GSEs, the Wall Street banks began buying pools of mortgages from mortgage originators,
securitizing the pools, and selling the bonds to global investors. Because mortgage interest rates
55 (and even more so Alt-A and subprime rates) generally exceeded those of U.S. Government bonds, the resulting PLMBS could provide investors with the higher rate of return they were seeking.
106. The one complication that the Wall Street banks needed to solve was the rating of the certificates. Debt securities secured by pools of mortgages made to lower credit quality borrowers would generally fail to meet the investment grade requirements of most institutional investors. The Wall Street banks’ solution was to structure the financings through the creation of
“tranches” as discussed above. As a general rule, the result was that up to 80% of any particular
PLMBS would receive an “investment grade” rating. The remaining 20% was often purchased by hedge funds and other entities that were able to buy non-investment grade certificates. The development opened the floodgates for the securitization and sale of PLMBS.
107. To ensure that the flood of securitizations and sale of PLMBS did not abate, the
Wall Street banks bankrolled the lenders (both the ones they owned and those that were independent) so that the lenders had ample capital to issue loans. A recent study by The Center for Public Integrity found that 21 of the top 25 subprime lenders (in terms of loan volume) were either owned outright by the biggest banks or former investment houses, or had their subprime lending hugely financed by those banks, either directly or through lines of credit. See “Who Is
Behind The Financial Meltdown: The Top 25 Subprime Lenders and their Wall Street Backers,”
The Center for Public Integrity (May 6, 2009), available at http://www.publicintegrity.org/investigations/economic_meltdown/ (visited Sept. 20, 2010).
108. As the PLMBS market expanded, the traditional “originate to hold” model morphed into the “originate to distribute” model. Under the new “originate to distribute” model, mortgage originators no longer held the mortgage loans to maturity. Rather, mortgage
56 originators sold the loans to Wall Street banks and other major financial institutions and shifted
the risk of loss to the investors who purchased an interest in the securitized pool of loans.
109. The new distribution model was highly profitable for the mortgage originators in the short-term. By securitizing and selling the mortgages to investors through underwriter/dealers, the mortgage originators shifted loans off their books, earned fees, and, thus,
were able to issue more loans. Additionally, the securitization process enabled the originators to earn most of their income from transaction and loan-servicing fees, rather than (in the traditional
model) from the spread between interest rates paid on deposits and interest rates received on
mortgage loans. This created an unchecked incentive to originate more and more loans to feed
into the securitization machine.
110. In testimony before the FCIC, Sheila C. Bair, Chair of the Federal Deposit
Insurance Corporation, explained both the misalignment of incentives arising from the sale of loans and the misalignment created by flawed compensation practices within the origination
industry:
The standard compensation practice of mortgage brokers and bankers was based on the volume of loans originated rather than the performance and quality of the loans made. From the underwriters’ perspective, it was not important that consumers be able to pay their mortgages when interest rates reset, because it was assumed the loans would be refinanced, generating more profit by ensuring a steady stream of customers. The long-tail risk posed by these products did not affect mortgage brokers and bankers’ incentives because these mortgages were sold and securitized.
111. The Attorney General for the Commonwealth of Massachusetts came to the same conclusion when she issued the results of her investigation into the subprime mortgage industry,
THE AMERICAN DREAM SHATTERED: THE DREAM OF HOMEOWNERSHIP AND THE REALITY OF
PREDATORY LENDING (“The AG Report”). This report explained:
57 Historically, the vast majority of home mortgages were written by banks which held the loans in their own portfolios, knew their borrowers, and earned profit by writing good loans and collecting interest over many years. Those banks had to live with their “bad paper” and thus had a strong incentive to avoid making bad loans. In recent years, however, the mortgage market has been driven and funded by the sale and securitization of the vast majority of loans. Lenders now frequently make mortgage loans with the intention to promptly sell the loan and mortgage to one or more entities. … The lenders’ incentives thus changed from writing good loans to writing a huge volume of loans to re-sell, extracting their profit at the front end, with considerably less regard to the ultimate performance of the loans.
112. An internal memorandum drafted by the former Credit Risk Officer at
Countrywide Financial demonstrates how originators recognized the link between reduced underwriting standards and the ability to pass the resultant associated risks on to third parties.
The Credit Risk Officer explained that “[Underwriting] Guidelines have become more aggressive. . . . Furthermore, the portion of our nonconforming loans that are expanded criteria has increased. Because the sub holders bear most of the credit risk we are not directly exposed to the expansion of guidelines or change of mix.” Declaration of Paris Wynn In Support of
Plaintiff SEC’s Ex Parte Application for Relief from Deposition Duration Limit for Deposition of John P. McMurray, SEC v. Mozilo, et al., No. 09-3994 (C.D. Cal.), Ex. 1.
113. As far as lenders were concerned, their profits were generated by origination of as many loans as possible, and once these loans were packaged and securitized, repayment risk was someone else’s problem. According to the FCIC, Wall Street’s approach to securitization was reflected by its embrace of a new term—“IBGYBG,” standing for “I’ll be gone, you’ll be gone.”
FCIC Majority Report at 8. This term referred to deals that brought in big fees up front for the financial institutions involved in securitization, while risking much larger losses in the future for the investors that purchased the securities. As the FCIC noted, “for a long time, IBGYBG worked at every level.” Id.
58 114. As Ben Bernanke, Chairman of the Federal Reserve Bank, explained in
Congressional testimony:
When an originator sells a mortgage and its servicing rights, depending on the terms of the sale, much or all of the risks are passed on to the loan purchaser. Thus, originators who sell loans may have less incentive to undertake careful underwriting than if they kept the loans. Moreover, for some originators, fees tied to loan volume made loan sales a higher priority than loan quality. This misalignment of incentives, together with strong investor demand for securities with high yields, contributed to the weakening of underwriting standards.
2. Mortgage Originators Abandoned Underwriting Guidelines in Order to Initiate High Cost Loans for Securitization.
115. The misalignment of incentives following the shift to the “originate to distribute
model,” noted by Mr. Bernanke and others following the collapse of the mortgage market,
caused mortgage originators to systematically violate their stated underwriting and appraisal
standards, and to accept, encourage, and even fabricate their own untrue information from loan applicants. As recent studies and reports have shown, this was not a problem limited to one or a
few mortgage originators, but, rather, was pervasive among mortgage originators, including
those that issued the loans that backed the PLMBS purchased by the Bank. Mortgage originators
and the financial institutions that bankrolled them sought loan volume, not loan quality, in order
to profit from the securitization market. As the FCIC concluded, “there was a systematic
breakdown in accountability and ethics.” FCIC Majority Report, Conclusions of the Financial
Crisis Inquiry Commission, at xxii. According to the FCIC, “major financial institutions
ineffectively sampled loans they were purchasing to package and sell to investors. They knew a
significant percentage of the sampled loans did not meet their own underwriting standards or
those of the originators. Nonetheless, they sold those securities to investors. The Commission’s
review of many prospectuses provided to investors found that this critical information was not
disclosed.” Id.
59 116. In addition, coincident with the widespread transfer to MBS purchasers of the
default risk attached to mortgage loans, mortgage originators expanded the practice of originating highly risky nontraditional loans. In a marked departure from traditional mortgage origination procedures, originators offered a variety of reduced documentation programs in which the verification or substantiation of the applicants’ statements as to income, assets, and employment history was limited or non-existent. Although these programs were touted as providing for “streamlined” but nonetheless effective underwriting, unbeknownst to the Bank, the programs were engineered to enable originators to make loans to borrowers who otherwise never would have qualified. When these loans were securitized, investors were assured that reduced documentation programs were available only where the borrower satisfied certain FICO criteria, such as minimum FICO scores, or loan-to-value and debt-to-income ratios. In fact, the originators lacked any principled basis on which to evaluate the increased credit risk posed by such loans, notwithstanding representations to the contrary in the offering documents.
Moreover, the widespread granting of exceptions to underwriting standards without legitimate compensating factors meant that the minimal safeguards associated with the reduced documentation programs were often abandoned in the headlong rush to maximize origination volume. Additionally, mortgage underwriters would often begin the underwriting of an applicant’s loan under full documentation procedures, only to transfer the loan applicant to a “No
Doc” program upon learning of information that would disqualify the applicant under the full documentation procedures.
117. Indeed, the President’s Working Group on Financial Markets concluded in its
Policy Statement on Financial Market Developments that, “[t]he turmoil in financial markets
60 clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime
mortgages beginning in late 2004 and extending into early 2007.” (emphasis in original).
118. As John C. Dugan, Comptroller of the Currency testified to the FCIC on April 8,
2010, following his description of poor underwriting practices:
The combination of all the factors I have just described produced, on a nationwide scale, the worst underwritten mortgages in our history. When house prices finally stopped rising, borrowers could not refinance their way out of financial difficulty. And not long after, we began to see the record levels of delinquency, default, foreclosures, and declining house prices that have plagued the United States for the last two years – both directly and through the spillover effects to financial institutions, financial markets, and the real economy.
3. Mortgage Originators Manipulated Appraisals of Collateralized Real Estate in Order to Initiate High Cost Loans for Securitization.
119. Accurate appraisals prepared in accordance with established appraisal standards are essential for MBS investors to evaluate the credit risk associated with their investment. An accurate appraisal is necessary to calculate an accurate loan-to-value (LTV) ratio, which is the ratio of the amount of the mortgage loan to the value of the collateral determined by the lower of the appraised value or the sale price of the mortgaged property when the loan is made. The LTV ratio is strongly indicative of the borrowers’ likelihood of defaulting. As a borrower’s equity decreases (and the corresponding LTV ratio increases), particularly to where equity is less than
10% and LTV ratios are greater than 90%, the borrower’s incentive to keep the mortgage current, or the collateral in good condition, decreases dramatically. Consequently, aggregate
LTV calculations are among the most significant characteristics of a mortgage pool because LTV ratios both define the extent of the investor’s “equity cushion” (i.e., the degree to which values may decline without the investor suffering a loss), and are strongly indicative of a borrower’s incentive to pay. But in the absence of properly prepared appraisals, the value component of the
LTV ratio is unreliable, and the aggregate LTV metrics become meaningless. The appraisal
61 practices of the mortgage originators who issued loans that back PLMBS, and the accuracy of the
representations in the Offering Documents regarding those practices, therefore, were critically
important to the value of the certificates, and to the investors’ decisions to purchase the
certificates.
120. Appraisers are governed by the Uniform Standards of Professional Appraisal
Practice (“USPAP”), which are promulgated by the Appraisal Standards Board. The USPAP
contain a series of ethical rules designed to ensure the integrity of the appraisal process. For
example, the USPAP Ethics Conduct Rule provides: “An appraiser must perform assignments
with impartiality, objectivity, and independence, and without accommodation of personal interests.”
121. The USPAP Ethics Conduct Rule states: “An appraiser must not accept an assignment that includes the reporting of predetermined opinions and conclusions.”
122. The USPAP Ethics Management Rule states:
It is unethical for an appraiser to accept an assignment, or to have a compensation arrangement for an assignment, that is contingent on any of the following:
1. the reporting of a predetermined results;
2. a direction in assignment results that favors the cause of a client;
3. the amount of a value opinion;
4. the attainment of a stipulated results; or
5. the occurrence of a subsequent event directly related to the appraiser’s opinions and specific to the assignment’s purpose.
123. The USPAP Scope of Work Acceptability Rule states: “An appraiser must not allow the intended use of an assignment or a client's objectives to cause the assignment results to be biased.”
62 124. The Appraisal Standards Board also issues Advisory Opinions regarding
appropriate appraisal conduct. For example, Advisory Opinion 19 states in part:
Certain types of conditions are unacceptable in any assignment because performing an assignment under such condition violates USPAP. Specifically, an assignment condition is unacceptable when it:
• precludes an appraiser’s impartiality because such a condition destroys the objectivity and independence required for the development of credible results;
• limits the scope of work to such a degree that the assignment results are not credible, given the intended use of the assignment; or
• limits the content of a report in a way that results in the report being misleading.
125. The USPAP Scope of Work Rule states: “For each appraisal . . . an appraiser must . . . determine and perform the scope of work necessary to develop credible assignment results.”
126. Additionally, USPAP Standard 1 states: “In developing a real property appraisal, an appraiser must identify the problem to be solved, determine the scope of work necessary to solve the problem, and correctly complete research and analyses necessary to produce a credible appraisal.”
127. USPAP Standards Rule 2-1 states that “[e]ach written or oral real property appraisal report must:
(a) clearly and accurately set forth the appraisal in a manner that will not be misleading;
(b) contain sufficient information to enable the intended users of the appraisal to understand the report properly; and
(c) clearly and accurately disclose all assumptions, extraordinary assumptions, hypothetical conditions, and limiting conditions used in the assignment.”
63 128. Despite the importance of accurate appraisals and the requirements that are
designed to ensure them, during the time frame that the Bank purchased the PLMBS at issue in
this case, mortgage originators routinely manipulated the process for appraising the collateralized
real estate properties. They did so by pressuring and coercing appraisers and blacklisting those that would not “come back at value.” The prevalence of this problem and its impact on the financial crisis has been extensively investigated and examined in the aftermath of the market collapse.
129. According to his statements submitted in connection with his April 7, 2010 testimony before the FCIC, Richard Bitner, a former executive of a subprime lender for 15 years and author of the book Confessions of a Subprime Lender, explains:
[T]he appraisal process [was] highly susceptible to manipulation, lenders had to conduct business as though the broker and appraiser couldn’t be trusted . . . .[and] either the majority of appraisers were incompetent or they were influenced by brokers to increase the value. . . . Throwing a dart at a board while blindfolded would’ve produced more accurate results.
…
If the appraisal process had worked correctly, a significant percentage of subprime borrowers would’ve been denied due to lack of funds. Inevitably, this would have forced sellers to drop their exorbitant asking price to more reasonable levels. The rate of property appreciation experienced on a national basis from 1998 to 2006 was not only a function of market demand, but was due, in part, to the subprime industry’s acceptance of overvalued appraisals, coupled with a high percentage of credit-challenged borrowers who financed with no money down.
…
[T]he demand from Wall Street investment banks to feed the securitization machine couple[d] with an erosion in credit standards led the industry to drive itself off the proverbial cliff.
The Financial Crisis Inquiry Commission, Official Transcript, Commission Hearing, Apr. 7, 2010, Session 2, at 9-10.
64 130. In her testimony before the FCIC, Patricia Lindsay, a former New Century
Financial Corporation wholesale lender, described widespread appraisal fraud and abuse:
The role and practices of appraisers in subprime mortgage origination:
Properly valuing a property . . . is one of the most important components in a loan. In my experience at New Century, fee appraisers hired to go to the properties were often times pressured into coming in “at value”, fearing if they didn’t, they would lose future business and their livelihoods. They would charge the same fees as usual, but would find properties that would help support the needed value rather than finding the best comparables to come up with the most accurate value. Some appraisers would take boards off boarded up windows, to take the needed photos, then board the properties back up once the shots were taken. Or they would omit certain important elements of a property by angling the camera a certain way or zooming close in to make the property look the best possible. This level of appraiser activism compromises their objectivity.
131. Alan Hummel, Chair of the Appraisal Institute, testified before the Senate
Committee on Banking that the dynamic between mortgage originators and appraisers created a
“terrible conflict of interest” where appraisers “experience[d] systemic problems with coercion” and were “ordered to doctor their reports or else never see work from those parties again.”
132. In his testimony before the House Financial Services Committee, Subcommittee on Financial Institutions and Consumer Credit, Jim Amorin, President of the Appraisal Institute, testified similarly that:
In recent years, many financial institutions have lost touch with fundamental risk management practices, including the separation between loan production and risk management. Unfortunately, parties with a vested interest in a transaction are often the same people managing the appraisal process within many financial institutions: a flagrant conflict of interest. Appraisers are ordered to doctor their reports or else never receive work from those parties again. This was evident in a recent case involving nearly all state Attorneys General against Ameriquest, which resulted in an out-of-court settlement imposing new standards to prevent unfair and deceptive practices.
…
Another coercion tactic is the threat of being placed on a “blacklist” (aka “exclusionary appraiser list”), commonly used to blackball appraisers. It is one
65 thing to maintain a list of reputable businesses to work with, or to maintain a list of firms to avoid as a result of poor performance. However, [it] is another to place an appraiser on a blacklist for refusal to hit a predetermined value.
133. Confirming the extent of the problem, a survey of 1,200 appraisers conducted by
October Research Corp. found that 90% of appraisers reported that mortgage brokers and others pressured them to raise property valuations to enable deals to go through during the relevant period. The study also “found that 75% of appraisers reported negative ramifications if they did not cooperate, alter their appraisal, and provide a higher valuation.”
134. In 2010, as a result of widespread appraisal abuse, Congress enacted the Dodd-
Frank Wall Street Reform and Consumer Protection Act, § 1472, which amended Chapter 2 of the Truth in Lending Act, 15 U.S.C. § 1631, et seq., to specifically prohibit actions that violate
“appraisal independence.” Under the new Act, acts or practices that violate appraisal independence include:
(1) any appraisal of a property offered as security for repayment of the consumer credit transaction that is conducted in connection with such transaction in which a person with an interest in the underlying transaction compensates, coerces, extorts, colludes, instructs, induces, bribes, or intimidates a person, appraisal management company, firm, or other entity conducting or involved in an appraisal, or attempts, to compensate, coerce, extort, collude, instruct, induce, bribe, or intimidate such a person, for the purpose of causing the appraised value assigned, under the appraisal, to the property to be based on any factor other than the independent judgment of the appraiser;
(2) mischaracterizing, or suborning any mischaracterization of, the appraised value of the property securing the extension of the credit;
(3) seeking to influence an appraiser or otherwise to encourage a targeted value in order to facilitate the making or pricing of the transaction; and
(4) withholding or threatening to withhold timely payment for an appraisal report or for appraisal services rendered when the appraisal report or services are provided for in accordance with the contract between the parties.
66 135. All of the abuses targeted by the amended Truth in Lending Act were widespread
during the time frame that the Bank purchased the PLMBS at issue, causing the appraisals of the
collateralized real estate backing the PLMBS to be inflated. As the FCIC noted:
[a]s the housing market expanded, another problem emerged, in subprime and prime mortgages alike: inflated appraisals. For the lender, inflated appraisals meant greater losses if a borrower defaulted. But for the borrower or for the broker or loan officer who hired the appraiser, an inflated value could make the difference between closing and losing the deal. Imagine a home selling for $200,000 that an appraiser says is actually worth only $175,000. In this case, a bank won’t lend a borrower, say, $180,000 to buy the home. The deal dies. Sure enough, appraisers began feeling pressure. One 2003 survey found that 55% of the appraisers had felt pressed to inflate the value of homes; by 2006, this had climbed to 90%. The pressure came most frequently from the mortgage brokers, but appraisers reported it from real estate agents, lenders, and in many cases borrowers themselves. Most often, refusal to raise the appraisal meant losing the client.
FCIC Majority Report at 91.
4. Mortgage Originators Engaged in Predatory Lending in Order to Initiate High Cost Loans for Securitization.
136. Under state and federal predatory lending laws, predatory loans are characterized
by excessively high interest rates or fees, and abusive or unnecessary provisions that do not
benefit the borrower, including balloon payments, and underwriting that ignores a borrower’s
repayment ability. Moreover, according to the Office of the Comptroller of the Currency
(“OCC”), “a fundamental characteristic of predatory lending is the aggressive marketing of
credit to prospective borrowers who simply cannot afford the credit on the terms being offered.”
OCC Advisory Letter, Guidelines for National Banks to Guard Against Predatory and Abusive
Lending Practices, AL 2003-2, at 2 (Feb. 21, 2003). The Defendants represented and warranted that the mortgage pools that backed the PLMBS purchased by the Bank did not contain predatory loans. This was false.
67 137. Predatory lending was part of the mortgage lenders’ effort to increase volume at any cost. The Wall Street banks and other financial institutions that issued and underwrote
PLMBS depended on a steady stream of higher interest subprime loans, which often were the result of predatory lending practices. As Federal Reserve Bank Chairman Bernanke explained:
“[a]lthough the high rate of delinquency has a number of causes, it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high- cost loans, that were inappropriate for or misled the borrower.” Written statement by Federal
Reserve Bank Chairman Bernanke, July 14, 2008.
138. “The truth is that many of us in the industry were deeply distressed by the
growing practice of pushing high risk loans on borrowers who had no reasonable expectation of
being able to repay the mortgage. Disclosures were often less than adequate, and faced with a
bewildering array of loan terms, borrowers tended to trust their mortgage banker or broker. . . .
In our industry, we have frankly seen too much mortgage malpractice.” Scott Stern, CEO of
Lenders One, in Testimony before the Senate Banking Committee, Apr. 10, 2008.
139. Too often, mortgage loans were issued to “a borrower who ha[d] little or no
ability to repay the loan from sources other than the collateral pledged,” a predatory practice explicitly identified by the Expanded Guidance for Subprime Lending Programs issued by the
OCC, the Board of Governors of the Federal Reserve System, the FDIC, and the Office of Thrift
Supervision. Expanded Guidance for Subprime Lending Programs at 10 (Jan. 31, 2001). The
Expanded Guidance stated:
Loans to borrowers who do not demonstrate the capacity to repay the loan, as structured, from sources other than the collateral pledged are generally considered unsafe and unsound. Such lending practices should be criticized in the Report of Examination as imprudent.
Id. at 11. Additionally, the OCC warned:
68 When a loan has been made based on the foreclosure value of the collateral, rather than on a determination that the borrower has the capacity to make the scheduled payments under the terms of the loan, based on the borrower's current and expected income, current obligations, employment status, and other relevant financial resources, the lender is effectively counting on its ability to seize the borrower's equity in the collateral to satisfy the obligation and to recover the typically high fees associated with such credit. Not surprisingly, such credits experience foreclosure rates higher than the norm.
[S]uch disregard of basic principles of loan underwriting lies at the heart of predatory lending . . . .
OCC Advisory Letter, Guidelines for National Banks to Guard Against Predatory and Abusive
Lending Practices, AL 2003-2, at 2 (Feb. 21, 2003).
140. Numerous state, federal, and private investigations have revealed the extent of
predatory lending conduct amongst almost every significant mortgage originator, including those
responsible for originating many of the loans underlying the securities at issue here.
141. In November 2007, the Office of the Attorney General for the Commonwealth of
Massachusetts issued The American Dream Shattered: The Dream of Homeownership and the
Reality of Predatory Lending (the “AG Report”). The AG Report explained how:
Subprime ARM loans typically carry an artificially low, fixed interest rate for two or three years, sometimes called a “teaser” rate. That initial rate eventually adjusts to a higher, variable rate for the remaining term of the loan, causing monthly payments to increase, often dramatically. In recent years, many subprime lenders qualified borrowers based only on their ability to make payments during the “teaser” rate period, ignoring the fact that the borrowers would not be able to make payments when the rate adjusted upwards. As a result, many borrowers had to continually refinance. Borrowers were forced to obtain new loans, each one higher than the last, at increasingly high loan to value (LTV) ratios. . . . Exacerbating the effects of serial refinancing, subprime mortgages often carry burdensome prepayment penalties, as well as high transaction costs including lender and broker commissions and other fees. . . . [T]his cycle could continue only so long as home valuations continued to increase[]. As soon as real estate prices flattened, however, homeowners – especially those who used high LTV loans – no longer had the same options when monthly payments began to adjust upward.
69 142. The AG Report also notes that “lax or sometimes nonexistent underwriting . . .
fueled bad subprime loans.”
143. The AG Report specifically lists numerous types of novel, risky mortgage loan features and explains that “[t]he collection of layers of risk, however, into a single loan product –
for instance, a stated income, 100 percent LTV loan with a 2/28 ARM, qualified only on the
‘teaser’ rate – is usually so structurally unsound and so contrary to the borrower’s ability to repay
the loan over time, that it can only be viewed as designed to fail, resulting in widespread harm to
the borrower and public alike.” (emphasis added).
144. Singling out one specific common practice, the AG Report notes that “[w]hen lenders qualify borrowers for ARM loans based only on the ‘teaser’ rate period that reflects an utter lack of diligence in determining whether the borrower could actually pay back the loan.
This problem is systemic.” According to the AG Report, this practice was permitted by lax underwriting standards that apparently reached its peak in 2006 (although it was continued into
2007), and was directly in violation of the Interagency Guidance on Nontraditional Mortgage
Product Risks issued in 2006, which stated that for “nontraditional” loans, “analysis of a borrower's repayment capacity should include an evaluation of their ability to repay the debt by final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule.” 71
Fed. Reg. 58,609, 58,613 (Oct. 4, 2006).
145. The Massachusetts Attorney General specifically identified Countrywide as a lender which employed this practice of qualifying borrowers based only on their ability to pay based on “teaser” rates. Massachusetts v. Countrywide Fin. Corp. et al., No. 10-1169 (Suffolk
County Sup. Ct.)
70 146. Among the “Principal Findings” of the Massachusetts Office of Attorney General was that “[t]oo often lenders made loans where they knew or should have known that the borrower could not repay the loan.”
147. The AG Report includes specific examples of such conduct. In one instance, a single mother with three children who worked two jobs was “put into a loan where the lender knew, based on all the information she provided at the inception of the loan, that she could not afford the loan once the low ‘teaser’ rate [of 5 percent] expired and monthly payments increased
. . . when the higher interest rate of almost 13 percent kicked in . . . .” As another example, an unemployed woman just out of a homeless shelter whose partner made less than $30,000 a year was approved for a $300,000 mortgage with a teaser rate of 4.95 percent adjustable with a cap over 15 percent. She defaulted within a year.
148. The AG Report also details multiple examples of how “some lenders and brokers steer borrowers into loans that are more expensive than ones for which they qualify based on their credit scores and financial picture.”
149. As FDIC Chairman Sheila C. Bair explained in testimony before the FCIC:
The well-publicized benefits associated with legitimate rate-reducing mortgage refinancing and rising housing prices conditioned consumers to actively manage their mortgage debt. An unfortunate consequence of this favorable environment for refinancing was fraud. Many consumers have only a limited ability to understand details of standard mortgage contracts let alone the complex mortgages that became common during this period. In this environment, unscrupulous mortgage providers capitalized on the widely advertised benefits associated with mortgage refinance, and took advantage of uniformed consumers by refinancing them into mortgage loans with predatory terms that were not readily transparent to many borrowers.
71 5. Widespread Delinquencies Reflected the Inevitable Consequence of Loans Issued Without Regard to Meaningful Underwriting.
150. High delinquency rates are reflective of a systematic disregard for underwriting
guidelines by mortgage issuers. When effective underwriting occurs, poor credit risks are
screened out. This is the purpose of underwriting. In the absence of effective underwriting,
loans are made to unqualified borrowers and fraud is not detected. When borrowers are loaned
money without regard to their ability to repay it, loan delinquencies (and foreclosures) ensue.
Hence, high delinquency rates in loans issued by an originator provides evidence that the originator failed to adhere to prudent underwriting practices.
151. Numerous studies and analyses have traced the effect of poor underwriting on delinquency rates. For example, the Federal Bureau of Investigation Mortgage Fraud Reports of
2006 and 2007 reported on the results of a BasePoint Analytics study of three million residential mortgage loans which found that between 30% and 70% of early payment defaults were linked to significant misrepresentations in the original loan applications. The BasePoint Analytics study found that loans containing egregious misrepresentations were five times as likely to default in the first six months as loans that did not.
152. An analysis of the same BasePoint Analytics study by FitchRatings concludes that
“[h]igh risk products, which require sound underwriting and which are easy targets for fraud, account for some of the largest variances to expected default rates.” Fitch notes that “[i]n addition to the inherent risk in . . . [issuing loans with] the high-risk ‘affordability’ features in subprime mortgages . . . , evidence is mounting that in many instances these risks were not controlled through sound underwriting practices. Moreover, in the absence of effective underwriting, products such as ‘no money down’ and ‘stated income’ mortgages appear to have
72 become vehicles for misrepresentations or fraud by participants throughout the origination
process.”
153. Academic studies as well have shown that the departure from sound underwriting
practices which accompanied the explosion in securitizations contributed to substantial increases
in early payment defaults and delinquencies. See Benjamin Keys et al., Did Securitization Lead to Lax Screening? Evidence from Subprime Loans, 125 Q. J. Econ. 307 (2010) (“[W]e show that a doubling of securitization volume is on average associated with about a 10%-25% increase in defaults . . . within two years of origination . . .[and] a decline in screening standards . . . .”).
154. Data collected on the performance of loans over the past several years and analyzed in these studies show that early payment default and delinquency rates have in fact soared as a result of faulty underwriting:
155. Moreover, economic analysis of recent mortgage default rates has confirmed that increased delinquency rates during this period were not the result of deterioration in the credit
73 characteristics of the borrowers that were disclosed to MBS investors – for example their FICO
scores – but rather from deterioration in credit characteristics of the borrowers that were not
disclosed to investors. Research by University of Michigan economists indicates that increased
use of low documentation underwriting – with its higher potential for borrower fraud and other
abuses not discernible by MBS investors – correlates to excessive default rates. In other words, even where disclosed characteristics are the same, the low-doc loans exhibit higher default rates,
suggesting flaws in the underwriting process.
156. Review of current performance data of loan pools backing the PLMBS purchased
by the Bank similarly show significantly increased incidence of default, delinquency, and foreclosure, indicating pervasive underwriting failures.
C. Federal and State Investigations, Press Reports, Publicly Available Documents Produced in Other Civil Lawsuits, and Analysis of the Loan Pools Underlying the Certificates Identify Systematic Violation of Underwriting Guidelines, Appraisal Guidelines, and Predatory Lending by Mortgage Originators Whose Loans Back the PLMBS in this Case.
157. There have been numerous investigations into the practices of the mortgage originators who issued loans backing the PLMBS purchased by the Bank. A review of these investigations and related litigation, as well as confidential witness testimony obtained during the
Bank’s investigation, demonstrate that mortgage originators in general, and those that issued loans that backed the PLMBS purchased by the Bank in particular, systematically violated and ignored their stated underwriting standards, rendering the statements in the Offering Documents
with regard to underwriting standards of the mortgage originators misleading. This evidence is
reinforced further by the analysis of the performance of the actual loan pools backing the
PLMBS purchased by the Bank.
74 158. Many of the mortgage originators who issued loans backing the PLMBS
purchased by the Bank have been specifically identified as problem lenders. In materials presented to the FCIC on April 8, 2010, the OCC presented a list of the “Worst of the Subprime
Lenders” based on their mortgage foreclosure rates in the hardest hit metropolitan areas of the country. See Activities of the National Banks Related to Subprime Lending, Attachment 2
“Worst Ten of the Worst Ten: Update.” Eleven of the originators of mortgage loans that back the PLMBS purchased by the Bank were included on the list, with the following rankings:
1. New Century Mortgage Corp. 8. Countrywide
3. Argent Mortgage Co. 9. Ameriquest Mortgage Co.
4. WMC Mortgage Corp. 12. IndyMac Bank, FSB
5. Fremont Investment & Loan 14. Wells Fargo
6. Option One Mortgage Corp. 15. Ownit Mortgage Solutions, Inc.
7. First Franklin Corp.
159. Abundant additional information now available reveals the extent to which these and other mortgage originators abandoned sound underwriting practices and engaged in predatory lending, as follows.
1. Countrywide Home Loans, Inc. and Countrywide Home Loans Servicing LP
160. Countrywide Home Loans, Inc. and Countrywide Home Loans Servicing LP
(“Countrywide”), under the direction of parent Countrywide Financial Corporation (“CFC,” collectively “Countrywide”) originated underlying mortgage loans securing at least 5 of the
PLMBS purchased by the Bank. Countrywide was the nation’s largest subprime loan originator between 2005 and 2007. In 2010, Countrywide was identified by the OCC as the eighth worst
75 subprime lender in the country based on the delinquency rates of the mortgages it originated in
the ten metropolitan areas with the highest rates of delinquency.
a. Government actions against Countrywide and documents produced therein demonstrate Countrywide’s failure to adhere to sound underwriting practices.
161. On June 4, 2009, the SEC filed a complaint against certain senior Countrywide
executives, including CFC President, David Sambol, Chairman and CEO, Angelo Mozilo, and
CFO Eric Sieracki. See SEC v. Mozilo, et al., No. 09-3994 (C.D. Cal.). In the Complaint, the
SEC alleged that these three senior officers committed securities fraud by hiding from investors
“the high percentage of loans originated that were outside its already widened underwriting guidelines due to loans made as exceptions to guidelines.” That SEC complaint detailed how
Countrywide was aware internally that its own underwriting guidelines were being ignored and
that borrowers were lying about their income in the reduced-documentation application process.
162. According to the SEC:
[T]he actual underwriting of exceptions was severely compromised. According to Countrywide’s official underwriting guidelines, exceptions were only proper where “compensating factors” were identified which offset the risks caused by the loan being outside the guidelines. In practice, however, Countrywide used as “compensating factors” variables such as FICO and loan to value which had already been assessed [in determining the loan to be outside the guidelines].
163. Countrywide’s top-down involvement in the securitization process and complete
abandonment of underwriting standards are confirmed by the documents produced in the SEC
action, including internal emails, memos, minutes, presentations, and deposition testimony,
which only became publicly available as part of the briefing on the Countrywide Defendants’
unsuccessful motion for summary judgment.
164. For example, Countrywide’s Chief Risk Officer John McMurray testified as to
Countrywide’s adoption of a “matching” strategy, pursuant to which Countrywide matched
76 whatever product was being offered by other originators in the marketplace. [Exh. 267]
However, Countrywide’s adoption of its competitors’ guidelines (without adoption of corresponding credit risk mitigants) rendered Countrywide’s origination practices “the most
aggressive in the country.” June 24, 2005 e-mail from McMurray to Sambol (stating that
“because the matching process includes comparisons to a variety of lenders, our [guidelines] will
be a composite of the outer boundaries across multiple lenders[,]”and that because comparisons
are only made to lender guidelines where they are more aggressive and not used where they are
less aggressive, CFC’s “composite guides are likely among the most aggressive in the industry.”)
[Exh. 106].
165. As part of that matching strategy, Countrywide adopted a policy of underwriting
even more loans based on exceptions to their underwriting guidelines. As Sambol explained in a
February 13, 2005 email to Countrywide management, Countrywide “should be willing to price
virtually any loan that we reasonably believe we can sell/securitize without losing money, even if
other lenders can’t or won’t do the deal.” [Exh. 220] Similarly, an internal Countrywide email
to McMurray and Countrywide’s Credit Risk Officer, Clifford Rossi, dated June 2, 2006 states that “[w]e should originate whatever we can sell to investors.” [Exh. 118]
166. Ever in pursuit of the next deal, Countrywide routinely went beyond and around its publicly touted automated underwriting system, the Countrywide Loan Underwriting Expert
System (“CLUES”). If CLUES rejected an applicant, Countrywide subjected the loan application to a process of manual underwriting whereby the loan would be sent up the chain for approval, first to a loan officer, then to the Structured Loan Desk (also referred to as the
“exception desk”), and if still not approved, the loan would be referred to Secondary Marketing where applications were routinely granted exceptions to stated underwriting guidelines, all in
77 furtherance of Countrywide’s matching strategy. As former Countrywide Managing Director for
Secondary Marketing Nathan “Josh” Adler testified in the SEC action:
Q. Do you know whether Countrywide sometimes originated loans that were considered to be exceptions to its underwriting guidelines?
A. We did.
Q. To your knowledge, was there a process by which such loans were approved?
* * *
THE WITNESS: There generally was, yes.
Q. And what is your understanding of that process?
A. Well, I was -- I was at the tail end of that process. There was -- we had guidelines, we had kind of core guidelines, and then we had these shadow guidelines, which were the kind of the second tier guideline, if you will. And then there was this third tier which would come to me. But essentially there were -- the tiering of guidelines related to the kind of the exception process. And there was an underwriting, they called it, Structured Loan Desk process in the divisions where loans would get referred to the Structured Loan Desk if they were outside, I believe, of kind of the core guidelines. And then if those loans were outside of even the shadow guidelines, then they would be referred to Secondary Marketing to determine if the loan could be sold given the exception that was being asked for.
[Exh. 234]
167. As the SEC alleged: “The elevated number of exceptions resulted largely from
Countrywide’s use of exceptions as part of its matching strategy to introduce new guidelines and product changes.” SEC Complaint (citing July 8, 2008 testimony of John P. McMurray at
373:25-375:6) [SOF 285/Exh. 267]. In order to boost revenue from securitizations, Countrywide was willing to approve virtually any loan, regardless of deviation from stated underwriting standards, so long as it could package and re-sell the loan in a securitization. While not publicly disclosed, these facts were well-known within Countrywide, including by Countrywide’s highest levels of management.
78 168. For example, in a May 22, 2005 email to Sambol, McMurray, after noting that
“exceptions are generally done at terms even more aggressive than [Countrywide] guidelines,” identified a number of concerns regarding credit risk associated with Countrywide’s exception loans, including the following:
(a) “Use of 2nds Liens as Credit Enhancement.” Because many exceptions
loans are structured as piggy-back transactions, Countrywide was taking
on much of the loan’s credit risk through the second lien, which is not sold
into the secondary market;
(b) “R&W [representation and warranty] Exposure.” Although Countrywide
sold “much of the credit risk associated with high risk transactions away
to third-parties,” Countrywide “will see higher rates of default on the
riskier transactions and third parties coming back to us seeking a
repurchase or indemnification” for losses due to the defaults;
(c) “Security Performance. To the extent our securities contain a greater
concentration of higher risk transactions than those issued by our
competitors, our security performance may be adversely impacted. The
issue here is the extent our concern over security performance drives what
we will or won’t do on an exception.”
169. McMurray also noted in his email that Countrywide’s pricing models were inherently limited because they “are often used to price transactions (e.g., exceptions) beyond the scope of the data used to estimate the models.” [SOF 288/Exh. 84]
79 170. At a June 28, 2005 Credit Risk Committee meeting, Countrywide senior
executives received a presentation informing the attendees that nonconforming exceptions loans
accounted for a staggering 40% of Countrywide's loan originations. [SOF 289]
171. On April 13, 2006, CEO Mozilo issued an email noting that he had “personally observed a serious lack of compliance with our origination system as it relates to documentation
and generally a deterioration in the quality of loans originated versus the pricing of those
loan[s].” Specifically, in his email, Mozilo explained that Countrywide was originating home mortgage loans “through our channels with disregard for process [and] compliance with guidelines.”
172. During June 2006, a Credit Risk Leadership package reported that Countrywide
underwrote, on an exceptions basis, 44.3% of its Pay-Option ARMs, 37.3% of its subprime first
liens, 25.3% of its subprime second liens, and 55.3% of its standalone home equity loans. [SOF
293/Exhs. 4, 117]
173. During December 2006, the Credit Risk Leadership package reported similar percentages of loans underwritten on an exceptions basis: 45.4% of Pay-Option ARMs, 35.3% of subprime first liens, 24.1% of subprime second liens, and 52.6% of standalone home equity loans
[SOF 294/Exh. 5].
174. Countrywide’s Quality Control group performed a “4506 Audit” for the 10-month period ended on April 30, 2006, comparing the stated income from loan applications to the income reported by that borrower to the Internal Revenue Service [SOF 427/Exhs. 115, 117,
119], and concluded that 50.3% of the stated income loans audited by the bank showed a variance in income from the borrowers’ IRS filings of greater than 10%. Of those, 69% had an income variance of greater than 50%. [SOF 428/Exh. 117] Now-available documents confirm
80 that the audit results were widely known within Countrywide, having been distributed to
Countrywide management, including its highest ranking officers, and were discussed at the April
24, 2006 Credit Risk Management Committee meeting [SOF 431/Exhs. 115, 117], where
McMurray stated that the income discrepancies revealed in the audit were also being seen at
Countrywide Home Loans. [SOF 432, Exhs. 115, 117] Rossi testified that the “vast majority” of
the income discrepancies revealed in the 4506 Audit were the result of fraud and
misrepresentation. [SOF 434/Exh. 275]
175. By February 2007, internal risk management at Countrywide “noted that the
production divisions continued to advocate for, and operated pursuant to, an approach based upon the matching strategy alone. . . . . Additionally, [a senior risk manager] warned [Sambol] that ‘I doubt this approach would play well with regulators, investors, rating agencies etc. To some, this approach might seem like we’ve simply ceded our risk standards and balance sheet to whoever has the most liberal guidelines.’” McMurray email to Sambol dated Feb. 11, 2007.
[Exh. 109]
176. The deterioration of Countrywide’s internal quality control process was noted by
Countrywide’s management and Corporate Credit Risk Committee. At the March 12, 2007 meeting, it was reported that of the loans reviewed through Countrywide’s internal quality control process, 30.3% had deficiencies or were rated high risk, and 11.9% were rated severely unsatisfactory, and that one of the principal causes for such ratings included inadequate debt-to- income or LTV ratios, missing income or appraisal documentation, or failure to meet minimum
FICO scores. Similarly, at the May 29, 2007 meeting, attendees were informed that loans were being made “outside of any guidelines.” A presentation made at the May 29, 2007 meeting notes that “loans continue to be originated outside guidelines primarily via the Secondary SLD desk,
81 and that there is no formal guidance or governance surrounding SLD approvals.” [Exhs. 133, 55,
176]
177. A December 2007 internal Countrywide memorandum quoted by the SEC states that “a Countrywide review of loans issued in late 2006 and early 2007 resulted in . . . the finding that borrower repayment capacity was not adequately assessed by the bank during the underwriting process. . . . More specifically, debt-to-income ratios did not consider the impact of principal [negative] amortization or any increase in interest.” SEC Complaint ¶ 56 (quoting
Mozillo memo dated Dec. 13, 2007).
178. In employing its “matching” strategy and thereby making as many loans as possible, regardless of exceptions, Countrywide was able to enjoy tremendous profits from securitization of the loans, which also shifted the risk of the loans from Countrywide to investors:
As indicated in a previous note, when we first started the SLD, the intent was to be able to offer at least one option for borrowers who wanted exceptions to our underwriting guides. The thought was that we would offer borrower exceptions in our two major loan programs: 30-year fixed rate and 5/1 ARMs. In addition, both of these programs were set up for Alt A and as such we could price and sell under these programs. While this process seemed to have worked well in the past, we have been recently seeing increased demand from Production for exceptions on all products in general and Pay Option loans in particular. In addition, Production has been expressing frustration that we were only offering major exceptions for 5/1 ARMs and 30-year fixed rates. As such, to the widest extent possible, we are going to start allowing exceptions on all requests, regardless of loan program, for loans less than $3 million effective immediately.
The pricing methodology we will use will be similar to that which we use for 30- year fixed rates and 5-1 Hybrids. We will assume securitization in all cases.
* * *
The methodology from a saleability point of view will also be similar to that used for 30-year fixed rates and 5-1 Hybrids. We will view the exception assuming securitization and will no longer take into account whole loan buyers. In the past, this has caused some exceptions to be declined for Ratios, Balances and
82 LTV/CLTV combinations. Provided we can sell all of the credit risk (i.e. not be forced to retain a first loss place due to a 80% LTV, 60 Back-end ratios $3 million loan) we will approve the loan as a salable loan. Finally, we will not be reviewing loans from an underwriting point of view but will rather be relying on Production to make certain that the loan[s] meet all other underwriting Guideline and w[i]ll have been reviewed for compliance acceptability and fraud.
July 28, 2005 email from David Spector, Managing Director, to Countrywide Managing
Directors and Ssecondary Marketing management (emphasis added).
179. As Nathan Adler, Managing Director of Secondary Markets, testified in the SEC action,
Q. Was one of the criteria for granting exceptions at the Secondary Loan Desk in Secondary Marketing whether or not the loan could be sold into the secondary market?
A. That was the only criteria that we followed.
180. Countrywide’s widespread use of exceptions to its underwriting guidelines were well-known within the Company, but permitted because, as recognized by John McMurray in his
May 22, 2005 email discussed above, “CW’s approach to exceptions has been lucrative over the past several years.”
181. Yet Countrywide did not publicly disclose the amount of loans it was underwriting on an exception basis for any loan product or division. [SOF 296] Paul Liu, a
Countrywide attorney who participated in the preparation of the Offering Documents, testified in the SEC Action that while the Prospectus Supplements stated that “some of those mortgage loans may have . . . been originated with exemptions that have compensating factors,” the Offering
Documents did not disclose the number or percentage of loans included in each securitization that were underwritten pursuant to exceptions, or even in many cases whether any loans within that securitization were underwritten pursuant to exceptions at all. [Exh. 262]
83 182. Countrywide assured investors that the level of exceptions was low. Christopher
Brendler, a Stifel Nicholas analyst who initiated coverage of Countrywide in early 2006, testified that Countrywide repeatedly advised conference call and investor presentation participants that it kept its “exceptions low.” Brendler also testified that a low exception rate in the mortgage industry would have been 5% to 10% of total loans – not the extreme number of exceptions that
Countrywide made. Brendler confirmed that such a disclosure would have been material:
That’s -- that would have been a very disturbing disclosure, I believe, to know that you’re basically seeking out the most aggressive policies and underwriting guidelines of your competitors without consideration for other factors. You’re essentially creating a worst of the worst.
[Exh. 242]
183. On November 3, 2009, the District Court for the Central District of California denied a motion to dismiss the SEC complaint. Judge Walter specifically noted that “neither
Countrywide’s disclosures nor a careful review of the context of the statements convince this
Court that the alleged omissions or misstatements were immaterial or not misleading as a matter of law.” SEC v. Mozilo, et al., No. 09-3994, slip op. at 10 (C.D. Cal. Nov. 3, 2009).
184. Subsequently, on September 16, 2010, Judge Walter denied Countrywide’s motion for summary judgment. Among other key determinations, the court found:
[The] SEC has also presented evidence that Countrywide routinely ignored its official underwriting guidelines to such an extent that Countrywide would underwrite any loan it could sell into the secondary mortgage market. According to the evidence presented by the SEC, Countrywide typically made four attempts to approve a loan. Countrywide first used an automated underwriting system known as “CLUES”, which applied Countrywide’s underwriting guidelines as set forth in Countrywide’s technical manuals and loan program guides. SF 279. . . . CLUES would either approve the loan or “refer” it to a loan officer for manual underwriting. SF 280. If that loan officer lacked the authority to make an exception to Countrywide’s underwriting guidelines, the loan was referred to the Structured Lending Desk, where yet another underwriter, with even more authority to waive guideline requirements, attempted to make the loan. Adler Dep. 31:23-33:4, July 15, 2010. If that attempt failed, the loan was referred to
84 Countrywide’s Secondary Markets Structured Lending Desk. SF 282, Adler Dep. 32:9-33:4. According to the testimony of the Managing Director of Countrywide Home Loans’ Secondary Marketing Division, once the loan was referred to Countrywide’s Secondary Markets Structured Lending Desk, the sole criterion used for approving the loan was whether or not the loan could be sold into the secondary market. SF 282. As a result of this process, a significant percentage (typically in excess of 20%) of Countrywide’s loans were issued as exceptions to its official underwriting guidelines. SF 293-294. As reported in one Corporate Credit Risk Committee meeting, one third of the loans referred from CLUES missed “major guidelines” and another one third missed “minor” guidelines. SF 289. In light of this evidence, a reasonable jury could conclude that Countrywide all but abandoned managing credit risk through its underwriting guidelines, that Countrywide would originate any loan it could sell, and therefore that the statements regarding the quality of Countrywide’s underwriting and loan production were misleading.
SEC v. Mozilo, et al., No. 09-3994, slip op., at 11–12 (C.D. Cal. Sept. 16, 2010).
185. In short, evidence presented to the court supported the claim that “Countrywide routinely ignored its official underwriting guidelines, and in practice, Countrywide’s only criterion for approving a loan was whether the loan could be sold into the secondary market.”
Id. at 12 (emphasis added).
186. The Attorneys General from many states also filed complaints against
Countrywide based on its abusive and predatory lending practices. Among them, the Attorney
General of California alleged based on its extensive investigation of Countrywide that the company “viewed borrowers as nothing more than the means for producing more loans, originating loans with little or no regard to borrowers’ long-term ability to afford them.”
Complaint at 5, People v. Countrywide Fin. Corp., No. LC083076 (Cal. Super. Ct.) (“Cal. AG
Countrywide Complaint”). Countrywide, the California Attorney General found, “did whatever it took to sell more loans, faster – including by . . . disregarding the minimal underwriting criteria it claimed to require.” Cal. AG Countrywide Complaint at 20.
85 187. For example, the Cal. AG Countrywide complaint quotes one former California loan officer explaining how stated income loans were sold, with a loan officer telling the borrower “with your credit score of X, for this house, and to make X payment, X is the income that you need to make”; after which the borrower would state that his or her income was X. Id. at 21.
188. A similar lawsuit instituted by the Illinois Attorney General, People v.
Countrywide Financial Corporation, No. 08-22994 (Cook County Ch. Ct.), detailed how (a) one
Countrywide employee estimated that approximately 90% of all reduced documentation loans sold out of the Chicago office had inflated incomes; and (b) one of Countrywide’s mortgage brokers, One Source Mortgage, Inc., routinely doubled the amount of the potential borrower’s income on stated income mortgage applications.
189. The Illinois complaint also detailed how Countrywide created incentives for its employees to increase the number of loans without concern for ability of the borrower to repay the loan. The New York Times described the allegations in the complaint as “paint[ing] a picture of a lending machine that was more concerned with volume of loans than quality.”
190. Among the many other abuses described in the Illinois complaint, the Attorney
General found that:
[t]hrough the securitization process, Countrywide extracted hefty over-head charges, then shifted the risk of the failure of these non-traditional loans to investors. Moreover, securitization allowed Countrywide to tap those investors for much needed capital to fuel its origination process and reach its goal of capturing more and more market share. To facilitate the increase in loan origination volume, Countrywide relaxed its underwriting standards even more and sold risky, unaffordable and unnecessarily more expensive mortgage loans to millions of American homeowners.
Testimony of Illinois Attorney General Lisa Madigan before the FCIC, Jan. 14, 2010.
86 191. Similar allegations appear in a complaint filed by the Connecticut Attorney
General, Connecticut v. Countrywide Fin. Corp., No. 08-40390945 (Hartford Sup. Ct.).
192. On October 6, 2008, Countrywide entities settled lawsuits brought by eleven State
Attorneys General and potential claims by 28 other states, including all of the States in which loans backing the PLMBS purchased by the Bank were issued. The settlement valued at $8.4 billion resolved charges of violations of predatory lending, unfair competition, false advertising, and violations of banking laws, and required Countrywide to implement a program to modify certain existing loans, particularly high risk loans and pay-option mortgages that were the subject of the Attorneys Generals’ investigations.
b. Private actions against Countrywide demonstrate Countrywide’s failure to adhere to sound underwriting practices.
193. A multitude of private class action and individual cases raise further challenges to
Countrywide’s underwriting practices—and substantiate the challenges with witness testimony and documentary evidence. For example, Mark Zachary, a former Regional Vice President of
Countrywide’s joint venture with KB Home, Countrywide Mortgage Ventures, LLC, detailed in the complaint filed in Zachary v. Countrywide Financial Corporation, No. 08-0214 (S.D. Tex.), how Countrywide blatantly ignored its underwriting policies and procedures. Mr. Zachary states that in September of 2006 he informed Countrywide executives that there was a problem with appraisals performed on KB Homes being purchased with Countrywide loans. Mr. Zachary raised concerns again in November of 2006 to Countrywide executives and described how loan officers would help loan applicants to submit applications with false income amounts.
194. Zachary’s observations about problems with appraisals at KB Homes are confirmed by documents reflecting internal correspondence within and between KB Homes and
Countrywide filed in Johnson v. KB Homes, et al., No. 09-972 (D. Ariz.).
87 195. For example, on June 8, 2005, Christina Nickerson, a KB Home salesperson
wrote: “We have an appraisal issue at IMR Mesa . . . the [lender’s] appraiser can not obtain value. . . . I have asked the [lender] for a copy of the appraisal, and I requested that she try a more aggressive appraiser. . . . My suggestion is that we have KBHMC order an appraisal from a
KB friendly appraiser and see what happens.” KB Home Director of Sales McLaury responds: “I agree, we need to order an appraisal from our KB friendly appraiser[.]” On June 16, the salesperson heard back: “Here’s our appraisal at purchase price[,]” but McLaury complains: “It’s
$1,966 short isn’t it? Can Ernie Carver bump it up?” Soon after, McLaury confirms that the maneuvering has worked: “Christina and the Mesa Team, the appraisal will come in at the total sales price . . . .”
196. In another instance, in July 2006, KB Home Phoenix Vice President Stacie
McDonald asked a KB Home salesman about a home for which an appraisal was low. The
salesman responded: “It was approved at $290,000 with a VC of 38%, however, we were able to
push appraisal to $300,000 and the addendum for $300,000 was done yesterday.”
197. Similarly, in October 2007, KB Home Director of Sales McLaury instructs
“friendly” appraiser Scott Dugan: “Please base your appraisal on today’s base sales price, the
options/upgrades the buyer purchased ($40,777), and comps in the neighborhood/area,
particularly the one lot 44 (66 Lions Den Avenue) that closed at $248,643.” On 10/11/07, Dugan
responds: “ok.”
198. When KB Home salesperson, Peter Manesiotis, reported to his manger, Gregory
Victors: “Appraisal came in low. This is a CW deal. How should we proceed?”, Victors
responded: “Have Countrywide order a second appraisal. KB will pay for it. Speak to [loan
officer] or processor to get someone who knows area. This process just worked at Mesquite.
88 Buyer did not know about first appraisal.” Manesiotis then instructed that a new appraisal be ordered and “do not notify the buyer about the first appraisal.”
199. Countrywide senior executives were apparently not just aware but actively involved in this conduct. In an August 9, 2006 email sent after an appraisal was below contract price and below the level that KB Home’s hand-picked appraiser, Harry, could reach,
Countrywide/CWKB Vice President, Tim Ryan writes: “Eric Sanford the western regional VP of landsafe is reviewing the appraisal – he is as high as it gets at landsafe. . . . As soon as I hear I will let you know. We are fighting all the way to the top for you . . . .” Ryan later reports: “We were just informed the original appraisal will be amended to Harry’s appraisal. . . . So CW will be able to use the $687,000.00 value.” On another occasion Ryan explained one scheme for generating self-perpetuating excessive appraisals: “Going forward I have asked ops to request
Harry on homes that are ‘decked’ out – this way we know max value has been given. Under the new rules we cannot do it often, however once a few closing occur – we have comps!”
200. More information is provided by the Consolidated Complaint filed in In re
Countrywide Financial Corporation Derivative Litigation, 07-6923 (C.D. Cal.) on February 15,
2008. The suit against certain Countrywide officers, Board members, and others alleged claims based upon, inter alia, a failure of “oversight of Countrywide’s lending practices, financial reporting, and internal controls.” That complaint details how, as to the specific mortgage backed securities at issue – all originated by Countrywide or affiliated entities – over 50% of the total mortgage loan balance in the underlying loans was severely delinquent, in default, repossessed, in bankruptcy, or in foreclosure. Consistent with the findings of the BasePoint Analytics study previously discussed and this 50% failure rate, the complaint quoted multiple former employees
89 of Countrywide who detailed how Countrywide routinely ignored its own underwriting standards when the company needed to book loans to maintain earnings.
201. Countrywide’s representations regarding its loan origination practices have also been challenged by the leading insurance companies that insured MBS sold by Countrywide. On
September 30, 2008, MBIA Insurance, one of the largest providers of bond insurance, filed its complaint in MBIA Insurance Corp. v. Countrywide Home Loans, et al. (N.Y. Sup. Ct.). This complaint explains how MBIA “provide[d] credit enhancement on the [MBS]—in the form of guarantee of repayment of principal and interest for the [MBS] notes in each securitization,” and claims MBIA issued such insurance on the basis of fraudulent representations by Countrywide.
202. MBIA explains that:
MBIA’s re-underwriting review has revealed that 91% of defaulted or delinquent loans in these fifteen Countrywide securitizations show material discrepancies from underwriting guidelines. . . . For example the loan documentation may (i) lack key documentation such as verification of borrower income or assets; (ii) include an invalid or incomplete appraisal; (iii) demonstrate fraud by the borrower on the face of the application; or (iv) reflect that any of the borrower income, FICO score, debt, DTI [“debt-to-income”] or CLTV ratios, fails to meet stated Countrywide guidelines (without any permissible exception).
MBIA specifically notes that “the Defective Loans run across Countrywide’s securitizations from 2004-2007, demonstrating the consistency of Countrywide’s disregard for its underwriting guidelines during this period.” On April 27, 2010, the Court denied Countrywide’s motion to dismiss MBIA’s fraud claims.
203. The September 28, 2010 Complaint filed by monoline insurer Ambac in Ambac
Assurance Corporation v. Countrywide Home Loans, et al. (N.Y. Sup. Ct.) alleges:
Because Countrywide [Financial Corporation, Countrywide Home Loans, Inc. and Countrywide Securities Corporation] was the nation’s leading mortgage originator, its many public pronouncements that its underwriting practices were the industry's gold standard carried significant weight. Countrywide repeatedly asserted that the loans in its portfolio, from which the loans in the transactions at
90 issue were drawn, were originated pursuant to Countrywide’s strict underwriting standards that allowed “exceptions” only if compensating factors were present. But what Countrywide concealed is that, contrary to its representations, approval of “exceptions” became the rule. Countrywide failed to disclose that its business model was premised on the perpetual origination and refinancing of loans to borrowers who did not have the ability to make the required payments.
204. Ambac alleges that Countrywide made numerous false and misleading statements and omitted material facts about the quality of Countrywide's loan origination procedures and the collateral underlying the transactions. Specifically, “[t]he Prospectus Supplements contained false and misleading statements concerning the quality of Countrywide's loan origination procedures and, in particular, failed to disclose that Countrywide had adopted a practice of making loans to borrowers who had little or no ability to repay their loans.”
205. The falsity of Countrywide’s representations is evidenced by the performance of the underlying loans, which have defaulted at extraordinary rates (as of September 2010, more
than 35,000 loans insured by Syncora with an aggregate principal balance of more than $1.95
billion hade defaulted or have been charged-off. Further, by September 2010, Ambac had reviewed the origination files for 6,533 loans for conformance with Countrywide's loan-level representations and warranties and discovered that 6,362 of the loans—more than 97%— materially breached Countrywide's loan-level representations and warranties.
206. In Financial Guaranty Insurance Company v. Countrywide Home Loans, Inc., et
al. (N.Y. Sup. Ct.), Countrywide MBS insurer FGIC alleges that, with respect to securitizations
it insured in 2006 and 2007, Countrywide and its corporate affiliates made multiple false
misrepresentations and omissions, including that Countrywide: (a) failed to disclose an increase
in its exceptions to and expansion of its mortgage-underwriting guidelines, including exceptions
for which there were no compensating factors; (b) failed to disclose and deliberately concealed
changes to its underwriting standards and procedures from those used for mortgage loans
91 included in prior securitizations; (c) engaged in “adverse selection” whereby poor quality loans
would be securitized while loans that were expected to perform better were retained on
Countrywide’s books; (d) failed to disclose mortgage-loan-origination fraud in which
Countrywide and its corporate affiliates were participants or complicit; (e) misrepresented to
FGIC the nature of key delinquency information; and (f) made numerous false and misleading public statements concerning the quality of Countrywide’s mortgage origination process and securitized mortgage loans.
207. According to FGIC, beginning in early 2006, at the latest, Countrywide made continuing undisclosed changes in its mortgage loan origination practices and started originating and securitizing lower-quality, poorly underwritten loans. These changes resulted in an undisclosed expansion of Countrywide’s underwriting guidelines by making increased exceptions in originating mortgage loans, and making these exceptions without adequate, and in many cases any, compensating factors. Moreover, FGIC alleges that Countrywide admitted to it that Countrywide not only expanded the exception process, but also Countrywide also engaged in “adverse selection” by retaining fewer exception mortgage loans for its portfolio while securitizing (for sale to investors) those loans with exceptions.
208. FGIC’s allegations and Countrywide’s purported admissions are supported by the analysis of professional residential mortgage loan review experts that were retained by FGIC to review statistically significant samples of mortgage loans from FGIC insured securitizations.
These reviews determined that approximately 70% of the mortgage loans in these securitizations significantly violated one or more of Countrywide’s underwriting guidelines or standard mortgage underwriting practices. Unsurprisingly, the loss rate for mortgage loans found to be in
92 breach of underwriting standards was two-and-a-half to three times the loss rate on non- breaching loans.
209. Similarly, in Syncora Guarantee Inc. v. Countrywide Home Loans, Inc., et al.
(N.Y. Sup. Ct.), Countrywide MBS insurer Syncora alleges that, with respect to Countrywide securitizations it insured between 2004 and 2006,
in originating the loans in these portfolios, Countrywide, consistent with its business practices at the time, systematically ignored its own underwriting guidelines and made imprudent loans that no reasonable underwriter would have made in a single-minded pursuit of generating ever-greater volumes of new loans. As a result, thousands of non-performing loans in the securitized portfolios violated Countrywide’s own published guidelines should never have been made. (Emphasis added.)
210. Syncora alleges that the Countrywide offering documents, including the
Prospectuses and Prospectus Supplements, were replete with misrepresentations regarding
Countrywide’s underwriting process and failed to disclose its routine, material deviations from sound underwriting practices. Countrywide is also alleged to have materially misrepresented the accuracy of data, including debt-to-income ratios and combined loan to value ratios, provided to
Syncora for each securitized loan (commonly referred to as the “loan tape”).
211. Syncora’s review of underlying files for 3,700 defaulted loans in two of the securitizations it insured revealed that 2709 of the loans—almost 75%—have severe underwriting defects. The majority of these loans exceeded or ignored one or more Countrywide underwriting guidelines regarding excessive debt-to-income ratio; excessive combined loan to value ratios; excessive loan amounts; improper calculation of first-lien debt; improper calculation of property values; patently unreasonable stated incomes; borrower fraud;
93 indiscriminate availability of stated income loans; inflated appraisals;3 insufficient borrower
credit; insufficient cash reserves; and/or missing documents. In fact, Countrywide frequently
breached a combination of underwriting guidelines for a given loan, which created a “layered
risk,” greatly increasing the likelihood of default.
c. Confidential witnesses provide further evidence of Countrywide’s failure to adhere to sound underwriting practices.
212. Confidential witnesses provide additional evidence of Countrywide’s failure to
adhere to sound underwriting practices and guidelines. For example, Confidential Witness
(“CW”)-A, a loan officer who worked at Countrywide from 1997 through 2007, CW-B, a former branch manager and regional vice president for Countrywide Home Loans from September 2005 through November 2008, CW-C, a loan specialist at Countrywide Home Loans’ subprime lender,
Full Spectrum Lending, from 2004 to 2005, and CW-EE, a former Countrywide branch operation’s manager from 2005 to 2010 (after Countrywide was taken over by Bank of
America), all confirm that: (a) Countrywide employees faced intense pressure to close loans at any cost; (b) Countrywide increasingly approved risky, low- or no-documentation loans without adequate review; (c) Countrywide failed to adhere to underwriting guidelines; (d) Countrywide routinely approved loans that contained exceptions for which there were no reasonable
3 With respect to inflated appraisals, Syncora alleges in part:
In a review of non-performing loans in the 2005-K and 2006-D Securitizations, Syncora has found that Countrywide’s appraisals of properties secured by non-performing loans show a clear pattern of inflation compared to sales prices achieved for comparable properties in the locale at the time of Countryside obtained its appraisals. Moreover, despite Countrywide’s promise in the contractual documents and the Prospectuses to obtain “independent third party” appraisals, the properties underlying the vast majority of the loans in the Securitizations were appraised by Countrywide’s own affiliated appraisal company, Landsafe, Inc. (“Landsafe”). Landsafe, like Countrywide Home Loans, is a subsidiary of Countrywide Financial [Corp.].
94 compensating factors; (e) Countrywide employees pressured appraisers to inflate home values;
and (f) Countrywide employees manipulated loan data in order to close loans.
213. Specifically, CW-A stated that employees at Countrywide always faced pressure
to produce and close more loans. Because CW-A’s performance was judged only on how many
loans he closed each month, and not on long-term performance, he used to joke to friends, “I’m
fired every month, and then every month they re-hire me.”
214. CW-A stated that from 2004 to 2006, Countrywide’s underwriting guidelines
became “looser and looser and looser.” During this period, the minimum credit scores required for prime or Alt-A mortgages fell repeatedly, such that a borrower with a FICO score of 680 could get a mortgage with a 100% LTV ratio based upon stated income/stated assets documentation. CW-A also stated that Countrywide offered no income/no asset (“NINA”) loans, whereby a borrower could obtain a loan without providing any employment, income, or asset
documentation, and did so without any effort, or for that matter any way, to determine whether the borrower had an ability to repay the loan. CW-A further stated that Countrywide frequently offered loans to borrowers who had been rejected by other mortgage providers. In fact,
Countrywide loan officers often emphasized to prospective borrowers that Countrywide could do loans that other lenders could not.
215. According to CW-A, Countrywide had an “Exception Desk,” whose purpose was to review loans which did not strictly meet the underwriting guidelines. During the 2004-2006 time period, CW-A stated that, “[i]t got to where loan approvals with exceptions were the norm.”
216. According to both CW-A and CW-B, Countrywide loan officers pressured appraisers to return values which would allow the loans to be approved. For example,
95 Countrywide loan officers would tell the appraisers that if they did not provide the value the loan
officers needed, Countrywide would not send any more work to the appraiser.
217. Both CW-A and CW-B described that, even in circumstances where the
appraisers were not directly threatened, Countrywide influenced their appraisal values by telling
appraisers exactly what value they needed in order to approve the loan. CW-B also explained
that in other instances, Countrywide provided appraisers with the purchase price of the home and the loan amount so that the appraisers could extrapolate the minimum value needed for the appraisal. CW-B noted that Countrywide also sent appraisers additional comparables that were higher than those the appraiser initially relied upon.
218. CW-B stated as well that Countrywide’s underwriting guidelines became “way too easy” to meet. As a consequence, many of Countrywide’s loans ended up in default.
Numerous times, he recalled thinking to himself, “people making this kind of money shouldn’t qualify for a $400,000 loan.” For example, he recalled seeing loan applications for $350,000 homes, with $1,900/month loan payments, when the borrowers were making only $3,000/month.
The DTI (“debt-to-income”) ratio on such a loan was approximately 63%. He said such situations were “absurd, but I saw it all the time.”
219. Additionally, CW-B said that most approved mortgages at Countrywide had 95-
100% LTV ratios, and most borrowers only put down zero to five percent of the purchase price.
Consequently, borrowers had “no skin in the game,” and when home values started to drop and the borrowers’ loans were for more than the homes were worth, they had no incentive to continue making their mortgage payments. Moreover, CW-B said that Countrywide granted numerous mortgages to borrowers with 65% DTI ratios, and that Countrywide did not require
96 borrowers to have any “reserve” (i.e., cash in their bank accounts)—or, at most, they only had to have one month’s reserve—in order to be approved.
220. CW-B also stated that Countrywide offered a “Fast and Easy” loan program, which required minimal documentation and thereby allowed mortgages to be approved more
quickly. It was Countrywide’s version of the stated income/stated asset mortgage. In order to
determine borrowers’ eligibility for the Fast and Easy loan program, Countrywide employees
entered data into Countrywide’s internally developed automated underwriting system, called
CLUES. CLUES had a flagging mechanism whereby loan officers could not change borrower
information and attempt to re-run it through CLUES in order to qualify borrowers for the Fast
and Easy loan program. If a loan officer did change such information, CLUES would
immediately flag it, decline it for the program, and require full documentation. However, CW-B
stated that Countrywide employees bypassed this flagging mechanism by entering inflated
borrower information in the first place. For example, they would report a higher monthly
income than the borrower actually reported in his or her application. By entering such inflated
information, there was no way for the CLUES system to know that the information was falsified.
Thus, the loan would not be flagged.
221. CW-B had “no doubt” that there was a lot of upward manipulation of borrower
income in order to qualify borrowers for a Fast and Easy loan. In fact, CW-B reported one
employee to Countrywide’s Fraud Department when he caught the employee repeatedly entering
fraudulently high income. However, the Countrywide human resources department said that
such reported incidents were not enough to fire the employee, and the employee was simply
suspended. While the employee was suspended, CW-B examined the employee’s loan files and
97 found four to five different applications in which the employee had nearly doubled the borrowers’ reported income in order to get the loans approved.
222. CW-C also saw a practice of inflating incomes on stated-income loans when she worked at Countrywide’s Full Spectrum Lending division. On instruction from the branch manager, CW-C said that loan officers “recalculated income and removed [any documents] they didn’t want the underwriters to see” in order to push the loans through. In addition, CW-C knew that loan officers at Countrywide cut and pasted false information into loan documents in order to get loans approved. “It was a pretty common practice,” she said.
223. Like CW-A, CW-EE was aware that her bosses were under a lot of pressure to produce a high volume of loans, and she noted that there was a big push on volume back then, and bonuses were tied to volume. In fact, CW-EE was admonished that she was being “too difficult” with respect to the underwriting rules, and was told that she “had to find a way to make the loans, and not try to find a way to not make them.” CW-EE recalls many times during her tenure when she did not believe a loan should be made, but it nevertheless was pushed through.
By way of example, CW-EE recalls a Countrywide loan officer in her branch who was allowed to originate loans for his family members, notwithstanding that this violated Countrywide policy, and despite the fact that the applications only contained names and addresses and no other information. In fact, it was only after several of these loans closed, and CW-EE complained to her regional manager, that her colleague was told he could no longer make loans to family.
224. CW-EE also recalls instances in which she spoke with a customer over the telephone regarding missing or questionable information, and was informed by the customer that they just put down what the loan officer told them to write. When CW-EE expressed her concerns to the loan officer involved, she was told not to contact any customers. CW-EE recalls
98 a lot of tension between the loan officers and loan processors in the branch, with the loan officers
insisting that loans be processed quickly and without questions and becoming angry when loan processors attempted to verify and validate the information on the loan.
225. CW-FF, a loan officer and branch manager for Countrywide, stated that verification of income under Countrywide’s Fast and Easy loan program was “a joke.”
Moreover, if the CLUES system—Countrywide’s automated underwriting system—did not
approve a loan at first, loan officers would often simply inflate the numbers until there was an
approval. There was no limit to how many times the numbers could be re-entered. In CW-FF’s
experience, loan officers were unlikely to seek exceptions to the underwriting guidelines from
the branch manager, since they could simply commit fraud on the “front end”—i.e., by inflating
the numbers.
226. CW-FF also said that 50% of mortgage loans were made without formal
appraisals. When appraisals were done, the appraiser was told that if the property did not “come
back at value,” Countrywide would simply go to another appraiser from then on. CW-FF said
when an appraised property had zoning violations, or other features that would bring down the
valuation, the appraiser was told to make sure their photographs of the property didn’t include
those features.
d. The mortgages originated by Countrywide and securitized in the PLMBS purchased by the Bank provide further evidence of Countrywide’s failure to adhere to sound underwriting practices.
227. Countrywide originated mortgages that secured at least Securities HVMLT 2006-
2 2A1A, HVMLT 2006-2 3A1A, SEMT 2006-1 2A1, SEMT 2006-1 3A1, and SARM 2005-21
3A1. As discussed in detail below, the Offering Documents contained serious material
misstatements regarding specific characteristics of the loan pools securing these Securities,
99 including misstatements with respect to their weighted average LTV ratio, the percentages of loans with LTV ratios in excess of 100%, 90%, and 80%, and the percentage of loans secured by property not the primary residence of the borrower. Moreover, as described below, see infra
¶¶ 591-592, these Securities have exhibited excessive delinquency and foreclosure rates. These circumstances are strong evidence of Countrywide’s failure to observe its stated underwriting standards. Countrywide’s actual practices—including the use of unreliable appraisals, routine granting of underwriting exceptions, and reliance on unverified borrower-supplied information— caused it to originate loans whose actual LTV ratios and primary residence rates were far different from that reported in the Offering Documents, and whose likelihood of default was much higher than that of loans issued under underwriting standards of the type described in the
Offering Documents.
e. Press reports, government investigations and related litigation, and confidential witnesses demonstrate that Countrywide engaged in predatory lending.
228. The New York Times detailed Countrywide’s abusive lending practices in a story entitled “Inside the Countrywide Lending Spree”:
On its way to becoming the nation’s largest mortgage lender, the Countrywide Financial Corporation encouraged its sales force to court customers over the telephone with a seductive pitch that seldom varied. “I want to be sure you are getting the best loan possible,” the sales representatives would say.
But providing “the best loan possible” to customers wasn’t always the bank’s main goal, say some former employees. Instead, potential borrowers were often led to high-cost and sometimes unfavorable loans that resulted in richer commissions for Countrywide’s smooth-talking sales force, outsize fees to company affiliates providing services on the loans, and a roaring stock price that made Countrywide executives among the highest paid in America.
Countrywide’s entire operation, from its computer system to its incentive pay structure and financing arrangements, is intended to wring maximum profits out of the mortgage lending boom no matter what it costs borrowers, according to interviews with former employees and brokers who worked in different units of
100 the company and internal documents they provided. One document, for instance, shows that until last September the computer system in the company’s subprime unit excluded borrowers’ cash reserves, which had the effect of steering them away from lower-cost loans to those that were more expensive to homeowners and more profitable to Countrywide.
229. According to the New York Times, “Countrywide was willing to underwrite loans that left little disposable income for borrowers’ food, clothing and other living expenses.” The
Company’s incentive compensation system encouraged such loans – regardless of the
inevitability that the borrower would default and the Company (and the borrower) would be
severely harmed.
230. According to Mark Zachary, a former Regional Vice President of Countrywide’s
joint venture with KB Home (Countrywide Mortgage Ventures, LLC), the appraiser, as known to
Countrywide executives, was strongly encouraged to inflate appraisal values by as much as 6%
to allow the homeowner to “roll up” all closing costs. Mr. Zachary explained that this resulted in
the homeowner being “duped” as to the value of the home. According to Mr. Zachary, this
inflated value put the buyer “upside down” on the home immediately after purchasing it, i.e., the
borrower owed more than the home’s worth. Thus, the buyer was set up to be more susceptible
to defaulting on the loan. See supra ¶¶ 193-194 (citing to complaints filed in Zachary v.
Countrywide Fin. Corp., No. 08-0214 (S.D. Tex.), and Johnson v. KB Homes, et al., No. 09-972
(D. Ariz.)).
231. Countrywide’s incentive compensation system encouraged brokers and sales representatives to place borrowers into the subprime category even if they in fact qualified for other loans. As reported in Bloomberg, Senator Charles Schumer urged that “Countrywide, the
biggest U.S. mortgage lender, should stop paying higher commissions to brokers who steer
borrowers to high-cost loans that ‘are designed to fail.’”
101 232. The Attorney General for the State of Massachusetts has detailed “Countrywide’s
indifference to its borrowers’ inability to repay its loans.” For example, while “[o]n its website,
Countrywide’s successor Bank of America suggests when obtaining a mortgage to purchase a
home that a borrower have a maximum back-end [debt-to-income (“DTI”)] ratio of 36%[,]
Countrywide routinely approved loans for borrowers with back-end DTI ratios exceeding 50%.”
233. The Massachusetts Attorney General’s complaint in Commonwealth v.
Countrywide Financial Corporation, No. 10-1169 (Mass. Super. Ct.), details Countrywide loan
practices that allegedly violated Massachusetts’ Consumer Protection Law by “originat[ing]
loans in such a manner that would lead predictably to a borrower’s default and foreclosure,” such
as negative amortization loans, hybrid ARMs where borrowers were not qualified based on the
post-teaser rate, stated income loans, and loans with these features plus prepayment penalties.
234. Among the conduct alleged and resolved in Countrywide’s above-noted
settlement with 39 states Attorney Generals were violations of state predatory lending laws by
(a) making loans it could not reasonably have expected borrowers to be able to repay; (b) using
high pressure sales and advertising tactics designed to steer borrowers toward high-risk loans;
and (c) failing to disclose to borrowers important information about loans, such as refinancing
costs, the availability of lower cost products, the existence of prepayment penalties, and that
advertised rates would adjust upwards sharply as soon as one month after closing.
f. Confidential witnesses provide further evidence of Countrywide’s predatory lending practices.
235. Confidential witnesses also confirmed that Countrywide engaged in predatory
lending practices. For example, CW-A said he knew a lot of Countrywide loan officers who
misrepresented to borrowers how a negative amortization loan worked. On a negative
amortization loan, the monthly payment covered an amount that was less than the total accrued
102 interest on the loan; any unpaid interest was added on to the end of the loan. The interest rate on
the negative amortization loans then adjusted upward periodically. Consequently, if a borrower
continued to make monthly payments that were below the amount of the accrued interest, the amount of the unpaid interest would skyrocket. In approximately three years, the amount due would hit a “ceiling” of 110% to 115% of the original principal balance. Then Countrywide would “recast” the loan balance and adjust the required monthly payment so that it would cover all of the previously deferred interest. As a result, the borrower’s monthly payment could rise to as much as two-and-a-half times the original monthly payment. Many borrowers fell into
problems with such loans.
236. CW-A said he knew that Countrywide loan officers misrepresented how these
types of loans worked because he used to make calls to Countrywide workers posing as a
prospective borrower. When the Countrywide officers explained the loans to him, their explanations were not accurate.
237. In summary, far from following its underwriting guidelines and making
occasional, targeted, and justified exceptions when other evidence of ability to repay justified a
deviation from the guidelines, in fact, at Countrywide, variance from the stated standards was the norm, and many loans were made with essentially little to no underwriting or effort to evaluate ability to repay. Nowhere did any of the Offering Documents inform the Bank that Countrywide effectively abandoned its underwriting guidelines and engaged in predatory lending in order to
issue and securitize as many loans as possible.
2. New Century Mortgage Corp.
238. New Century Mortgage Corp. originated underlying mortgage loans securing at
least seven of the PLMBS purchased by the Bank. New Century, which filed for bankruptcy on
103 April 2, 2007, was at one time one of the country’s largest mortgage origination companies,
reporting over $56 billion of total mortgage originations and purchases in 2005 alone. New
Century was identified by the OCC in 2010 as the worst subprime lender in the country based on the delinquency rates of the mortgages it originated in the ten metropolitan areas with the highest
rates of delinquency. Like Countrywide and the other mortgage originators that issued loans that
backed the PLMBS purchased by the Bank, New Century effectively abandoned underwriting
guidelines in favor of loan volume.
a. Government actions and related lawsuits and investigations demonstrate New Century’s failure to adhere to sound underwriting practices.
239. On February 29, 2008, Michael J. Missal, the Bankruptcy Court Examiner for
New Century, issued a detailed report on the various deficiencies at New Century, including lax
mortgage standards and a failure to follow its own underwriting guidelines. During the course of
his investigation, the Examiner conducted 110 interviews of 85 witnesses and reviewed millions
of pages of documents from New Century, its outside auditors, and others.
240. Among the findings in his 550 page Final Report, the Examiner noted:
New Century had a brazen obsession with increasing loan originations without due regard for the risks associated with that business strategy. . . . The Loan Production Department was the dominant force within the Company and trained mortgage brokers to originate New Century loans in the aptly named “CloseMore University.” Although the primary goal of any mortgage banking company is to make more loans, New Century did so in an aggressive manner that elevated the risks to dangerous and ultimately fatal levels.
New Century also made frequent exceptions to its underwriting guidelines for borrowers who might not otherwise qualify for a particular loan. A Senior Officer of New Century warned in 2004 that the “number one issue is exceptions to the guidelines.” Moreover, many of the appraisals used to value the homes that secured the mortgages had deficiencies.
New Century . . . layered the risks of loan products upon the risks of loose underwriting standards in its loan originations to high risk borrowers.
104 Senior Management turned a blind eye to the increasing risks of New Century’s loan originations . . . [and] was aware of an alarming and steady increase in early payment defaults on loans originated by New Century beginning no later than mid-2004.
241. On May 7, 2007, a Washington Post front page story entitled “Pressure at
Mortgage Firm Led to Mass Approval of Bad Loans,” quoted former New Century appraiser
Maggie Hardiman recounting how “[y]ou didn’t want to turn away a loan because all hell would break loose” and that when she did reject a loan because of a low or otherwise inadequate appraisal, “her bosses often overruled her and found another appraiser to sign off on it.”
242. On December 7, 2009, the SEC charged three of New Century’s top officers with violations of federal securities laws. The complaint detailed the falsity of New Century’s assurances to the market about its commitment to “adhere to high origination standards in order to sell [its] loan products in the secondary market” and its policy to “only approve subprime loan applications that evidence a borrower’s ability to repay the loan.”
243. Business Chief Underwriter for CitiFinancial Mortgage, Richard Bowen, testifying to the FCIC on April 7, 2010, specifically identified the inadequate underwriting standards employed by New Century. “A large New Century subprime pool was underwritten and purchased against their policy guidelines. The purchase approval rate under their guidelines was 93%. The approval rate under Citi guidelines would have been 83%.”
244. In June 2010, Morgan Stanley agreed to pay $102 million to Massachusetts homeowners and the Commonwealth following the State Attorney General’s investigation into
Morgan Stanley’s role in acting as a partner in financing mortgages issued by New Century, noting that “[t]hese loans often were unsustainable because of payment shock or poor underwriting,” and that the lenders “should have known [the loans] were destined to fail.”
105 245. The Massachusetts Attorney General identified how a Morgan Stanley review of
New Century loans found that a large majority failed to meet New Century’s underwriting
guidelines. Further review disclosed that for 91% of those loans there was insufficient evidence
of compensating factors to justify an exception to the underwriting guidelines and that for fully
one third of a random sample of loans there was no compensating factor to justify the extension
of credit. See Assurance of Discontinuance at 10, In re Morgan Stanley, Inc., No. 10-2538
(Mass. Super. Ct. June 24, 2010).
246. Patricia Lindsey, a former risk manager at New Century testified before the FCIC in April of 2010 that starting in 2004, underwriting guidelines were all but abandoned. She
explained how New Century was approving loans with 100% financing to borrowers with low
credit scores and no supporting proof of income.
b. Confidential witnesses provide further evidence of New Century’s failure to adhere to sound underwriting practices.
247. Confidential witnesses provided further evidence that New Century failed to
adhere to sound underwriting practices and created a culture in which exceptions to underwriting
standards were the norm. Statements by confidential witnesses confirm that: (a) New Century
underwriters faced intense pressure to close loans at any cost; (b) New Century increasingly
approved risky, low- or no-documentation loans without adequate review; (c) New Century
routinely approved loans that contained exceptions for which there were no reasonable
compensating factors; (d) New Century employees approved loans with inflated appraisal values;
and (e) New Century employees manipulated data in order to close loans.
248. Confidential witnesses include CW-D, a senior underwriter at New Century in
Scottsdale, Arizona from March 2004 to 2006, who underwrote wholesale loans that independent
brokers and brokerage firms brought to New Century account executives; CW-E, a risk manager
106 at New Century from 2004 to 2005; CW-F, an operations manager who worked in New
Century’s Irvine, California branch for 11 years until the company closed its doors in May 2007;
CW-G, a former loan officer and senior branch manager at New Century from December 2000
through December 2005; and CW-H, a loan officer at New Century from 2001 through 2004.
249. CW-D reported that in order to close the loans, managers would “rerun loans all
kinds of ways . . . to get any form of an approval.” CW-D recalled one particular instance in
which a manager pressured her to approve a stated income loan for a C-rated borrower, when they “were not supposed to do anything below a B.” Although she refused to sign off on the loan
because the borrower was a retired person on a fixed income, the manager signed off on it and
“rearrange[d] a bunch of stuff to get the loan to work.”
250. Due to the pressures that New Century employees faced to generate loan volume,
they increasingly approved risky, low- to no-documentation loans; approved “exception” loans for which there were no reasonable compensating factors; encouraged appraisers to inflate
property values; and manipulated loan data in order to close loans. According to CW-F, New
Century account executives (who brought in loans from independent brokers and brokerage
firms) received commissions based on the number of loans they closed. CW-G, a branch
manager at New Century, also confirmed that he was compensated based only on loan volume.
CW-D said she was “always pressured to close loans” at New Century. She mentioned that
account executives would yell at her for declining loans and would often go to upper
management to overturn her decisions to decline loans. CW-H, a loan officer for New Century
from 2001 through 2004, said that if loan officers did not make at least five loan closings in a
month, they were “put on a three-month program that put them on track for termination.”
107 Additionally, loan officers who did not meet their numbers were subject to verbal abuse, including screaming.
251. CW-G ultimately resigned from the company because he “did not believe in the products being offered.” Specifically, he disagreed with New Century’s decision to offer a new mortgage product, called a “stated income W-2 loan.” This loan allowed salaried employees to state their income and back it up with only a W-2 and no pay stubs or tax returns. While this flexibility may have been designed to address situations such as the Las Vegas employment market, where many employees make a lot of their income in tips—which are usually in cash and so often are not reported as income on a W-2—it became impossible to reconcile the amount
of money that the individuals stated that they were making, and the amount of income the W-2s reflected and, as explained by CW-G, the loan files consequently lacked “integrity.”
252. According to CW-G, “low doc” loans were more likely to be approved at New
Century than full-documentation loans. Moreover, CW-G said that New Century approved loans
with 100% LTV ratios all the time, and 100% LTV mortgages continued to increase as a
percentage of the total loans approved in his branch during his time as branch manager. When
CW-G complained to senior management that increasingly risky loans were being offered at
New Century, senior management instructed him just to sell the products.
253. Confidential witnesses also described New Century’s standard practice of deviating from prudent underwriting guidelines. As stated by CW-F, exceptions were made “all the time. It was the nature of subprime. They were granted frequently.”
254. CW-D calculated that 50% of the loans that her branch underwrote each day
contained exceptions. “Exceptions happened more often than not . . . . It was all about getting
the loans approved.” CW-D stated that New Century underwrote exception loans which had no
108 reasonable compensating factors, and that exceptions were made to clear loans that might
otherwise have been rejected.
255. Similarly, CW-E said that New Century did “goofy loans that were hugely non-
compliant.” As an example of a “goofy loan” that New Century approved, he described providing a stated loan to a landscaper who allegedly made $25,000 per month, but had a $500
Visa credit card limit.
256. Confidential witnesses further described the pressure employees placed on
appraisers to inflate property values so that loans could be approved. CW-H said that New
Century loan officers advised appraisers what specific dollar amount they needed in order for a
loan to be approved by New Century underwriters; the appraiser then came up with that exact
figure in his or her appraisal.
257. Similarly, CW-D explained that New Century managers frequently reworked
appraisals that came in short of New Century’s guidelines. The managers would try to find
something wrong with the comparable properties provided by the appraiser so that they could
request new comparables. However, the new comparables generally were not true comparables
because they inflated the value of the purchase property. Additionally, CW-D stated that New
Century managers added “general inflation for the area” if the appraiser’s comparables fell short
on value and hindered the loans from closing.
258. According to confidential witnesses, New Century employees frequently
manipulated loan data in order to close loans and generate volume. For example, CW-D stated
that managers at New Century told underwriters to remove documents from the loan files or
rerun credit reports in the hopes of improving credit scores. Similarly, CW-D described how
underwriters were instructed to remove a wife’s records from a loan file if she had bad credit and
109 only rely on the husband’s credit score, even though the individuals were married and were
borrowing based on dual incomes.
259. CW-E also mentioned that, while at New Century, he reviewed a lot of loans with
fake documents, including fake verifications of employment, fake green cards, and fake social
security cards.
c. The mortgages originated by New Century and securitized in the PLMBS purchased by the Bank provide further evidence of New Century’s failure to adhere to sound underwriting practices.
260. New Century originated mortgages that secured at least Securities CMLTI 2006-
NC1 A2C, CMLTI 2006-NC2 A2B, GSAMP 2006-NC2 A2C, MABS 2006-NC1 A3, MSAC
2006-HE5 A2C, MSAC 2006-HE6 A2C, and SABR 2006-NC3 A2B. As discussed in detail below, the Offering Documents contained serious material misstatements regarding specific characteristics of the loan pools securing these Securities, including misstatements with respect
to the percentages of loans with LTV ratios in excess of 100%, 90%, and 80%, and the
percentage of loans secured by property not the primary residence of the borrower. Moreover, as
described below, see infra ¶¶ 591-592, these Securities have exhibited excessive delinquency
and foreclosure rates. These circumstances are strong evidence of New Century’s failure to
observe its stated underwriting standards. New Century’s actual practices—including the use of
unreliable appraisals, routine granting of underwriting exceptions, and reliance on unverified
borrower-supplied information—caused it to originate loans whose actual LTV ratios and
primary residence rates were far different from that reported in the Offering Documents, and
whose likelihood of default was much higher than that of loans issued under underwriting standards of the type described in the Offering Documents.
110 d. Confidential witnesses also provide evidence of predatory lending.
261. Confidential witnesses detailed predatory practices at New Century in which the originators failed to disclose the true terms of the loans to the buyers.
262. For example, CW-D estimated that half of her loans at New Century were stated income loans. She said, “It was really sad because a lot of the borrowers were uneducated” and did not understand the terms of the loan; she blamed the mortgage brokers for not explaining the terms of the loans to the borrowers.
263. Similarly, CW-H said that in the case of adjustable-rate mortgages, New Century employees only looked at the borrower’s ability to make the initial monthly payment, and did not consider the fully indexed rate over the life of the loan. Additionally, he said that loan officers were coached not to call them “adjustable rate loans” when speaking with borrowers. Instead,
New Century’s sales model was to put the borrower first into a “two-year fixed loan,” and when the two years expired, New Century would target the borrower for conversion to another mortgage product.
264. In summary, far from following its underwriting guidelines and making occasional, targeted, and justified exceptions when other evidence of ability to repay justified a deviation from the guidelines, in fact, at New Century, variance from the stated standards was the norm, and many loans were made with essentially little to no underwriting or effort to evaluate ability to repay. Nowhere did any of the Offering Documents apprise the Bank of the extent to which New Century deviated from its guidelines, and engaged in predatory lending.
3. IndyMac Bank, FSB
265. IndyMac Bank originated underlying mortgage loans securing at least four of the
PLMBS purchased by the Bank. IndyMac as well abandoned sound underwriting practices.
111 a. Government actions and related lawsuits and investigations demonstrate IndyMac’s failure to adhere to sound underwriting practices, applicable appraisal standards, and predatory lending.
266. As reported in the Audit Report of the Office of Inspector General, Department of
Treasury (“OIG”):
IndyMac often made loans without verification of the borrower’s income or assets, and to borrowers with poor credit histories. Appraisals obtained by IndyMac on underlying collateral were often questionable as well. As an Alt-A lender, IndyMac’s business model was to offer loan products to fit the borrower’s needs, using an extensive array of risky option-adjustable-rate-mortgages (option ARMs), subprime loans, 80/20 loans, and other nontraditional products. Ultimately, loans were made to many borrowers who simply could not afford to make their payments.
SAFETY AND SOUNDNESS: MATERIAL LOSS REVIEW OF INDYMAC BANK, FSB, OIG-09-032, (Feb.
26, 2009).
267. In describing what it referred to as IndyMac’s “Unsound Underwriting Practices,” the OIG Audit explained:
IndyMac encouraged the use of nontraditional loans. IndyMac’s underwriting guidelines provided flexibility in determining whether, or how, loan applicants’ employment, income, and assets were documented or verified. The following procedures were used by the thrift:
• No doc: income, employment, and assets are not verified • No income/no assets (NINA): income and assets are not verified; employment is verbally verified • No ratio: no information about income is obtained; employment is verbally verified; assets are verified • Stated income: income documentation is waived, employment is verbally verified, and assets are verified • Fast forward: income documentation is sometimes waived, employment is verbally verified, and assets may or may not be verified.
268. The OIG also explained that:
among other things, we noted instances where IndyMac officials accepted appraisals that were not in compliance with the Uniform Standard of Professional Appraisal Practice (USPAP). We also found instances where IndyMac obtained
112 multiple appraisals on a property that had vastly different values. There was no evidence to support, or explain why different values were determined. In other instances, IndyMac allowed the borrowers to select the appraiser. As illustrative of these problems, the file for one 80/20, $1.5 million loan we reviewed contained several appraisals with values ranging between $639,000 and $1.5 million. There was no support to show why the higher value appraisal was the appropriate one to use for approving the loan.
269. The OIG Audit contained 6 examples of examined loans with serious underwriting failings and questionable appraisals. These included the following examples of
IndyMac’s conduct and the losses resulting from IndyMac’s violation of underwriting standards and reliance on faulty appraisals:
Loan 1
On May 2, 2007, IndyMac approved a $926,000 stated income loan for the borrower, . . . an adjustable rate mortgage with a 5-year term and a beginning interest rate of 5.875 percent, which was subject to change monthly. . . .
As a stated income loan, IndyMac performed no verification of the borrower’s self-employment income of $50,000 a month ($600,000 annually). IndyMac also did not verify the borrower’s assets. . . .
The loan file contained an appraisal which indicated that the property value was $1.43 million. This value was based on comparable properties that had been improved with single family residences. However, the comparable properties were located closer to the ocean and bay, and their values were based on listing price instead of the actual selling price. The appraised value also did not take in consideration a slowdown in the real estate market. We saw no evidence in the loan file that IndyMac resolved these and other anomalies with the appraisal.
The borrower made payments totaling $5,389 before defaulting on the loan. The unpaid principal and interest at the time of foreclosure totaled approximately $1.01 million. At the time of our review, the property was listed for sale for an asking price of $599,000.
Loan 2
In November 2007, IndyMac approved a $3 million stated income loan, secured by the borrower’s primary residence in Scottsdale, Arizona. The loan proceeds were used to refinance the primary residence which the borrower had owned for 11 years and reported its value as $4.9 million.
113 As a stated income loan, IndyMac performed no verification of the borrower’s reported self-employment income of $57,000 a month ($684,000 annually). Contrary to IndyMac policy, the borrower selected the appraiser who appraised the property at $4.9 million.
Notes in the loan file indicated that the borrower had listed the property for sale in November 2006, first at a price of $4.9 million that was later reduced to $4.5 million before the borrower pulled the property off the market. Despite this, the appraiser concluded that the value of $4.9 million appeared to be reasonable. IndyMac accepted the appraiser’s value based on a review of online sale and public records. It did not physically inspect the property.
The borrower made no payments on the loan before default. The total delinquent loan amount as of November 2008 was $3,015,625. According to the IndyMac official, the property sold in October 2008 for $2.0 million.
Loan 3
In February 2007, IndyMac provided the borrower a stated income, 80/20 loan, for a combined total of $1.475 million, to purchase a property in Marco Island, Florida. The combined loan equaled the appraised value of the property.
As a stated income loan, IndyMac performed no verification of the borrower’s reported income of $28,500 a month ($342,000 annually). For 80/20 loans, IndyMac allowed an $800,000/$200,000 maximum loan amount and a maximum combined loan amount of $1 million. This loan was an exception to IndyMac policy as the combined loan amount of $1,475,000 exceeded the maximum combined loan amount. The loan exception was approved anyway.
Various appraisals in the loan file contained significant differences with no indication of how they were resolved by IndyMac. A January 2007 appraisal valued the property at $1.48 million. A valuation analysis prepared by an IndyMac employee on January 25, 2007, stated that the skill level of the appraiser was unacceptable—the appraiser had not provided accurate comparable properties to the subject property and did not accurately consider the location of the property. The IndyMac employee estimated the property value at $1 million and recommended that another appraisal be obtained. Another note in the loan indicated that the IndyMac official overruled the employee’s recommendation and the appraisal was accepted. The IndyMac official, however, adjusted the appraised value approximately 10 percent lower, to $1.33 million, citing as a justification that a property on the same street had sold for $1.97 million.
The borrower made no payments before defaulting on the combined $1.48 million loans. According to the IndyMac official, the borrower deeded the property to the thrift in lieu of foreclosure. The IndyMac official estimated in November 2008 that the property was worth about $700,000.
114 Loan 4
In April 2002, IndyMac approved the borrower for a stated income home equity line of credit of $550,000. This line of credit was in addition to a 80/20 loan for $3 million that the borrower already had with IndyMac. The borrower reported that the property was worth $5.2 million.
As a stated income loan, IndyMac performed no verification of the borrower’s reported gross income of $95,000 a month ($1.14 million annually) as the owner/manager of a limited liability corporation. The loan notes history did not indicate how IndyMac resolved negative information revealed in credit reports on the borrower. Two credit reports obtained in March 2002 listed serious and frequent delinquencies. An earlier credit report had noted a discrepancy with the borrower’s social security number.
Various appraisals in the loan file also contained significant discrepancies with no indication of how they were resolved by IndyMac. Specifically, the appraisal for the original 80/20 loan, dated in October 2001, valued the property which the appraisal described as new construction at $5.2 million. This same value was reported by a second appraisal dated in March 2002. A third appraisal, dated in April 2002, placed the market value of the home at $508,500. The appraisal stated that the home was less than ½ mile from a hazardous waste facility. A fourth appraisal, also prepared in April 2002, valued the property at $730,000, with the lowest reasonable value at $590,000 and the highest reasonable at $900,000. This appraiser also reported that the home was built in 1959.
The borrower made payments totaling about $11,000 before defaulting on the $550,000 home equity line of credit loan. According to the IndyMac official, the thrift was able to recover approximately $600,000 on both loans. . . .
270. A June 30, 2008 report issued by the Center for Responsible Lending entitled
INDYMAC: WHAT WENT WRONG? HOW AN “ALT-A” LEADER FUELED ITS GROWTH WITH
UNSOUND AND ABUSIVE MORTGAGE LENDING (the “CRL Report”) concluded that IndyMac often
ignored its stated underwriting and appraisal standards and encouraged its employees to approve loans regardless of the borrower’s ability to repay.
271. The CRL Report quotes an IndyMac underwriting team leader, Audrey Streater, as stating of her time at IndyMac: “I would reject a loan and the insanity would begin. It would go to upper management and the next thing you know it’s going to closing.”
115 272. The CRL Report describes the recollection of another former underwriter for
IndyMac, Wesley Miller, interviewed by CRL:
[W]hen he rejected a loan, sales managers screamed at him and then went up the line to a senior vice president and got it okayed. “There’s a lot of pressure when you’re doing a deal and you know it’s wrong from the get-go – that the guy can’t afford it,” Miller told CRL. “And then they pressure you to approve it.” The refrain from managers, Miller recalls, was simple: “Find a way to make this work.
273. As to the recollection of another former underwriter interviewed by the CRL,
Scott Montilla, who worked as an underwriter for IndyMac in Arizona. . . . says that when salespeople went over his head to complain about loan denials, higher- ups overruled his decisions roughly half the time. “I would tell them: ‘If you want to approve this, let another underwriter do it, I won’t touch it – I’m not putting my name on it,’ ” Montilla says. “There were some loans that were just blatantly overstated. . . . Some of these loans are very questionable. They’re not going to perform.”
b. Private actions against IndyMac demonstrate IndyMac’s failure to adhere to sound underwriting practices.
274. Multiple insurers of IndyMac originated loans – MBIA Insurance Corporation,
Financial Guarantee Insurance Company, and Syncora Guarantee Inc. – all of whom have experienced unprecedented losses in connection with the financial guarantee insurance they provided on IndyMac loans, have filed suit against IndyMac alleging the abandonment of underwriting standards based, in part, on their analysis of the loan files for IndyMac loans.
Some of the allegations made by the insurers are virtually identical to the allegations made by the
Bank here – namely that IndyMac completely abandoned its underwriting standards in its rush to originate (and securitize) as many loans as possible.
275. By way of example, according to MBIA:
IndyMac had abandoned any reasonable and prudent underwriting standards. In an effort to expand its market share during the mortgage lending boom, IndyMac systematically abandoned its own underwriting guidelines in pursuit of increased loan originations: it knowingly loaned millions of dollars to borrowers who could not afford to repay the loans, or who IndyMac personnel knew or should have
116 known were including misstatements in their loan applications, often with the assistance and encouragement of IndyMac’s employees and brokers, or who otherwise did not satisfy did not satisfy the basic risk criteria for prudent and responsible lending that IndyMac claimed to use.
See MIBA Ins. Corp. v. IndyMac ABS, Inc., et al., No. BC422358 (Cal. Super. Ct.). This systematic abandonment of underwriting standards stands in sharp contrast to the representations made about IndyMac’s underwriting standards in numerous documents, including investor prospectuses and prospectus supplements.
276. MBIA’s allegations are supported by a review of a sample of the loan files to which they, as an insurer, eventually gained access. Of the 6,970 loans included in the mortgage pool for one of the PLMBS that MBIA provided insurance for, 418 loans – roughly 6% -- were in default less than a year after the security was issued. A review of the loan files for the defaulting loans indicated that only 401 loans — more than 95% — were not originated or acquired in material compliance with IndyMac’s representations and warranties with respect to its underwriting guidelines and policies. Similarly, of the 3956 loans included in the mortgage pool for another PLMBS insured by MBIA, 297 loans — roughly 7.5% — were in default less than a year after the security was issued. A review of the of the 297 loans indicated that 294 loans — more than 99% — failed to comply with IndyMac’s stated underwriting guidelines and policies.
277. The results of MBIA’s analysis of two loan pools were duplicated by Syncora’s analysis of various loans for pools for which it provided insurance. Out of the 107 loans analyzed by Syncora, 105 of the loans breached representations and warranties made by MBIA to Syncora. These include: (a) 83 loans in breach of the representation that “each Mortgage
Loan was originated in all material respects in accordance with the applicable Originator’s underwriting criteria in effect at the time of origination;” (b) 57 loans in breach of the
117 representation that “each Mortgage Note be a legal, valid and binding obligation, all parties had full legal capacity to execute the documents and convey real estate to the best of the Seller’s knowledge, and there was no fraud involved in the origination of any Mortgage loan;” and (c) six loans in breach of the representation that “each Mortgage Loan contain an appraisal conforming to the standards of the applicable Originator.”
278. It is also important to note that while the monoline insurers’ loan reviews have been limited with respect to number of loans examined, this is because IndyMac is refusing to provide complete access to its loan files, notwithstanding its contractual obligation to do so. For this reason, all three insurers are seeking judicial relief to gain access to these various loan files.
Investors, such as the Bank, also do not have access to these loan files, and the Bank does not expect to be able to gain access until Defendants are required to produce the files in discovery in this lawsuit.
279. In addition, in May of 2009, Deutsche Bank National Trust Company, pursuant to its contractual obligations and in its capacity as a trustee, filed suit against IndyMac Bank and the FDIC (in its corporate capacity as well as in its capacity as receiver and conservator for
IndyMac Bank and IndyMac Federal Bank) over the more than 150,000 mortgage loans that
IndyMac Bank had originated or acquired and sold to the trust. See Deutsche Bank Nat’l Trust
Co. v. FDIC, et al., No. cv09-3852-GAF (C.D. Cal.). Deutsche Bank’s complaint asserts claims for breach of contract, breach of the duty of good faith and fair dealing, and breach of fiduciary duty, and alleges that IndyMac breached numerous representation and warranties that it made to the trusts, including: (a) mortgage loans IndyMac sold into the trusts failed to comply with
IndyMac’s credit underwriting standards and origination process; (b) mortgage loan origination files failed to contain required documentation; (c) the origination of mortgage loans did not
118 comply with applicable law; and (d) mortgage loans did not possess the characteristics set forth in the schedules to the relevant governing agreements. Simply put, the Deutsche Bank trustee, similar to the Bank here, is alleging that IndyMac sold “materially defective mortgage loans into the Trusts that did not comply with IndyMac’s express Representations and Warranties,” including representations and warranties regarding underwriting standards and loan quality.
c. Confidential witnesses provide further evidence of IndyMac’s failure to adhere to sound underwriting practices.
280. Confidential witnesses provide additional evidence of IndyMac’s failure to adhere to sound underwriting practices and guidelines as well as appraisal guidelines. For example,
CW-GG, a former underwriter for IndyMac in Missouri from June 2005 to June 2007; CW-HH, a former underwriter for IndyMac in California from 2006 to 2008; CW-II, a former underwriter for IndyMac in New Jersey from 2004 to 2007; and CW-JJ, who began working for IndyMac in
California as a licensed real estate appraiser trainee and who did appraisals for IndyMac, all confirm that IndyMac’s failures.
281. According to CW-GG, on a daily basis she was required to approve loans that she believed should not be approved. IndyMac required underwriters who wanted to deny stated income loans to obtain management approval for the denial. As a result, CW-GG was frequently overruled, even when the income provided in the application was obviously overstated, such as when a cab driver from Chicago claimed to have $12,000 a month in income. Upset at being forced to approve clearly inaccurate loan applications, CW-GG many times noted in the file that
“the loan was approved under duress.”
282. CW-GG noted that IndyMac underwriters were under a lot of pressure to close loans. IndyMac underwriters received bonuses based on the number of loans that they permitted to be funded, not the number of loans that they reviewed. According to CW-GG, this structure
119 incentivized the approval of unscrupulous loans and opened the doors to committing fraud on the inside. CW-GG stated that a broker could not commit fraud unless an underwriter approved it, and there were certain underwriters that would approve anything, not matter how blatant, because they wanted a larger paycheck. In fact, in 2007, CW-GG recalls being required, along with the other underwriters in her department, to come in on a Saturday and review the loan files for stated income loans that had been previously funded. CW-GG believes that during this time period a lot of questions were coming up about the loans being reviewed, and CW-GG and her colleagues went through every loan her department had approved to see whether or not the stated salary was within the correct range—as indicated by salary.com—for the job description of the loan applicant. CW-GG found a lot of overstated incomes in the files that had been reviewed by other underwriters – “some of the underwriters would rather see a bigger paycheck than do the right thing.”
283. The testimony of CW-HH and CW-II further confirms IndyMac’s abandonment of underwriting standards. CW-HH stated that on several occasions she suspected that stated- income loan applications contained inflated income information. In particular, she recalls a gardener in California that purportedly made $20,000 a month. Notwithstanding her concerns, because the loan applicant had a sufficiently high FICO score, IndyMac’s automated system – eMITS – approved him for the loan. When CW-HH questioned this approval, she was informed that because the system approved it, she needed to process the loans. CW-HH also recalled that the bonus system – which was based on the number of loans funded – incentivized underwriters to quickly approve loans. Those underwriters who failed to meet their quotas were written up.
Similarly, CW-II reported that no-documentation and stated income loans were “the norm” during CW-II’s tenure as an underwriter. CW-II stated that his managers approved loans that
120 CW-II would not have approved, and were known to overrule CW-II on loans that he denied.
CW-II believed that IndyMac did too many no-doc and stated income loans, and approved deals
that should not have been approved. CW-II was sufficiently concerned about the number of no-
doc and stated income loans being approved that he brought it to the attention of upper
management during an online chat in 2004. Upper management responded that because the
loans were backed by Fannie Mae and Freddie Mac, the deals were secure.
284. CW-GG also testified as to the loosening of appraisal standards. When CW-GG
first started at IndyMac, the bank had an automated system for scoring appraisals that took into
account different factors such as the location of the property and the date of the comparable
sales. Based on the scoring of this data, certain appraisals were sent to IndyMac’s appraisal
review department, which denied a lot of loans. According to CW-GG, at a certain point
management concluded that too many loans were being reviewed and denied, so management
relaxed the standards, thereby reducing the number of appraisals automatically sent to the review
department. CW-GG worked on the same floor as the appraisal review department, and recalls
talking with appraisal reviewers who complained “a lot” that they had strong belief that “they weren’t seeing appraisals (they should be seeing),” i.e., that suspect appraisals were not being reviewed. CW GG’s testimony was confirmed by CW-JJ, an appraiser in California that performed work for IndyMac. CW-JJ recalls being blacklisted over her appraisal of a California home with a separate guest house. Consistent with standard appraisal practices, CW-JJ did not include the guest house’s square footage in the main house, and refused to do so even under
pressure from IndyMac. CW-JJ’s refusal prompted IndyMac to stop sending her work, and an
IndyMac representative verbally confirmed that she had been placed on a blacklist.
121 d. The mortgages originated by IndyMac and securitized in the PLMBS purchased by the Bank provide further evidence of IndyMac’s failure to adhere to sound underwriting practices.
285. IndyMac originated mortgages that secured at least Securities HVMLT 2006-2
2A1A, HVMLT 2006-2 3A1A, INABS 2005-D AII3, and INDX 2006-AR15 A2. As discussed in detail below, the Offering Documents contained serious material misstatements regarding
specific characteristics of the loan pools securing these Securities, including misstatements with
respect to their weighted average LTV ratio, the percentages of loans with LTV ratios in excess
of 100%, 90%, and 80%, and the percentage of loans secured by property not the primary
residence of the borrower. Moreover, as described below, see infra ¶¶ 591-592, these Securities
have exhibited excessive delinquency and foreclosure rates. These circumstances are strong
evidence of IndyMac’s failure to observe its stated underwriting standards. IndyMac’s actual
practices—including the use of unreliable appraisals, routine granting of underwriting
exceptions, and reliance on unverified borrower-supplied information—caused it to originate
loans whose actual LTV ratios and primary residence rates were far different from that reported
in the Offering Documents, and whose likelihood of default was much higher than that of loans
issued under underwriting standards of the type described in the Offering Documents.
286. In summary, far from following its underwriting guidelines and making
occasional, targeted and justified exceptions when other evidence of ability to repay justified a
deviation from the guidelines, in fact, at IndyMac, variance from the stated standards was the
norm, and many loans were made with essentially little to no underwriting or effort to evaluate
ability to repay. Nowhere did any Offering Document apprise the Bank of the extent to which
IndyMac deviated from its guidelines and engaged in predatory lending.
122 4. Fremont Investment & Loan
287. Fremont Investment & Loan originated underlying mortgage loans securing at least two of the PLMBS purchased by the Bank. Fremont as well abandoned sound underwriting practices. Fremont was identified by the OCC in 2010 as the sixth worst subprime lender in the country based on the delinquency rates of the mortgages it originated in the ten metropolitan areas with the highest rates of delinquency.
a. Government actions and related lawsuits and investigations demonstrate Fremont’s failure to adhere to sound underwriting practices and its predatory lending.
288. Fremont was one of the country’s largest subprime lenders until it was forced out of the business by the FDIC in March of 2007.
289. In March 2007, the FDIC announced it had issued a cease and desist order against
Fremont Investment & Loan, and its parent corporations, to resolve claims set forth in In re
Fremont Investment & Loan, No. FDIC-07-035b (F.D.I.C. Mar. 7, 2007). According to the
FDIC’s press release:
The FDIC determined, among other things, that [Fremont] had been operating without adequate subprime mortgage loan underwriting criteria, and that it was marketing and extending subprime mortgages in a way that substantially increased the likelihood of borrower default. . . .
290. The FDIC Cease and Desist Order noted Fremont’s “inadequate underwriting criteria and excessive risk in relation to the kind and quality of assets held,” and that Fremont
“had been operating without adequate subprime mortgage loan underwriting criteria.”
291. The FDIC, in its Cease and Desist order and accompanying press release, also sets forth how Fremont “operated inconsistently with the FDIC’s Interagency Advisory on Mortgage
Banking and Interagency Expanded Guidance for Subprime Lending Programs” and “that it was
123 marketing and extending subprime mortgage loans in a way that substantially increased the likelihood of borrower default,” including by:
• “qualifying borrowers for loans with low initial payments based on an introductory or ‘start’ rate that will expire after an initial period, without an adequate analysis of the borrower’s ability to repay the debt at the fully-indexed rate”;
• “making mortgage loans without adequately considering the borrower’s ability to repay the mortgage according to its terms”;
• “approving borrowers without considering appropriate documentation and/or verification of income”;
• “approving borrowers for loans with inadequate debt-to-income analyses that do not properly consider the borrowers’ ability to meet their overall level of indebtedness and common household expenses”;
• issuing mortgages “containing product features likely to require frequent refinancing to maintain an affordable monthly payment and/or to avoid foreclosure”;
• “providing borrowers with inadequate and/or confusing information relative to product choices, material loan terms and product risks, prepayment penalties, and the borrower’s obligations for property taxes and insurance”;
• “approving borrowers for loans with inadequate debt-to-income analyses that d[id] not properly consider the borrowers’ ability to meet their overall level of indebtedness and common housing expenses”;
• issuing loans “including substantial prepayment penalties and/or prepayment penalties that extend beyond the initial interest rate adjustment period”; and
• “approving loans or ‘piggyback’ loan arrangements with loan-to-value ratios approaching or exceeding 100 percent of the value of the collateral.”
292. Similarly, in its complaint against Fremont, the Massachusetts Attorney General provided specific examples of Fremont’s allegedly predatory practices, including the approval of loans worth over $800,000 to Frances Darden, a single mother of three with a monthly income of
$1,800 from social security disability. Ms. Darden subsequently discovered that her application
124 falsely stated that she worked for Philip Medical earning $10,760 per month. Fremont paid her
broker a yield spread premium of $7,024 for originating these loans, a premium that specifically rewards brokers for placing borrowers in higher interest rate loans. See Commonwealth v.
Fremont Inv. & Loan, et al., No. 07-4373 (Mass. Super. Ct.).
293. Fremont also approved a mortgage for 100% of the property purchase price for
Macdala Louis, who had provided proof of income of $2,000 a month. When, at closing, Ms.
Louis discovered her monthly payments (even at the low ‘teaser’ rate that would reset after two years) was over $3,600 she tried to back out but was told by Fremont’s lawyer and her broker that it was too late to change her mind. She later discovered her loan papers falsely represented her income as $7,300 a month. She lost all her life savings trying to make payments until eventually the property was foreclosed.
294. On December 9, 2008, the Supreme Judicial Court of Massachusetts affirmed a preliminary injunction preventing Fremont from foreclosing on thousands of loans, finding evidence that “Fremont made no effort to determine whether borrowers could ‘make the scheduled payments under the term of the loan’ [and] ma[de] loans based on information
Fremont knew or should have known was inaccurate or false, including, but not limited to, borrowers’ income, property appraisals, and credit scores.” See Fremont Inv. & Loan, 897
N.E.2d 548 (Mass. 2008)
295. In reaching its decision, the Supreme Judicial Court relied on affidavits from two outside account executives who marketed Fremont loans. Each testified that Fremont purposefully relaxed its underwriting standards and made loans on documents known to contain false information.
125 296. In its ruling, the Supreme Judicial Court held that certain Fremont loans were
“presumptively unfair” because their very terms – low teaser rates followed by payment shock along with high loan-to-value and debt-to-income ratios – resulted in a package that Fremont should have known was “doomed to foreclosure.” See Fremont Inv. & Loan,,897 N.E.2d at 558-
59.
297. Subsequently, Fremont agreed to pay the Commonwealth of Massachusetts $10 million in consumer relief, civil penalties and costs arising from its conduct related to the issuance of mortgage loans in Massachusetts.
298. In October 2007, Morgan Stanley Mortgage Capital Holdings, LLC sued
Fremont, alleging that it had found “hundreds” of improperly underwritten loans that “fail[ed] to meet Fremont’s underwriting guidelines” because Fremont had “fail[ed] to verify assets prior to closing,” performed “defective verification of rent, fail[ed] to obtain the minimum credit history information, and [made] loans … to borrowers that did not have the requisite credit score.”
299. Fremont also was among 14 lenders named by the NAACP in a complaint alleging “systematic, institutionalized racism in sub-prime home mortgage lending.” According to the lawsuit, African American homeowners who received sub-prime mortgage loans from these lenders were more than 30 percent more likely to be issued a higher rate loan than
Caucasian borrowers with the same qualifications. In January 2009, the court denied a motion to dismiss, finding that the plaintiff had sufficiently pled a disparate impact claim, and also denied an individual motion to dismiss brought by Fremont, finding the claims were not moot as to
Fremont.
126 b. The mortgages originated by Fremont and securitized in the PLMBS purchased by the Bank provide further evidence of Fremont’s failure to adhere to sound underwriting practices.
300. Fremont originated mortgages that secured at least Securities FHLT 2005-E 2A3 and SABR 2006-FR3 A2. As discussed in detail below, the Offering Documents contained
serious material misstatements regarding specific characteristics of the loan pools securing these
Securities, including misstatements with respect to the percentages of loans with LTV ratios in
excess of 100%, 90%, and 80%, and the percentage of loans secured by property not the primary
residence of the borrower. Moreover, as described below, see infra ¶¶ 591-592, these Securities
have exhibited excessive delinquency and foreclosure rates. These circumstances are strong
evidence of Fremont’s failure to observe its stated underwriting standards. Fremont’s actual
practices—including the use of unreliable appraisals, routine granting of underwriting
exceptions, and reliance on unverified borrower-supplied information—caused it to originate
loans whose actual LTV ratios and primary residence rates were far different from that reported
in the Offering Documents, and whose likelihood of default was much higher than that of loans
issued under underwriting standards of the type described in the Offering Documents.
301. In summary, far from following its underwriting guidelines and making
occasional, targeted, and justified exceptions when other evidence of ability to repay justified a
deviation from the guidelines, in fact, at Fremont, variance from the stated standards was the
norm, and many loans were made with essentially little to no underwriting or effort to evaluate
ability to repay. Nowhere did any Offering Document apprise the Bank of the extent to which
Fremont deviated from its guidelines and engaged in predatory lending.
127 5. GMAC and Residential Funding Corp.
302. GMAC Mortgage Corporation, which is now known as GMAC Mortgage, LLC
(together, “GMAC”) was the originator of loans for at least three of the PLMBS purchased by
the Bank, and Residential Funding Corp. (“RFC”), a GMAC affiliate, was the sponsor and master servicer of at least one of the Bank’s PLMBS investments. Both GMAC’s representations regarding its loan origination practices and the representations of RFC, have been challenged by MBIA Insurance, one of the largest providers of bond insurance, which insured
MBS securities sold by GMAC and RFC.
303. In MBIA Insurance Corporation v. GMAC Mortgage LLC (N.Y. Sup. Ct.),
GMAC MBS insurer MBIA alleges that, with respect to GMAC securitizations it insured in
2004, 2006, and 2007, GMAC represented and warranted that (a) all of the information it provided to MBIA about the mortgage loans was accurate and not misleading; (b) all of the mortgage loans in the pools were underwritten in accordance with GMAC Mortgage’s underwriting standards; and (c) in the case of each loan, after receiving all applicable employment, credit, and property information, a determination had been made that the borrower was able to meet his or her monthly payments.
304. According to MBIA, GMAC “blatantly violated its contractual representations and warranties.” MBIA supports this allegation by explaining that in 2009, in the face of mounting payments caused by delinquent and “charged-off” loans, MBIA began to examine the loan files and documentation associated with thousands of loans. The result of this review clearly demonstrates that GMAC “had wholly abandoned its own underwriting policies and instead routinely approved loans to borrowers who failed to meet basic risk criteria.” At least
89% of the 4,104 delinquent or charged off loans reviewed by MBIA were not originated in
128 material compliance with GMAC’s underwriting guidelines or the contractual representations and warranties made by GMAC.
305. More specifically, MBIA alleges that many of the loans it has found to be non- compliant contained multiple breaches of representations and warranties, including:
• GMAC Mortgage routinely breached its representation and warranty that the mortgage loans were underwritten generally in compliance with GMAC Mortgage's underwriting standards.
• A significant number of mortgage loans were made on the basis of "stated incomes" that were grossly unreasonable or were approved despite DTI [debt-to- income] or CLTV [combined loan-to-value] ratios in excess of the cut-offs stated in GMAC Mortgage's Underwriting Guidelines or the Purchase Agreements or Prospectus Supplements.
• Contrary to its Underwriting Guidelines, GMAC Mortgage failed in many cases to verify the borrower's employment when required to do so or to verify prior rental or mortgage payment history, approved mortgage loans with ineligible collateral, approved mortgage loans to borrowers with ineligible credit scores, and approved loans without verifying that the borrower had sufficient funds or reserves.
• GMAC Mortgage used its proprietary automated electronic loan underwriting program, known as “Assetwise,” to approve loans that did not comply with its Underwriting Guidelines. Assetwise assisted in the underwriting of mortgage loans by automating the process of determining whether a loan met prespecified underwriting criteria set up in the program. GMAC Mortgage used the program itself and also made the program available to its affiliates. Assetwise, however, failed to analyze proposed mortgage loans using the criteria set forth in GMAC Mortgage's Underwriting Guidelines. As a result, GMAC Mortgage routinely contributed loans to the Transactions that failed to comply with its own underwriting standards.
• GMAC Mortgage routinely breached its representation and warranty that the mortgage loan files were complete and contained all required documents and instruments. Many of the of mortgage loan files are missing necessary mortgage loan documents, such as disclosures relating to loan transfers and notes establishing the first lien. The absence of these and other necessary documents from the loan files impedes the ability of the trustees for the Transactions to enforce their rights and remedies with respect to delinquent mortgages. The failure to maintain the required loan documentation also impairs proper servicing.
129 • GMAC Mortgage breached its representation and warranty that all mortgage loans would comply with all local, state and federal laws, by furnishing, among other things, mortgage loans to the pools that violated state predatory lending laws. These laws are designed to protect borrowers from abusive lending practices by, for example, prohibiting the approval of a loan to a borrower who lacks the ability to repay.
306. Similarly, MBIA explains, in its complaint in MBIA Insurance Company v.
Residential Funding Corporation, No 603552-2008, (N.Y. Sup. Ct.): “Of the 1,847 mortgage
loans [examined by MBIA] . . . only 129 mortgage loans—less than 7% of the mortgage loans
reviewed—were originated or acquired in material compliance with RFC’s representations and
warranties . . . with respect to the underwriting of the mortgage loans contributed to the RFC
transactions.” The complaint notes that “The Underwriting Guidelines . . . only allowed RFC to
make exceptions to the Underwriting Guidelines in very specifically defined and limited circumstances. . . . RFC’s Underwriting Guidelines required that a form—Form 1600—be
completed and approve for any exceptions made to the Underwriting Guidelines in connection
with the underwriting of purchase of a mortgage loan. [Yet, in fact f]or a significant number of
non-compliant mortgage loans, RFC did not identify any specifically defined exception that was
permitted under the Underwriting Guidelines. Further for a significant number of mortgage
loans, RFC failed to document the alleged exceptions on a form 1600 as required by the
Underwriting Guidelines.”
307. GMAC and Residential Funding originated mortgages that secured at least
Securities GMACM 2006-AR2 2A1, GMACM 2006-AR2 4A1, RFMSI 2006-SA2 2A1 and
RASC 2005-KS12 A2. As discussed in detail below, the Offering Documents contained serious
material misstatements regarding specific characteristics of the loan pools securing these
Securities, including misstatements with respect to the weighted average LTV ratios, the
130 percentages of loans with LTV ratios in excess of 100%, 90%, and 80%, and the percentage of loans secured by property not the primary residence of the borrower. Moreover, these Securities have exhibited excessive delinquency and foreclosure rates. Securities GMACM 2006-AR2 2A1 and GMACM 2006-AR2 4A1 have experienced a delinquency rate as of January, 2010, that was over 50% higher than that of loans of comparable vintage with comparable FICO scores and
LTV ratios. The cumulative loss rate on mortgages securing Security GMACM 2006-AR2 4A1 is more than double that of such comparable mortgages. Further information on the excessive delinquency and foreclosure rates of these securities is set forth below, see infra ¶¶ 591-592.
These circumstances are strong evidence of GMAC’s and Residential Funding’s failure to observe its stated underwriting standards. GMAC’s and Residential Funding’s actual practices— including the use of unreliable appraisals, routine granting of underwriting exceptions, and reliance on unverified borrower-supplied information—caused GMAC and Residential Funding to originate loans whose actual LTV ratios and primary residence rates were far different from that reported in the Offering Documents, and whose likelihood of default was much higher than that of loans issued under underwriting standards of the type described in the Offering
Documents.
308. In summary, far from following its underwriting guidelines and making occasional, targeted, and justified exceptions when other evidence of ability to repay justified a deviation from the guidelines, in fact, at GMAC and RFC, variance from the stated standards was the norm, and many loans were made with essentially little to no underwriting or effort to evaluate ability to repay. Nowhere did any of the Offering Documents apprise the Bank of the extent to which GMAC and RFC deviated from their guidelines and engaged in predatory lending.
131 6. Wells Fargo
a. Other investigations and lawsuits and confidential witness testimony demonstrate that Wells Fargo abandoned underwriting guidelines and applicable appraisal standards.
309. Wells Fargo originated underlying mortgage loans securing at least 7 of the
PLMBS purchased by the Bank. In 2010, Wells Fargo was identified by the OCC as the thirteenth worst subprime lender in the country based on the delinquency rates of the mortgages it originated in the ten metropolitan areas with the highest rates of delinquency. Wells Fargo as well abandoned sound underwriting practices. In denying in part a motion to dismiss in In re
Wells Fargo Mortgage-Backed Securities Litigation, No. 3:09-1376 (N.D. Cal.) (the “Wells
Fargo Complaint”), the court found that plaintiffs had adequately pled that ”variance from the stated [underwriting] standards was essentially [Wells Fargo’s] norm” and that this conduct
“infected the entire underwriting process.”
310. The Wells Fargo Complaint is supported by numerous confidential witness statements substantiating the allegations that Wells Fargo abandoned underwriting guidelines, increasingly made exceptions without compensating factors, sacrificed underwriting standards to loan volume, and manipulated loan information in order to close loans without regard to borrowers’ ability to repay the loans.
311. Confidential witnesses provide additional evidence of Wells Fargo’s repeated failure to adhere to sound underwriting practices and guidelines. Statements by confidential witnesses confirm that: (a) Wells Fargo underwriters faced intense pressure to close loans at any cost; (b) Wells Fargo increasingly approved risky, low- or no-documentation loans without adequate review; (c) Wells Fargo routinely approved loans that contained exceptions for which there were no reasonable compensating factors; (d) Wells Fargo employees approved loans with
132 inflated appraisal values; and (e) Wells Fargo employees manipulated data in order to close loans.
312. Confidential witnesses include CW-J and CW-K. CW-J worked as an underwriter at Wells Fargo for five years and left the company in approximately 2006. She helped start one of Wells Fargo’s wholesale lending offices. The wholesale lending office received mortgage applications from various brokers in the area and then underwrote, approved, and funded such mortgages. CW-K was an underwriting manager at a Wells Fargo branch in California from
2004 until late 2007, when Wells Fargo closed the branch. The branch was a “MAP” center, which was a location where Wells Fargo loans were registered, underwritten, processed, closed, and shipped out for sale in pools.
313. Wells Fargo employees increasingly disregarded the credit risk of loans and quality controls in favor of generating loan volume. According to CW-K, this was because loan officers and underwriters at Wells Fargo received commissions and/or bonuses based on the number of loans closed.
314. Among Wells Fargo’s abuses of underwriting standards, confidential witnesses detailed a practice of approving risky loans based upon little or no documentation. CW-J explained that underwriters at Wells Fargo’s branches used two automated underwriting systems
(“AUS”), which were pre-programmed with the minimum credit scores, LTV and DTI (“debt-to- income”) ratios, cash reserve levels, and documentation levels needed for the borrower to qualify for the various mortgage products that Wells Fargo offered. If these AUS returned an “approve” or “accept” result, then Wells Fargo typically approved the application and funded the mortgage.
CW-J commented that she was skeptical of the “approvals” that came from the AUS, and often
133 thought to herself, “How did it approve this?” The systems approved borrowers who “never should have been approved.”
315. For example, the AUS would approve a borrower with recent late payments, a 50-
55% DTI ratio, a 650 credit score, and no cash reserves. CW-J would have questioned such an application. However, so long as the AUS approved the loan, the underwriters in Wells Fargo’s
branches were not required to look any deeper. In CW-J’s view, the integrity of mortgage
origination “all fell apart when the AUS became the standard.” She explained that by the mid-
2000s, when the AUS were being relied upon almost exclusively, she no longer agreed with the
loans that were being approved because the underwriting guidelines had become so loose.
316. According to CW-J, upper level management at Wells Fargo did not want to hear
her concerns about mortgages being approved for borrowers with questionable credit, high debt
levels, high LTV ratios, or minimal cash reserves. They were not concerned with such issues
because, throughout her time with Wells Fargo, the origination and underwriting emphasis was
completely sales-oriented. According to CW-J, the motto at the company was “sales rules,” and
underwriters had no say in the kinds of borrowers that the AUS approved.
317. The only time human underwriters were involved in the underwriting process was
when the AUS recommended a loan for “refer” instead of “accept.” A result of “refer” meant
that the application did not meet the underwriting guidelines programmed into the AUS. These
loans required manual underwriting, and most of the time they were still approved.
318. CW-J stated that underwriters at Wells Fargo were pressured to approve
applications on which the AUS returned a “refer” result because “sales rules.” Underwriters
were pressured to approve the loans because if they did not, they were at risk of suddenly being
fired. As stated by CW-J, “[t]he loan officer or broker would go to the Operations Manager and
134 complain, and suddenly people [underwriters] were no longer there.” Additionally, underwriters
received emails directly from the outside mortgage brokers or loan officers indicating that they
were unhappy with the underwriter’s decision not to approve an application. Many mortgage
brokers expected the underwriter to approve all of his or her loans. In general, CW-J stated that
the mortgage brokers and loan officers “learned how to get away with what they needed in order
to get the loans approved.”
319. CW-J explained that, in deciding whether to approve loans, underwriters
disregarded whether the borrower had the ability to repay the loan: “We were just supposed to
ignore all the warning signs.” Even for government loan programs, LTV ratios were in the range
of 95-100%, FICO scores were as low as 550 to 560, and DTI (“debt-to-income”) ratios were as
high as 55%. Cash reserves were only required “sometimes.” Many of the conventional loans
that CW-J underwrote between 2004 and 2006 were stated income/stated asset or no-income/no- asset loans.
320. Confidential witnesses also described Wells Fargo’s standard practice of
approving exceptions which deviated from prudent underwriting guidelines. According to CW-
K, 30-40% of the time, Wells Fargo loan officers issued exceptions to underwriting guidelines on loans that otherwise would have been rejected.
321. CW-K noticed that the exceptions that Wells Fargo granted increased in late 2006 or early 2007, in conjunction with Wells Fargo’s purported decision to tighten its underwriting guidelines. Wells Fargo’s sales staff could not understand why a loan that would have been approved the prior year could not be approved in the current year, and did not accept the tightened guidelines. According to CW-K, the sales staff “wouldn’t take ‘no’ for an answer,” and therefore placed tremendous pressure on the Wells Fargo underwriters to approve their
135 loans. Even where the Wells Fargo underwriters would deny requests for exceptions, Wells
Fargo’s sales staff would take their loans to lead underwriters and risk managers to have the
decisions overridden. According to CW-K, the increase in exceptions countered Wells Fargo’s
efforts to tighten the underwriting guidelines.
322. According to confidential witnesses, Wells Fargo employees also manipulated
loan data in order to close loans and generate volume. CW-K was aware of circumstances in
which loan files were doctored in order for the loans to be approved.
323. Confidential witnesses also detailed how mortgages approved by Wells Fargo
were based upon inflated appraisal values. According to CW-J, the outside mortgage brokers who brought the loans to her branch for approval chose the appraisers that they wanted to use.
The outside brokers, loan officers, and appraisers all had a vested interest in the appraised value being accepted and the mortgage application being approved by Wells Fargo, since they all made money off of the transaction. Consequently, they all had a “let’s make a deal mentality” about reaching an appraisal value that supported the amount of the mortgage and the home’s value.
324. CW-LL has been a licensed appraiser in Washington state since 1992. In the spring of 2007, CW-LL was given an assignment by Rels Valuation—the appraisal management firm used by Wells Fargo—to appraise a home on the outskirts of Seattle. CW-LL’s appraisal noted that the house was being remodeled, that the remodel was incomplete, and that the house was consequently not habitable. After submitting his appraisal, CW-LL was contacted by both
Wells Fargo underwriters and Rels customer service representatives, ordering him to change his appraisal to state that the house remodel was complete. This pressure culminated with CW-LL receiving a phone call from a Rels Valuation Area Manager informing him that “you appraisers take USPAP [the uniform appraisal standards] too seriously,” and that if CW-LL failed to alter
136 his appraisal, he would be blacklisted. When CW-LL refused on the grounds that changing the
appraisal would violate appraisal standards, he was blacklisted and ceased receiving work from
Wells Fargo.
325. CW-MM, who formerly worked as a review resolution coordinator for Rels
Valuation from February 2007 to July 2010, confirms the problematic nature of the appraisal process. According to CW-MM, Wells Fargo had an unwritten “Five Percent Rule,” whereby if a Rels review appraiser came up with a new value that was within 5% of the original value, the higher value was automatically accepted.
326. CW-MM also testified that from the beginning of his tenure at Rels in 2007, until the implementation of the new federal Home Valuations Code of Conduct in 2009, pressure from
Wells Fargo officers occurred “quite frequently,” with CW-MM receiving at least one call a day from a review appraiser complaining that a Wells Fargo loan officer contacted him or her directly. CW-MM also sat near 18 review resolution analysts that were tasked with resolving appraisals in which the original appraiser and the review appraiser could not agree on the value.
On multiple occasions, CW-MM recalls a Rels national review manager arguing with the review analysts and telling them what he believed was the correct value. CW-MM believes that this constituted undue pressure on review analysts. According to CW-MM, “[o]n the one hand the review manager was trying to run a delicate balancing act with the client, Wells Fargo. But on the other hand, you have to draw the line. Most of the stuff that I saw I felt like it was a little over the line.”
327. CW-MM also emphasized that not every appraisal ordered by Rels Valuation for
Wells Fargo was reviewed by human eyes. Rels relied on a computer program, called ACE, to identify problematic appraisals. While the system caught clerical errors or omissions, appraisals
137 containing “egregious violations of USPAP” were sometimes not identified until after the loan
had closed.
b. The mortgages originated by Wells Fargo and securitized in the PLMBS purchased by the Bank provide further evidence of Wells Fargo’s failure to adhere to sound underwriting practices.
328. Wells Fargo originated mortgages that secured at least Securities BAFC 2006-F
2A1, BAFC 2006-F 3A1, CMLTI 2006-WFH2 A2B, CMLTI 2006-WFH4 A3, NHELI 2006-
WF1 A3, WFHET 2006-3 A2, and WFMBS 2006-AR3 A4. As discussed in detail below, the
Offering Documents contained serious material misstatements regarding specific characteristics
of the loan pools securing these Securities, including misstatements with respect to their
weighted average LTV ratio, the percentages of loans with LTV ratios in excess of 100%, 90%,
and 80%, and the percentage of loans secured by property not the primary residence of the
borrower. Moreover, as described below, see infra ¶¶ 591-592, these securities have exhibited
excessive delinquency and foreclosure rates. These circumstances are strong evidence of Wells
Fargo’s failure to observe its stated underwriting standards. Wells Fargo’s actual practices—
including the use of unreliable appraisals, routine granting of underwriting exceptions, and
reliance on unverified borrower-supplied information—caused it to originate loans whose actual
LTV ratios and primary residence rates were far different from that reported in the Offering
Documents, and whose likelihood of default was much higher than that of loans issued under underwriting standards of the type described in the Offering Documents.
329. Thus, far from following its underwriting guidelines and making occasional,
targeted, and justified exceptions when other evidence of ability to repay justified a deviation
from the guidelines, at Wells Fargo, variance from the stated standards was the norm, and many loans were made with essentially little to no underwriting or effort to evaluate ability to repay.
138 Nowhere did any Offering Document apprise the Bank of the extent to which Wells Fargo
deviated from its underwriting guidelines.
c. Other investigations and lawsuits and confidential witness testimony demonstrate that Wells Fargo engaged in predatory lending.
330. In July 2009, the Attorney General for the State of Illinois brought a lawsuit in
Cook County Circuit Court, captioned People v. Wells Fargo & Corporation, No. 09-26434 (Ill.
Cir. Ct.), alleging that Wells Fargo “steer[ed minority applicants] into high cost subprime or
riskier mortgage loans while White borrowers with similar incomes received lower cost or less
risky mortgages” and that Wells Fargo “engaged in deceptive practices by misleading Illinois borrowers about their mortgage terms, misrepresenting the benefits of refinancing, and repeatedly refinancing borrowers’ mortgages, also known as loan flipping, without any real benefit to consumers.”
331. The Illinois Attorney General Complaint detailed how borrowers were “plac[ed] into subprime mortgages, even though they qualified for prime mortgages with better terms,” with the result that “[i]nstead of the affordable mortgages that these borrowers should have received, they were sold mortgages that were unaffordable and unsuitable.” The complaint also detailed how Wells Fargo rewarded its employees for steering borrowers away from prime mortgages and into subprime loans, creating an incentive to sell borrowers higher cost subprime loans even if they qualified for prime loans, and “failed to maintain proper controls to ensure that borrowers were not placed into mortgages that were riskier or more expensive than the mortgage loans for which they were qualified.”
332. On April 7, 2010 the City of Memphis filed its First Amended Complaint in City
of Memphis v. Wells Fargo Bank, No. 09-2857 (W.D. Tenn.), alleging violations of the Fair
Housing Act and of the Tennessee Consumer Protection Act arising from Wells Fargo’s
139 discriminatory lending practices. The Complaint attaches sworn declarations from six former
Wells Fargo employees providing evidence of discriminatory and predatory lending practices.
333. Doris Dancy, a former Wells Fargo credit manager explained how she was
provided with lists of leads who were predominantly minorities despite her branch being “in an
area where a lot of white people lived” and how she was required to present a misleading sales
pitch that did not disclose that “we were actually just giving them a new more expensive loan that put their house at risk.” She detailed how her “district manager pressured the credit managers . . . to convince our leads to apply for a loan, even if we knew they could not afford the loan or did not qualify for the loan.” She stated that “I knew that Wells Fargo violated its own underwriting guidelines in order to make these loans to these customers.” She was instructed by her district manager “to conceal the details of the loan.” Eventually she resigned because she
“decided that the practices were too unethical for me to participate any longer. I hated to go to work, and found myself crying at the end of the day.”
334. Another Wells Fargo credit manager, Mario Taylor, testified how:
branch managers told us how to mislead borrowers. For example we were told to make “teaser rate” loans without informing the borrower that the rate was adjustable. . . . We were told not to tell the customer what was in the fine print. In many cases income documents were falsified in order to qualify a borrower for a loan. I know that some managers, including one of my branch managers, changed pay stubs and used white-out on documents to alter the borrower’s income so it would look like the customer qualified for the loan. Borrowers were not told about prepayment penalties. [O]ne of my branch managers told me not to disclose . . . fees to borrowers.
335. Camille Thomas, a Wells Fargo loan processor, explained that “[i]t was the
practice at the Wells Fargo offices where I worked to target African Americans for subprime
loans . . . . Elderly African Americans were thought to be highly vulnerable and were frequently
targeted for subprime loans with high interest rates.” She confirmed Mr. Taylor’s testimony that
140 “credit managers and branch managers made ‘teaser rate’ loans without informing the borrower that the loan had an adjustable rate . . . . In many cases documents were actually falsified to
inflate a borrower’s income so that the borrower would appear to meet the debt-to-income requirements. I know that at least one branch manager engaged in this practice.”
336. Tony Pashal, a Wells Fargo loan officer, described the case of one borrower who had a two-year-old subprime loan and was seeking to refinance in 2006 before his “teaser rate”
expired. He explained that:
I determined that the borrower qualified for a prime loan. The borrower had an excellent credit score and for this reason I suspected that he had previously qualified for a prime loan in 2004 but had been inappropriately placed by Wells Fargo into a subprime ARM at that time. In working with the borrower in 2006, I informed my branch manager, Dave Zolnak, that the borrower qualified to refinance into a prime fixed-rate loan. Mr. Zolnak told me I should instead refinance the borrower into another subprime ARM. I refused [and was written up with] a negative performance evaluation in my personnel folder.
337. Elizabeth Jacobson, who “was the top subprime loans officer at Wells Fargo” for many years testified about how:
the commission and referral system at Wells Fargo was set up to make it more profitable for a loan officer to refer a prime customer for a subprime loan than to make the prime loan directly to the customer. . . . When I got referrals it was my job to figure out how to get the customer into a subprime loan. I knew that many of the referrals I received could qualify for a prime loan. . . . [Loan officers] used their discretion to steer loan customers to subprime loans by telling the customer, for example, that this was the only way for the loan to be processed quickly; that there would be less paperwork or documentation requirements; or that they would not have to put any money down. Customers were not told about the added costs, or advised about what was in their best interest. . . . According to company policy, we were not supposed to solicit 2/28 customers for re-finance loans for two years after we made a 2/28 subprime loan. . . . [M]y area manager told his subprime loan officers to ignore this rule and go ahead and solicit 2/28 customers within the two year period, even though this violated our agreement with secondary market investors. The result was that Wells Fargo was able to cash in on the pre-payment penalty by convincing the subprime customer to refinance his or her 2/28 loan within the initial two-year period. . . . Wells Fargo qualified borrowers for subprime loans by underwriting all adjustable rate mortgage loans, including 2/28 loans, with the assumption that the borrower would pay the teaser rate for the full
141 life of the loan even though this lower rate only applied during the first two or three years of the loan. . . . I learned of [loan officers] cutting and pasting credit reports from one applicant to another [and] subprime loan officers who would cut and paste W2 forms [to] increase the credit worthiness of the applicant so that Wells Fargo’s underwriters would approve the loan. I reported this conduct to management. . . . Underwriters, like loan officers, had a financial incentive to approve subprime loans than [sic], even if the customer could qualify for a prime loan, because they got paid more . . . if a subprime loan went through.
338. Confidential witnesses confirmed that Wells Fargo engaged in predatory lending
practices. For example, CW-K mentioned that Wells Fargo’s underwriters did not fully inform borrowers of the risks of the loans. In addition, as the above discussion shows, Wells Fargo routinely issued loans to borrowers who lacked the ability to repay the loans in violation of
predatory lending restrictions.
7. Decision One Mortgage Company, LLC
339. Decision One Mortgage Company, LLC (“Decision One”) originated underlying
mortgage loans securing at least two of the PLMBS purchased by the Bank. Decision One also abandoned sound underwriting practices.
340. CW-L was a senior underwriter at Decision One Mortgage from 2004 through
2007. During this period, CW-L’s duties included underwriting broker and correspondent subprime, home equity, and Alt-A loans. CW-L also trained new underwriters and account managers, conducted second signature reviews, and interacted with Decision One’s corporate underwriting team on loans beyond his branch’s authority.
341. In approximately 2006, CW-L recalls that Decision One released internal deficiency reports that showed quality issues in tens of millions of dollars worth of defaulted loans. During this internal audit, CW-L stated, “We tore these loans apart and found a lot of fraud.” CW-L believes that the bulk of the loans that were the subject of this internal audit had been approved between 2001 and 2004. However, CW-L stated that many of the practices that
142 led to the quality issues discovered in the loan audit continued at Decision One until late 2005 or
2006.
342. According to CW-L, the main quality issues discovered by the internal audit at
Decision One in 2006 included failure to properly confirm borrower income, fraudulent verification of rental payment history, and inadequate employment verification. Regarding borrower income, CW-L explained, underwriters in some of Decision One’s branches would justify a borrower’s stated income by assuming they were at the highest, management-level tier of any stated field, rather than verifying the actual applicable tier. Regarding rental payment verification, CW-L explained, inexperienced Decision One underwriters and support staff failed to cross-reference landlord contact information to ensure they were contacting the borrower’s actual landlord to confirm rental payment history and payment amounts. CW-L explained that similar problems occurred when supposedly verifying a borrower’s employment history, but failing to verify that the underwriter was actually speaking to the borrower’s employer. Instead,
CW-L revealed, Decision One underwriting staff would sometimes call the borrower him or herself to “verify” the borrower’s current employment.
343. CW-L further stated that as a result of end-of-month pressure at Decision One to close loans, “loans just closed without verification.”
344. In approximately 2006, the corporate office of Decision One issued a company- wide directive to increase loan data due diligence, “but there were probably still branches that were closing loans that should not have been closed,” according to CW-L. As part of this directive, Decision One eliminated its “stated W2” or “stated income” program on which it relied through that time as a means of borrower income “verification.”
143 345. CW-L reports that Decision One managers overturned underwriter’s decisions to deny loans “more frequently than it should [have happened].” At Decision One, a manager’s decision to overturn a loan denial was usually a “business decision,” which meant that the loan was for a large broker client and the manager did not want to damage the company’s relationship with the broker. For example, CW-L processed about six loans per day, and estimates that one out of six of those loans was a denial that management would subsequently overturn.
346. CW-L saw “a lot” of inflated appraisal values through 2005 or 2006. “They were values that just weren’t there . . . . We had some management overrides on [inflated] appraisal values that were unwarranted.” According to CW-L, Decision One managers also removed
“derogatory” photos of properties from comparables supplied by appraisers. The company discovered this practice when investment banks occasionally requested copies of the original appraisals and noticed that Decision One had removed the photos. This practice of removing photos of comparables at Decision One occurred until some point in 2006.
347. By 2006 or 2007, CW-L saw fewer inflated appraisal values cross his desk because of third-party reviews.
348. Decision One originated mortgages that secured at least Securities MSAC 2006-
HE5 A2C and MSAC 2006-HE6 A2C. As discussed in detail below, the Offering Documents contained serious material misstatements regarding specific characteristics of the loan pools securing these Securities, including misstatements with respect to the percentages of loans with
LTV ratios in excess of 100%, 90%, and 80%, and the percentage of loans secured by property not the primary residence of the borrower. Moreover, as described below, see infra ¶¶ 591-592, these securities have exhibited excessive delinquency and foreclosure rates. These circumstances are strong evidence of Decision One’s failure to observe its stated underwriting
144 standards. Decision One’s actual practices—including the use of unreliable appraisals, routine
granting of underwriting exceptions, and reliance on unverified borrower-supplied information— caused it to originate loans whose actual LTV ratios and primary residence rates were far different from that reported in the Offering Documents, and whose likelihood of default was much higher than that of loans issued under underwriting standards of the type described in the
Offering Documents.
349. In summary, far from following its underwriting guidelines and making occasional, targeted, and justified exceptions when other evidence of ability to repay justified a deviation from the guidelines, at Decision One, variance from the stated standards was the norm, and many loans were made with essentially little to no underwriting or effort to evaluate ability to repay. Nowhere did any Offering Document apprise the Bank of the extent to which Decision
One deviated from its underwriting guidelines.
8. Ameriquest and Argent
350. Ameriquest Mortgage Company originated underlying mortgage loans securing at least two of the PLMBS purchased by the Bank. Ameriquest was the wholly owned retail lending subsidiary of ACC Capital Holdings (“ACC”), one of the nation’s largest subprime lenders. ACC also owned mortgage subsidiary, Argent. Argent originated underlying mortgage loans for at least one of the PLMBS purchased by the Bank.
351. Both Ameriquest and Argent abandoned sound underwriting practices and engaged in predatory lending during the relevant period. In 2010, Argent was identified by the
OCC as the eighth worst subprime lender in the country, and Ameriquest was identified as the
fourteenth worst, based on the delinquency rates of the mortgages they originated in the ten
metropolitan areas with the highest rates of delinquency.
145 352. Ameriquest’s management pressured employees to generate loan volumes at all costs: “Up and down the line, from loan officers to regional managers and vice presidents,
Ameriquest’s employees scrambled at the end of each month to push through as many loans as possible to pad their monthly production numbers, boost their commissions, and meet [founder]
Roland Arnall’s expectations. Arnall was a man ‘obsessed with loan volume,’ former aides recalled, a mortgage entrepreneur who believed ‘volume solved all problems.’” Michael
Hudson, The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced
America – and Spawned a Global Crisis (forthcoming from Times Books 2010), excerpt available at http://us.macmillan.com/BookCustomPage.aspx?isbn=9780805090468#Excerpt
(last visited Oct. 12, 2010). As a result of such pressures at Ameriquest, employees falsified documents, forged borrowers’ signatures on government-required disclosure forms, and misrepresented the terms of loans in order to induce borrowers to take out loans they could not afford. Id. In fact, “Ameriquest’s deals were so overpriced and loaded with nasty surprises that getting customers to sign often required an elaborate web of psychological ploys, outright lies, and falsified papers. Every closing that we had really was a bait and switch,” a loan officer who worked for Ameriquest in Tampa, Florida, recalled. “[c]ause you could never get them to the table if you were honest.” Id.
353. According to a December 8, 2007 Miami Herald article, various Argent employees, including former vice president Orson Bean who is currently in prison for his activities at Argent, actively assisted brokers in falsifying borrower information, inflating income, inventing jobs, and inflating net worth. Mr. Bean explained that “the accuracy of loan applications was not a priority.” Unsurprisingly, then, when the Miami Herald examined loan applications it “found at least 103 [out of 129 examined] that contained false and misleading
146 information” and “red flags [such as] non-existent employers, grossly inflated salaries and
sudden drastic increases in a borrower’s net worth.” In one instance a “borrower [who] claimed
to work a job that didn’t exist . . . got enough money to buy four houses.”
354. The Cleveland Plain Dealer, in a May 2008 article entitled The Subprime House
of Cards, quoted Jacquelyn Fishwick, who worked for Argent for two years in the Chicago area as an underwriter and account manager, as stating that “some Argent employees played fast and loose with the rules.” For instance she “saw account managers remove documents from files and create documents by cutting and pasting them.”
355. Citibank’s Business Chief Underwriter, Richard Bowen, testified before the FCIC in April 2010 that he advised against Citibank’s 2007 acquisition of Argent because of the number of fraudulent loan applications he saw in an Argent loan sampling prior to the acquisition.
356. Mr. Bowen testified before the FCIC that “we sampled loans that were originated by Argent and we found large numbers that did not – that were not underwritten according to the representations that were there.”
357. An August 2007 Business Week article discusses the case of Mary Overton of
Brooklyn, New York. Without her knowledge or understanding, Ameriquest created false tax returns, employment records, and a 401(k) to make her appear qualified for a loan as part of a scheme to coerce her to sign a loan which she could not afford.
358. A former Ameriquest loan officer interviewed on National Public Radio recalled that at her office in Tampa Florida, in order to close a loan “at any cost,” “managers encouraged loan officers to conceal the actual cost and interest rate on loans” and would “white out income numbers on W2s and bank statements and fill in bigger amounts basically to qualify people for
147 loans that they couldn’t afford.” This practice was known as “taking the loan to the Art
Department.” The National Public Radio broadcast stated that other former Ameriquest employees confirmed this same conduct occurred around the country.
359. Senior management at Ameriquest was well aware of the fraud plaguing the origination process, but willfully ignored it. Ed Parker, the former head Ameriquest’s Mortgage
Fraud Investigations Department, told the FCIC that fraudulent loans were very common at the company. “No one was watching. The volume was up and now you see the fallout behind the loan origination process.” FCIC Majority Report at 161. According to Parker, he detected fraud at the company within one month of starting his job there in January 2003, but senior management did nothing with the reports he sent. He later heard that other departments were complaining he “looked too much” into the loans. In November 2005, he was downgraded from
“manager” to “supervisor,” and was laid off in May 2006. Id. at 12.
360. Ameriquest was also among 14 lenders named by the NAACP in a complaint alleging “systematic, institutionalized racism in sub-prime home mortgage lending.” According to the lawsuit, African American homeowners who received sub-prime mortgage loans from these lenders were more than 30 percent more likely to be issued a higher rate loan than
Caucasian borrowers with the same qualifications. In January of 2009 the court denied a motion to dismiss, finding that the plaintiff had sufficiently pled a disparate impact claim. Moreover,
Marc S. Savitt, a past president of the National Association of Mortgage Brokers, testified to the
FCIC that while most mortgage brokers looked out for borrowers’ best interests and steered them away from risky loans, about 50,000 of the newcomers to the field nationwide were willing to do whatever it took to maximize the number of loans they made. Savitt singled out Ameriquest as an example of a loan originator that was “absolutely” corrupt. FCIC Majority Report at 14.
148 361. Ameriquest and Argent originated mortgages that secured at least Securities
AMSI 2005-R10 A2B, ARSI 2005-W5 A2C, and CBASS 2006-CB4 AV3. As discussed in detail below, the Offering Documents contained serious material misstatements regarding specific characteristics of the loan pools securing these securities, including misstatements with respect to their weighted average LTV ratio, the percentages of loans with LTV ratios in excess of 100%, 90%, and 80%, and the percentage of loans secured by property not the primary residence of the borrower. Moreover, as described below, see infra ¶¶ 591-592, these securities have exhibited excessive delinquency and foreclosure rates. These circumstances are strong evidence of Ameriquest’s and Argent’s failures to observe their stated underwriting standards.
Ameriquest’s and Argent’s actual practices—including the use of unreliable appraisals, routine granting of underwriting exceptions, and reliance on unverified borrower-supplied information— caused it to originate loans whose actual LTV ratios and primary residence rates were far different from that reported in the Offering Documents, and whose likelihood of default was much higher than that of loans issued under underwriting standards of the type described in the
Offering Documents.
362. In summary, far from following its underwriting guidelines and making occasional, targeted, and justified exceptions when other evidence of ability to repay justified a deviation from the guidelines, variance from the stated standards was the norm at Ameriquest, and Ameriquest approved numerous loans with essentially little to no underwriting screens applied to the loans or effort to evaluate the borrowers’ ability to repay. Similarly, Argent was widely engaged in actively falsifying borrower information, inflating income, inventing jobs, and inflating net worth on the mortgage loan applications it approved.
149 363. Nowhere did any Offering Document appraise the Bank of the extent to which
Argent or Ameriquest deviated from their underwriting guidelines and the extent to which they
engaged in predatory lending.
9. Downey Savings & Loan
364. Downey Savings & Loan originated underlying mortgage loans securing at least 2
of the PLMBS purchased by the Bank. Downey also abandoned sound underwriting practices.
365. In its SAFETY AND SOUNDNESS: MATERIAL LOSS REVIEW OF DOWNEY SAVINGS
AND LOAN, FA, OIG-09-039 (June 15, 2009), the OIG noted that:
Downey’s loan underwriting standards, in terms of income and asset documentation, became more lenient. Downey required no documentation for some borrowers. . . . [T]he trend toward reduced documentation loans rose from an already high level of 60 percent of Downey’s option ARM portfolio in 2000 to 91 percent of that portfolio in March 2008.
366. The OIG further explained how:
[i]n October 2003, Downey expanded use of . . . Downey Express . . . stated income and stated assets loan[s]. Underwriting was limited to Downey’s review of the property appraisal . . . and the borrower’s FICO score. At that same October 2003 meeting, the board agreed to . . . expand[] the program to include subprime borrowers. . . . Through Downey it was [therefore] possible for a subprime borrower to get an option ARM loan (with negative amortization potential) with reduced documentation.
367. Downey originated mortgages that secured at least Securities HVMLT 2006-2
2A1A and HVMLT 2006-2 3A1A. As discussed in detail below, the Offering Documents
contained serious material misstatements regarding specific characteristics of the loan pools
securing these securities, including misstatements with respect to their weighted average LTV
ratio, the percentages of loans with LTV ratios in excess of 100%, 90%, and 80%, and the
percentage of loans secured by property not the primary residence of the borrower. Moreover, as
described below, see infra ¶¶ 591-592, these securities have exhibited excessive delinquency and
150 foreclosure rates. These circumstances are strong evidence of Downey’s failure to observe its stated underwriting standards. Downey’s actual practices—including the use of unreliable appraisals, routine granting of underwriting exceptions, and reliance on unverified borrower- supplied information—caused it to originate loans whose actual LTV ratios and primary residence rates were far different from that reported in the Offering Documents, and whose likelihood of default was much higher than that of loans issued under underwriting standards of the type described in the Offering Documents.
368. In summary, far from following its underwriting guidelines and making occasional, targeted, and justified exceptions when other evidence of ability to repay justified a deviation from the guidelines, in fact at Downey variance from the stated standards was the norm, and many loans were made with essentially little to no underwriting or effort to evaluate ability to repay. Nowhere did any Offering Document apprise the Bank of the extent to which
Downey deviated from its underwriting guidelines.
10. Option One Mortgage
369. Option One Mortgage Corporation (“Option One”) originated underlying mortgage loans securing at least two of the PLMBS purchased by the Bank. Option One as well abandoned sound underwriting practices. Option One was identified by the OCC as the seventh worst subprime lender in the country based on the delinquency rates of the mortgages it originated in the ten metropolitan areas with the highest rates of delinquency.
370. In denying a Motion to Dismiss and approving a preliminary injunction against
Option One and its parent H&R Block, the Superior Court for the Commonwealth of
Massachusetts found that the defendants had issued loans for which there was “a substantial likelihood that the Commonwealth will prevail in proving that Option One and H&R Mortgage
151 acted unfairly in violation of G.L. c. 93A, § 2 by issuing a significant number of home mortgage
loans with reckless disregard of the risk of foreclosure” and further explained that there was
substantial authority suggesting that “the issuance of [such a] loan is predatory lending.”
Massachusetts v. H&R Block, Inc., No. 08-2474, slip op. at 8, 48 (Suffolk County Super. Ct.
Nov. 10, 2008) (order granting preliminary injunction).
371. According to the complaint filed by the Attorney General for the Commonwealth of Massachusetts, filed after a significant investigation, Option One “increasingly disregarded underwriting standards, created incentives for loan officers and brokers to disregard the interests of borrowers and steer them into high cost loans, and originated thousands of loans that [Option
One] knew or should have known the borrowers would be unable to pay, all in an effort to increase loan origination volume so as to profit from the practice of packaging and selling the vast majority of its residential subprime loans to the secondary market.”
372. The Massachusetts Attorney General’s complaint alleges that Option One agents and brokers “frequently overstated an applicant’s income and/or ability to pay, and inflated the appraised value of the applicant’s home,” and that these practices were allowed to continue because Option One “avoided implementing reasonable measures that would have prevented or limited these fraudulent practices.”
373. In addition, Option One was among 14 lenders named by the NAACP in a complaint alleging “systematic, institutionalized racism in sub-prime home mortgage lending.”
In 2008, Option One settled all claims, agreeing to allow the NAACP to participate in the design of a training and testing program for its employees, to assist with various public education projects, and to contribute money to help pay for various NAACP programs.
152 374. Statements by confidential witnesses CW-M, a senior review appraiser at Option
One in a California branch from April 2001 to December 2006, and CW-N, senior account manager at Option One in a Georgia branch from August 2005 until April 2006, confirm that: (a)
Option One underwriters faced intense pressure to close loans; (b) Option One approved risky loans without adequate review; and (c) Option One employees approved loans with inflated appraisal values.
375. CW-M explained that, due to high demand for securitized loans, Option One wanted its employees “to be more aggressive.” When Option One employees told top level managers at the company that “investors will never buy this,” the managers would reply,
“Somebody will buy it.” Consequently, Option One’s focus was simply on generating loans for sale – “[a]s long as they could sell it, that’s what mattered.”
376. CW-N recalled one particular broker who insisted that Option One approve his loans, even though his loan files frequently did not contain the requisite documentation.
Nevertheless, “[h]e was given preferential treatment and his loans were always pushed through” because he supplied the company with “lots and lots of loans.”
377. CW-M also recalled situations in which Option One allowed loans with inflated appraisal values to be approved. She mentioned that underwriters often failed to spot “red flags” in the appraisal values on the loans, and therefore did not escalate the appraisals to CW-M’s appraisal department for further review and due diligence. Moreover, during her tenure at
Option One, CW-M recalled that Option One “watered down” its appraisal system so that fewer loans were “kicked over to the appraisal department.”
153 378. According to CW-M, when Option One’s staff appraisers did receive loans for review, they would “cut the value” of appraisals on loans that were “really bad.” Nevertheless,
Option One sometimes disregarded the appraisers’ reports and made the loans anyway.
379. Option One originated mortgages that secured at least Securities OOMLT 2005-5
A3 and OOMLT 2006-2 2A3. As discussed in detail below, the Offering Documents contained serious material misstatements regarding specific characteristics of the loan pools securing these
Securities, including misstatements with respect to the percentages of loans with LTV ratios in excess of 100%, 90%, and 80%, and the percentage of loans secured by property not the primary residence of the borrower. Moreover, as described below, see infra ¶¶ 591-592, these securities have exhibited excessive delinquency and foreclosure rates. These circumstances are strong evidence of Option One’s failure to observe its stated underwriting standards. Option One’s actual practices—including the use of unreliable appraisals, routine granting of underwriting exceptions, and reliance on unverified borrower-supplied information—caused it to originate loans whose actual LTV ratios and primary residence rates were far different from that reported in the Offering Documents, and whose likelihood of default was much higher than that of loans issued under underwriting standards of the type described in the Offering Documents.
380. In summary, far from following its underwriting guidelines and making occasional, targeted, and justified exceptions when other evidence of ability to repay justified a deviation from the guidelines, in fact, at Option One, variance from the stated standards was the norm, and many loans were made with essentially little to no underwriting or effort to evaluate ability to repay. Nowhere did any Offering Documents apprise the Bank of the extent to which
Option One deviated from its underwriting guidelines.
154 11. First Franklin
381. First Franklin originated underlying mortgage loans for at least six of the PLMBS purchased by the Bank. Merrill Lynch acquired First Franklin Financial Corp. and affiliated lending units NationPoint and National City Home Loan Services Inc. on December 30, 2006.
Like the other originators identified above, First Franklin also abandoned sound underwriting practices and engaged in predatory lending. First Franklin was identified by the OCC as the fifth worst subprime lender in the country based on the delinquency rates of the mortgages it originated in the ten metropolitan areas with the highest rates of delinquency.
382. Statements by confidential witnesses confirm that: (a) First Franklin underwriters faced intense pressure to close loans at any cost; (b) First Franklin increasingly approved risky, low- or no-documentation loans without adequate review; (c) First Franklin routinely approved loans that contained exceptions for which there were no reasonable compensating factors; (d)
First Franklin employees approved loans with inflated appraisal values; and (e) First Franklin employees manipulated data in order to close loans.
383. Confidential witnesses include CW-O, an underwriter at a First Franklin branch in
Georgia from March 2004 to November 2007. He underwrote wholesale, subprime loans. The
Georgia branch where he worked employed approximately 70 individuals, seven of which were underwriters. CW-P was an underwriter at a First Franklin from August 2004 to June 2005, and worked out of a First Franklin branch in Texas. Similarly, CW-Q was an underwriter at a First
Franklin branch in Florida from 1999 until 2007.
384. CW-R worked at a First Franklin branch in Utah from 1996 until March 2008.
She began working in the shipping department, became a loan account manager (account
155 executive), and then transitioned to underwriting. CW-R served as an underwriter between July
2006 and March 2008.
385. CW-S was an underwriter at a First Franklin branch in Washington from 2005 until November 2007. Her Washington branch received loan applications from across the country.
386. CW-T worked at First Franklin from 1998 until April 2007. Between 1998 and
1999, she worked in a Nevada branch of First Franklin as an underwriter. From 2000 until 2007, she worked in First Franklin’s branch in Ohio, first as an underwriter and then as an account executive. During her last four years as an account executive at the company, she also assisted with the underwriting of loans when the volume of loans was too much for the underwriters to handle.
387. According to CW-O, account executives received a monthly commission based on the dollar value of approved loans; the more loans that were approved, the higher the account executive’s commission. Consequently, said CW-O, “Account executives were making
$100,000 a month in commissions. They lived in Sugarloaf Country Club with baseball players and other celebrities. I couldn’t get into Sugarloaf if I tried. I’d have to sneak in the back door.”
388. Due to the commissions they stood to make, CW-O explained that account executives at First Franklin frequently pressured underwriters who declined loans. If the underwriter refused to change his or her mind, the account executives went to upper management to get the loan approved. As CW-O stated, “Nine out of ten times the loan went through.”
Upper management frequently overrode the underwriters’ recommendations to decline loans because “people were making so much money” on the loans.
156 389. CW-T echoed the same comments, and said that the more loans First Franklin
closed, the more money account executives received in commissions. She explained, “Account executives paid processors cash under the table to help them get loans closed.” CW-T recalled
that one loan processor at her branch office, who worked for one of the top-producing account
executives, was caught altering loan documents to get loans closed.
390. Similarly, as detailed by CW-S, after First Franklin hired a number of former employees from a company called “OwnIt Mortgage” (in the 2005/2006 time frame), non- compliant loans at her branch in Washington were frequently approved. The OwnIt underwriting manager became the manager at First Franklin’s branch, and the OwnIt employees “were used to approving anything. They’d say, ‘If we don’t’ approve it, somebody else will. So why lose the
money?’” The new underwriting manager from OwnIt “overrode [loans] that we [the
underwriters] declined.” The manager told CW-S that she was overriding the underwriters’
recommendations in order to grow business for the branch and make their numbers.
391. Among First Franklin’s abuses of underwriting standards, confidential witnesses detailed a pervasive practice of approving risky loans based upon little to no documentation.
According to CW-O, First Franklin underwrote tons of “stated loans,” which he and colleagues referred to as “liar loans” because they understood that “the borrower could basically state whatever they wanted” on the loan application. He said that the problem became particularly bad between 2005 and 2007.
392. Additionally, CW-O said he underwrote many no-documentation loans for borrowers, even when such borrowers had W-2s. He knew that the borrowers had W-2s because the borrowers would mention them on their applications, which made him question their eligibility for the loans: “Why would you need a no-doc loan if you had the documents?”
157 393. CW-T said that, as stated loans grew in popularity at First Franklin in the early
2000s and particularly in 2005, all underwriting became credit score-oriented. As she said, “If the [credit] score was above 700, you used a no-doc loan and you could just give a loan away. It was basically a blank 1003 [the uniform residential loan application].”
394. According to CW-P, fraudulent loans were underwritten at First Franklin “all the time.” CW-P did not approve fraudulent loans, but “somebody would come behind me and sign off on the loan,” or a more senior manager would tell CW-P to approve the loan and the manager would “counter-sign,” so that CW-P would not be entirely responsible for the loan. If CW-P still refused to approve the loan, he would risk losing his job.
395. Confidential witnesses also described First Franklin’s standard practice of approving exception loans which deviated from prudent underwriting guidelines. According to
CW-T, the pressure to grant exceptions increased significantly at the end of the month because borrowers wanted to reduce closing costs by closing at the end of the month. In the 2005 to 2007 timeframe, “people were working until 8 p.m. on Saturdays and Sundays” in order to close the loans. Consequently, “a lot of loans slipped through. People were tired of being beat up. With the rush of loans, stuff could have been overlooked. Maybe the conditions didn’t exactly meet the guidelines.” Significantly, during the last crucial days of each month, employees were
“begging for exceptions to close their loans.” At times, employees formed a line outside the door of the branch manager’s office in order to ask for exceptions to the guidelines. CW-T recalled one month when the branch manager, exhausted from having reviewed so many loans, came out of his office and yelled: “Oh f*** it! Just close the f***ing loans.” The employees returned to their desks and closed their loans. According to CW-T, “It got out of hand.”
158 396. CW-R detailed similar problems, and said that, at First Franklin, “some loans
were approved that were not compliant with guidelines.” CW-R also testified that account executives would approach branch managers to ask for exceptions and to have the underwriters’ decisions to decline overturned. The managers would approve the loans in order to maintain relationships with the mortgage brokers. Because the mortgage brokers were providing the supply of loans, they did not want to risk angering them and losing the business.
397. On March 5, 2008, Merrill Lynch announced that it was discontinuing mortgage origination at its first Franklin subsidiary and was planning to explore the sale of Home Loan
Services, a mortgage loan servicing unit for First Franklin. According to a March 5, 2008, press release issued by Merrill Lynch:
The company said it made the decision to discontinue lending by First Franklin because of the deterioration of the subprime lending market.
"Since July, we have reduced staffing at First Franklin by nearly 70 percent, but after evaluating a number of strategies, we believe it is appropriate to discontinue mortgage origination," said David Sobotka, head of Fixed Income, Currencies & Commodities at Merrill Lynch.
398. According to CW-R, as part of the discontinuation of its mortgage origination
operations, in November 2007, First Franklin shut down all but six of the company’s branches and decided that all underwriters in the remaining branches would assist with loss mitigation.
The purpose of the loss mitigation group was to review loans that the investment banks requested
First Franklin to repurchase because the loans allegedly were not compliant with First Franklin’s guidelines. The loss mitigation staff compared the loans to the guidelines that existed on the day
the loan was approved in order to conduct their compliance review. CW-R found that fifty
percent of the loans that she reviewed were not complaint with First Franklin’s guidelines.
Moreover, during her review, CW-R found examples of fraud and areas of non-compliance that
159 the investment banks had missed: “We were finding more [non-compliance issues] than the
banks were finding.” Examples of non-compliance included inflated appraisal values,
insufficient employment verification or no employment verification, and credit scores that fell
short of First Franklin’s guidelines. All of the non-compliant loans were stated loans. CW-R
was not shocked that 50% of the loans she reviewed were not compliant: “We were doing so
much volume. There were lots of chances for things to slip through.”
399. CW-Q explained that First Franklin compromised loan quality for business
growth: “If a loan was borderline compliant [with guidelines], we would approve the loan.”
400. Confidential witnesses further explained that First Franklin approved loans based upon inflated appraisal values. CW-O said that First Franklin often hired contract appraisers to provide values on properties, and the appraisers inflated the values. CW-O recalls that “[t]hese were homes with busted out windows and the meter boxes were missing,” but they were still appraised at $300,000. According to CW-O, the combination of stated income loans and inflated property values which “led to the mortgage crisis.”
401. According to confidential witnesses, First Franklin employees frequently manipulated loan data in order to close loans and generate volume. CW-Q explained that, at
First Franklin, “a lot of fraudulent loans were going through. There was tons of fraud going on.”
Even when the underwriters said loans weren’t reasonable, the branch manager would override their opinions. According to CW-Q, “In 2005 . . . growth was the top priority for the company.”
402. Similarly, while underwriting loans for First Franklin, CW-O “saw a lot of fake
W-2s come through.” He knew that the documents were fabricated because the tax withholdings did not match the stated income amounts. He knew that brokers were “whiting out or faxing
160 over” the actual numbers, and writing in new numbers so that the loans would work. According
to CW-O, “a lot of loans were getting through that had false incomes.”
403. CW-O said that when loans defaulted before the first payment, the underwriters were tasked with finding out why the loan had defaulted. In some instances, CW-O went out to
the property to try and speak with the borrowers. When he went, it was not uncommon for him
to find an empty house that had been sold as an owner-occupied home. As he said, “There’d be a couch and a TV and no blinds on the windows.” The problems were not isolated in his area:
“There was so much negligence and fraud in the Atlanta area, but it wasn’t just Atlanta. It was
all over.”
404. CW-R confirmed that, at First Franklin, she came across fraudulent loan
applications on a regular basis, typically with regard to the borrower’s employment or income information. “I saw blatant fraud,” she said, and recalled a borrower who was buying a $500,000 property as owner-occupied when the same borrower had just purchased a $1 million home in the same neighborhood a month earlier as owner-occupied. As CW-R stated, “You can’t have two owner-occupied properties.” Although that particular loan “ended up dying,” First Franklin managers “were mad at [her] for catching it.” And other similar loans “did get approved” because other underwriters were looser with their practices and guidelines than she was.
405. CW-T said that the mortgage brokers sent her a lot of fraudulent loans: “A lot of brokers sent me sh**. I could smell fraud a mile away.” Although she said she declined
fraudulent loan applications when she found them, she admitted that she didn’t always examine the entire loan file because “there might be something in the file that would kill the loan.”
161 406. CW-S also explained that managers could manipulate loans so that they would be
approved by First Franklin’s systems. Thus, loans that had previously been declined were being
approved, even though, according to CW-S, they “were not good loans to begin with.”
407. Confidential witnesses also described predatory lending practices at First
Franklin, where originators enticed borrowers into loans they could not afford and
misrepresented the terms of adjustable-rate mortgages. CW-O said First Franklin employees
frequently approved stated loans even when they were uncomfortable with the loans. After work
on several occasions, CW-O met with his colleagues and they all discussed their level of
discomfort with the loans that were being approved. “We had to go out collectively,” he said.
“We thought, ‘This was ridiculous.’” They knew that First Franklin was approving loans for
borrowers that the borrowers couldn’t really afford. For example, “[Borrowers] had foreclosures
and bankruptcies,” yet underwriters approved their stated loan applications. CW-O also saw applications where a borrower had a 780 credit score, but only a $5,000 credit line, and was trying to buy a million dollar house.
408. Similarly, CW-R said that she saw loans which fit First Franklin’s guidelines, but which nevertheless seemed beyond the borrower’s ability to pay. Despite this problem, First
Franklin’s underwriters were expected to approve any loan which fit the guidelines. As CW-R said, “If it fit the guidelines, you can’t not approve it.”
409. CW-T said that mortgage brokers who sent loans to First Franklin to close did not explain to borrowers how adjustable-rate mortgages worked: “Brokers didn’t give a sh**. They
just wanted to do a loan. They didn’t explain ARMs to borrowers.”
410. In addition, First Franklin was among 14 lenders named by the NAACP in a complaint alleging “systematic, institutionalized racism in sub-prime home mortgage lending.”
162 411. CW-P also described rampant appraisal fraud. “Appraisals were inflated all the time.” First Franklin, as a wholesale lender, did not order appraisals directly from appraisers, but the brokers that were responsible for obtaining the appraisals for First Franklin routinely called up appraisers and told them that they needed a certain value to make the deal work. If the appraiser refused to come in at value, the broker would simply move on to another appraiser that would come in at value. While an underwriter could reject a loan if he believed an appraisal was inflated, high productivity loan officers would sometimes complain to a branch manager about the rejection, and often the loan officers would win. CW-P rejected loans that contained
“pushed” loan-to-value ratios, inflated incomes, or inflated appraisal values, only to be overruled by his managers. CW-P estimates that for 10-15% of the loans he underwrote, management would override his denials and issue the loan.
412. First Franklin originated mortgages that secured at least Securities FFML 2006-
FF13 A2C, FFML 2006-FF8 IIA3, FFML 2006-FF12 A3, FFML 2006-FF12 A4, FFML 2006-
FF14 A5, and FFML 2006-FF10 A7. As discussed in detail below, the Offering Documents contained serious material misstatements regarding specific characteristics of the loan pools securing these securities, including misstatements with respect to their weighted average LTV ratio, the percentages of loans with LTV ratios in excess of 100%, 90%, and 80%, and the percentage of loans secured by property not the primary residence of the borrower. Moreover, as described below, see infra ¶¶ 591-592, these securities have exhibited excessive delinquency and foreclosure rates. These circumstances are strong evidence of First Franklin’s failure to observe its stated underwriting standards. First Franklin’s actual practices—including the use of unreliable appraisals, routine granting of underwriting exceptions, and reliance on unverified borrower-supplied information—caused it to originate loans whose actual LTV ratios and
163 primary residence rates were far different from that reported in the Offering Documents, and
whose likelihood of default was much higher than that of loans issued under underwriting standards of the type described in the Offering Documents.
413. In summary, far from following its underwriting guidelines and making
occasional, targeted, and justified exceptions when other evidence of ability to repay justified a
deviation from the guidelines, in fact, at First Franklin, variance from the stated standards was
the norm, and many loans were made with essentially little to no underwriting or effort to
evaluate ability to repay. Nowhere did any Offering Document apprise the Bank of the extent to
which First Franklin deviated from its guidelines and engaged in predatory lending.
12. WMC Mortgage Corp.
414. WMC Mortgage Corp, owned by General Electric as of 2004, originated
underlying mortgage loans for at least three of the PLMBS purchased by the Bank. WMC was
identified by the OCC as the second worst subprime lender in the country based on the
delinquency rates of the mortgages it originated in the ten metropolitan areas with the highest
rates of delinquency. Like the other originators identified above, WMC Mortgage Corp.
abandoned sound underwriting practices and engaged in predatory lending.
415. In June 2008, the Washington State Department of Financial Institutions filed a
Statement of Charges and Notice of Intent to Enter Order to Revoke License, Prohibit from
Industry, Order Restitution and Collect Investigation Fees against WMC Mortgage, alleging
multiple violations of Washington State deceptive and unfair practices laws, including multiple
failures to make required disclosures to borrowers of the essential terms of their loans.
416. The State of Washington Department of Financial Institutions also closed down a
broker who worked to market WMC Loans for multiple instances of fraud, including “caus[ing]
164 the preparation of false and fraudulent payment instruments such as cashier’s checks, personal checks and business checks, which were submitted to mortgage lenders in support of loan applications for buyers of residential properties to obtain financing” and “caus[ing] the preparation of false and fraudulent loan documentation such as HUD-1 settlement statements, loan application forms, and gift letters in order to misrepresent that buyers/borrowers of residential properties had paid down payments as required by mortgage lenders, when in truth and in fact, buyers/borrowers had not provided the down payments required by the mortgage lenders.”
417. A New York Times story reported on a WMC mortgage issued based on fraudulent income and asset disclosures unknown to the borrower, Ms. Philemond. The borrower, a receptionist whose husband owned a sign business, was issued two mortgages with monthly payments of $3,800 prior to resetting to a higher level when the interest rate became adjustable early in 2008. The couple’s income had been overstated on the mortgage application by brokers who had helped them buy the house and get a loan from WMC Mortgage, which said that it had granted Ms. Philemond the loan because the information on her application indicated that she and her husband had income of more than $100,000 a year, savings exceeding $60,000 and had a tenant. None of this was true. Vikas Bajaj, For Some Subprime Borrowers, Few Good Choices,
N.Y. TIMES, Mar. 22, 2007.
418. A Reuters Report states that:
General Electric Co.’s subprime mortgage unit is responsible for some of the worst-performing loans in the benchmark index for the $575 billion market for home equity asset-backed securities, showing few lenders are immune to recent U.S. housing sector problems.
Losses on more than $2.6 billion in loans issued by WMC Mortgage, a Burbank, California-based unit of GE Money Bank, are expected to top 15 percent, the
165 highest projected rate of any bond in the widely watched ABX derivative index of bonds issued in early 2006, a UBS Securities model showed.
Thirty-day delinquencies rose to 9.62 percent in February, from less than 2.0 percent six months ago, on WMC's loans backing one of the 20 bonds in the ABX 06-2 index, according to Morgan Stanley, whose Morgan Stanley ABS Capital I Trust packaged the loans into home equity ABS.
WMC loans in Morgan Stanley's MSAC 2006-WMC2 bond carry characteristics of subprime issues that analysts have blamed for surging delinquencies.
More than half the loans have "stated" income documentation that don't require borrowers to prove their ability to repay the loan, data on Morgan Stanley's Web site showed.
First and second lien loans together cover more than 90 percent of the homes’ values, making them riskier to investors since the homeowners have little equity at stake. Most lenders have been paring back on such loans, especially those with "piggyback" second mortgages that help finance 100 percent of the home.
419. In PMI Mortgage Insurance Company v. WMC Mortgage Corporation, No. BC
381972 (L.A. Sup. Ct.), WMC MBS insurer PMI alleges that, with respect to WMC securitizations it insured, WMC “breached various representations and warranties” including that
(a) the loan to value ratios for mortgages at the time of origination was greater than 100%; (b)
fraud, errors and misrepresentations, or gross negligence took place on the part of WMC, the
associated borrower, and/or another party involved in the origination of the Mortgage loans; and
(c) the loans did not comply with WMC’s own underwriting standards at the time of origination.
420. PMI’s allegations are supported by a review of a sampling of loan documents
performed by Clayton Fixed Income Services Inc. Clayton’s sampling review identified 120
loans that breached WMC’s representations and warranties. For 46 out of the 120 defective
loans, Clayton discovered an unreasonable stated income and/or misrepresentations of income
and/or employment, the large majority of which could have been discovered by WMC through
simple due diligence procedures. For 27 out of the 120 defective loans, Clayton discovered
166 misrepresentations of occupancy status by the borrower that could also have been discovered
through simple due diligence procedures.
421. PMI’s complaint emphasizes that while Clayton only analyzed a sample of loans,
the deficiencies it uncovered demonstrate a “systematic failure” by WMC to apply sound
underwriting standards and practices, and that these deficiencies cut across all of the loans in the
securitization. In fact, 30% of the loans in the securitization were delinquent as of October 2007,
a mere eight months after the close of the securitization. According to PMI, the sheer volume of
delinquencies compels the conclusion that widespread underwriting deficiencies are present throughout the entire loan pool.
422. WMC was also among 14 lenders named by the NAACP in a complaint alleging
“systematic, institutionalized racism in sub-prime home mortgage lending.” According to the lawsuit, African American homeowners who received subprime mortgage loans from these lenders were more than 30 percent more likely to be issued a higher rate loan than Caucasian borrowers with the same qualifications. In January of 2009 the court denied a motion to dismiss, finding that the plaintiff had sufficiently pled a disparate impact claim.
423. WMC originated mortgages that secured at least Securities MSAC 2006-WMC2
A2C, MSAC 2006-HE5 A2C, and MSAC 2006-HE6 A2C. As discussed in detail below, the
Offering Documents contained serious material misstatements regarding specific characteristics of the loan pools securing these Securities, including misstatements with respect to the percentages of loans with LTV ratios in excess of 100%, 90%, and 80%, and the percentage of loans secured by property not the primary residence of the borrower. Moreover, as described below, see infra ¶¶ 591-592, these certificates have exhibited excessive delinquency and foreclosure rates. These circumstances are strong evidence of WMC’s failure to observe its
167 stated underwriting standards. WMC’s actual practices—including the use of unreliable
appraisals, routine granting of underwriting exceptions, and reliance on unverified borrower-
supplied information—caused it to originate loans whose actual LTV ratios and primary
residence rates were far different from that reported in the Offering Documents, and whose
likelihood of default was much higher than that of loans issued under underwriting standards of
the type described in the Offering Documents.
424. Accordingly, far from following their underwriting guidelines and making
occasional, targeted, and justified exceptions when other evidence of ability to repay justified a
deviation from the guidelines, in fact, at WMC Mortgage Corp., variance from the stated
standards was the norm, and many loans were made with essentially little to no underwriting or
effort to evaluate ability to repay. Nowhere did any Offering Document apprise the Bank of the
extent to which these mortgage originators deviated from its guidelines and engaged in predatory lending.
13. OwnIt Mortgage Solutions, Inc.
425. OwnIt Mortgage Solutions, Inc. (“OwnIt”) originated underlying mortgage loans
for bond CBASS 2006-CB4 AV3 purchased by the Bank.
426. OwnIt Mortgage Solutions, Inc. was located in Agoura Hills, California. It was
the nation’s sixteenth biggest issuer of subprime home loans, and in 2010, OwnIt was identified
by the OCC as the fifteenth worst subprime lender in the country based on the delinquency rates
of the mortgages it originated in the ten metropolitan areas with the highest rates of delinquency.
427. In 2005, OwnIt’s 700 employees originated $8.3 billion in home mortgage loans.
As described by CW-S, see supra ¶ 390, a former First Franklin underwriter who worked with
former OwnIt employees – including managers – at First Franklin in 2005, OwnIt employees
168 were “used to approving anything. They’d say, ‘If we don’t approve it, somebody else will. So why lose the money?’” CW-S’s underwriting manager and underwriting supervisor, both former
OwnIt employees, overrode loans that CW-S declined and knew how to “re-work” loans so that system accepted them.
428. OwnIt originated mortgages that secured at least Certificate CBASS 2006-CB4
AV3. As discussed in detail below, the Offering Documents contained serious material misstatements regarding specific characteristics of the loan pools securing this Security, including misstatements with respect to the percentages of loans with LTV ratios in excess of
100%, 90%, and 80%, and the percentage of loans secured by property not the primary residence of the borrower. Moreover, as described in Paragraphs 470-71 below, this certificate has exhibited excessive delinquency and foreclosure rates. These circumstances are strong evidence of OwnIt’s failure to observe its stated underwriting standards. OwnIt’s actual practices— including the use of unreliable appraisals, routine granting of underwriting exceptions, and reliance on unverified borrower-supplied information—caused it to originate loans whose actual
LTV ratios and primary residence rates were far different from that reported in the Offering
Documents, and whose likelihood of default was much higher than that of loans issued under underwriting standards of the type described in the Offering Documents.
429. Further allegations relating to OwnIt are supra at ¶ 390 and infra at ¶¶ 473-474.
14. First Horizon Home Loan Corporation
430. First Horizon Home Loan Corporation (“First Horizon”) originated underlying mortgage loans securing at least one of the PLMBS purchased by the Bank.
431. Confidential witnesses provided evidence of First Horizon’s failure to adhere to sound underwriting practices and guidelines. Statements by CW-U, an underwriter at First
169 Horizon from August 2004 until May 2006, confirm that First Horizon pressured employees to
meet high production volumes, to the detriment of quality control.
432. As an underwriter, CW-U said he found problems in the loans that he reviewed
“almost daily.” Most frequently, he saw loan files that were “missing pay stubs” or other
documents. CW-U was required to bring serious errors to the attention of his supervisor, which
he did approximately once per week.
433. In 2006, CW-U stated that his work-production quota doubled from reviewing 5
loans per day to reviewing 10 per day. Although First Horizon demanded that he review more
loans, they did not provide any software or “anything that would make the job go faster.” CW-U
felt that he could perform a decent quality-control review of the loans when his quota was 5 per day, but when he was told to review 10 per day his “real fear was degradation of quality.”
Nevertheless, First Horizon’s emphasis was solely on quantity: according to CW-U, “It was put to me that I had to meet the quota or I’d be let go.” After CW-U regularly fell short of the 10-
per-day quota in an attempt to perform a sufficient review, he was counseled for low production
volume “two to three times” and ultimately terminated for failing to meet the quota.
434. First Horizon originated mortgages that secured at least Certificate FHASI 2006-
AR1 2A1. As discussed in detail below, the Offering Documents contained serious material misstatements regarding specific characteristics of the loan pools securing this security, including misstatements with respect to their weighted average LTV ratio, the percentages of loans with LTV ratios in excess of 100%, 90%, and 80%, and the percentage of loans secured by property not the primary residence of the borrower. Moreover, as described below, see infra
¶¶ 591-592, this security has exhibited excessive delinquency and foreclosure rates. These circumstances are strong evidence of First Horizon’s failure to observe its stated underwriting
170 standards. First Horizon’s actual practices—including the use of unreliable appraisals, routine
granting of underwriting exceptions, and reliance on unverified borrower-supplied information— caused it to originate loans whose actual LTV ratios and primary residence rates were far different from that reported in the Offering Documents, and whose likelihood of default was much higher than that of loans issued under underwriting standards of the type described in the
Offering Documents.
435. As detailed above, rather than follow its underwriting guidelines and perform a prudent review of the loans it was approving, First Horizon sacrificed quality for quantity.
Consequently, many loans were made with essentially little to no underwriting. Nowhere did any of the Offering Documents apprise the Bank of the extent to which First Horizon deviated from its underwriting guidelines.
15. Bank of America, N.A.
436. Bank of America, N.A. (“Bank of America”) originated underlying mortgage loans securing at least three of the PLMBS purchased by the Bank.
437. Confidential witnesses provided evidence of Bank of America’s failure to adhere
to sound underwriting practices and guidelines. Statements by CW-V, who worked for Bank of
America from August 2004 through April 2008 as a bank teller, sales and service specialist, and
personal banker, confirm that Bank of America: (a) adopted practices encouraging employees to
disregard a borrower’s ability to qualify for a loan; (b) pressured employees to generate large
quantities of loans at any cost; (c) created an environment where employees manipulated loan
data in order to get loans approved; and (d) failed to adhere to its own underwriting guidelines.
438. During his time at Bank of America, CW-V was involved in the bank’s retail and
consumer banking operations, including generating residential mortgages by taking mortgage
171 applications from prospective borrowers who applied through his branch office. CW-V ultimately left Bank of America because of “unethical stuff” he observed in the mortgage lending
side of Bank of America’s business.
439. Specifically, CW-V said there was “horrible” pressure to generate quantities of
loan applications and approved loans. According to CW-V, Bank of America imposed a
quarterly requirement to book one million dollars in mortgage loans per banker. CW-V received
a notice when mortgage applications that he prepared were approved for funding and were thus
“booked” for purposes of meeting his one-million-dollar requirement. To meet these
requirements, CW-V said he and his colleagues were told to enter mortgage applications
regardless of whether it appeared the borrower would qualify for the loan. These practices led
CW-V to view Bank of America’s way of doing business as “fast food banking.”
440. CW-V explained that there were times at quarter-end when Bank of America
employees would believe that they weren’t going to meet the million-dollar-per-quarter quota.
Suddenly, the employee’s loan would be booked because the Branch Manager had gone to the
Regional Manager, who “pulled some strings” to get the loan approved.
441. Additionally, CW-V believed that Bank of America was lax on enforcing its own
credit guidelines. He recalled that borrowers with a lower FICO score than was required still
obtained mortgages from his branch.
442. CW-V described other practices with which he was uncomfortable, including
manipulating loan data to get loans approved. For example, CW-V said that he and other
bankers in his branch regularly rounded up applicants’ salaries on the loan applications.
Specifically, if someone’s income was $34,000 annually, Bank of America employees would
round it up to $40,000 to make the figure look better for loan approval purposes. CW-V said that
172 Bank of America employees also inflated how long an applicant had worked for his or her current employer. If the applicant had only worked for an employer for one year and the qualifications required two years with that employer, the Bank of America employee would input on the application that the person had worked for his or her company for three years.
443. CW-V said that he understood these practices were necessary in order to have greater success meeting the quarterly quota of one million dollars in booked mortgage volumes.
444. Bank of America originated mortgages that secured at least Certificates BAFC
2006-C 2A1, BAFC 2006-E 2A2, and BAFC 2006-E 3A1. As discussed in detail below, the
Offering Documents contained serious material misstatements regarding specific characteristics of the loan pools securing these Securities, including misstatements with respect to their weighted average LTV ratio, the percentages of loans with LTV ratios in excess of 100%, 90%, and 80%, and the percentage of loans secured by property not the primary residence of the borrower. Moreover, as described below, see infra ¶¶ 591-592, these securities have exhibited excessive delinquency and foreclosure rates. These circumstances are strong evidence of Bank of America’s failure to observe its stated underwriting standards. Bank of America’s actual practices—including the use of unreliable appraisals, routine granting of underwriting exceptions, and reliance on unverified borrower-supplied information—caused it to originate loans whose actual LTV ratios and primary residence rates were far different from that reported in the Offering Documents, and whose likelihood of default was much higher than that of loans issued under underwriting standards of the type described in the Offering Documents.
445. As detailed, far from following its underwriting guidelines and making occasional, targeted, and justified exceptions when other evidence of ability to repay justified a deviation from the guidelines, in fact, at Bank of America, N.A., variance from the stated
173 standards was the norm, and many loans were made with essentially little to no underwriting or
effort to evaluate ability to repay. Nowhere did any Offering Document apprise the Bank of the
extent to which Bank of America, N.A. deviated from its underwriting guidelines.
16. HomeComings Financial Network, Inc.
446. HomeComings Financial Network, Inc. (“HomeComings”) originated underlying
mortgage loans securing at least one of the PLMBS purchased by the Bank.
447. Confidential witnesses provided evidence of HomeComings’ failure to adhere to
sound underwriting practices and guidelines. Statements by CW-W, an underwriter at
HomeComings from January 2006 until December 2006, and CW-X, an underwriter for
HomeComings from May 2005 until his office closed in October 2007, confirm that
HomeComings: (a) engaged in predatory lending by making loans to borrowers when it was clear that they could not afford to make the monthly payments; (b) approved risky, low- or no- documentation loans; (c) approved exception loans for which there were no reasonable compensating factors; and (d) abandoned sound underwriting practices.
448. CW-X said a lot of the problem with HomeComings’ mortgages during his employment was due to “what became the norm” in the lending industry: underwriting guidelines became really loose, and “the gray areas became even grayer.” According to CW-X, he and other underwriters thought the extent to which the guidelines relaxed was “ridiculous.”
449. During his tenure at HomeComings, CW-X underwrote full-documentation, stated income, stated income/stated asset (“SISA”), and no income/no asset (“NINA”) documentation loans. Of these, the majority – 75% – were stated income loans. According to CW-X, it was the stated income and the option-ARM (negative amortization) loans that “killed the industry.”
174 450. Both CW-W and CW-X explained that HomeComings employed automated
underwriting systems (“AUS”) to underwrite loans. According to CW-X, HomeComings
employees had the choice of two different options: (1) Desktop Underwriter (“DU”), and (2)
Assetwise. As CW-X explained, HomeComings employees used DU for subprime applications
from low-income applicants because it approved loans with higher debt-to-income ratios than
Assetwise.
451. CW-W said that, with respect to Assetwise, HomeComings employees entered
borrowers’ information into the system and the computer provided its findings. As CW-W
explained, “One of my problems was that [a loan application] would fit inside the guidelines, but
if you read between the lines, you could see that the borrower was not going to be able to make
the payments.” Nevertheless, when CW-W raised such concerns to her supervisor, she was told:
“It fits, you do the loan. We’re going to do this deal.”
452. Irrespective of which AUS HomeComings employees chose, CW-X said that
virtually all of the loan applications ended up being approved. Moreover, said CW-X, once the
AUS approved the application, the underwriters could not change the decision.
453. Besides approving loans that CW-W believed borrowers could not afford, CW-W
also noted that mortgage brokers often appealed loans to CW-W’s supervisor that had been
denied by HomeComings’ underwriters. CW-W’s supervisor then instructed CW-W and other underwriters that they had to sign off on the loans.
454. CW-X also explained that underwriters searched for compensating factors which would enable them to approve loans, even in the presence of “red flags.” For example, if a stated income application reflected a monthly income of $10,000 or more, that would be a “red flag,”
175 and the underwriter would review the loan application to find “contributing factors” which would nevertheless allow the loan to be approved.
455. HomeComings originated mortgages that secured at least Security RFMSI 2006-
SA2 2A1. As discussed in detail below, the Offering Documents contained serious material misstatements regarding specific characteristics of the loan pools securing this security, including misstatements with respect to their weighted average LTV ratio, the percentages of loans with LTV ratios in excess of 100%, 90%, and 80%, the percentage of loans secured by property not the primary residence of the borrower, and the percentage of the loans originated using full documentation. Moreover, as described below, see infra ¶¶ 591-592, this security has exhibited excessive delinquency and foreclosure rates. These circumstances are strong evidence of HomeComings’s failure to observe its stated underwriting standards. HomeComings’ actual practices—including the use of unreliable appraisals, routine granting of underwriting exceptions, and reliance on unverified borrower-supplied information—caused it to originate loans whose actual LTV ratios and primary residence rates were far different from that reported in the Offering Documents, and whose likelihood of default was much higher than that of loans issued under underwriting standards of the type described in the Offering Documents.
456. In summary, far from following its underwriting guidelines and making occasional, targeted, and justified exceptions when other evidence of ability to repay justified a deviation from the guidelines, in fact, at HomeComings variance from the stated standards was the norm, and many loans were made with essentially little to no underwriting or effort to evaluate ability to repay. Nowhere did any Offering Document apprise the Bank of the extent to which HomeComings deviated from its underwriting guidelines.
176 17. Other Mortgage Originators Also Abandoned Sound Underwriting Practices and Engaged in Predatory Lending in Order to Issue Loans for Securitization.
457. On information and belief, based on government reports and assessment of mortgage origination practices during the time period that the loans at issue were issued, as discussed above, see supra Section IV.C.1-16, and the Bank’s investigation, each of the other
mortgage originators who issued loans that backed the PLMBS purchased by the Bank similarly
abandoned their underwriting guidelines and engaged in predatory lending in order to increase
loan volume. These abuses were pervasive in the mortgage origination industry and were the
standard operating practice of mortgage originators who issued loans so that they could be sold and securitized either by their affiliates or other financial institutions who acted as
Depositors/Issuers, and Underwriters of PLMBS.
458. Accordingly, instead of following their underwriting guidelines and making occasional, targeted, and justified exceptions when other evidence of ability to repay justified a deviation from the guidelines, at these mortgage originators, variance from the stated standards was the norm, and many loans were made with essentially little to no underwriting or effort to evaluate ability to repay. Nowhere did any Offering Document apprise the Bank of the extent to which these mortgage originators deviated from their underwriting guidelines.
D. The Securitization Process Was Plagued by Conflicts of Interest and Misplaced Incentives.
459. A few large financial institutions dominated every aspect of the mortgage securitization process. They owned many of the mortgage originators themselves, and funded the lending activities of many of the originators they did not own outright. As a result, these financial institutions—and the sponsors, depositors, and underwriters that were divisions of these financial institutions—were in a position to scrutinize the practices of the originators and
177 examine closely the mortgages placed in the pools. Indeed, they had the legal responsibility to do so and to provide investors with complete and accurate information.
1. The Vertical Integration of Many of the Firms Involved in the Issuance of the PLMBS Purchased by the Bank Provided the Defendants with Access to Information Regarding the Abandonment of Underwriting Guidelines, the Manipulation of the Appraisal Process, and Predatory Lending Practices.
460. Many of the PLMBS purchased by the Bank were issued by vertically integrated firms which were involved in several if not all of the stages of the securitization of the PLMBS – loan origination, sponsoring, obtaining credit ratings, issuing, underwriting, and/or selling the securities. The following table summarizes the vertical integration of the entities involved in various of the PLMBS purchased by the Bank:
Sponsor Security Roles of Affiliated Entities Bank of America, BAFC 2006-C 2A1 Originator: Bank of America, National National BAFC 2006-E 2A2 Association Association BAFC 2006-E 3A1 Underwriter: Banc of America Securities BAFC 2006-F 2A1 LLC BAFC 2006-F 3A1 Depositor: Banc of America Funding Corporation Servicer: Bank of America, National Association
Citigroup Global CMLTI 2006-NC1 A2C Underwriter: Citigroup Global Markets, Markets Realty CMLTI 2006-WFH2 Inc. Corporation A2B Depositor: Citigroup Mortgage Loan CMLTI 2006-WFH4 A3 Trust Inc. CMLTI 2006-NC2 A2B Trust Administrator: Citibank, N.A.
178 Sponsor Security Roles of Affiliated Entities Wells Fargo Bank, WFHET 2006-3 A2 Originator: Wells Fargo Bank, National WFMBS 2006-AR3 A4 National Association Association Depositor: Wells Fargo Asset Securities Corp. Servicer: Wells Fargo Bank, National Association Securities Administrator: Wells Fargo Bank, National Association
Custodian: Wells Fargo Bank, National Association
Morgan Stanley MSAC 2006-WMC2 Underwriter: Morgan Stanley & Co. Mortgage Capital A2C Incorporated Inc. MSAC 2006-HE5 A2C Depositor: Morgan Stanley ABS MSAC 2006-HE6 A2C Capital I Inc.
Goldman Sachs FFML 2006-FF13 A2C Underwriter: Goldman Sachs & Co. Mortgage Company GSAMP 2006-NC2 Depositor: GS Mortgage Securities A2C Corp.
Option One OOMLT 2005-5 A3 Originator: Option One Mortgage Corp. Mortgage OOMLT 2006-2 2A3 Depositor: Option One Acceptance Corporation Corp. Underwriter: H&R Block Financial Advisors, Inc. (affiliated entity) Master Servicer: Option One Mortgage Corp. IndyMac Bank INDX 2006-AR15 A2 Originator: IndyMac Bank INABS 2005-D AII3 Depositor: IndyMac MBS, Inc. (INDX 2006-AR15 A2) Depositor: IndyMac ABS, Inc. (INABS 2005-D AII3) Master Servicer: IndyMac Bank
179 Sponsor Security Roles of Affiliated Entities Residential Funding RFMSI 2006-SA2 2A1 Originators: Homecomings Financial Corporation RASC 2005-KS12 A2 Network, Inc. GMAC Mortgage Corp. (affiliates of Residential Funding Corporation) Depositors: Residential Funding Mortgage Securities I, Inc. Residential Asset Securities Corporation Master Servicer: Residential Funding First Horizon Home FHASI 2006-AR1 2A1 Originator: First Horizon Home Loan Loan Corporation Corporation Underwriter: FTN Financial Capital Markets (affiliate of First Horizon) Depositor: First Horizon Asset Securities Inc. Master Servicer: First Horizon Home Loan Corporation Greenwich Capital HVMLT 2006-2 2A1A Depositor: Greenwich Capital Financial Products, Acceptance, Inc. Inc. HVMLT 2006-2 3A1A Underwriter: Greenwich Capital Markets, Inc. GMAC Mortgage GMACM 2006-AR2 Originator: GMAC Mortgage Corporation Corporation 2A1 Depositor: Residential Asset Mortgage Products, Inc. Underwriter: Residential Funding Securities Corporation (a/k/a GMAC RFC Securities) Master Servicer: GMAC Mortgage Corporation
Nomura Credit & NHELI 2006-WF1 A3 Underwriter: Nomura Securities Capital, Inc. International, Inc. Depositor: Nomura Home Equity Loan, Inc.
461. Between 2005 and 2007, the number of vertically integrated firms grew significantly because investment banks and other issuers of mortgage backed securities sought to ensure a steady supply of mortgage loans for securitization and sale to investors. Yet, as a result of the direct involvement in the origination of the loans they securitized, the vertically integrated
180 firms, and specifically, the Depositor/Issuer and Underwriter affiliates of the firms, had access to and often first-hand knowledge of the underwriting abuses of the mortgage originators.
462. For example, in GMACM 2006-AR2, GMAC RFC Securities as underwriter for the securities issuance, knew precisely what its affiliate, GMAC Mortgage Corporation as mortgage originator, was doing when it issued loans to people without regard to their ability to pay, and without any meaningful mortgage underwriting. The same is true for the other vertically integrated entities listed above, many of whom, like the GMAC entities, had corporate affiliates that originated the substandard loans underlying the Bank’s certificates, or had corporate affiliates that served as sponsors that purchased and assembled the substandard loans into securities that were sold to the Bank. Unfortunately, the vertical integration of these firms created enormous incentives to push their affiliated originators and sponsors to loosen standards so that more loans could be issued and more securitizations sold. In this regard, the
Depositor/Issuer Defendants and Underwriter Defendants themselves dictated and were well aware of the quality of the loans.
463. Rather than use their superior access to information about the underlying mortgage pools and unique ability to exert influence over the underwriting standards responsibly, the Depositor/Issuer and/or Underwriter Defendants at the vertically integrated firms accepted defective loans that their affiliates purchased or originated for securitization. The reason was straightforward. They made more money that way on the front end, when issuing the loans, and on the back end, when securitizing them. Adequate, actual, due diligence and exclusion of defective loans would have cut into their profits and slowed down the securitization machine.
464. Moreover, even those Defendants that did not have corporate affiliates involved in concocting the risky securities sold to the Bank still had corporate affiliates intimately involved
181 in the creation and marketing of MBS. Given these corporate affiliations, all of the Defendants should have known, and failed to disclose, the substantial risks associated with mortgage-backed securities.
2. Financial Ties Between the Investment Banks and Non-Bank Lenders Provided the Defendants with Access to Information Regarding the Mortgage Originators’ Failure to Adhere to Underwriting Guidelines and Engagement in Predatory Lending Practices.
465. Even where the parties involved in the securitization were not all affiliated under a single parent (for example, where a sponsor purchased the loans from an unaffiliated mortgage originator) the Depositor/Issuer and Underwriter Defendants had access to abundant information about the mortgage originators’ abandonment of underwriting guidelines and predatory lending practices. This was the result of the close financial ties between the unaffiliated mortgage lenders and the financial institutions that funded them.
466. An example of this relationship is the credit facilities that mortgage originators maintained with the financial institutions involved in the securitization and underwriting of the
PLMBS that were backed by those originators’ loans. For example, Countrywide Financial
Corp., collectively with its origination subsidiary, Countrywide Home Loans, Inc., had credit agreements with Bank of America, J.P. Morgan Chase, Citicorp USA (part of Citigroup), and
Barclays, each of which funded Countrywide’s origination business. Likewise, originator New
Century Mortgage Corp., collectively with other subsidiaries of New Century Financial Corp., had credit agreements with Bank of America, Morgan Stanley, Citigroup, and Barclays, each of which funded New Century’s origination business. See John Dunbar and David Donald, The
Roots of the Financial Crisis: Who is to Blame? (May 6, 2009), available at http://www.publicintegrity.org/investigations/economic_meltdown/articles/entry1286 (noting that 21 of the 25 largest subprime lenders were financed by Wall Street banks).
182 467. Mortgage originators, including those that issued loans backing the PLMBS
purchased by the Bank, depended on credit facilities of this sort to fund their operations. The
originators would borrow from these credit facilities pursuant to “warehouse agreements” so that
they could continue to make loans to home buyers. When loans were sold, the originators would
repay the warehouse agreements. When loans serving as collateral lost value, the financial
institutions would make margin calls requiring the originators to pay cash to the institutions. In
connection with this process, the mortgage originators provided the financial institutions with
documents about the underlying loans, including performance characteristics and early warning
signs of poor credit quality. The files were then passed to other divisions of the financial
institutions for review and securitization. See Mortgage Bankers Association Warehouse
Flowchart: Securitization, available at
http://www.mbaa.org/files/ResourceCenter/WarehouseLending/FlowchartSecuritization.pdf (last
visited Sept. 15, 2010).
468. The financial institutions also entered into purchase agreements with unaffiliated
originators. These agreements ensured that the financial institutions were assured access to a
batch of mortgages to securitize, and the originators were guaranteed a buyer for the mortgages they made. As part of the agreement, the financial institutions typically set the prices and quantities of the types of loans it wanted to buy and also gained access to loan information prior to purchase.
469. The investment banks that operated credit facilities for non-bank lenders and entered into purchase agreements did not limit their activities to just funding the lenders. To the
contrary, they funded the lenders so that the lenders could issue more loans for the investment banks to purchase and securitize. These inter-relationships are illustrated by the warehouse lines
183 of credit which were extended to New Century Financial Corp. and its subsidiary, New Century
Mortgage Corp., the originator of loans that backed the PLMBS in this case:
Certificate **Warehouse Line Sponsor of the Depositor/Issuer Underwriter of Credit with: PLMBS of the PLMBS Defendant for Certificate Certificate the PLMBS Certificate GSAMP Goldman Sachs Goldman Sachs GS Mortgage Goldman, Sachs 2006-NC2 Mortgage Co. Mortgage Co. Securities Corp. & Co. A2C
MSAC Morgan Stanley Morgan Stanley Morgan Stanley Morgan Stanley & 2006-HE5 Mortgage Capital Mortgage Capital ABS Capital I Co. Incorporated A2C Inc. Inc. Inc. MSAC 2006-HE6 A2C
CMLTI Citigroup Global Citigroup Global Citigroup Citigroup Global 2006-NC1 Markets Realty Markets Realty Mortgage Loans Markets Inc. A2C Corp. Corp. Trust, Inc. CMLTI 2006-NC2 A2B
**Source: Factbox: New Century Creditors Named in Bankruptcy Filing, Reuters (April 2, 2007), available at http://www.reuters.com/assets/print?aid=USN0243292520070402 (last visited Sept. 14, 2010).
470. As the chart shows, the same investment banks that offered warehouse lines of
credit to New Century purchased the loans as sponsor, deposited them into trusts as depositor,
securitized and issued them as issuer, and underwrote the securities backed by the loans as
underwriter. Because the investment banks were involved in several if not all of the steps of securitization, they had direct information and knowledge about the problems in the loan pools.
471. In addition, the sponsors, the Depositor/Issuer Defendants, and the Underwriter
Defendants, were all intimately aware of the mortgage originators’ practices as a result of their direct role negotiating with the originators regarding the quality and characteristics of the loans
184 in the mortgage pools they purchased. This is confirmed by confidential witness testimony. For
example, CW-G, a branch manager at New Century from December 2000 through December
2005, indicated that not only did the investment banks know about the origination guidelines,
they were the ones who designed them. As CW-G explained, the investment banks took advantage of their leverage over the mortgage originators and “abused subprime” for their own purposes – to make profits by selling mortgage-backed securities to unsuspecting investors.
3. Conflicts of Interest Undermined Adequate Due Diligence and Disclosure to Investors.
472. The multiple roles of large financial institutions in the securitization process created conflicts of interest that prevented these institutions from engaging in adequate due diligence on the loan pools. For example, these financial institutions did not use their influence and control over the mortgage origination process to ensure that underwriting guidelines were followed, because to do so would have jeopardized repayment of their warehouse lines of credit.
By keeping the mortgage origination wheel turning, these financial institutions (by and through the Certificate’s sponsors, the Depositor/Issuer Defendants, and the Underwriter Defendants) not only secured repayment on existing warehouse lines, but also paved the way for ever increasing lines in the future, with additional short-term profits. While these financial institutions eventually shut down their lines of credit, they did so only after the originators’ financial condition deteriorated to the point that the financial institutions faced the risk of non-payment.
Ironically, this risk was created by ever increasing numbers of repurchase demands by the financial institutions themselves for defective loans sold to the banks by the originators.
473. For example, Merrill Lynch Mortgage Capital, an affiliate of Underwriter
Defendant Merrill Lynch, Pierce, Fenner & Smith, Inc., provided warehouse lines of credit to subprime originator OwnIt Mortgage Solutions. Pleadings filed in OwnIt’s bankruptcy reveal
185 that Merrill Lynch Mortgage Capital was a secured creditor on its warehouse line of credit to
OwnIt for $633 million. Bond CBASS 2006-CB4 AV3, which the Bank purchased from
Defendant Underwriter Merrill Lynch, Pierce, Fenner & Smith, Inc. includes a substantial
number of loans originated by OwnIt Mortgage Solutions – an entity with which investment
bank and Defendant Underwriter Merrill Lynch was in a conflicted relationship in general, and
with respect to Bond CBASS 2006-CB4 AV3 in particular.
474. Furthermore, papers filed in OwnIt’s bankruptcy proceedings also show that
Merrill Lynch LP Holdings, Inc., another affiliate of Defendant Underwriter Merrill Lynch,
Pierce, Fenner & Smith, Inc., holds an unsecured mortgage repurchase claim against OwnIt,
arising from its right to compel repurchases of mortgage loans it purchased from OwnIt. The
amount of such claim is estimated at $92.96 million, which is 20% of the principal balance of the
mortgage loans subject to repurchase.
475. Similar conflicts prevented the investment banks from insisting on compliance
with underwriting guidelines when they purchased loans at “loan auctions.” At the loan
auctions, the mortgage originators would set a date and time for the sponsors to purchase a block
of mortgage loans. In advance of the auction, the mortgage originator would provide certain
potential bidders with a bid stipulation sheet that described the general characteristics of the loan
pool being auctioned and the variance rate of the pool. The investment banks depended on the
auctions to feed loans into their securitization machines. But investment banks feared that they
would lose access to the bid stipulation sheets and other information from mortgage originators if they conducted rigorous quality reviews of the subject mortgages and rejected loans as being non-compliant with the mortgage originators’ stated guidelines. Thus, to curry favor with the mortgage originators and assure a continued pipeline of mortgages (however flawed) for
186 securitization, the parties who should have protected the quality of the mortgages being deposited into the pools instead ignored the flaws with the mortgages.
476. Simply put, as a result of corporate affiliations and conflicted relationships in the
industry, the investment banks, by and through the sponsors and affiliated Depositor/Issuer and
Underwriter Defendants, failed to appropriately fulfill their due diligence function with respect to the mortgages placed in the pools. Rather than conducting the appropriate due diligence on the loan pools, and either rejecting loans that failed to meet underwriting standards or adequately disclosing the true risks of the certificates, the Defendants utilized the securitization process to pass the risk of default down the line to investors, such as the Bank, through the use of materially false and misleading Offering Documents.
477. Confidential witnesses confirmed the failings of the Defendants’ due diligence process and their representations about the process. For example, statements by CW-Y, an associate in RBS Greenwich Capital’s4 asset-backed finance modeling group from October 2004
to February 2006, demonstrated that RBS Greenwich employees modeled the flow of funds for
the PLMBS based upon superficial summary information even though more detailed information
was available to RBS Greenwich. CW-Y also described how employees at RBS Greenwich
turned a blind eye to red flags regarding the quality of the loans that were being packaged into
mortgage-backed securities. For example, when CW-Y tried to discuss an article with his boss
regarding an investigation into Ameriquest’s lending practices, his boss told him: “You need to
4 Until April 1, 2009, RBS Greenwich Capital was the marketing name which encompassed The Royal Bank of Scotland’s North American broker-dealer entities, including: (1) Underwriter Defendant Greenwich Capital Markets, Inc., n/k/a RBS Securities Inc.; (2) Controlling Person Defendant Greenwich Capital Holdings, Inc., n/k/a RBS Holdings USA Inc.; and (3) sponsor Greenwich Capital Financial Products, Inc., n/k/a RBS Financial Products Inc. See The Royal Bank of Scotland, “RBS Greenwich Capital Re-Name and Re-Brand FAQ’s,” March 6, 2009, available at http://www.rbsgc.com/images/panels/rbsm/document/faq.pdf (last visited Oct. 3, 2010). As used herein, “RBS Greenwich” is meant to encompass all of these entities.
187 sit down and shut the f*** up.” CW-Y explained that employees at RBS Greenwich ignored red
flags because they stood to gain significant profits from securitization: “I knew we were
destroying the economy. . . . But if you’re making $40 million a year, do you care? No.”
478. Similarly, CW-Z, a capital markets analyst at Citigroup from July 2006 until
November 2008, said that they did not review the underlying loan files when they were
structuring and securitizing the mortgage pools, even though they had access to them. Instead,
they simply “trust[ed]” the mortgage originator’s data. CW-Z also explained that Citigroup’s
models for stress-testing the PLMBS were inadequate because the company “could model a bond
to see how it performed under the stress of 50% losses, but it never took into account the
possibility of house prices falling.” As explained above and echoed by CW-Z, the monetary
incentives that the originators stood to gain by securitizing mortgage pools “stimulated fraud.”
4. Defendants Undermined and Misused Loan Pool Due Diligence Results Prepared by Third-Party Firms.
a. The Defendants directed the due diligence process and were provided with detailed reports describing the results of the process.
479. Information obtained from press reports, government investigations and confidential witnesses demonstrates that the financial institutions that retained third-party due diligence firms to conduct loan pool due diligence both manipulated the due diligence process
and also disregarded the results of the process. They did so in order to maximize the profits they
made from issuing and selling mortgage-backed certificates.
480. The two firms that dominated the third-party due diligence market were Clayton
Holdings, Inc. (“Clayton”) and The Bohan Group (“Bohan”). Upon information and belief, both
Clayton and Bohan were retained by Defendants or their affiliates to conduct third-party reviews
of loans pools purchased by the sponsors of the PLMBS at issue. According to Clayton’s Form
188 10-K for the fiscal year ended December 31, 2006, Clayton monitored over $418.0 billion in
loans underlying mortgage-backed certificates, which represented 22.8% of the total outstanding
U.S. non-GSE mortgage-backed certificates at such date. During 2006, 2005, and 2004, Clayton
worked with each of the ten largest non-agency mortgage-backed certificates underwriters, as
ranked by Inside MBS & ABS magazine, which accounted for 73%, 73%, and 78% of total
underwriting volume during those respective periods.
481. Confidential witnesses, who worked at Clayton during the relevant time period
and were familiar with the identity of Clayton’s clients and the due diligence performed by
Clayton during the relevant time period, named several different entities they knew had hired
Clayton to perform due diligence on loan pools. These confidential witnesses include: CW-AA,
an underwriting consultant at Clayton from 1999 until 2006, who underwrote mortgage-backed
securities for a “lot of investment banks” that hired Clayton; CW-BB, an underwriter at Clayton
from 2002 until 2008, who reviewed loans for financial institutions that hired Clayton; and CW-
CC, who worked as a valuation specialist at Clayton from January 2006 until March 2008 and
reviewed appraisals and properties in loan files on behalf of investment banks that hired Clayton.
Together, CW-AA, CW-BB, and CW-CC confirmed that Clayton was hired to perform due
diligence on underlying loan pools by such sponsors/investment banks as Morgan Stanley, RBS
Greenwich, Countrywide, Nomura, Washington Mutual, Webster Financial, and National City.
Media reports also indicate that Clayton Holdings did work for Goldman Sachs and Merrill
Lynch. Gretchen Morgenson, Raters Ignored Proof of Unsafe Loans, N.Y. Times, Sept. 26,
2010.
482. Less information is publicly available about Bohan’s due diligence business because it is a privately held company. However, press reports and confidential witnesses
189 confirm that Bohan provided third-party loan pool due diligence to a large number of financial
institutions. For example, CW-DD, who worked as an underwriter at Bohan from 2003 to 2006 and reviewed loans that Bohan’s clients were considering for securitization, said that Bohan’s clients included Morgan Stanley, Chase, J.P. Morgan, and others.
483. The financial institutions that retained Clayton, Bohan, and other third-party due diligence firms for loan pool review maintained close contact and control over the process. As explained by Vicki Beal, Senior Vice President of Clayton Holdings in her September 23, 2010 written testimony before the FCIC:
The loan review process is conducted as follows:
• A client reviews a pool of loans and selects a sample of loans for diligence review. . . .
• Client hires Clayton to perform diligence on the sample. Client gives Clayton’s Client Services Manager instructions on the type and scope of review and the time frame for the deal.
• Client sends or has sent to Clayton a tape containing loan information from the originator, which Clayton programmers “crack” and loads [sic] into our CLAS system.
• At the end of each day, the lead underwriter generates reports for the client that summarizes Clayton’s findings, including exception reports.
484. In addition, during the review process, the client financial institutions often put their own employees on-site to oversee the review process. For example, according to CW-BB,
Morgan Stanley and RBS Greenwich always sent their own employees to the mortgage originator’s site.
485. Numerous confidential witnesses confirm that due diligence reports are provided to the financial institutions that retained the third-party due diligence firms. According to CW-
CC, Clayton’s clients “had access to our [Clayton’s] databases,” and “could see everything.”
190 CW-BB also explained that Clayton’s lead underwriters could consult with the sponsor’s representatives to determine if the sponsor wanted particular loans “kicked out” of the mortgage pools.
486. As Ms. Beal reported to the FCIC: “The work product produced by Clayton is comprised of reports that include loan-level data reports and loan exception reports. Such reports are ‘works for hire,’ the property of our clients and provided exclusively to our clients.” Thus, on information and belief, the financial institutions that hired Clayton (including the Defendants) should have known about the red flags that the third-party underwriters identified.
487. Similarly, Bohan employed “lead” underwriters, who communicated directly with the financial institutions that retained them to review loan pools. As was the case with Clayton,
CW-DD said that many of the sponsors sent their own employees to the originator’s sites to review the loans that were being considered for inclusion in a mortgage pool and subsequent securitization. CW-DD also explained that the sponsors had access to Bohan’s computer system and could view which loans were being approved or rejected. Thus, on information and belief, the investment banks (including the Defendants) should have known about the red flags that the third-party underwriters identified.
b. The Defendants manipulated and misused due diligence results.
488. As Ms. Beal testified with regard to Clayton, the client financial institutions determined the type and scope of review performed on the loan pools. Yet, rather than directing the firms to conduct thorough reviews that were most likely to identify defective loans, the financial institutions pressured the loan reviewers to disregard problem loans through exceptions and offsets that did not satisfy the applicable underwriting guidelines.
191 489. According to confidential witnesses, third-party due diligence underwriters were pressured by the banks that hired them to depart from the standards so that loans were not tagged as defective. For example, CW-BB, a Clayton employee, stated that one out of every four or five loans that he reviewed on behalf of client financial institutions did not meet the originator’s guidelines. Although he felt many of the loans were “dead assets” (the lowest rating Clayton gave), he was required to provide “compensating factors,” which were reasons why the loan should be considered for inclusion in the mortgage pool.
490. Similarly, CW-DD said that she reviewed many loans requiring no documentation at Bohan. Yet, she was not allowed to challenge the borrower’s claims. As CW-DD said,
“Whatever [the borrower] filled out on an application got through.” When she informed a lead underwriter that she suspected the borrower’s income was inflated, the lead underwriter pointed to the borrower’s signature and fine print at the bottom of the loan application that indicated the borrower swore the information to be true. The lead underwriter told CW-DD, “You can’t call the borrower a liar.” Due to such actions by the lead underwriters, CW-DD received the impression that the financial institutions who were buying the loans for securitization did not care about inflated income.
491. CW-DD also recalled other loans in the mortgage pools which included a credit score of 600, no income documentation, and no asset verification, but where the borrowers were receiving 100% financing. At the time, she recalled thinking: “Why would anybody in the world want these loans?” Nevertheless, the financial institutions bought and packaged the loans for securitization.
492. Bohan employees were pressured by the financial institutions who hired them to leave information out of their reports that detailed non-compliant or predatory loans that should
192 have been excluded from the pool. For example, CW-DD explained that many underwriters at
Bohan did not include in their reviews the borrower’s fee associated with rebates on wholesale loans. A rebate is negative points on a loan, whereby a borrower pays the lender for a higher interest rate in order to have lower up-front costs. The Bohan employees left such information out of their reports because if they mentioned it, the loans would often be considered predatory.
CW-DD recalled one rebate situation in which the borrower refinanced a property three times over a one-year period. When she reviewed the loan on the third refinancing, she discovered that the borrower was seeking the loan to pay off $5,000 in bills and to obtain $8,000 cash, but the rebate fees totaled $12,000. CW-DD thought the loan was ultimately included in the mortgage pool because nothing was wrong with the loan, except that the borrower was getting nothing out of it and was “an older person that was being taken advantage of.”
493. Further compounding the problems, Clayton employees were instructed to review fewer loans in the loan pools as the securitization market grew. Frank P. Filipps, Clayton’s chairman and CEO, stated that “[e]arly in the decade, a securities firm might have asked Clayton to review 25 to 40 percent of the sub-prime loans in a pool, compared with typically 10% in
2006.” E. Scott Reckard, Sub-Prime Mortgage Watchdogs Kept on Leash; Loan Checkers Say
Their Warnings of Risk Were Met with Indifference, L.A. TIMES, Mar. 17, 2008, at C1.
494. According to Ms. Beal’s 2010 testimony before the FCIC, as the securitization markets grew even more frenzied “when lenders and securitizers were trying to sell off as much as they could before the market collapsed, that figure reached as low as 5 percent.”
495. Notably, according to Bohan President Mark Hughes: “By contrast, loan buyers who kept the mortgages as an investment instead of packaging them into securities would have
50% to 100% of the loans examined.” See Reckard, supra, at C1.
193 496. As explained in Paul Muolo and Matthew Padilla, Chain of Blame 228 (2010):
There were two reasons the [Wall] Street firms reviewed only a small sample of the loans they were buying . . . . The most important reason was the relationship with the lender. “The lower the sample you requested [of the lender], the more likely it was that you’d win the bid.” . . . Lenders like Aegis and First Franklin had so many Street firms interested in buying their subprime and alt-A mortgages they could tell potential suitors that if they wanted to win the bid for the loan pool they should agree to review just a fraction of the mortgages.
497. Even though the third-party due diligence providers were instructed to review smaller samples of the mortgage pools over time, the demand for mortgage-backed certificates was so great that, in the aggregate, the third-party due diligence firms were reviewing staggering quantities of loans. According to Chain of Blame, “[i]n 2006, rank-and-file clerks hired by
Clayton vetted a million individual mortgages for Wall Street firms. . . .” Id. at 228.
c. The Defendants should have known that the sponsors included defective loans in the pools.
498. Notwithstanding pressures on loan reviewers to look the other way, the third-party due diligence process provided the sponsors with extensive information about loan pool defects.
As reported by the Los Angeles Times, Clayton and Bohan employees (including eight former loan reviewers who were cited in the article) “raised plenty of red flags about flaws so serious that mortgages should have been rejected outright – such as borrowers’ incomes that seemed inflated or documents that looked fake – but the problems were glossed over, ignored, or stricken from reports.” Reckard, supra, at C1.
499. Ironically, while the financial institutions pressured third-party reviewers to make exceptions for defective loans, these financial institutions often utilized information about bad loans to negotiate a lower price for the pool of loans from the seller (i.e., the originator).
According to the September 2010 testimony of Clayton’s former president, D. Keith Johnson,
194 before the FCIC, negotiating a lower price was one of the primary purposes of the due diligence review.
500. CW-DD, who worked at Bohan from 2003 to 2006, confirmed that Bohan’s review was used in price negotiations between the sponsors and the mortgage originators. The sponsors could request a discount if Bohan’s reviewers rejected a large number of the loans. This is not to say that the financial institutions actually eliminated all of the defective loans from the pools. To the contrary, they obtained a lower price for the pools because the defective loans stayed in the pools.
501. Recent testimony before the FCIC reveals the extent of this activity with regard to loans reviewed by Clayton. During 2006 and the first half of 2007, Clayton reviewed 911,039 loans issued by originators including New Century Financial, Countrywide Financial, and
Fremont Investment & Loan for securitization by its clients (including Bank of America,
JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, Bear Stearns, and Lehman
Brothers). Clayton determined that 28% or 255,802 mortgages that they reviewed did not satisfy applicable underwriting guidelines. Of this number, Clayton’s Wall Street clients “waived”
100,653 of them, or 39 percent of those loans that did not meet basic standards. See Testimony of Beal, Johnson, and supporting waiver reports documents, attached hereto at Appendix II.
502. Clayton provided the FCIC with documents showing the defect and waiver rate of the main financial institutions which had retained Clayton to conduct loan pool due diligence.
Clayton’s documents reveal the following rejection and waiver rates for entities that were involved in the securitization of the PLMBS purchased by the Bank:
Percentage of Rejected Percentage of Mortgages Mortgages Subsequently Client: Rejected by Clayton: Waived by Client:
195 Percentage of Rejected Percentage of Mortgages Mortgages Subsequently Client: Rejected by Clayton: Waived by Client: Bank of America 30% 27% Credit-Based Asset Servicing 29% 43% and Securitization LLC Countrywide 26% 12% Credit Suisse 37% 32% Citigroup 42% 31% Goldman Sachs 23% 29% HSBC 27% 62% JP Morgan Chase 27% 51% Nomura 38% 58% UBS 20% 33%
503. The Offering Documents fail to state that (1) that Clayton had informed their
clients that a substantial percentage of loans in the loans pools backing PLMBS were defective;
(2) that the Defendants, nonetheless, had waived the defects as to a substantial percentage of
these loans; and (3) that the Defendants had used the due diligence reports to negotiate a lower price for the loans pools. As Keith Johnson, the former President of Clayton testified to the
FCIC, Clayton “looked at a lot of prospectuses” and the firm wasn’t aware of any disclosure to investors of Clayton’s “alarming findings.”
5. Defendants’ Own Due Diligence Identified a High Number of Defective Loans in the Mortgage Pools Backing PLMBS.
504. The financial institutions that dominated the securitization markets did not just obtain information about defective loan pools from third-party due diligence firms, but also through their own in-house due diligence efforts. Wall Street banks in particular currently face a
slew of investigations into their knowledge of mortgage pool defects that were withheld from
investors. As stated in a January 12, 2008 New York Times article titled Inquiry Focuses on
Withholding of Data on Loans:
196 An investigation into the mortgage crisis by New York state prosecutors is now focusing on whether Wall Street banks withheld crucial information about the risks posed by investments linked to subprime loans. Reports commissioned by the banks raised red flags about high-risk loans known as exceptions, which failed to meet even the lax credit standards of subprime mortgage companies and the Wall Street firms. But the [investment] banks did not disclose the details of these reports to credit-rating agencies or investors. The inquiry, which was opened last summer by New York’s attorney general, Andrew M. Cuomo, centers on how the banks bundled billions of dollars of exception loans and other subprime debt into complex mortgage investments.
(emphasis added).
505. Likewise, in its investigation into the “causes . . . of the current financial and
economic crisis in the United States,” the FCIC examined in particular Citigroup’s securitization
practices. The FCIC heard testimony from Richard M. Bowen, III, the former Senior Vice
President and Chief Underwriter for Correspondent and Acquisitions for CitiFinancial Mortgage
(Citigroup’s subprime mortgage lending subsidiary from 2002-2005) and starting in 2006,
Business Chief Underwriter for Correspondent Lending in Citigroup’s Consumer Lending
Group. In the latter position, Mr. Bowen supervised 220 professional underwriters and exercised
direct oversight over the underwriting or more than $90 billion of mortgages annually.
506. Mr. Bowen testified that each year since 2005, Citigroup’s mortgage operation
systematically acquired tens of billions of dollars of risky loans that violated Citigroup’s own underwriting criteria and were likely to default. He also testified that Citigroup’s Wall Street
Chief Risk Officer routinely overruled underwriters’ rejections of pools of both prime and subprime mortgages that did not satisfy Citigroup’s underwriting criteria for purchase, causing
Citigroup to purchase billions of dollars of loan pools that fell far short of underwriting
standards. Mr. Bowen testified that “[d]uring 2006 and 2007, I witnessed business risk practices
which made a mockery of Citi credit policy. . . .”
197 507. Mr. Bowen reported that he discovered that of the $50 billion of prime mortgages
purchased in 2006, “over 60% of these mortgages purchased and sold were defective.” He testified further that he “started issuing warnings in June of 2006 and attempted to get management to address these critical risk issues. These warnings continued through 2007 and went to all levels of the Consumer Lending Group.” Likewise, he reported systematic abuses in the subprime pools as well.
508. Mr. Bowen also testified that he recommended that Citigroup not purchase
Ameriquest, because his due diligence found that Argent’s loans did not meet the standards they had represented to Citigroup. Specifically, Mr. Bowen testified that “we sampled the loans that were originated by Argent and we found large numbers that did not – that were not underwritten according to the representations that were there.”
509. Mr. Bowen submitted with his testimony email that he sent to Citigroup’s then
CEO, Robert Rubin, in late 2007 documenting his concerns. One email indicated, among abundant other information of abuses that:
During 2006-7 there were pools of mortgage loans aggregating $10 billion which were purchased from large mortgage companies with significant numbers of files identified as “exceptions” (higher risk and substantially outside of our credit policy criteria). These exceptions were approved by the Wall Street Channel Chief Risk Officer, many times over underwriting objections and with the files having been turned down by underwriting. These pools involved files aggregated and originated by Merrill Lynch, Residential Funding Corp, New Century, First NLC and others.
Available at http://www.fcic.gov/hearings/pdfs/2010-0407-Bowen.pdf. Citigroup disregarded the warnings and red flags and completed the acquisition.
510. On May 12, 2010, the Wall Street Journal reported that “[f]ederal prosecutors, working with securities regulators, are conducting a preliminary criminal probe into whether
198 several major Wall Street banks misled investors about their roles in mortgage-bond deals,
according to a person familiar with the matter.” The article noted that:
the banks under early-stage criminal scrutiny—J.P. Morgan Chase & Co., Citigroup Inc., Deutsche Bank AG and UBS AG—have also received civil subpoenas from the Securities and Exchange Commission as part of a sweeping investigation of banks’ selling and trading of mortgage-related deals, the person says. Under similar preliminary criminal scrutiny are Goldman Sachs Group Inc. and Morgan Stanley, as previously reported by The Wall Street Journal.
511. As the pending criminal probe indicates, Citigroup’s practices were not unique.
For example, on June 24, 2010, the Massachusetts Attorney General announced that Morgan
Stanley had agreed to pay $102 million to the Commonwealth and borrowers in the
Commonwealth to settle charges related to “Morgan Stanley’s role in facilitating predatory lending by New Century.” The Attorney General reported that “our investigation revealed that
Morgan Stanley backed loans for homeowners that they knew, or should have known, were destined to fail and they failed to disclose the riskiness of those loans to investors.” She noted as well that:
Morgan Stanley funded, purchased and securitized New Century loans. Morgan developed an intimate knowledge of New Century’s business over time. And they uncovered signals pretty early on that the lending practices of New Century were not sound. Morgan Stanley continued to fund and securitize subprime loans even as New Century’s bad loans were causing the lender to collapse . . . .
Available at http://www.mass.gov/Cago/docs/press/2010_06_24_ms_settlement_attachment4.pdf
512. Upon information and belief, the Defendants should have known as a result of the red flags generated by their own due diligence as well by third-party due diligence firms hired by the Defendants indicating that the pools of loans they purchased and sold in securitizations were far riskier than was represented to investors, including the Bank.
199 E. The Vertical Integration of Many of the Firms Involved in the Issuance of the PLMBS Purchased by the Bank Enabled the Controlling Person Defendants to Control the Management and Policies of the Controlled Entities
513. The Controlling Person Defendants, which had a 100% or substantial majority direct or indirect ownership in the respective Depositor/Issuer Defendants, Underwriter
Defendants, Sponsors, and/or Originators, as well as the other entities identified herein, had the power to, and did, conduct and participate, directly and indirectly, in the management and control of all aspects of the management and policies of the Controlled Entities, as evidenced by the fact that, inter alia:
A. The Controlling Person Defendants created the respective Depositor/Issuer
Defendants as their special purpose entities for the purpose of issuing the Certificates that are the subject of this action;
B. The Controlling Person Defendants played other vital roles regarding the structuring and administration of the issuing trusts and certificates, which allowed them to exercise substantial control over many parties to the securitization, including the respective
Depositor/Issuer and/or Underwriter Defendants;
C. Revenue from the securitizations inured to the benefit of the Controlling Person
Defendants;
D. Statements in the Controlling Person Defendants’ SEC filings show control through comprehensive involvement with the Controlled Entities’ operations;
E. The financial result of the Controlled Entities were often combined and reported as part of the Controlling Person’s reported financial results;
F. The Controlling Person Defendants directly participated in the issuance of the
Certificates, including touting their extensive activity and experience in the securitization
200 market, particularly in initiating securitization of the residential mortgage loans they originated
or acquired in the secondary mortgage market and transferring those loans to Depositor
Defendants for sale through the trust to purchasers such as the Bank;
G. The Controlling Person Defendants frequently and prominently identified
themselves in the Offering Documents; and
H. Officers and/or directors of the Controlling Person Defendant frequently signed the respective registration statements.
514. In addition, the Controlling Person Defendants were frequently parties to the agreements necessary to the securitizations, such as the Pooling and Servicing Agreement,
Mortgage Loan Purchase Agreement, Servicing Agreement, Assignment, Assumption and
Recognition Agreement, including amendments, restatements and exhibits thereto, which agreements frequently:
A. Were between vertically integrated entities;
B. Were signed by the same officer or director of the Controlling Person Defendant on behalf of the Controlled Entity;
C. For purposes of providing formal notice under the agreement, identified a single individual and/or address as the notice recipient for two or more parties to the agreement and;
D. Provided for indemnification by the Controlling Person Defendant.
515. Control over the vertically integrated firms in all aspects of the securitization is apparent in prospectus language that shows the relationship among the Controlling Person
Defendants and the controlled entities. For example, a prospectus for a Citigroup PLMBS states:
[Depositor Defendant] Citigroup Mortgage Loan Trust Inc., as depositor, was incorporated in the State of Delaware on July 16, 2003 as an indirect wholly- owned subsidiary of [Controlling Person Defendant] Citigroup Financial Products
201 Inc. and is an affiliate of [Underwriter Defendant] Citigroup Global Markets Inc.
* * *
The depositor, the sponsor and the underwriter are direct wholly-owned subsidiaries of [Controlling Person Defendant] Citigroup Financial Products, Inc. The trust administrator is a direct wholly-owned subsidiary of Citicorp Holdings Inc., a Delaware corporation. Citigroup Financial Products Inc. and Citicorp Holdings Inc. are both wholly owned subsidiaries of [Controlling Person Defendant] Citigroup Inc.
Prospectus Supplement for Certificate CMLTI 2006-NC1 A2C, dated June 28, 2006.
516. In sum, the Controlling Person Defendants controlled, influenced, or participated in essentially all material aspects relating to the acquisition, structure, and sale of the Certificates purchased by the Bank identified herein.
517. The Controlling Person Defendants’ control, position, and influence over the
Controlled Defendants made them privy to, and provided them with actual knowledge of, the material facts and omissions concealed from the Bank with regard to the underlying mortgage pools.
F. The Securitization Process Was Supported by Credit Ratings that Materially Misstated the Credit Risk of the PLMBS.
518. The triple-A credit ratings of the PLMBS played a crucial role in the Bank’s purchase of PLMBS. Pursuant to Bank policy, the Bank could only purchase triple-A rated tranches of the certificates. Without that rating, no purchase would have occurred. Thus, the
Bank relied to its detriment on the ratings and the Defendants’ representations regarding the ratings in the Offering Documents.
519. The Defendants well understood (and banked on) the important role the credit ratings played in the PLMBS markets. They featured the ratings prominently in the Offering
Documents and discussed at length the ratings received by the different tranches of the PLMBS,
202 and the bases for the ratings. Yet, the Rating Agencies knew, and the Defendants should have known, that the ratings were not reliable. Those ratings were bought and paid for and were based on flawed information.
1. The Credit Ratings Were Unreliable, Based As They Were on Underwriting Standards That the Rating Agencies Knew Had Been Abandoned.
520. By virtue of their intimate involvement in the securitization process, the Credit
Rating Agencies knew that many mortgage originators, including the ones whose abandonment of underwriting guidelines is discussed above, had abandoned their stated mortgage underwriting guidelines, and thus knew that the ratings were false when made.
521. The Senate Subcommittee on Investigations, for example, uncovered internal
Rating Agency emails from the summer and fall of 2006 noting that “there has been rampant appraisal and underwriting fraud in the industry for quite some time”; that “underwriting fraud[,] appraisal fraud and the general appetite for new product among originators [are] resulting in loans being made that shouldn’t be made”; and that “this is like another banking crisis potentially looming.”
522. Standard & Poor’s became so concerned with underwriting standards that, when it was asked to rate certificates backed by subprime loans which Fremont Investment and Loan had originated, one analyst asked his supervisors whether he should treat Fremont collateral differently. “No,” one of his supervisors responded, “we don’t treat their collateral any differently.” The other supervisor said that as long as there were current FICO scores for the borrowers, then the analyst was “good to go,” no matter how little documentation the origination process required, and regardless of any other characteristic of the mortgage loans.
203 523. Based on its investigation, the Senate Subcommittee on Investigations found that
from 2004 to 2007, the Credit Rating Agencies knew of the increased risks caused by mortgage
fraud and lax underwriting standards, but failed to factor those risks into their rating models.
524. Here, just as in other cases, the Credit Rating Agencies did not factor the
abandonment of underwriting standards into their analysis of the PLMBS that are the subject of
this lawsuit. Instead, they based their ratings on underwriting standards they knew to have been
abandoned in practice.
2. The Credit Ratings Were Compromised by Conflicts of Interest, Manipulation and Misinformation.
525. The Credit Rating Agencies received enormous revenues from the issuers who paid them for rating the products they sold.
526. Because the desired rating of a securitized product was the starting point for any securities offering, the Rating Agencies were actively involved in helping issuers structure the products to achieve the requested rating. As a result, the Rating Agencies essentially worked backwards, starting with the issuer’s target rating and thereafter working toward a structure that could conceivably yield the desired rating.
527. A 2008 SEC Report entitled, “Summary Report of Issues Identified in the
Commission Staff’s Examinations of Select Credit Rating Agencies” (“Summary Report”) revealed that the issuers and the Credit Rating Agencies worked together so that securities would receive the highest ratings:
[t]ypically, if the analyst concludes that the capital structure of the RMBS does not support the desired ratings, this preliminary conclusion would be conveyed to the arranger. The arranger could accept that determination and have the trust issue the securities with the proposed capital structure and the lower rating or adjust the structure to provide the requisite credit enhancement for the senior tranche to get the desired highest rating. Generally, arrangers aim for the largest possible senior tranche, i.e., to provide the least amount of credit enhancement possible, since the
204 senior tranche—as the highest rated tranche—pays the lowest coupon rate of the RMBS’ tranches and, therefore, costs the arranger the least to fund.
528. As a result of this collaboration with the Credit Rating Agencies, issuers were able to manipulate the system to achieve inflated ratings. For example, through repeated interactions with the Credit Rating Agencies, issuers (and the underwriters working with them) could effectively reverse engineer aspects of the ratings models and then modify the structure of a financing to improve its ratings without actually improving its credit quality. In this process, the issuers and underwriters could change aspects of a PLMBS very slightly—but without any real effect on the economic reality of the instrument—or simply present the same data in a different way, and thus get better ratings. Gretchen Morgenson & Louise Story, Rating Agency
Data Aided Wall Street in Deals, N.Y. TIMES , Apr. 23, 2010.
529. This rating process was further compromised by the practice of issuers “rating
shopping.” The issuers did not pay for the Credit Rating Agencies’ services until after the Credit
Rating Agencies gave a preliminary rating to the issuer. This practice created, essentially,
bidding wars where the issuers would hire the agency that provided the highest rating for the
lowest price. The Credit Rating Agencies were paid only if they provided the desired Investment
Grade ratings, and only in the event that the transaction closed with those ratings. “Ratings
shopping” jeopardized the integrity and independence of the rating process.
530. Raymond McDaniel, Moody’s CEO, realized that the market-share war had
undermined the Ratings Agencies’ work product. In a presentation to Moody’s Board of
Directors in 2007, he stated,
The real problem is not that the market does underweights [sic] ratings quality but rather that . . . it actually penalizes quality by awarding rating mandates based on
205 the lowest credit enhancement needed for the highest rating. Unchecked, competition on this basis can place the entire financial system at risk.5
531. McDaniel described to the board how Moody’s has “erected safeguards to keep teams from too easily solving the market share problem by lowering standards” but then stated,
“This does NOT solve the problem.” Turning then to a topic he referred to as “Rating Erosion
by Persuasion,” McDaniel observed, “Analysts and [managing directors] are continually
‘pitched’ by bankers, issuers, investors” and sometimes “we ‘drink the kool-aid.’”
3. The Credit Ratings Were Unreliable Due to the Use of Inaccurate, Outdated Models and Inadequate Resources.
532. The outdated models used by the Credit Rating Agencies turned out PLMBS
ratings that were inaccurate.
533. The models relied on pre-2000 data, and this data, for a number of reasons,
produced wildly inaccurate results. First, this pre-2000 data ignored the dramatic changes in the
mortgage industry following 2000: increased lending to riskier borrowers, increased origination
of riskier kinds of mortgage loans, and a dramatic rise in housing prices. Second, the pre-2000 data, as the Congressional Research Service reported in 2009, was based on a “benign period of economic moderation in financial markets and rising house prices.” Congressional Research
Serv., Credit Rating Agencies and Their Regulation 7 (2009). They were useless in predicting
the likelihood of default in a time of macroeconomic crisis and falling housing prices.
534. The models had other flaws, too. They attached the wrong weights to the effect
of falling housing prices on loan default rates, and they miscalculated the interdependence
among loan defaults—the likelihood, in other words, that an economic storm would sink more
than one financial ship.
5 Exhibit to October 22, 2008, hearing before the House Oversight Committee.
206 535. The Credit Rating Agencies knew of these flaws, but did nothing to fix them.
536. In 2007, for example, Vickie Tillman, an S&P Executive Vice President, stated before the Senate Banking Committee: “We are fully aware that, for all our reliance on our historically rooted data that sometimes went as far back as the Great Depression, some of that data has proved no longer to be as useful or reliable as it has historically been.”
537. In an April 27, 2008 article in the New York Times Magazine, Mark Adelson, a former Managing Director in Moody’s structured finance division, criticized Moody’s use of historical data about 30-year fixed mortgages to predict defaults and delinquencies in the new mortgage market—describing it as “observing 100 years of weather in Antarctica to forecast the weather in Hawaii.”
538. In fact, the Credit Rating Agencies themselves did not believe the results their models turned out.
539. In a December 2006 email, an S&P analyst expressed concern by describing the
“CDO market” as a “monster” and concluding: “Let’s hope we are all wealthy and retired by the time this house of cards falters.” In an April 2007 electronic communication uncovered by the
Senate Subcommittee on Investigations, two S&P analysts agreed that a particular mortgage- backed deal was “ridiculous,” and that the model “definitely does not capture half the ris[k].” A month later, one of those analysts complained that “no body [sic] gives a straight answer about anything around here,” and that there were no “clear cut parameters on what the hell we are supposed to do.”
540. Eric Kolchinsky, a former managing director at Moody’s who oversaw the rating of subprime-mortgage-backed CDOs during 2007, testified before the House Oversight and
Government Reform Committee on September 30, 2009 that “[m]ethodologies produced by
207 Moody’s for rating structured finance securities are inadequate and do not realistically reflect the underlying credits. Rating models are put together in a haphazard fashion and are not validated
if doing so would jeopardize revenues.”
541. Compounding the inherent problems with the rating models was the fact that the
Rating Agencies simply did not commit the resources necessary to adequately rate residential-
mortgage-backed financial products.
542. Frank L. Raiter, who from 1995 until 2005 was a Managing Director at S&P’s
and head of its Residential Mortgage Rating Group, stated in prepared testimony before the
Senate Subcommittee on Investigations that “in the residential ratings group[,] . . . between 1995
and 2005[,] rating volumes grew five or six fold without similar increases in staffing. Rating
production was achieved at the expense of maintaining criteria quality.”
543. This inadequate staffing had practical consequences: it meant that the Rating
Agencies were not able to improve the models they knew were producing inaccurate and
misleading ratings. As Raiter testified, by early 2004 S&P had developed a model that took into
account much more historical data than had been analyzed previously—a new model suggesting
that the model then in use “was underestimating the risk of some Alt-A and subprime products.”
Due to inadequate staffing, Raiter testified, this model “was never implemented.” If S&P had
implemented the new model, stated Raiter, it would have required much greater credit
enhancement from PLMBS issuers in 2005, 2006, 2007—at the price of being assigned much
less favorable ratings.
544. Similarly, Jerome Fons, a former Managing Director of Credit Policy at Moody’s,
testified before the House Oversight Committee on October 22, 2008 that when evidence arose
208 that previously assigned ratings of PLMBS were inaccurate, the Rating Agencies “did not update their models or their thinking.”
4. The Rating Agencies Knew, and the Defendants Should Have Known, That the PLMBS Ratings in This Case Fundamentally Differed from the Ratings of Corporate Bonds.
545. Neither the Credit Rating Agencies nor Defendants disclosed to investors that the ratings of PLMBS were materially different from, and less reliable than, standard corporate bond ratings.
546. Instead, the Credit Rating Agencies represented that the credit ratings were comparable to corporate bonds. Moody’s stated in a 2004 presentation that, “[t]he comparability of these opinions holds regardless of the country of the issuer, its industry, asset class, or type of fixed-income debt.” A May 2007 S&P document on rating methodology stated: “Our ratings represent a uniform measure of credit quality globally and across all types of debt instruments.
In other words, an ‘AAA’ rated corporate bond should exhibit the same degree of credit quality as an ‘AAA’ rated securitized debt issue.”
547. In fact, however, the Credit Rating Agencies did not simply estimate expected loss and/or probability of default in determining the ratings of the PMLBS purchased by the
Bank, as they do with corporate bonds. Rather, the agencies employ mathematical credit risk models based on random event simulations to determine the estimated loss distributions associated with the great many separate assets that backed those PLMBS. These models require the Credit Rating Agencies to make many estimates and assumptions regarding each of the various assets, including the degree to which losses or defaults on these assets would be correlated with each other.
548. The Credit Rating Agencies in this case knowingly made unreasonable
209 assumptions about how frequently defaults on the assets would be correlated with each other.
See supra ¶¶ 533-537. And, unlike the assumptions the Credit Rating Agencies use for rating
other instruments, such as corporate bonds, the correlation assumptions used to rate the PLMBS
in this case were based on dramatically incomplete historical data or on pure speculation.
549. Defendants, by virtue of their close working relationship with the Rating
Agencies, and their abundant and well-documented efforts to game the ratings to ensure the
AAA or AA rating that was necessary for the sale of their PMLBS, should have known that the
rating of the PLMBS differed fundamentally from the rating of corporate bonds in the way just
described.
5. Subsequent Downgrades Confirm that the Investment Grade Ratings Reported in the Offering Documents Were Unjustifiably High and Misstated the True Credit Risk of the PLMBS Purchased by the Bank.
550. “Investment grade” products are understood in the marketplace to be stable, secure, and safe. Using S&P’s scale, “investment grade” ratings are AAA, AA, A and BBB, and
represent, respectively, highest credit quality, high credit quality, upper-medium credit quality
and medium credit quality. Any instrument rated below BBB is considered below investment
grade or, colloquially, a “junk bond.”
551. Each prospectus supplement states that the issuance of the PLMBS was
conditioned on the assignment of particular, investment grade ratings, and listed the ratings in a
chart.
552. As noted, the Bank purchased only triple-A rated tranches of PLMBS. However,
the triple-A ratings of the PLMBS misstated the credit quality of the underlying loans. The triple-A rating denotes “high credit-quality,” and is the same rating as those typically assigned to
210 bonds backed by the full faith and credit of the United States Government, such as Treasury
Bills.
553. On or about July 10, 2007, S&P publicly announced it was revising the methodologies used to rate numerous MBS because the performance of the underlying collateral
“called into question” the accuracy of the loan data. S&P announced it was revising its methodology assumption to require increased “credit protection” for rated transactions. S&P reiterated that it would seek in the future to review and minimize the incidence of potential underwriting abuse given “the level of loosened underwriting at the time of loan origination, misrepresentation and speculative borrow behavior reported for the 2006 ratings.”
554. One day later, on July 11, 2007, Moody’s announced it was also revising its methodology used to rate the MBS and anticipated MBS downgrades in the future. Moody’s did in fact significantly downgrade most of the MBS, noting “aggressive underwriting” used in the origination of the collateral.
555. Yet, at the time these statements were made in July 2007, all of the PLMBS at issue in this case retained their investment-grade ratings.
556. Historically, investments with triple-A ratings had an expected loss rate of less than .05%. The default rate on investment grade corporate bonds from 1981 to 2008, for example, averaged about 0.106% with no year higher than 0.41%.
557. Beginning in the spring of 2008, the PLMBS purchased by the Bank also became subject to these rating agency downgrades. Forty of the forty-three triple-A rated certificates at issue in this case (originally valued at over $3.3 billion) now have been downgraded to non- investment grade ratings, i.e., junk status.
211 558. The en masse downgrade of triple-A rated PLMBS indicates that the ratings set
forth in the Offering Documents were false, unreliable, and inflated. As the SEC has noted, “[a]s
the performance of these securities continued to deteriorate, the three rating agencies most active
in rating these instruments downgraded a significant number of their ratings. The rating
agencies[’] performance in rating these structured finance products raised questions about the
accuracy of their credit ratings generally as well as the integrity of the ratings process as a
whole.” SUMMARY REPORT OF ISSUES IDENTIFIED IN THE COMMISSION STAFF’S EXAMINATIONS
OF SELECT CREDIT RATING AGENCIES BY THE STAFF OF THE SECURITIES AND EXCHANGE
COMMISSION at 2 (July 2008). The Defendants should have known the Offering Documents’
statements with respect to these ratings were misleading because of their direct involvement in
and manipulation of the rating process and awareness of the poor credit quality of the underlying
loan collateral.
6. The Bank Reasonably Relied on the Credit Ratings Reported in the Prospectuses.
559. The Bank did not know, and reasonably could not have known, that the credit
ratings set forth in the Offering Documents were flawed, and that the rating agencies knew they
were flawed. The Bank did not know that when they secured the credit ratings reported in the
Offering Documents, the Depositor/Issuer Defendants and the Underwriter Defendants had done
so by gaming the system. Moreover, the Bank did not know that the specific statements regarding the ratings contained in the Offering Documents were false – specifically, that the ratings did not in fact address the risk of the certificates and the likelihood of payment by borrowers on the underlying mortgage loans. No disclosure in any Offering Document informed the Bank that the rating was the unreliable result of inaccurate information and deficient
modeling, as opposed to a legitimate evaluation of credit risk.
212 560. The Credit Rating Agencies continued to assure the market of the integrity of their MBS ratings long after the PLMBS at issue here were purchased by the Bank. In a letter to the editor of The Wall Street Journal dated September 17, 2007, Vickie Tillman, then Executive
Vice President of Credit Market Services at S&P, stated: “We have numerous safeguards in place that have helped us effectively manage” potential conflicts of interest. “Our credit ratings provide objective, impartial opinions on the credit quality of bonds.” Tillman likewise testified before the Senate Committee on Banking, Housing and Urban Affairs on September 26, 2007:
S&P maintains rigorous policies and procedures designed to ensure the integrity of our analytical processes. For example, analysts are not compensated based upon the amount of revenue they generate. Nor are analysts involved in negotiating fees. Similarly, individuals responsible for our commercial relationships with issuers are not allowed to vote at rating committees. These policies, and others, have helped ensure our long-standing track record of excellence.
561. The Rating Agencies also assured the market that the ratings assigned to PLMBS were just as reliable as ratings assigned to corporate bonds. See supra ¶ 546.
562. At the time these statements were made in September 2007, all of the PLMBS at issue in this case retained their investment-grade ratings.
G. The Proper Steps Were Not Taken To Ensure That The Mortgages Underlying The Trusts Were Enforceable.
1. The PLMBS Have Value Only If the Mortgage Loans and Mortgages Have Been Validly Assigned and Transferred to the Issuing Trust Such That They Are Enforceable
563. For PLMBS certificates to have any value, the issuing trust must be able to enforce the mortgage notes that back the certificates. If the trust cannot enforce the loans, they are effectively worthless—and so are the certificates.
564. The mortgage originator is the entity responsible for generating the loans that are ultimately transferred to the trusts. But if the trustee is to enforce the loans—and if PLMBS
213 certificates are to have any value—both the promissory note executed by the borrower and the
mortgage itself must be validly transferred to the trust in the securitization process.
565. The promissory notes and mortgages are not transferred directly from the loan
originator to the trust. Instead, they are typically transferred to a depositor, or to a sponsor and
thence to a depositor. See supra ¶¶ 87-88.
566. The Offering Documents for all of the PLMBS in this action represented that the
mortgage notes would be validly transferred to the issuing trust in accordance with specified
procedures.
567. A trust that issues PLMBS certificates must be able to enforce not only the
mortgage notes that back the certificates, but also the mortgages that secure the mortgage notes.
If the mortgages cannot be enforced, then the properties that secure the mortgage notes cannot be
foreclosed on if the borrower defaults. If the mortgages that secure the mortgage notes are not
enforceable, PLMBS are to that extent worthless.
568. Before mortgages can be enforced by the trustee, however, they must be validly
assigned to the issuing trust.
569. Before a purported mortgage holder can foreclose on a mortgaged property, state
law generally requires that the purported holder—if it is not the original mortgagee—prove that
it is a valid assignee of the mortgage. The assignment, or chain of assignment, must trace back
without gaps to the original mortgagee, it must be in writing, and it must identify the mortgage
that is assigned.
570. The Offering Documents for all of the PLMBS in this action represented that the
mortgages would be validly assigned to the issuing trust in accordance with specified procedures.
214 2. Failure to Validly Assign and Transfer the Mortgages or Mortgage Loans to the Issuing Trust Has Been Systemic, Thus Materially Affecting the Value of the PLMBS Certificates
571. A material number of the mortgage notes underlying the issuing trusts have not
been validly transferred in accordance with the procedures outlined in the Offering Documents.
572. The best known example of this failure is Kemp v. Countrywide Home Loans, Inc.
(In re Kemp), No. 08-18700 (Bankr. D.N.J.), in which Linda DeMartini, whom Countrywide had
employed for a decade and who testified that in her employment, she had been “involved in
every aspect of the servicing,” and “had to know about everything,”6 testified—on direct
examination—that failure to deliver the promissory note to the trust was normal operating
procedure for Countrywide when acting as originator and servicer.7 Among the PLMBS at issue
in this action, Countrywide was an originator and servicer for SARM 2005-21 3A1.
573. In Kemp, the U.S. Bankruptcy Court for the District of New Jersey, applying New
Jersey law, held that because the debtor’s mortgage note had not been physically transferred to
the issuing trust’s trustee, or properly indorsed, it was not enforceable by either the issuing
6 Kemp, Hr’g Tr. 45:7, :9-10 (Aug. 11, 2009). 7 As DeMartini testified: Q. [I]s it generally the custom . . . for [the trust] to hold the documents? A. No. They would stay with us as the servicer. . . . Q. So I believe you testified Countrywide was the originator of this loan? A. Yes. . . . Q. So the physical documents were retained within the corporate entity Countrywide or Bank of America? A. Correct. Q. . . . [W]ould you say that this is standard operating procedure in the mortgage banking business? A. Yes. It would be . . . the normal course of business . . . , as we’re the ones that are doing all the servicing, and that would include retaining the documents. Id. at 14:5-15:6.
215 trust’s trustee or the trustee’s agent. Kemp v. Countrywide Home Loans, Inc. (In re Kemp), 440
B.R. 624, 630-34 (Bankr. D.N.J. 2010).
574. Similarly, recent months have revealed that a material number of the mortgages
backing the PLMBS were not validly assigned to the issuing trusts in accordance with the procedures outlined in the Offering Documents. U.S. Bank N.A. v. Ibanez, 941 N.E.2d 40 (Mass.
2011), for example, consisted of two consolidated cases arising out of two different mortgages
purportedly assigned to two different mortgage-backed trusts. In both, there was no evidence
that, prior to the foreclosure sales, the mortgage had ever been assigned to the relevant
depositors. See Ibanez, 941 N.E.2d at 649-50.
575. In both of the cases consolidated in Ibanez, the servicer was Option One. In both
cases, Option One failed to validly assign the mortgage to the issuing trust such that the issuing
trust could enforce it. Among the PLMBS at issue here, Option One is the servicer for OOLMT
2005-5 A3 and OOLMT 2006-2 2A3.
576. These failures appear to be systemic in the industry. Even if they do not affect
every mortgage underlying every issuing trust, the failures affect a sufficient number of the
mortgages and materially impair the value of the PLMBS.
577. Multiple cases have been filed in courts across the country by homeowners
challenging the right of financial institutions to foreclose. See, e.g., In re Mims, 438 B.R. 52
(Bankr. S.D.N.Y. 2010); Deutsche Bank Nat’l Trust Co. v. Tarantola (In re Tarantola), No. 09-
09703, 2010 WL 3022038 (Bankr. D. Ariz. July 29, 2010); In re Weisband, 427 B.R. 13 (Bankr.
D. Ariz. 2010); Wells Fargo Bank, N.A. v. Marchione, 887 N.Y.S.2d 615 (App. Div. 2009);
IndyMac Bank F.S.B. v. Garcia, 28 Misc. 3d 1202(A) (N.Y. Sup. Ct. 2010); Deutsche Bank Nat’l
Trust Co. v. McRae, 894 N.Y.S.2d 720 (Sup. Ct. 2010); Citigroup Global Markets Realty Corp.
216 v. Bowling, 25 Misc. 3d 1244(A) (N.Y. Sup. Ct. 2009); HSBC Bank USA, N.A. v. Miller, 889
N.Y.S.2d 430 (Sup. Ct. 2009); Deutsche Bank Nat’l Trust Co. v. Abbate, 25 Misc. 3d 1216(A)
(N.Y. Sup. Ct. 2009); In re Adams, 693 S.E.2d 705 (N.C. Ct. App. 2010); HSBC Bank USA v.
Thompson, No. 23761, 2010 WL 3451130 (Ohio Ct. App. Sept. 3, 2010); Bank of N.Y. v.
Gindele, No. C-090251, 2010 WL 571981 (Ohio Ct. App. Feb. 19, 2010).
578. According to the New York Times, the United States Trustee Program has taken
the unusual step of intervening in bankruptcy proceedings to force the mortgage companies to
prove that they own, or otherwise have the standing required to enforce, the mortgages on which
they are seeking to foreclose. See Gretchen Morgenson, Don’t Just Tell Us. Show Us That You
Can Foreclose, N.Y. TIMES , Nov. 27, 2010. The Time’s article noted the Trustee’s intervention
in two Atlanta bankruptcy cases, one involving Wells Fargo and the other involving J.P. Morgan
Chase.
579. The failure is also shown by the recent drop in foreclosures system-wide, which is
attributable to lack of necessary documentation. See, e.g., Dan Levy & John Gittelsohn,
Foreclosure Filings Hit Three-Year Low As U.S. Servicers in “Dysfunction”, Bloomberg News,
Mar. 9, 2011, available at http://www.bloomberg.com/news/2011-03-10/foreclosure-filings-
drop-to-3-year-low-as-u-s-servicers-in-dysfunction-.html. In addition, in the Fall of 2010, major
financial institutions such as Bank of America (which acquired Countrywide) and J.P. Morgan
Chase, both originators of mortgages underlying the certificates purchased by the Bank,
announced they were suspending mortgage foreclosures because they had discovered significant
problems in their ability to locate and document the ownership of mortgage notes.
580. The evidence of misconduct in this regard has been so severe and pervasive that
the Attorneys General of all 50 states have announced an investigation into the Defendants’
217 practices. In addition, major financial institutions have reserved hundreds of millions, if not billions, of dollars to address litigation and losses stemming from the financial crisis and foreclosure problems.
581. Perhaps most telling is a recent proposal by a group friendly to the mortgage industry to enact federal legislation to loosen the standards for foreclosure. Jason Gold & Anne
Kim, Third Way, Fixing “Foreclosure-gate” (2011), available at http://content.thirdway.org/publications/362/Third_Way_Memo_-_Fixing_Foreclosure-gate.pdf.
The proposal would hardly be necessary if the industry’s house were in order.
V. DEFENDANTS’ MATERIAL UNTRUE STATEMENTS AND OMISSIONS IN CONNECTION WITH THE SALE OF PLMBS TO FHLBC
582. As detailed above, the Sponsor purchased mortgage loans and deposited them into issuing trusts, from which the Depositor/Issuer issued certificates, and the Underwriter
Defendants—Wall Street banks and other large financial institutions—offered and sold those certificates to the Bank through the Offering Documents for each securitization. The
Depositor/Issuer and Underwriter Defendants drafted the Offering Documents. In addition, each
Depositor/Issuer Defendant and Underwriter Defendant was identified in these documents as the depositor/issuer or underwriter, respectively, of the certificates, and approved the versions of these documents that were delivered by the Underwriter Defendants to Plaintiff.
583. The Offering Documents contained extensive material misstatements and omissions of material facts with regard to the underwriting guidelines and practices purportedly applied by the mortgage originators whose loans backed the PLMBS purchased by the Bank, the appraisal process underlying the LTV ratios, predatory lending abuses by the mortgage originators, the transfer and enforceability of the mortgage loans underlying the certificates, and a number of key characteristics of the mortgage pools that pertain to the risk of the certificates.
218 These misstatements are not predictions of future events or subjective opinions; rather these
misstatements constitute misrepresentations of current or historical material facts that were false
when made. Moreover, all of the misstatements concern information that the Bank did not have
access to and could not independently verify – this information was only available to the
Defendants, and thus the Bank relied upon the Defendants to accurately present the information.
The Bank notes, in particular, that unlike Defendants, it did not have access to the mortgage loan
files that contain (or at one time contained) complete information regarding the mortgage loans
backing the PMLBS purchased by the Bank. Specifically, the misstatements and omissions of
material fact are as follows:
A. Defendants Misrepresented Underwriting Guidelines Utilized by Mortgage Lenders
1. The Materiality of Underwriting Guidelines
584. As alleged above, the originator’s underwriting standards, and the extent to which
the originator departs from its standards, are key indicators of the risk of the mortgage loans
made by the originator. And because the mortgage loans back the certificates that are issued to investors such as the Bank, the loan underwriting standards are also material to assessing the risk of the PLMBS certificates. For these reasons, the originator’s underwriting standards as described in the Offering Documents were material to the Bank’s decision to purchase the
PLMBS certificates at issue here.
2. Misstatements Regarding Underwriting Guidelines
585. The Offering Documents contained material untrue or misleading statements and omissions regarding the underwriting guidelines allegedly employed in the origination of the mortgage loans that secure the PLMBS. Appendix III attached hereto and incorporated herein sets forth those statements and omissions and the reasons each is misleading. The following are
219 examples of these materially misleading statements and omissions regarding mortgages originated or acquired by Wells Fargo Bank, taken from the Banc of America Funding 2006-F
Trust Prospectus Supplement (incorporated herein by this reference):
• That Wells Fargo’s underwriting standards were used “to evaluate the applicant's
credit standing and ability to repay the loan, as well as the value and adequacy of
the mortgaged property as collateral.” BAFC 2006-F Pros. Sup. S-30 (emphasis
added).
• That Wells Fargo balanced the following factors in determining a mortgagor’s
eligibility for a mortgage: “the amount of the loan, the ratio of the loan amount to
the property value (i.e., the lower of the appraised value of the mortgaged
property and the purchase price), the borrower’s means of support and the
borrower’s credit history.” BAFC 2006-F Pros. Sup. S-30.
• That Wells Fargo “supplements the mortgage loan underwriting process with
either its own proprietary scoring system or scoring systems developed by third
parties,” which scoring systems provided “consistent, objective measures of
borrower credit and certain loan attributes” that were then “used to evaluate loan
applications and assign each application a ‘mortgage score.’” BAFC 2006-F Pros.
Sup. S-31 (emphasis added).
• That Wells Fargo required that “borrowers applying for loans must demonstrate
that the ratio of their total monthly debt to their monthly gross income does not
exceed a certain maximum level,” which varied depending on the following
factors:
220 [L]oan-to-value ratio, a borrower's credit history, a borrower's liquid net worth, the potential of a borrower for continued employment advancement or income growth, the ability of the borrower to accumulate assets or to devote a greater portion of income to basic needs such as housing expense, a borrower's Mortgage Score and the type of loan for which the borrower is applying.
BAFC 2006-F Pros. Sup. S-32.
• That “[t]he Mortgage Score is used to determine the type of underwriting process
and which level of underwriter will review the loan file.” These levels were
described as follows:
For transactions which are determined to be low-risk transactions, based upon the Mortgage Score and other parameters (including the mortgage loan production source), the lowest underwriting authority is generally required. For moderate and higher risk transactions, higher level underwriters and a full review of the mortgage file are generally required. Borrowers who have a satisfactory Mortgage Score (based upon the mortgage loan production source) are generally subject to streamlined credit review (which relies on the scoring process for various elements of the underwriting assessments). Such borrowers may also be eligible for a reduced documentation program and are generally permitted a greater latitude in the application of borrower debt-to-income ratios.
BAFC 2006-F Pros. Sup. S-31.
• That “Wells Fargo Bank permits debt-to-income ratios to exceed guidelines when
the applicant has documented compensating factors for exceeding ratio guidelines
such as documented excess funds in reserves after closing, a history of making a
similar sized monthly debt payment on a timely basis, substantial residual income
after monthly obligations are met, evidence that ratios will be reduced shortly
after closing when a financed property under contract for sale is sold, or
additional income has been verified for one or more applicants that is ineligible
for consideration as qualifying income.” BAFC 2006-F Pros. Sup. S-32
(emphasis added).
221 • The Supplement further asserts the following with regard to mortgages purchased
from originators other than Wells Fargo:
In order to qualify for participation in Wells Fargo Bank's mortgage loan purchase programs, lending institutions must (i) meet and maintain certain net worth and other financial standards, (ii) demonstrate experience in originating residential mortgage loans, (iii) meet and maintain certain operational standards, (iv) evaluate each loan offered to Wells Fargo Bank for consistency with Wells Fargo Bank's underwriting guidelines or the standards of a pool insurer and represent that each loan was underwritten in accordance with Wells Fargo Bank standards or the standards of a pool insurer and (v) utilize the services of qualified appraisers.
BAFC 2006-F Pros. Sup. S-30.
586. These statements were materially misleading for multiple reasons that Appendix
III describes in detail. Fundamentally, they grossly distort the underwriting process that was
actually employed by indicating that it was a principled process that followed stated standards
and employed enumerated safeguards. However, as described above in Sections IV.B and IV.C,
both Wells Fargo and the other originators of mortgage loans that backed the PLMBS purchased
by the Bank effectively abandoned their stated underwriting standards in an effort to maximize
their mortgage origination volume. Thus Wells Fargo and other originators did not follow the
underwriting standards set forth or otherwise referred to in the Offering Documents.
“Exceptions” to standards became the rule. Reduced documentation was employed not to
streamline the process where warranted, but instead to mask the borrower's disqualification.
587. In addition, the statements were materially misleading because they failed to disclose that Wells Fargo had no reliable basis on which to conclude that the scoring systems allegedly employed provided the asserted “consistent, objective measures of borrower credit,” or that the resulting “mortgage score” was a reliable indicator of the probability of default. Wells
Fargo, like others in the industry, constructed “models” to justify their underwriting programs,
222 but the models were based on scant historical data and were therefore utterly unreliable. Indeed, the explosion in Alt-A, subprime and other untraditional lending, described supra § IV.B.1, rendered irrelevant the industry’s historical models, which were based on traditional underwriting practices. But Wells Fargo and others continued to use this data to construct
“models” to justify their ever-less rigorous underwriting programs, and continued to present these models and programs to investors as prudent, thoroughly tested, and well-grounded in reliable and objective data.
588. The statements were further materially misleading because they failed to disclose that Wells Fargo, like the other originators of mortgages that backed the PLMBS purchased by the Bank, lacked adequate procedures and practices to monitor or evaluate their mortgage loan underwriters’ exercise of judgment, or to provide appropriate training and education to their mortgage loan underwriters.
3. Evidence Demonstrating Misstatements in the Offering Documents Regarding the Originators’ Underwriting Practices.
a. Government investigations, actions and settlements, confidential witnesses and evidence developed in other private lawsuits demonstrate systematic and pervasive abandonment of stated underwriting practices by the originators.
589. As alleged in detail above, government investigations and lawsuits, press reports, and statements of confidential witnesses who are former employees of mortgage originators all document how the mortgage originators who issued the loans backing the PLMBS purchased by the Bank failed to apply their stated underwriting guidelines, ensure that compensating factors justified exceptions, and obtain accurate appraisals. Additional evidence has been generated by the many other private lawsuits against many of the same Defendants in connection with the sale of MBS and related certificates. This evidence – and the allegations herein based on this
223 evidence – demonstrates that the statements in the Offering Documents regarding the mortgage
originators’ underwriting and appraisal practices are false and misleading. Contrary to the representations in the Offering Documents, the mortgage originators did not genuinely attempt to determine the borrowers’ ability to pay, or the adequacy of the collateral provided for the loans they issued, but abandoned these standards in order to issue and sell for securitization as many loans as possible.
b. Analysis of loans that backed the PLMBS purchased by the Bank demonstrates the abandonment of stated underwriting practices by the originators.
590. Analysis of the specific loans that backed the PLMBS purchased by the Bank show high rates of delinquency and foreclosure, evidencing a pervasive disregard of sound underwriting practices.
591. For example, for the following PLMBS, the rate of delinquent loans as of
December 2010 was 10% or greater:
• Certificate AMSI 2005-R10 A2B, 29.44%
• Certificate ARSI 2005-W5 A2C, 44.04%
• Certificate BAFC 2006-C 2A1, 33.54%
• Certificate BAFC 2006-E 2A2, 30.51%
• Certificate BAFC 2006-E 3A1, 23.09%
• Certificate BAFC 2006-F 2A1, 23.75%
• Certificate BAFC 2006-F 3A1, 18.84%
• Certificate CBASS 2006-CB4 AV3, 44.90%
• Certificate CMLTI 2006-NC1 A2C, 52.57%
• Certificate CMLTI 2006-WFH2 A2B, 37.48%
224 • Certificate CMLTI 2006-WFH4 A3, 37.85%
• Certificate CMLTI 2006-NC2 A2B, 50.74%
• Certificate FFML 2006-FF13 A2C, 47.70%
• Certificate FFML 2006-FF8 IIA3, 51.55%
• Certificate FFML 2006-FF12 A3, 34.13%
• Certificate FFML 2006-FF12 A4, 34.13%
• Certificate FFML 2006-FF14 A5, 34.81%
• Certificate FFML 2006-FF10 A7, 34.17%
• Certificate FHASI 2006-AR1 2A1, 19.49%
• Certificate FHLT 2005-E 2A3, 58.65%
• Certificate GMACM 2006-AR2 2A1, 16.41%
• Certificate GMACM 2006-AR2 4A1, 20.82%
• Certificate GSAMP 2006-NC2 A2C, 42.33%
• Certificate HVMLT 2006-2 2A1A, 17.61%
• Certificate INABS 2005-D AII3, 37.25%
• Certificate INDX 2006-AR15 A2, 35.70%
• Certificate MABS 2006-NC1 A3, 41.69%
• Certificate MSAC 2006-WMC2 A2C, 49.20%
• Certificate MSAC 2006-HE5 A2C, 58.44%
• Certificate MSAC 2006-HE6 A2C, 70.67%
• Certificate NHELI 2006-WF1 A3, 36.36%
• Certificate OOMLT 2005-5 A3, 35.66%
225 • Certificate OOMLT 2006-2 2A3, 44.92%
• Certificate RFMSI 2006-SA2 2A1, 18.10%
• Certificate RASC 2005-KS12 A2, 35.34%
• Certificate SABR 2006-FR3 A2, 50.25%
• Certificate SABR 2006-NC3 A2B, 40.86%
• Certificate SEMT 2006-1 2A1, 26.11%
• Certificate SEMT 2006-1 3A1, 29.84%
• Certificate SARM 2005-21 3A1, 24.58%
• Certificate WFHET 2006-3 A2, 46.04%
• Certificate WFMBS 2006-AR3 A4, 13.42%
592. Similarly, for the following PLMBS purchased by the Bank, the rate of foreclosure as of December 2010 was 5 percent or greater:
• Certificate AMSI 2005-R10 A2B, 14.23%
• Certificate ARSI 2005-W5 A2C, 27.34%
• Certificate BAFC 2006-C 2A1, 15.30%
• Certificate BAFC 2006-E 2A2, 14.30%
• Certificate BAFC 2006-E 3A1, 8.61%
• Certificate BAFC 2006-F 2A1, 7.09%
• Certificate BAFC 2006-F 3A1, 10.23%
• Certificate CBASS 2006-CB4 AV3, 18.42%
• Certificate CMLTI 2006-NC1 A2C, 25.39%
• Certificate CMLTI 2006-WFH2 A2B, 16.19%
226 • Certificate CMLTI 2006-WFH4 A3, 14.23%
• Certificate CMLTI 2006-NC2 A2B, 24.15%
• Certificate FFML 2006-FF13 A2C, 18.74%
• Certificate FFML 2006-FF8 IIA3, 19.62%
• Certificate FFML 2006-FF12 A3, 12.41%
• Certificate FFML 2006-FF12 A4, 12.41%
• Certificate FFML 2006-FF14 A5, 12.95%
• Certificate FFML 2006-FF10 A7, 12.02%
• Certificate FHASI 2006-AR1 2A1, 10.48%
• Certificate FHLT 2005-E 2A3, 25.61%
• Certificate GMACM 2006-AR2 2A1, 6.72%
• Certificate GMACM 2006-AR2 4A1, 12.16%
• Certificate GSAMP 2006-NC2 A2C, 19.84%
• Certificate INABS 2005-D AII3, 24.08%
• Certificate INDX 2006-AR15 A2, 19.63%
• Certificate MABS 2006-NC1 A3, 19.03%
• Certificate MSAC 2006-WMC2 A2C, 23.42%
• Certificate MSAC 2006-HE5 A2C, 21.90%
• Certificate MSAC 2006-HE6 A2C, 27.12%
• Certificate NHELI 2006-WF1 A3, 13.22%
• Certificate OOMLT 2005-5 A3, 17.16%
• Certificate OOMLT 2006-2 2A3, 22.62%
227 • Certificate RFMSI 2006-SA2 2A1, 9.45%
• Certificate RASC 2005-KS12 A2, 16.25%
• Certificate SABR 2006-FR3 A2, 25.41%
• Certificate SABR 2006-NC3 A2B, 19.37%
• Certificate SEMT 2006-1 2A1, 13.74%
• Certificate SEMT 2006-1 3A1, 12.13%
• Certificate SARM 2005-21 3A1, 10.73%
• Certificate WFHET 2006-3 A2, 16.86%
• Certificate WFMBS 2006-AR3 A4, 6.37%
B. Defendants Misrepresented the Appraisal Process and Loan-to-Value Ratios (“LTV”) That Were Based Upon Those “Appraisals”
1. The Materiality of Representations Regarding Appraisals and LTVs
593. The loan-to-value ratio of a mortgage loan is the ratio of the amount of the
mortgage loan to the value of the mortgaged property when the loan is made. For example, a loan of $200,000 secured by property valued at $500,000 has an LTV of 40%; a loan of
$450,000 on the same property has an LTV of 90%. The LTV is one of the most important
measures of the risk of a mortgage loan because it is a primary determinant of the likelihood of
default. The lower the LTV, the greater the borrower’s equity relative to the value of the house.
Thus, when an LTV is low, it is less likely that a decline in the property’s value will wipe out the
owner’s equity and give the owner an incentive to stop making mortgage payments and abandon
the property (a “strategic default”). Additionally, lower LTV ratios indicate that the losses on
loans that do default will be less severe – i.e., loans with lower LTVs provide a greater equity
228 “cushion” because the proceeds of foreclosure are more likely to cover the unpaid balance on the
mortgage loan.
594. Because the numerator (the amount of the loan) is predetermined, the key to an
accurate LTV is an accurate denominator (the value of the property). The key to an accurate
denominator, in turn, is an accurate appraisal of the property. In a purchase of a property, the denominator in the LTV is usually determined by choosing the lower of the purchase price or the appraised value. In a refinancing or home equity loan, the denominator is always an appraised value because there is no purchase price. Accordingly, an inflated appraisal will inflate the denominator of the LTV.
595. A denominator that is too high will understate, sometimes greatly, the risk of a loan. In the example above, if the property’s actual value is $500,000, but is valued incorrectly at $550,000, then the LTV of the $200,000 loan falls from 40% to 36.4%, and the LTV of the
$450,000 loan falls from 90% to 81.8%. In either case, an LTV that is based upon an improperly inflated appraisal value understates the risk of the loan.
596. Additionally, at higher LTV ratios or higher loan amounts, even minor inflations in a property’s value can translate to significantly riskier loans. In the example above, although the risk of a loan with an LTV of 40% is greater than the risk of one with an LTV of 36.4%, both imply a relatively safe loan because of the large equity cushions. By contrast, a loan with an
LTV of 90% is much riskier than one with an LTV of 81.8%. In the case of a loan with an LTV of 81.8%, there is an equity cushion of 18.2% of the value of the property, while in the case of the 90% LTV loan, the equity cushion is only 10%—just over half as much. Thus, in the example in the preceding paragraph, the $50,000 overstatement in the appraisal has a far more dramatic effect on the risk profile of the $450,000 loan than on the $200,000 loan.
229 597. Because the riskiness of the underlying loans in the asset pool (including the risk
of default and the severity of the losses on default) impacts the risk of the associated PLMBS
certificates, aggregate LTV metrics are material to an investor’s decision to purchase PLMBS,
and, specifically, were material to the Bank. The sole source of payment on the certificates is the
cash flow from the mortgage loans that back them. If borrowers fail to make their payments,
there is less cash to pay the investors in the certificates. The safety of their certificates
consequently depends upon the quality of the loans, and a key indicator of loan quality is an LTV
ratio resulting from an appraisal conducted in accordance with governing standards. In fact, credit rating agencies use LTVs to determine the proper structuring and credit enhancement necessary to assign a particular rating to a security. If the LTVs of the mortgage loans in the
asset pool of the securitization are not based on appraisals conducted in accordance with
governing standards, as the Bank alleges here, see infra ¶¶ 603-612, the ratings of the certificates
sold in that securitization will also be incorrect. Investors will therefore be misled about the risk
of investing in a particular PLMBS certificate.
598. LTVs also serve as indicators of prepayment patterns – that is, the number of
borrowers who pay off their mortgage loans before maturity. LTVs thus predict the expected
lives of the loans and the associated PLMBS certificates that are backed by the loans.
Prepayment patterns affect many aspects of the PLMBS certificates that are material to the
investors purchasing them, such as the life of the certificate and the timing and amount of cash
that the investor will receive during that life.
599. Even seemingly minor differences in the aggregate LTV metrics have a
significant effect on both the risk and rating of each certificate sold in the securitization. For
example, assume the Offering Documents assert that the loan pool had a weighted average LTV
230 (i.e., the average of the LTVs for the mortgages in the pool, weighted by the principal amount thereof) of 80%. If the true weighted average LTV (after correcting flawed procedures in
“appraisals” that overstated the value of the properties securing the mortgages) was 82%, the
Offering Documents’ assertion would constitute a material misstatement of the risk profile of the mortgage pool—and the PLMBS the pool secured—because the equity cushion (and the borrowers’ equity interest in the properties) would be eroded by 10%.
600. Finally, because an LTV is only as reliable as the appraisal used to determine the value of the collateral, LTVs and aggregate LTV metrics are meaningless to PLMBS investors unless the appraisals underlying the LTVs are done in accordance with governing standards.
Thus statements regarding the valuation of collateral—including statements that “appraisals” were conducted in calculating the LTVs and that such appraisals conformed to uniform standards—are material to an investor’s decision to purchase PLMBS, and, specifically, were material to the Bank:
Mortgage bankers and investors consider the property appraisal one of the most important documents contained in the loan file since it establishes the value of the property securing the mortgage loan. In fact, investors put review of the appraisal on the same level as the review of credit. The appraisal assists the mortgage banker in assessing the collateral risk . . . . Obviously, the ultimate investor wants to mitigate such risk and relies on the appraisal to ensure that the property falls within the investor's valuation parameters.
Handbook of Mortgage Lending 165 (Mortgage Bankers Ass'n of Am. 2003).
601. Furthermore, assertions that appraisals conformed to the applicable standards are material to PLMBS investors like the Bank because such investors like the Bank have no reasonable means of verifying the LTVs represented metrics asserted in the offering documents at the time of sale. When conducted in accordance with governing standards, appraisals and their resulting LTVs are based on knowledge of particular facts that are not available to investors
231 in mortgage backed securities - an investor simply does not have access to the relevant data, let
alone the time and resources needed to conduct an independent valuation of each piece of
collateral underlying each certificate.
602. Statements regarding the independence and impartiality of appraisers are
important as they provide assurance that manipulation by mortgage originators did not artificially
inflate the LTVs. Likewise, statements in the Offering Documents that the appraisals conformed
to USPAP or Fannie Mae and Freddie Mac standards, including requirements that appraisals be
independently and impartially conducted, indicate that the appraisals and the aggregate data
included in the Offering Documents based on the appraisals properly assess the value of the
collateral and provide a reliable measure of the risk of the loan pools.
2. Misstatements Regarding Appraisals and LTVs
a. The Offering Documents falsely state that the LTVs were based upon appraisals
603. The Offering Documents contained numerous material untrue or misleading statements regarding the valuation of collateral and the “appraisal” process conducted upon the
origination of the mortgages underlying the PLMBS. The Prospectus or Prospectus Supplement
for each certificate states that the loan-to-value ratio represent a “ratio” or “fraction,” the
numerator of which is the “principal balance” or “principal amount” of the mortgage loan, and
the denominator of which is the “lesser” or “least” of (1) the “sales price” or “purchase price” or
“selling price” of the mortgaged property and (2) the “appraised value” or “appraisal” or “the
appraised value determined in an appraisal” or “the appraised value . . . as established by an
appraisal.” See Appendix VII.
604. These are false statements of material fact because, contrary to Defendant’s
representations that the LTV ratios were based on “appraisals” or “appraised values,” in reality
232 the biased and coerced valuations of collateral that Defendants labeled as “appraisals” failed to meet the federally required definition of “appraisal” applicable to entities that are regulated by the Office of Thrift Supervision (“OTS”), the Office of the Comptroller of the Currency
(“OCC”), the Federal Deposit Insurance Corporation (“FDIC”), or the Board of Governors of the
Federal Reserve System (“FRB”) (collectively the “Bank Regulators”). Thus, the LTVs were not based on “appraisals” at all as that term was defined in the offering documents and is used and understood in the industry.
605. The Originators of the mortgages underlying the PLMBS were regulated by the
Bank Regulators:
• Bank of America, N.A., and Wells Fargo Bank, N.A., are “national banking
associations” chartered with the OCC pursuant to 12 U.S.C. § 21. Therefore, under
12 U.S.C. § 1813(q)(1), the OCC is the “appropriate Federal banking agency” with
jurisdiction to regulate both banks.
• Downey Savings and Loan Association, F.A., IndyMac Bank, F.S.B., and
Washington Mutual Bank are “federal savings association” within the meaning of 12
U.S.C. §§ 1813(b) and 1462(5). Pursuant to 12 U.S.C. § 1813(q)(4), the Director of
the OTS is the “appropriate Federal banking agency” with jurisdiction to regulate
these originators.
• Fremont Investment & Loan was a “state nonmember bank” within the meaning of 12
U.S.C. § 1813(e). Pursuant to 12 U.S.C. § 1813(q), the FDIC is the “appropriate
Federal banking agency” with jurisdiction to regulate this originator.
• GreenPoint Mortgage Funding, Inc., was a subsidiary of North Fork Bank, which was
a “state nonmember bank” within the meaning of 12 U.S.C. § 1813(e). Any
233 subsidiary of such a “state nonmember bank” is regulated by the FDIC. See 12 U.S.C.
§ 1831a(d)(1); 12 CFR § 362.4(a).
• Countrywide Home Loans, Inc. and Decision One Mortgage Company LLC were
nonbank subsidiaries of the following “bank holding companies” within the meaning
of 12 U.S.C. §§ 1841 and 1843:
Originator: Controlling “Bank Holding Company” Countrywide Home Loans, Inc. Countrywide Financial Corporation8 Decision One Mortgage Company, HSBC North America LLC
Subsidiaries of “bank holding companies” are regulated by the Board of Governors
for the Federal Reserve System pursuant to 12 U.S.C. §§ 1813(q), 1841(n). See also
12 C.F.R. §§ 225.21-225.28.
• Chase Home Finance LLC, First Franklin Financial Corporation, and First Horizon
Home Loan Corporation were subsidiaries of the following “national banking
associations”:
Originator: Controlling “National Banking Association”: Chase Home Finance LLC JPMorgan Chase Bank, National Association First Franklin Financial Corporation National City Bank First Horizon Home Loan Corporation First Tennessee Bank National Association
Subsidiaries of “national banking associations” are regulated by the OCC pursuant to
12 U.S.C. § 24a and 12 C.F.R. §§ 5.34 and 5.39.
8Countrywide Financial Corporation was a “bank holding company” until March 12, 2007.
234 606. Each of the Bank Regulators has issued regulations pursuant to Title XI of the
Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA), 12 U.S.C.
§ 1339, that govern the appraisal practices of the institutions they regulate. These regulations define an “appraisal” as a “written statement independently and impartially prepared by a qualified appraiser setting forth an opinion as to the market value of an adequately described property as of a specific date(s) . . . .” 12 C.F.R. § 564.2 (OTS); 12 C.F.R. § 34.42 (OCC); 12
C.F.R. § 323.2 (FDIC); 12 C.F.R. § 225.62 (FRB) (emphasis added). Therefore, by representing
that the LTV ratios were based on “appraisals” of the collateral, Defendants represented that the
LTV ratios were based on independent and impartial valuations of the collateral.
607. The Bank Regulators define appraiser independence as follows:
(a) Staff appraisers. If an appraisal is prepared by a staff appraiser, that appraiser must be independent of the lending, investment, and collection functions and not involved, except as an appraiser, in the federally related transaction, and have no direct or indirect interest, financial or otherwise, in the property . . . .
(b) Fee appraisers. (1) If an appraisal is prepared by a fee appraiser, the appraiser shall be engaged directly by the regulated institution or its agent, and have no direct or indirect interest, financial or otherwise, in the property or the transaction . . . .
12 C.F.R. § 564.5 (OTS); 12 C.F.R. § 34.45 (OCC); 12 C.F.R. § 323.5 (FDIC); 12 C.F.R. §
225.65 (FRB) (emphasis added). In 2005 the Bank Regulators further elaborated on the standards for appraiser independence, stating that “[l]oan production staff should not select appraisers.” Office of the Controller of the Currency et al., Frequently Asked Questions on the
Appraisal Regulations and the Interagency Statement on Independent Appraisal and Evaluation
Functions 2 (2005), available at http://www.federalreserve.gov/boarddocs/srletters/2005/
SR0505a1.pdf. Additionally, the Bank Regulators specified that although loan production staff may use a “revolving, board approved list to select a residential appraiser,” the “[s]taff
235 responsible for the development and maintenance of the list should be independent of the loan production process . . . .” Id.
608. Defendants’ statements in the Offering Documents are materially misleading
because the LTV ratios were not based on impartial and independent “appraisals,” but rather
were the result of manipulation and coercion by loan production staff. As described above in
sections IV.B and IV.C, the originators’ loan production staff pressured and coerced appraisers
to inflate values, demanded and obtained the ability to have “business managers” overrule staff
and third-party appraisers, and routinely fed improper information to appraisers in an effort to
manipulate their valuations, all of which served to undermine the independence of the appraisal
process. Contrary to the interagency guidance, the originators’ lending departments constantly
pressured appraisers to increase their valuations, made clear that their continued access to work
from these originators depended upon the appraisers coming in “at value,” and in some cases
simply overruled appraisers that refused to cooperate and refused to provide them with additional
work. All of this resulted in appraisers having an indirect financial interest in each property they
appraised, since their ability to obtain future work depended on their willingness to come in “at
value” for each property they appraised. Simply put, as a result of this coercion, appraisers
provided appraisals that they did not believe accurately reflected the value of the appraised
property, but nevertheless were sufficiently high—i.e., “at value”—to enable the deal to close.
Because these valuations were not “independently and impartially prepared” as required by the
federal definition of “appraisal,” Defendants made false statements of material fact in the
Offering Documents by stating that the LTV ratios were based on “appraisals” or “appraised
values.”
236 b. Misstatements regarding the standards to which the purported “appraisals” conformed
609. In addition, the Offering Documents contained materially untrue or misleading
statements and omissions regarding the standards to which the purported “appraisals”
conformed. The Offering Documents represented that, under the underwriting guidelines for
each of the following originators, the appraisals are required to conform to the Uniform
Standards of Professional Appraisal Practice (“USPAP”) adopted by the Appraisal Standards
Board of the Appraisal Foundation: Argent Mortgage Company, LLC; Decision One Mortgage
Company, LLC; Downey Savings and Loan Association, F.A.; First Horizon Home Loan Corp.;
IndyMac Bank, F.S.B.;9 New Century Mortgage; Option One Mortgage Corporation; and WMC
Mortgage Corp. See Appendix III.
610. Additionally, the Offering Documents represent that, under the underwriting
guidelines of each of the following originators, the appraisals conformed to Fannie Mae and
Freddie Mac appraisal standards: Countrywide Home Loans, Inc.; First Franklin Financial
Corporation; First Horizon Home Loan Corp.; and Wells Fargo Bank, National Association.10
See Appendix III. The Fannie Mae and Freddie Mac appraisal standards require that appraisals
be conducted in accordance with the USPAP. See 2006 Single Family Selling Guide, Part XI,
102.02.
611. These statements in the Offering Documents were materially misleading because
the mortgage originators routinely accepted – and in fact overtly sought – valuations of collateral
that were conducted in violation of USPAP and Fannie Mae and Freddie Mac Standards. As
9 This statement is not included in the offering documents for INABS 2005-D AII3. 10 This statement is not included in the offering documents for BAFC 2006-F 2A1, BAFC 2006-F 3A1, or WFMBS 2006-AR3 A4.
237 detailed above, the USPAP requires that an appraiser “perform assignments with impartiality, objectivity, and independence, and without accommodation of personal interests.” Similarly, the
Fannie Mae standards provide that “it is essential that a lender obtain an independent, disinterested examination.” As alleged in paragraph 608 and further described in sections IV.B and IV.C, which contain, among other details, abundant testimony from Confidential Witnesses, the appraisals used by the mortgage originators were the product of manipulation and coercion and thus were not impartial, objective, and independent as required by USPAP.
612. Additionally, USPAP precludes acceptance of an appraisal assignment where compensation is contingent upon “reporting a predetermined result” or “a direction in assignment results that favors the cause of a client.” Similarly, it is an “unacceptable appraisal practice” under Fannie Mae standards to develop and report an appraisal “that favors either the cause of the client . . . [or] the attainment of a specific result . . . in order to receive compensation . . . and/or in anticipation of receiving future assignments.” However, these are precisely the conditions that loan production staff for the mortgage originators forced upon appraisers when they repeatedly pressured appraisers to increase their valuations, implicitly or explicitly linked the receipt of continued work to “at value” appraisals, and even threatened to place appraisers on a blacklist if their appraisals did not “come back at value.”
c. Misstatements regarding aggregate LTVs
613. Because the LTV ratios were not based on “appraisals” conducted in conformance with applicable appraisal standards, the statements in the Offering Documents regarding the LTV ratios of the mortgage pools were materially untrue and misleading. These statements include: representations about the extent to which loans in the pools underlying each certificate had LTVs in excess of 100%, 90%, or 80%, and representations about the weighted average LTV of each
238 pool. Section V.B.3, infra, sets forth those statements for each certificate as well as the reasons each is misleading.
3. Evidence Demonstrating Misstatements about Appraisals and LTV Ratios in the Offering Documents
a. Government investigations, press reports, and confidential witnesses demonstrate systemic and pervasive appraisal manipulation by the mortgage originators
614. As alleged in detail above, see supra §§ IV.B and C, failure on the part of the mortgage originators to obtain accurate appraisals for the loans backing the PLMBS purchased by the Bank has been well-documented in government investigations and lawsuits, press reports, and statements of confidential witnesses. Furthermore, as alleged above, this evidence demonstrates that the mortgage originators manipulated the appraisal process and undermined the independence and impartiality of appraisers that is crucial to the determination of credible collateral valuations. This evidence – and the allegations herein based on this evidence – demonstrates that the statements in the Offering Documents regarding the appraisals and appraisal process are false and misleading.
615. The Bank’s claim with respect to appraisals and LTVs is that the Defendants are liable for false statements of fact in the Offering Documents by representing that the LTVs were based upon appraisals conducted pursuant to governing standards. In fact, the “appraisals” underlying the LTVs were not appraisals at all since they were not independent assessments of a property’s value, but rather were simply coerced or otherwise misleading statements from appraisers to enable loans to close.
616. The following Depositor and Underwriter Defendants, by virtue of being vertically integrated with the mortgage originators, that originated the loans underlying the certificates purchased by the Bank, see supra § IV.D.1, should have known that the appraisals
239 were inflated and were the product of manipulation and coercion in violation of the requirements of the USPAP:
Defendants: Vertically Integrated Originators:
Banc of America Securities LLC Bank of America, National Association Banc of America Funding Corporation Wells Fargo Asset Securities Corp. Wells Fargo Bank, National Association Option One Mortgage Acceptance Corp. Option One Mortgage H&R Block Financial Advisors, Inc. Residential Funding Mortgage Securities I, Inc. Homecomings Financial Network, Inc. Residential Asset Securities Corporation GMAC Mortgage Corp. FTN Financial Capital Markets First Horizon Home Loan Corporation First Horizon Asset Securities Inc. Residential Asset Mortgage Products, Inc. GMAC Mortgage Corporation Residential Funding Securities Corporation IndyMac MBS, Inc. IndyMac Bank IndyMac ABS, Inc.
617. Similarly, the remaining Depositor and Underwriter Defendants should have
known that the appraisals were the product of manipulation and coercion because their corporate
affiliates served as depositors/issuers for multiple other deals, including deals backed by loans
originated by the originators that originated the loans underlying the certificates purchased by the
Bank. See supra § IV.D.2. The Defendants should have known of the manipulation of the
appraisal process because their corporate affiliates sought to use the knowledge of the inaccurate
appraisals and other violations of underwriting standards to their advantage in purchasing loan
pools at reduced prices. See supra § IV.D.2.
618. Moreover, as Underwriters for the certificates purchased by the Bank, the
Underwriter Defendants performed reviews on the mortgage pools underlying the certificates.
By virtue of these reviews, the Underwriter Defendants should have known that the originators
had manipulated the appraisal process to inflate the appraisals and the LTV ratios based on the
appraisals, but failed to take the necessary action of replacing substandard loans or adequately
disclosing the risks to investors.
240 b. Analysis of loans that backed the PMLBS purchased by the Bank demonstrate that appraisals were materially inflated and the LTV ratios were materially understated.
619. As part of its investigation of the claims asserted herein, the Bank has analyzed
the LTV ratios of mortgage loans that secure each of the PLMBS that it purchased. The Bank
has tested the LTV ratios as represented in the Offering Documents against the LTV ratios that
would have been calculated had the properties been valued at the time of loan origination in
accordance with accepted and reliable appraisal practices (as was represented in the Offering
Documents). To perform this analysis, the Bank has employed an industry-standard automated
valuation model (“AVM”) that reliably calculates the values of the subject properties as of the
date of mortgage loan origination. The AVM draws upon a database of 500 million sales
covering ZIP codes that represent 98.7% of the homes, occupied by 99.8% of the population, in the United States. Based on that database, the AVM calculates a valuation based on criteria including the type, condition, and location of the property, as well as the actual sale prices of comparable properties in the same locale shortly before the specified date. The extensive
independent testing of the AVM confirms that the AVM is highly reliable and accurate means of
determining the value that would have been determined for a property as of a historical date had
that property been valued in accordance with accepted and reliable appraisal practices.
620. This analysis demonstrates stark misstatements in the LTV ratios information as
represented in the Offering Documents. Because the LTV calculation is simply a ratio of loan
amount to value, and because the loan amounts are unquestioned, the reason for the
discrepancies is inescapable: the LTV ratios represented in the Offering Documents were the
result of inflated and unreliable collateral valuations that were misleadingly labeled as
“appraisals.” Had the collateral valuation practices comported with the OTS definition of
241 “appraisal” and with the USPAP and Fannie Mae/ Freddie Mac standards as represented in the
Offering Documents, the resulting aggregate LTV ratios would have been materially different from those represented in the Offering Documents.
621. The aggregate LTV ratio representations in the Offering Documents were key metrics in the Bank’s decision to purchase the PLMBS, and the Bank was materially misled by the inaccurate information reported in the Offering Documents. Moreover, as a result of their knowledge of the manipulation of the appraisal process in the origination of mortgage loans, see supra §§ IV.B and IV.C, the Defendants should have known that the collateral valuations were unreliable and that statements made in the Offering Documents based in whole or in part on the collateral values, including statements regarding LTV ratios and credit ratings, were false and misleading.
622. The following tables summarize four types of material LTV ratio understatements contained in the Offering Documents: the percentage of loans with over 100% LTV; the percentage of loans with over 90% LTV; the percentage of loans with over 80% LTV; and the weighted average LTV ratio for the mortgage pool. Each is a distinct and significant misrepresentation in the Offering Documents.
623. The 100% LTV representation is obviously significant because loans with over
100% LTV afford the lender no equity cushion and leave the lender with inadequate collateral from the outset of the lender. The Offering Documents consistently assured the Bank that there were no such loans in the mortgage pools. Unfortunately, as the following table indicates, the recalculated LTV ratios (which, based on the AVM, indicate what the reported LTV would have been had proper appraisal methods been employed) indicate that there were a material number of mortgage loans with LTV ratios in excess of 100%:
242
% of Loans with Greater Recalculated % of Security than 100% LTV Per the Loans with Greater Prospectus (Certificate) Prospectus than 100% LTV Understatement AMSI 2005‐R10 (AMSI 2005‐R10 A2B) 0.00% 27.18% 27.18% Argent 2005‐W05‐2 (ARSI 2005‐W5 A2C) 0.00% 16.96% 16.96% BOA Funding2006C‐2 (BAFC 2006‐C 2A1) 0.00% 16.39% 16.39% BOA Funding2006E‐2 (BAFC 2006‐E 2A2) 0.00% 16.67% 16.67% BOA Funding2006E‐3 (BAFC 2006‐E 3A1) 0.00% 13.58% 13.58% BOA Funding2006F‐2 (BAFC 2006‐F 2A1) 0.00% 14.71% 14.71% BOA Funding2006F‐3 (BAFC 2006‐F 3A1) 0.00% 7.69% 7.69% C‐BASS 2006‐CB4 (CBASS 2006‐CB4 AV3) .04% 15.81% 15.77% Citigroup 06‐NC1‐2 (CMLTI 2006‐NC1 A2C) 0.00% 14.29% 14.29% Citigroup 06‐WFHE2 (CMLTI 2006‐WFH2 A2B) 0.00% 20.91% 20.91% Citigroup 06‐WFHE4 (CMLTI 2006‐WFH4 A3) 0.00% 25.00% 25.00% Citigroup 06‐NC2‐2 (CMLTI 2006‐NC2 A2B) 0.00% 22.69% 22.69% 1st Frkln06‐FF13‐2 (FFML 2006‐FF13 A2C) 0.00% 26.87% 26.87% 1st Frkln06‐FF08‐2 (FFML 2006‐FF8 IIA3) 0.27% 20.73% 20.46% 1st Frkln06‐FF12‐2 (FFML 2006‐FF12 A3) 0.00% 23.20% 23.20% 1st Frkln06‐FF14‐2 (FFML 2006‐FF14 A5) 0.00% 24.00% 24.00% 1st Frkln06‐FF10‐2 (FFML 2006‐FF10 A7) 0.00% 28.00% 28.00% FirstHorizon06AR1‐2 (FHASI 2006‐AR1 2A1) 0.00% 9.09% 9.09% Fremont 2005‐E‐2 (FELT 2005‐E 2A3) 0.00% 15.38% 15.38% GSAMP 2006‐NC2‐2 (GSAMP 2006‐NC2 A2C) 0.00% 18.33% 18.33%
243 % of Loans with Greater Recalculated % of Security than 100% LTV Per the Loans with Greater Prospectus (Certificate) Prospectus than 100% LTV Understatement Harborview2006‐02‐2 (HVMLT 2006‐2 2A1A) 0.00% 3.49% 3.49% Harborview2006‐02‐3 (HVMLT 2006‐2 3A1A) 0.00% 3.57% 3.57% INABS 2005‐D‐2 (INABS 2005‐D (AII3) 0.00% 18.29% 18.29% IndyMac 2006‐AR15 (INDX 2006‐AR15 A2) 0.00% 4.07% 4.07% Master Asst06NC1 (MABS 2006‐NC1 A3) 0.00% 21.68% 21.68% Morgan Stan06WMC2‐2 (MSAC 2006‐WMC2 A2C) 0.00% 8.54% 8.54% Morgan Stan06‐HE5‐2 (MSAC 2006‐HE5 A2C) 0.00% 13.46% 13.46% Morgan Stan06‐HE6‐2 (MSAC 2006‐HE6 A2C) 0.00% 12.10% 12.10% Nomura 2006‐WF1 (NHELI 2006‐WF1 A3) 0.00% 26.67% 26.67% Option One 05‐5‐2 (OOMLT 2005‐5 A3) 0.00% 25.61% 25.61% Option One 06‐2‐2 (OOMLT 2006‐2 2A3) 0.00% 18.24% 18.24% RFC 2006‐SA02‐2 (RFMSI 2006‐SA2 2A1) 0.00% 10.17% 10.17% RFC 2005‐KS12 (RASC 2005‐KS12 A2) 0.00% 14.22% 14.22% SABR 2006‐FR3 (SABR 2006‐FR3 A2) 0.04% 18.31% 18.27% SABR 2006‐NC3‐2 (SABR 2006‐NC3 A2B) 0.00% 6.15% 6.15% Sequoia 2006‐01‐2 (SEMT 2006‐1 2A1) 0.00% 16.07% 16.07% Sequoia 2006‐01‐3 (SEMT 2006‐1 3A1) 0.00% 11.00% 11.00% WA Mutl 2006‐AR12‐1 (SARM 2005‐21 3A1) 0.00% 10.00% 10.00% WFHET 2006‐3 (WFHET 2006‐3 A2) 0.00% 35.29% 35.29% WFMBS 2006‐AR3 (WFMBS 2006‐AR3 A4) 0.00% 5.65% 5.65%
244 624. The following table lists the certificates purchased by the Bank in which the LTV calculated using the AVM exceeds 90%, and lists the representation in the associated Offering
Documents with respect to the percentage of the mortgages in the subject pool with LTVs greater than 90%. An LTV in excess of 90% represents an extremely risky mortgage for the investor, as the borrower has little equity in the property and there is a significant risk that upon foreclosure the collateral will be inadequate to pay the debt. Accordingly, for each of the certificates listed in the following table, the statement regarding the mortgages in the subject pool with LTVs in excess of 90% was materially misleading.
% of Loans with Greater Recalculated % of Security than 90% LTV Per the Loans with Greater Prospectus (Certificate) Prospectus than 90% LTV Understatement AMSI 2005‐R10 (AMSI 2005‐R10 A2B) 12.07% 42.72% 30.65% Argent 2005‐W05‐2 (ARSI 2005‐W5 A2C) 22.54% 37.66% 15.12% BOA Funding2006C‐2 (BAFC 2006‐C 2A1) 0.00% 32.79% 32.79% BOA Funding2006E‐2 (BAFC 2006‐E 2A2) 0.17% 25.00% 24.83% BOA Funding2006E‐3 (BAFC 2006‐E 3A1) 0.00% 23.46% 23.46% BOA Funding2006F‐2 (BAFC 2006‐F 2A1) 1.75% 26.47% 24.72% BOA Funding2006F‐3 (BAFC 2006‐F 3A1) 2.04% 20.88% 18.84% C‐BASS 2006‐CB4 (CBASS 2006‐CB4 AV3) 15.83% 38.06% 22.23% Citigroup 06‐NC1‐2 (CMLTI 2006‐NC1 A2C) 24.14% 33.33% 9.19% Citigroup 06‐WFHE2 (CMLTI 2006‐WFH2 A2B) 21.57% 35.45% 13.88% Citigroup 06‐WFHE4 (CMLTI 2006‐WFH4 A3) 31.91% 48.33% 16.42% Citigroup 06‐NC2‐2 (CMLTI 2006‐NC2 A2B) 21.47% 40.34% 18.87% 1st Frkln06‐FF13‐2 (FFML 2006‐FF13 A2C) 21.62% 41.79% 20.17% 1st Frkln06‐FF08‐2 17.30% 45.12% 27.82%
245 % of Loans with Greater Recalculated % of Security than 90% LTV Per the Loans with Greater Prospectus (Certificate) Prospectus than 90% LTV Understatement (FFML 2006‐FF8 IIA3) 1st Frkln06‐FF12‐2 (FFML 2006‐FF12 A3) 18.81% 40.33% 21.52% 1st Frkln06‐FF14‐2 (FFML 2006‐FF14 A5) 21.22% 50.00% 28.78% 1st Frkln06‐FF10‐2 (FFML 2006‐FF10 A7) 19.11% 42.00% 22.89% FirstHorizon06AR1‐2 (FHASI 2006‐AR1 2A1) 0.00% 22.73% 22.73% Fremont 2005‐E‐2 (FHLT 2005‐E 2A3) 25.98% 37.69% 11.71% GSAMP 2006‐NC2‐2 (GSAMP 2006‐NC2 A2C) 6.23% 35.00% 28.77% Harborview2006‐02‐2 (HVMLT 2006‐2 2A1A) 0.43% 11.05% 10.62% Harborview2006‐02‐3 (HVMLT 2006‐2 3A1A) 0.00% 5.36% 5.36% INABS 2005‐D‐2 (INABS 2005‐D AII3) 8.85% 36.59% 27.74% IndyMac 2006‐AR15 (INDX 2006‐AR15 A2) 0.70% 21.14% 20.44% Master Asst06NC1 (MABS 2006‐NC1 A3) 15.95% 34.97% 19.02% Morgan Stan06‐HE5‐2 (MSAC 2006‐HE5 A2C) 23.24% 42.31% 19.07% Morgan Stan06‐HE6‐2 (MSAC 2006‐HE6 A2C) 22.82% 33.06% 10.24% Nomura 2006‐WF1 (NHELI 2006‐WF1 A3) 31.00% 33.33% 2.33% Option One 05‐5‐2 (OOMLT 2005‐5 A3) 33.43% 40.24% 6.81% RFC 2006‐SA02‐2 (RFMSI 2006‐SA2 2A1) 0.54% 23.73% 23.19% RFC 2005‐KS12 (RASC 2005‐KS12 A2) 20.26% 26.67% 6.41% SABR 2006‐FR3 (SABR 2006‐FR3 A2) 24.11% 35.21% 11.10% SABR 2006‐NC3‐2 (SABR 2006‐NC3 A2B) 22.46% 30.77% 8.31% Sequoia 2006‐01‐2 (SEMT 2006‐1 2A1) 0.44% 30.36% 29.92% Sequoia 2006‐01‐3 (SEMT 2006‐1 3A1) 0.14% 25.00% 24.86%
246 % of Loans with Greater Recalculated % of Security than 90% LTV Per the Loans with Greater Prospectus (Certificate) Prospectus than 90% LTV Understatement WA Mutl 2006‐AR12‐1 (SARM 2005‐21 3A1) 4.08% 28.00% 23.92% WFHET 2006‐3 (WFHET 2006‐3 A2) 24.90% 48.04% 23.14% WFMBS 2006‐AR3 (WFMBS 2006‐AR3 A4) 0.68% 14.69% 14.01%
625. The following table lists the certificates purchased by the Bank in which the LTV calculated using the AVM exceeds 80%, and lists the representation in the associated Offering
Documents with respect to the percentage of the mortgages in the subject pool with LTVs greater than 80%. The 80% LTV metric is very significant to an PLMBS investor such as the Bank, because in traditional mortgage underwriting an LTV in excess of 80% was generally considered as affording the lender little value cushion to protect against borrower default and loss upon foreclosure. Accordingly, for each of the certificates listed in the following table, the statement regarding the percentage of mortgages in the subject pool with LTVs in excess of 80% was materially misleading.
% of Loans with Greater Recalculated % of Security than 80% LTV Per the Loans with Greater Prospectus (Certificate) Prospectus than 80% LTV Understatement AMSI 2005‐R10 54.65% 60.19% 5.54% (AMSI 2005‐R10 A2B) Argent 2005‐W05‐2 43.32% 66.08% 22.96% (ARSI 2005‐W5 A2C) BOA Funding2006C‐2 3.18% 81.25% 61.34% (BAFC 2006‐C 2A1) BOA Funding2006E‐2 1.53% 56.25% 54.72% (BAFC 2006‐E 2A2) BOA Funding2006E‐3 0.00% 54.32% 54.32% (BAFC 2006‐E 3A1) BOA Funding2006F‐2 3.51% 58.82% 56.19% (BAFC 2006‐F 2A1) BOA Funding2006F‐3 3.57% 61.54% 26.11% (BAFC 2006‐F 3A1)
247 % of Loans with Greater Recalculated % of Security than 80% LTV Per the Loans with Greater Prospectus (Certificate) Prospectus than 80% LTV Understatement C‐BASS 2006‐CB4 40.56% 59.68% 17.43% (CBASS 2006‐CB4 AV3) Citigroup 06‐NC1‐2 46.26% 55.95% 9.99% (CMLTI 2006‐NC1 A2C) Citigroup 06‐WFHE2 48.32% 58.18% 9.86% (CMLTI 2006‐WFH2 A2B) Citigroup 06‐NC2‐2 44.38% 68.07% 23.69% (CMLTI 2006‐NC2 A2B) 1st Frkln06‐FF13‐2 36.37% 62.69% 27.81% (FFML 2006‐FF13 A2C) 1st Frkln06‐FF08‐2 27.00% 80.49% 53.49% (FFML 2006‐FF8 IIA3) 1st Frkln06‐FF12‐2 32.64% 73.48% 39.74% (FFML 2006‐FF12 A3) 1st Frkln06‐FF14‐2 35.56% 84.00% 48.76% (FFML 2006‐FF14 A5) 1st Frkln06‐FF10‐2 34.06% 68.00% 35.94% (FFML 2006‐FF10 A7) FirstHorizon06AR1‐2 1.29% 53.03% 50.22% (FHASI 2006‐AR1 2A1) Fremont 2005‐E‐2 43.65% 56.92% 13.60% (FHLT 2005‐E 2A3) GSAMP 2006‐NC2‐2 32.32% 63.33% 31.01% (GSAMP 2006‐NC2 A2C) Harborview2006‐02‐2 27.80% 30.81% 4.38% (HVMLT 2006‐2 2A1A) Harborview2006‐02‐3 0.00% 25.00% 25.00% (HVMLT 2006‐2 3A1A) INABS 2005‐D‐2 33.51% 59.76% 26.25% (INABS 2005‐D AII3) IndyMac 2006‐AR15 2.49% 58.54% 57.01% (INDX 2006‐AR15 A2) Master Asst06NC1 45.90% 58.04% 15.72% (MABS 2006‐NC1 A3) Morgan Stan06WMC2‐2 (MSAC 2006‐WMC2 45.46% 50.00% 4.54% A2C) Morgan Stan06‐HE5‐2 47.84% 65.38% 19.46% (MSAC 2006‐HE5 A2C) Morgan Stan06‐HE6‐2 44.27% 60.48% 16.21% (MSAC 2006‐HE6 A2C) Option One 05‐5‐2 56.07% 62.20% 6.13% (OOMLT 2005‐5 A3)
248 % of Loans with Greater Recalculated % of Security than 80% LTV Per the Loans with Greater Prospectus (Certificate) Prospectus than 80% LTV Understatement RFC 2006‐SA02‐2 2.24% 48.24% 46.00% (RFMSI 2006‐SA2 2A1) RFC 2005‐KS12 43.66% 54.24% 10.57% (RASC 2005‐KS12 A2) SABR 2006‐FR3 43.49% 52.89% 9.40% (SABR 2006‐FR3 A2) SABR 2006‐NC3‐2 47.62% 57.75% 10.13% (SABR 2006‐NC3 A2B) Sequoia 2006‐01‐2 3.07% 58.46% 55.39% (SEMT 2006‐1 2A1) Sequoia 2006‐01‐3 0.95% 51.79% 50.84% (SEMT 2006‐1 3A1) WA Mutl 2006‐AR12‐1 10.58% 56.00% 45.42% (SARM 2005‐21 3A1) WFHET 2006‐3 47.12% 63.00% 15.88% (WFHET 2006‐3 A2) WFMBS 2006‐AR3 1.70% 65.69% 63.99% (WFMBS 2006‐AR3 A4)
626. The following table lists mortgage pools securing the PLMBS purchased by the
Bank in which the representation contained in the related Offering Documents with respect to the weighted average LTV of the mortgage pool securing those PLMBS was materially understated.
The weighted average LTV representation is significant because it provides the investor with an important gauge as to the overall riskiness of the mortgage pool.
Recalculated Security Weighted Average LTV As Weighted Average Prospectus (Certificate) Stated in Prospectus LTV Understatement AMSI 2005‐R10 (AMSI 2005‐R10 A2B) 80.49% 83.39% 2.90% BOA Funding2006C‐2 (BAFC 2006‐C 2A1) 72.79% 83.97% 11.18% BOA Funding2006E‐2 (BAFC 2006‐E 2A2) 72.59% 85.24% 12.65% BOA Funding2006E‐3 (BAFC 2006‐E 3A1) 69.84% 78.09% 8.25% BOA Funding2006F‐2 (BAFC 2006‐F 2A1) 73.56% 80.70% 7.14% BOA Funding2006F‐3 73.15% 78.96% 5.81%
249 Recalculated Security Weighted Average LTV As Weighted Average Prospectus (Certificate) Stated in Prospectus LTV Understatement (BAFC 2006‐F 3A1) 1st Frkln06‐FF13‐2 (FFML 2006‐FF13 A2C) 82.64% 87.73% 5.09% 1st Frkln06‐FF08‐2 (FFML 2006‐FF8 IIA3) 82.02% 87.84% 5.82% 1st Frkln06‐FF12‐2 (FFML 2006‐FF12 A3) 82.40% 87.35% 4.95% 1st Frkln06‐FF14‐2 (FFML 2006‐FF14 A5) 82.89% 90.47% 7.58% 1st Frkln06‐FF10‐2 (FFML 2006‐FF10 A7) 81.56% 87.93% 6.37% FHASI2006AR1‐2 (FHASI 2006‐AR1 2A1) 74.07% 77.16% 3.09% Harborview2006‐02‐2 (HVMLT 2006‐2 2A1A) 66.85% 72.35% 5.50% Harborview2006‐02‐3 (HVMLT 2006‐2 3A1A) 60.41% 66.62% 6.21% INABS 2005‐D‐2 (INABS 2005‐D AII3) 78.84% 81.63% 2.79% IndyMac 2006‐AR15 (INDX 2006‐AR15 A2) 75.97% 78.32% 2.35% RFC 2006‐SA02‐2 (RFMSI 2006‐SA2 2A1) 72.68% 75.40% 2.72% Sequoia 2006‐01‐2 (SEMT 2006‐1 2A1) 73.08% 82.59% 9.51% Sequoia 2006‐01‐3 (SEMT 2006‐1 3A1) 72.39% 80.17% 7.78% WFMBS 2006‐AR13 (WFMBS 2006‐AR13 A2) 68.79% 78.43% 9.64%
C. Defendants Misrepresented the Occupancy Status Rates.
1. The Materiality of Occupancy Status Rates
627. Residential real estate can be divided into the following occupancy status categories: primary residences, second homes, and investment properties. Mortgages on primary residences are less risky because they are less likely to default than mortgages on non-owner- occupied residences. Thus, the percentage of loans in the asset pool of a securitization that are secured by mortgages on other than primary residences is a key indicator of the risk of
250 certificates sold in the securitization. Occupancy status rates also influence prepayment patterns
(which in turn affects the timing and payments on the PLMBS certificates).
628. For these reasons, the occupancy status of the collateral backing the mortgages in loan pools was material to the Bank’s decision to invest in the PLMBS certificates. The Offering
Documents for each of the PLMBS contained specific assertions as to the occupancy status rates of the mortgages backing the PMLBS.
2. Evidence Demonstrating Misstatements about the Occupancy Status Rates
629. The following table lists mortgage pools securing the PLMBS purchased by the
Bank, sets forth the assertion contained in the related Offering Documents with respect to the percentage of the mortgages that were on properties that were not the borrower's primary residence, and sets forth the non-primary residence occupancy status rates generated by a review of information contained in various public and private databases. The databases reviewed contain information regarding, inter alia, the address to which borrower’s tax bills were sent, the addresses used by borrower’s other creditors to send billings, whether borrowers claimed the property as a homestead under applicable law, and whether borrowers owned other properties of record and how the amount of the subject loan compared to the amounts of mortgage loans on other properties owned. Defendants should have known, as set forth in the following table, that the occupancy status rates set forth in the Offering Documents for the PLMBS listed below were materially misstated, and materially misled the Bank regarding the true risk of the certificates it
purchased:
251 % of Mortgage on Non‐ % of Mortgages on Primary Non‐Primary Security Residence Per Residence Per Prospectus (Certificate) Prospectus Database Review Understatement AMSI 2005‐R10 (AMSI 2005‐R10 A2B) 1.77% 7.50% 5.73% Argent 2005‐W05‐2 (ARSI 2005‐W5 A2C) 3.37% 14.31% 10.94% BOA Funding2006E‐2 (BAFC 2006‐E 2A2) 12.93% 16.55% 3.62% BOA Funding2006F‐2 (BAFC 2006‐F 2A1) 10.82% 12.99% 2.17% C‐BASS 2006‐CB4 (CBASS 2006‐CB4 AV3) 7.18% 10.11% 2.93% Citigroup 06‐NC1‐2 (CMLTI 2006‐NC1 A2C) 10.38% 16.09% 5.71% Citigroup 06‐WFHE2 (CMLTI 2006‐WFH2 A2B) 8.48% 9.15% 0.67% Citigroup 06‐WFHE4 (CMLTI 2006‐WFH4 A3) 10.08% 13.60% 3.52% Citigroup 06‐NC2‐2 (CMLTI 2006‐NC2 A2B) 10.49% 14.85% 4.36% 1st Frkln06‐FF13‐2 (FFML 2006‐FF13 A2C) 5.57% 14.85% 9.28% 1st Frkln06‐FF08‐2 (FFML 2006‐FF8 IIA3) 8.15% 13.79% 5.64% 1st Frkln06‐FF12‐2 (FFML 2006‐FF12 A3) 5.41% 10.90% 5.49% 1st Frkln06‐FF14‐2 (FFML 2006‐FF14 A5) 5.66% 10.96% 5.30% 1st Frkln06‐FF10‐2 (FFML 2006‐FF10 A7) 5.94% 12.88% 6.94% FirstHorizon06AR1‐2 (FHASI 2006‐AR1 2A1) 5.17% 11.37% 6.20% Fremont 2005‐E‐2 (FHLT 2005‐E 2A3) 2.09% 19.21% 17.12% Harborview2006‐02‐3 (HVMLT 2006‐2 3A1A) 1.10% 9.87% 8.77% INABS 2005‐D‐2 (INABS 2005‐D AII3) 5.20% 9.25% 4.05% Morgan Stan06WMC2‐2 (MSAC 2006‐WMC2 A2C) 4.16% 22.76% 18.60% Morgan Stan06‐HE5‐2 (MSAC 2006‐HE5 A2C) 7.53% 9.60% 2.07%
252 % of Mortgage on Non‐ % of Mortgages on Primary Non‐Primary Security Residence Per Residence Per Prospectus (Certificate) Prospectus Database Review Understatement Nomura 2006‐WF1 (NHELI 2006‐WF1 A3) 2.69% 11.24% 8.55% Option One 05‐5‐2 (OOMLT 2005‐5 A3) 8.45% 10.94% 2.49% RFC 2006‐SA02‐2 (RFMSI 2006‐SA2 2A1) 5.20% 9.42% 4.22% SABR 2006‐FR3 (SABR 2006‐FR3 A2) 6.00% 12.24% 6.24% SABR 2006‐NC3‐2 (SABR 2006‐NC3 A2B) 9.58% 12.15% 2.57% Sequoia 2006‐01‐2 (SEMT 2006‐1 2A1) 6.14% 13.23% 7.09% Sequoia 2006‐01‐3 (SEMT 2006‐1 3A1) 6.40% 10.08% 3.68% WFHET 2006‐3 (WFHET 2006‐3 A2) 10.39% 13.05% 2.66% WFMBS 2006‐AR3 (WFMBS 2006‐AR3 A4) 5.78% 11.94% 6.16%
630. Furthermore, unbeknownst to the Bank, as described supra §§ IV.B. and IV.C.,
borrower deception with respect to occupancy status, often encouraged by unscrupulous loan
originators, was commonplace during the relevant period among the originators of the mortgages
that secured the PLMBS.
D. Defendants’ Statements Regarding the AAA Rating of the PLMBS Were False and Misleading.
1. The Materiality of the Credit Rating Process and Ratings
631. The Bank only was authorized to purchase investment grade, AAA-rated tranches
of the certificates. Hence, the ratings issued by the Credit Rating Agencies were manifestly material to the Bank’s decision to purchase the PLMBS at issue in this case. The ratings were not mere subjective opinions, rather they were factual representations that purported to assess the risk of the certificates based on factual information pertaining to the loans in the mortgage pools
253 and modeling based on this factual information and the likelihood that the bank would receive
the payments contemplated by the certificates. Thus, the ratings provided material information for investors, including the Bank.
2. False Representations That the Certificates the Bank Purchased Would Not Be Issued Unless They Earned AAA Ratings
632. As alleged above, the Rating Agencies knew, and the Defendants should have known, that the ratings were unreliable and substantially understated the riskiness of the
mortgage loans which underlie the PLMBS. Consequently, the Rating Agencies knew, and the
Defendants should have known, that the PLMBS certificates did not in fact possess the
characteristics necessary to qualify for accurate, bona fide AAA ratings.
633. All the Offering Documents for the PLMBS in this action stated that it was “a
condition to the issuance of the offered certificates” purchased by the Bank that those certificates
received AAA ratings.11 The representation that the certificates the Bank purchased would not
have been issued unless they had received AAA ratings was misleading because the certificates
had not received accurate, bona fide AAA ratings. The AAA ratings the certificates received
were fundamentally flawed because they were based on information about the underlying assets
that was factually inaccurate.
3. Misstatements about the Credit Rating Process and Ratings
634. The Offering Documents misstated and omitted information about the ratings issued by the Credit Rating Agencies and the rating process. Each Prospectus contained disclosures regarding the ratings process and the purpose and bases of the ratings. Appendix IV
11 See e.g., AMSI 2005-R10 Pros. Sup. S-92; BAFC 2006-C Pros. Sup. S-68; FFML 2006-FF13 Pros. 127; HVMLT 2006-2 Pros. Sup. S-142; OOMLT 2005-5 Pros. Sup. S-105; SEMT 2006-1 Pros. Sup. S-105; WFMBS 2006-AR3 Pros. Sup. S-51.
254 attached hereto and incorporated herein sets forth those statements and omissions. For example,
Ticker # JPMMT 2006-A5, Supplement to Prospectus, dated April 24, 2006, states:
The ratings assigned to mortgage pass through certificates address the likelihood of the receipt of all payments on the mortgage loans by the related Certificate holders under the agreements pursuant to which such certificates are issued. Such ratings take into consideration the credit quality of the related mortgage pool, including any credit support providers, structural and legal aspects associated with such certificates, and the extent to which the payment stream on the mortgage pool is adequate to make the payments required by such certificates. Ratings on such certificates do not, however, constitute a statement regarding frequency of prepayments of the Mortgage Loans.
635. These disclosures, however, were incomplete, inaccurate, and misleading.
Specifically, the Offering Documents misrepresented and omitted the following material information:
• The ratings did not “take into consideration the credit quality of the mortgage pool,” because the credit ratings were based on false factual information about the underwriting standards, the “appraisals” and their resulting loan-to-value ratios, and similar characteristics of the loan.
• The ratings did not “address the likelihood of the receipt of all payments on the mortgage loans by the related Certificate holders,” because—for the reasons just given—the ratings did not take into consideration the true characteristics of the mortgage loans, and thus could not address the true likelihood of the receipt of distribution on those loans.
• The Offering Documents did not disclose the Credit Rating Agencies’ conflicts of interest, which compromised the rating process;
• The Offering Documents did not disclose the manipulation of the credit rating process and “ratings shopping” by issuers and underwriters;
• The Offering Documents did not disclose that the credit ratings were based on false and misleading information with respect to underwriting standards, loan-to- value ratios and other matters pertaining to the mortgages that secured the PLMBS purchased by the Bank;
• The Offering Documents did not disclose the scope and limitations of the Credit Rating Agencies’ rating models, including that they relied on outdated data and failed to adequately protect against misinformation provided by issuers and borrowers;
255 • The Offering Documents did not disclose that the investment grade ratings given to the PMLBS were not, in fact, comparable to investment-grade ratings given to corporate bonds or other instruments;
• The Offering Documents did not disclose that the investment grade ratings stated and discussed in Offering Documents failed to reflect the true credit risk of the PLMBS purchased by the Bank.
636. In sum, the ratings provided by the Credit Rating Agencies did not in fact assess the likelihood of the receipt of all payments on the mortgage loans by the related certificate holders under the agreements pursuant to which such certificates are issued, the credit quality of the related mortgage pool, or the extent to which the payment stream on the mortgage pool was adequate to make the payments required by such certificates. As a result, the statements in the
Offering Documents regarding the ratings assigned by the Credit Rating Agencies and the rating process materially misled the Bank regarding the true risk of the certificates it purchased.
4. Evidence Demonstrating Misstatements about the Ratings and Ratings Process
637. As alleged in detail above, see supra § IV.F, the credit rating process was subject to false information about underwriting standards, conflicts of interest, issuer and underwriter manipulation, inflated appraisals, and faulty and outdated models. Furthermore, as alleged above, the Depositors/Issuers manipulated the rating process through ratings shopping, their direct involvement in the rating process, and their knowledge that the loan pools were of far worse quality than they represented to the Rating Agencies. As set forth above, these allegations are all well-documented in government investigations, other litigation, and press reports. This evidence—and the allegations herein based on this evidence—demonstrates that the statements in the Offering Documents regarding the ratings and the rating process are false and misleading.
638. In addition, the en masse downgrade of the PLMBS purchased by the Bank from
AAA to junk status indicates that the initial ratings were incorrect and without any legitimate
256 basis. Likewise, delinquency and foreclosure rates indicate that the PLMBS were far riskier and
more prone to loss than the initial ratings indicated. As explained above, Defendants, by virtue
of their access to information held by their corporate affiliates, their intimate involvement in the
securitization process, and their own due diligence, see supra § IV.D.4, had access to ample
information about the quality of the loan pools and should have known that the bundled
certificates, even though tranched and credit-enhanced, did not possess the characteristics of a
AAA-rated investment; that the AAA rating that was obtained as a result of the
Depositor/Issuers’ and the Underwriters’ influence over the ratings process; and that the rating
was the direct product of inaccurate information about the underwriting standards actually used
in originating the mortgages backing the PLMBS. Defendants failed to state that the ratings
were unreliable as a result of the Rating Agencies’ failure to take into account the actual
underwriting standards being used by mortgage originators, that the Defendants had access to
important information about the characteristics and quality of the loans in the loan pools that was not shared with the Rating Agencies, that the models used to produce the credit ratings were inaccurate and outdated, that the ratings were the product of manipulation and conflicts of interest, and that the ratings were not anywhere near as reliable as the ratings given to other financial instruments such as corporate bonds. As a result, the rating misrepresented the risk of the PLMBS purchased by the Bank.
639. The following table sets forth the original face amounts and ratings of the PLMBS the subject of this action, and the first date on which such securities’ ratings were downgraded to below investment grade:
257 Date First Downgrade to Moody’s S&P Fitch Original Face Original Original Original Junk Ticker Value Rating Rating Rating Status AMSI 2005-R10 A2B $10,000,000 Aaa AAA AAA ARSI 2005-W5 A2C $25,000,000 Aaa AAA AAA 3/24/09 BAFC 2006-C 2A1 $159,073,000 n/a AAA AAA 7/21/09 BAFC 2006-E 2A2 $201,149,000 n/a AAA AAA 7/1/09 BAFC 2006-E 3A1 $72,054,000 n/a AAA AAA 7/1/09 BAFC 2006-F 2A1 $192,425,000 n/a AAA AAA 4/6/09 BAFC 2006-F 3A1 $97,840,000 n/a AAA AAA 7/8/09 CBASS 2006-CB4 AV3 $20,000,000 Aaa AAA AAA 3/16/09 CMLTI 2006-NC1 A2C $20,000,000 Aaa AAA n/a 3/19/09 CMLTI 2006-WFH2 A2B $141,817,000 Aaa AAA n/a 3/19/09 CMLTI 2006-WFH4 A3 $8,600,000 Aaa AAA n/a 3/19/09 CMLTI 2006-NC2 A2B $60,000,000 Aaa AAA n/a 4/4/08 FFML 2006-FF13 A2C $70,000,000 Aaa AAA n/a 12/16/08 FFML 2006-FF8 IIA3 $20,000,000 Aaa AAA n/a 3/19/09 FFML 2006-FF12 A3 $16,000,000 Aaa AAA AAA FFML 2006-FF12 A4 $96,096,000 Aaa AAA AAA 6/12/09 FFML 2006-FF14 A5 $70,000,000 Aaa AAA AAA 9/22/08 FFML 2006-FF10 A7 $73,031,000 Aaa AAA AAA 3/19/09 FHASI 2006-AR1 2A1 $85,111,000 n/a AAA AAA 7/8/09 FHLT 2005-E 2A3 $25,000,000 Aaa AAA AAA 6/12/09 GMACM 2006-AR2 2A1 $151,856,000 n/a AAA AAA 4/6/09 GMACM 2006-AR2 4A1 $42,060,700 n/a AAA AAA 9/10/09 GSAMP 2006-NC2 A2C $36,900,000 Aaa AAA n/a 10/23/08 HVMLT 2006-2 2A1A $235,610,000 n/a AAA AAA 7/8/09 HVMLT 2006-2 3A1A $49,102,000 n/a AAA AAA 8/6/09 INABS 2005-D AII3 $12,500,000 Aaa AAA AAA 6/12/09 INDX 2006-AR15 A2 $60,000,000 Aaa AAA n/a 1/29/09 MABS 2006-NC1 A3 $19,650,000 Aaa AAA AAA 3/20/09 MSAC 2006-WMC2 A2C $25,000,000 Aaa AAA AAA 4/16/08 MSAC 2006-HE5 A2C $20,000,000 Aaa AAA AAA 11/24/08 MSAC 2006-HE6 A2C $20,000,000 Aaa AAA AAA 10/30/08 NHELI 2006-WF1 A3 $31,357,000 Aaa AAA AAA 6/12/09 OOMLT 2005-5 A3 $15,000,000 Aaa AAA AAA OOMLT 2006-2 2A3 $36,552,000 Aaa AAA n/a 3/17/09 RFMSI 2006-SA2 2A1 $310,023,000 n/a AAA AAA 4/6/09 RASC 2005-KS12 A2 $50,000,000 Aaa AAA n/a 4/6/10 SABR 2006-FR3 A2 $30,000,000 Aaa AAA AAA 6/12/09 SABR 2006-NC3 A2B $8,000,000 Aaa AAA AAA 11/21/08 SEMT 2006-1 2A1 $105,230,000 n/a AAA AAA 7/1/09 SEMT 2006-1 3A1 $378,716,000 n/a AAA AAA 7/1/09 SARM 2005-21 3A1 $67,709,000 Aaa AAA n/a 2/20/09
258 Date First Downgrade to Moody’s S&P Fitch Original Face Original Original Original Junk Ticker Value Rating Rating Rating Status WFHET 2006-3 A2 $12,500,000 Aaa AAA AAA 3/23/09 WFMBS 2006-AR3 A4 $125,000,000 n/a AAA AAA 9/10/09
E. Defendants Misrepresented the Mortgage Originators’ Compliance with Predatory Lending Restrictions.
1. The Materiality of Predatory Lending Practices and the Issuance of Loans that Violate Other State and Federal Lending Statutes.
640. As a matter of policy, the Bank was not permitted to purchase PLMBS backed by
mortgage pools that contained predatory loans.
641. Accordingly, the Bank insisted as an absolute requirement that as to any security
it purchased the issuer warrant that none of the underlying mortgages violated any state or
federal law concerning predatory lending. Representations and warranties regarding compliance
with predatory lending laws are generally contained in either a Mortgage Loan Purchase
Agreement (MLPA) or a Pooling and Service Agreement (PSA) executed prior to the
securitization of the mortgages.
642. Prior to purchasing any of the subprime PLMBS, the Bank reviewed the “reps and
warranties” contained in either the actual agreements for each bond or the agreements from prior
closed transactions that were presented to the Bank as containing “reps and warranties” that
would be substantially similar to those included in the final agreements executed for each
PLMBS it purchased. Additionally, each subprime PLMBS Prospectus contained either the required “rep and warranty” regarding predatory lending or a representation that such a “rep and warrant” would be contained in the relevant MLPA or PSA for each bond.
259 643. Thus, statements in the Offering Documents representing and warranting that the subprime mortgage pools did not contain loans that violated state or federal predatory lending laws were material to the Bank’s decision to purchase the PLMBS from Defendants.
2. Misstatements about Predatory Lending Compliance
644. The Offering Documents contained material untrue or misleading statements and
omissions regarding compliance with applicable predatory lending laws. As an example of the type of representations and warranties reviewed by the Bank prior to the purchased of each
PLMBS, Amendment No. 2 to the Flow Mortgage Loan Purchase and Warranties Agreement backing bond FFML 2006-FF13 A2C, dated January 20, 2006, between Goldman Sachs
Mortgage Co., the Purchaser (the Sponsor), and First Franklin Financial Corp., the Seller (the
Originator), includes a provision stating:
Any and all requirements of any applicable federal, state or local law, including, without limitation, usury, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity and disclosure laws, all applicable predatory and abusive lending laws, or unfair and deceptive practice laws applicable to the Mortgage Loans, including with limitation, any applicable provision relating to prepayment penalties, have been complied with . . . .
645. Substantively identical provisions were included in the MLPAs and PSAs reviewed by the Bank and relied upon prior to the purchase of each PLMBS. Additionally, representations that substantively similar “reps and warranties” would be included in the MLPAs and PSAs executed for each PLMBS purchased by the Bank were included in each Prospectus.
Appendix V attached hereto and incorporated herein sets forth those statements.
260 3. Evidence Demonstrating Misstatements about Predatory Lending Practices of the Mortgage Originators
a. Government investigations, actions and settlements, confidential witnesses and evidence developed in other private lawsuits demonstrate predatory lending by the mortgage originators.
646. As alleged in detail above, predatory lending practices by mortgage originators, including those who issued the loans backing the PLMBS purchased by the Bank, is well- documented in government investigations and lawsuits, press reports, and statements of confidential witnesses who are former employees of the mortgage originators. Additional evidence has been generated by the many other private lawsuits against many of the same
Defendants in connection with the sale of MBS and related certificates. This evidence – and the allegations herein based on this evidence – demonstrates that the statements in the Offering
Documents regarding compliance with state and federal predatory lending rules are false and misleading. Contrary to the representations in the Offering Documents, the mortgage originators underlying these PLMBS engaged in predatory lending, and often issued loans to borrowers who lacked the ability to make the required payments, and without regard to such ability. Eleven of the sixteen lenders classified by the OCC as the “worst of the worst” based on foreclosure rates in the ten hardest hit metropolitan areas issued loans that backed PLMBS purchased by the Bank.
b. Analysis of loans that backed the PLMBS purchased by the Bank demonstrate that loans in the mortgage pools were the result of predatory lending.
647. An examination of the underlying mortgage loans that back the PLMBS purchased by the Bank provides strong evidence of the violation of predatory lending restrictions
by the mortgage originators. This evidence takes several forms. First, given that the issuance of
a loan to a borrower who is not qualified for the loan is itself a form of predatory lending, high
rates of delinquency in the mortgage pools suggest predatory lending. Hence the data presented
261 in paragraphs 591 and 592 provides strong evidence of predatory lending practices of the
mortgage originators who issued loans that back the PLMBS purchased by the Bank.
648. For many of the securities purchased by the Bank, the data is telling. For example,
with respect to the two securities that included loans originated by Fremont Savings & Loan,
total delinquency for the Fremont loans averaged over 54%, and foreclosures averaged over
25%. Likewise, for New Century, total delinquency averaged over 55% and foreclosures over
23%. Overall, for the loans (both prime and subprime) backing the PLMBS purchased by the
Bank, delinquency averages were over 42%, and foreclosures were over 18%.
649. This analysis demonstrates that the representation and warranty of no predatory
lending or high-cost loans made with respect to that pool are materially inaccurate and
misleading.
F. Defendants Misrepresented the Due Diligence Performed on the Mortgage Pools that Backed the PLMBS Purchased by the Bank.
1. The Materiality of Due Diligence on the Mortgage Pools
650. As alleged in detail above, the Bank did not have access to the loan file information generated at the time the loans were issued; only the Defendants had access to this information. Consequently, the Bank was dependent on representations made by the Defendants regarding the quality of the mortgage loans backing the PLMBS it purchased.
651. Defendants made two types of representations regarding the acquisition of mortgages that were originated by third-party originators. First, the Defendants represented that certain of the originators that are identified in the Offering Documents conducted post-purchase due diligence reviews of a sampling of mortgages they acquired from third-party originators.
Second, with respect to certain PLMBS backed by mortgages acquired by sponsors from unaffiliated originators, the Defendants represented that the sponsors conducted due diligence
262 reviews of the mortgages prior to their acquisition and securitization. In both cases, these due diligence reviews allegedly were undertaken to ensure that the mortgages were of adequate credit quality and that they were underwritten in compliance with applicable underwriting standards.
652. The representations regarding the underwriting standards employed by the originators and those regarding the sponsor’s due diligence reviews of the mortgage loans provided the Bank with critical reassurances that the overall credit quality of the mortgage pools securing the PLMBS it purchased were as represented in the Offering Documents. The Bank relied on these representations in making its decisions to purchase these certificates.
2. Misstatements about Due Diligence
653. The Prospectuses provided to the Bank contained material untrue or misleading statements and omitted material information regarding the due diligence purportedly conducted by the Sponsors and Originators when they acquired mortgages from third-party originators. For example, Banc of America Funding 2006-F Trust Prospectus Supplement, provides the following with respect to mortgages acquired by Wells Fargo from third-parties:
The contractual arrangements with Correspondents may . . . involve the delegation of all underwriting functions to . . . Correspondents, which will result in Wells Fargo Bank not performing any underwriting functions prior to acquisition of the loan but instead relying on . . . , in the case of bulk purchase acquisitions from such Correspondents, Wells Fargo Bank's post-purchase reviews of samplings of mortgage loans acquired from such Correspondents regarding the Correspondents' compliance with Wells Fargo Bank's underwriting standards. In all instances, however, acceptance by Wells Fargo Bank is contingent upon the loans being found to satisfy Wells Fargo Bank's program standards or the standards of a pool insurer.
BAFC 2006-F Pros. Sup. S-30. Substantively similar provisions regarding a mortgage
Originator’s due diligence reviews of acquired mortgages were included in the Prospectuses for many of the PLMBS purchased by the Bank. Appendix VI attached hereto and incorporated herein sets forth those statements.
263 654. Additionally, as an example of the representations made regarding a Sponsor’s due diligence reviews of acquired mortgages, Ticker # CBASS 2006-CB4 AV3, Supplement to
Prospectus, dated April 24, 2006, provides:
The Sponsor or a loan reviewer reviewed a substantial majority of the files related to the Mortgage Loans in connection with the acquisition of the Mortgage Loans by the Sponsor for credit, compliance and property value considerations. These files may include the documentation pursuant to which the mortgage loan was originally underwritten, as well as the mortgagor’s payment history on the mortgage loan. In its review, the Sponsor evaluates the mortgagor’s credit standing, repayment ability and willingness to repay debt, as well as the value and adequacy of the mortgaged property as collateral.
655. Substantively similar provisions were included in the Prospectuses for many of the PLMBS purchased by the Bank. Appendix VI attached hereto and incorporated herein sets forth those statements. These statements were materially misleading because they omit to state the following information:
• The sponsors and originators routinely manipulated the due diligence process by determining the type and scope of review performed and pressuring the third- party due diligence firms to ignore deviations from the applicable underwriting criteria without regard to whether “compensating factors” were present;
• The level of due diligence performed by sponsors and originators of mortgages backing PLMBS deviated substantially from the level of due diligence performed by purchasers of mortgages who retained those mortgages as investments;
• The sponsors did not undertake any legitimate effort to determine whether the originators had satisfied their stated underwriting guidelines or the sponsor’s purported standards; and instead allowed defective loans to be included in the loan pools for securitization;
• Due diligence review conducted by third-party underwriters often overlooked questionable claims by borrowers in stated income and other reduced documentation loans;
• The third-party underwriters informed the sponsors and originators that a substantial percentage of loans in the loans pools backing PLMBS were defective;
• The sponsors and originators nonetheless waived the defects as to a substantial percentage of these loans;
264 • In many cases, these reportedly defective loans were not removed from PLMBS deals, but rather were used by the sponsors to negotiate lower prices for the pools of mortgages they acquired and subsequently securitized; and
• Where defective loans in the sample were removed from the pool, no further review was conducted to ensure that none of the remaining 90% of the mortgages was plagued by similar defects as those in the sample.
3. Evidence of Misstatements about Due Diligence
656. As alleged in detail above, see supra §§ IV.D.4 and IV.D.5, the manipulation and
disregard of the third-party due diligence process by sponsors and originators of mortgages
backing PLMBS, including those PLMBS purchased by the Bank, is documented in public
testimony and press reports, as well as confidential witness testimony discussed above. This
evidence – and the allegations herein based on this evidence – demonstrate that the statements in and omissions from the Offering Documents regarding the due diligence review process were materially false and misleading.
G. Defendants Misrepresented That Mortgages and Mortgage Loans Were Validly Assigned and Transferred to the Issuing Trusts
1. The Materiality of Valid Assignment and Transfer
657. PLMBS have value because they are backed by income streams from loans and by the collateral that secure the loans. If mortgage notes and mortgages are not enforceable by the trust that issues the PLMBS, then the PLMBS have no value. For that reason, the valid
assignment and transfer of mortgage notes and mortgages in accordance with the procedures laid
out in the Offering Documents was material to the Bank’s decision to purchase the PLMBS
certificates at issue here.
2. Misstatements Regarding Procedures for Valid Assignment and Transfer
658. The Offering Documents misrepresented that all promissory notes had been or
would be validly transferred to the trusts that issued the PLMBS certificates.
265 659. By way of example, the Offering Documents for SARM 2005-21 state:
The Mortgage Loans will be assigned to the Trustee, together with all principal and interest received with respect to the Mortgage Loans on and after the Cut-off Date . . . . As to each Mortgage Loan, the following documents are generally required to be delivered to the Trustee (or its custodian) in accordance with the Trust Agreement: (1) the related original Mortgage Note endorsed without recourse to the Trustee or in blank . . . .
[T]he depositor will, as to each Mortgage Loan, deliver or cause to be delivered to the trustee, or a custodian on behalf of the trustee . . . the mortgage note endorsed without recourse to the order of the trustee or in blank . . . . The trustee, or the custodian, will hold the documents in trust for the benefit of the securityholders . . . . The trustee, its agent or a custodian will review the documents related to each Mortgage Loan within the time period specified in the related Agreement after receipt thereof, and the trustee will hold the documents in trust for the benefit of the securityholders. Unless otherwise specified in the prospectus supplement, if any document is found to be missing or defective in any material respect, the trustee (or the custodian) will [demand repurchase or substitution of the defective loan, if the defect cannot be timely cured].
SARM 2005-21 Pros. Sup. S-72; SARM 2005-21 Pros. 81-82.
660. As Kemp and other cases show, the procedure specified in the Offering
Documents was not followed. Mortgage notes were not properly endorsed by the originators, such that the depositor could in turn properly endorse the note. Possession of the notes was not transferred to the trustee, custodian, or agent of the trustee.
661. Further, where the procedure was not followed, the defective loans have not been repurchased or substituted, as represented in the Offering Documents.
662. The Offering Documents also misrepresented that all mortgages had been or would be validly assigned to the trusts that issued the PLMBS certificates.
663. By way of example, the Offering Documents for both OOLMT 2005-5 and
OOLMT 2006-2 state:
266 The Pooling Agreement will require that, within the time period specified therein, the Depositor will deliver or cause to be delivered to the Trustee (or a custodian, as the Trustee’s agent for such purpose) . . . the Related Documents.12 In lieu of delivery of original Mortgages . . . , if such original is not available or lost, the Depositor may deliver or cause to be delivered true and correct copies thereof . . . . Within 45 days of the Closing Date, the Trustee will review . . . the Related Documents . . . and if any . . . Related Document is found to be defective in any material respect[, repurchase or substitution of the defective loan will be demanded, if the defect cannot be timely cured].
[T]he Depositor will . . . deliver, or cause to be delivered, to the related Trustee (or to the custodian described below) . . . an assignment of the Mortgage in blank or to the Trustee (or its nominee) in recordable form, together with any intervening assignments of the Mortgage with evidence of record thereon . . . .
OOLMT 2005-5 Pros. Sup. S-48; OOLMT 2005-5 Pros. 28; OOLMT 2006-2 Pros. Sup.,
Assignment of the Mortgage Loans; OOLMT 2006-2 Pros., Assignment of Trust Fund Assets.
664. As Ibanez shows, the procedure specified here was not followed. The mortgages
were not properly assigned and physical transfer of the mortgages was not effected.
665. Further, where the procedure was not followed, the defective loan was not
repurchased or substituted, as represented in the Offering Documents.
3. A Material Number of Mortgages and Mortgage Notes Were Not Validly Transferred or Assigned to the Issuing Trusts in Accordance with the Offering Documents
666. As alleged above, see supra § IV.G, a material number of the promissory notes backing the PLMBS were not validly transferred to the trust in accordance with the procedures outlined in the Offering Documents, as is necessary before those notes can be enforced under applicable state law. Where those procedures were not followed, the defective loan was not repurchased or substituted, as represented in the Offering Documents.
12 “Related Documents” are defined by the Offering Documents as including the “Mortgage, [and] assignment of Mortgage in recordable form in blank or to the Trustee.” OOLMT 2005-5 Pros. Sup. S-47; OOLMT 2006-2 Pros. Sup., Assignment of the Mortgage Loans.
267 667. As alleged above, see supra § IV.G, a material number of the mortgages backing the PLMBS were not validly assigned to the trust in accordance with the procedures outlined in the Offering Documents, as is necessary before those mortgages may be enforced under applicable state law. Where those procedures were not followed, the defective loan was not repurchased or substituted, as represented in the Offering Documents.
668. Thus, statements in relevant Offering Documents that mortgages and mortgage notes were validly assigned and transferred to the issuing trust in accordance with specified procedures—and that loans that were defective in this respect would be repurchased or substituted—were false and misleading.
VI. COUNTS
FIRST CAUSE OF ACTION
UNTRUE OR MISLEADING STATEMENTS IN THE SALE OF SECURITIES
(Illinois Securities Law, 815 ILCS § 5/12(F) & (G))
669. This cause of action is alleged jointly and severally against the following
Defendants in connection with the sale of the following securities:
Security Against Defendant As Barclays Capital Inc. Underwriter AMSI 2005-R10 A2B Greenwich Capital Markets, Inc. Underwriter J.P. Morgan Securities Inc. Underwriter Banc of America Securities LLC Underwriter Barclays Capital Inc. Underwriter ARSI 2005-W5 Greenwich Capital Markets, Inc. Underwriter A2C Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Bank of America Corporation Successor Banc of America Funding Corporation Depositor/Issuer Banc of America Securities LLC Underwriter BAFC 2006-C Controlling 2A1 Bank of America Corporation Person/Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor
268 Security Against Defendant As Banc of America Funding Corporation Depositor/Issuer Banc of America Securities LLC Underwriter BAFC 2006-E 2A2 Controlling Bank of America Corporation Person/Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Banc of America Funding Corporation Depositor/Issuer Banc of America Securities LLC Underwriter BAFC 2006-E 3A1 Controlling Bank of America Corporation Person/Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Banc of America Funding Corporation Depositor/Issuer Banc of America Securities LLC Underwriter BAFC 2006-F 2A1 Bank of America Corporation Controlling Person/Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Banc of America Funding Corporation Depositor/Issuer Banc of America Securities LLC Underwriter BAFC 2006-F 3A1 Controlling Bank of America Corporation Person/Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Merrill Lynch Mortgage Investors, Inc. Depositor/Issuer CBASS 2006-CB4 J.P. Morgan Securities Inc. Underwriter AV3 Merrill Lynch, Pierce, Fenner & Smith Incorporated Underwriter Bank of America Corporation Successor Citigroup Mortgage Loan Trust Inc. Depositor/Issuer CMLTI 2006-NC1 Citigroup Global Markets Inc. Underwriter A2C Citigroup Financial Products, Inc. Controlling Person Citigroup Inc. Controlling Person Citigroup Mortgage Loan Trust Inc. Depositor/Issuer CMLTI 2006-NC2 Citigroup Global Markets Inc. Underwriter A2B Citigroup Financial Products, Inc. Controlling Person Citigroup Inc. Controlling Person Citigroup Mortgage Loan Trust Inc. Depositor/Issuer CMLTI 2006- Citigroup Global Markets Inc. Underwriter WFH2 A2B Citigroup Financial Products, Inc. Controlling Person Citigroup Inc. Controlling Person Citigroup Mortgage Loan Trust Inc. Depositor/Issuer CMLTI 2006- Citigroup Global Markets Inc. Underwriter WFH4 A3 Citigroup Financial Products, Inc. Controlling Person Citigroup Inc. Controlling Person
269 Security Against Defendant As Financial Asset Securities Corp. Depositor/Issuer FFML 2006-FF8 Greenwich Capital Markets, Inc. Underwriter IIA3 National City Corporation Underwriter The PNC Financial Services Group, Inc. Successor NatCity Investments, Inc. Underwriter FFML 2006-FF10 A7 PNC Investments LLC Successor The PNC Financial Services Group, Inc. Sucessor NatCity Investments, Inc. Underwriter FFML 2006-FF12 A3 PNC Investments LLC Successor The PNC Financial Services Group, Inc. Sucessor NatCity Investments, Inc. Underwriter FFML 2006-FF12 A4 PNC Investments LLC Successor The PNC Financial Services Group, Inc. Sucessor GS Mortgage Securities Corp. Depositor/Issuer Goldman, Sachs & Co. Underwriter NatCity Investments, Inc. Underwriter FFML 2006-FF13 A2C Goldman Sachs Mortgage Company Controlling Person The Goldman Sachs Group Inc. Controlling Person PNC Investments LLC Successor The PNC Financial Services Group, Inc. Sucessor NatCity Investments, Inc. Underwriter FFML 2006-FF14 A5 PNC Investments LLC Successor The PNC Financial Services Group, Inc. Sucessor First Horizon Asset Securities, Inc. Depositor/Issuer Banc of America Securities LLC Underwriter FHASI 2006-AR1 First Tennessee Bank, National Underwriter/Controlling 2A1 Association Person Bank of America Corporation Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Barclays Capital Inc. Underwriter Credit Suisse First Boston LLC Underwriter FHLT 2005-E 2A3 Greenwich Capital Markets, Inc. Underwriter UBS Securities LLC Underwriter Residential Asset Mortgage Products, Inc. Depositor/Issuer Residential Funding Securities GMACM 2006- Corporation Underwriter AR2 2A1 GMAC Inc. Controlling Person GMAC Mortgage Group Inc. Controlling Person Residential Asset Mortgage Products, Inc. Depositor/Issuer Residential Funding Securities GMACM 2006- Corporation Underwriter AR2 4A1 GMAC Inc. Controlling Person GMAC Mortgage Group Inc. Controlling Person
270 Security Against Defendant As GS Mortgage Securities Corp. Depositor/Issuer GSAMP 2006- Goldman, Sachs & Co. Underwriter NC2 A2C Goldman Sachs Mortgage Company Controlling Person The Goldman Sachs Group Inc. Controlling Person Greenwich Capital Acceptance, Inc. Depositor/Issuer Countrywide Securities Corporation Underwriter HVMLT 2006-2 2A1A Greenwich Capital Markets, Inc. Underwriter Greenwich Capital Holdings, Inc. Controlling Person Bank of America Corporation Successor Greenwich Capital Acceptance, Inc. Depositor/Issuer Countrywide Securities Corporation Underwriter HVMLT 2006-2 3A1A Greenwich Capital Markets, Inc. Underwriter Greenwich Capital Holdings, Inc. Controlling Person Bank of America Corporation Successor Credit Suisse First Boston LLC Underwriter INABS 2005-D Greenwich Capital Markets, Inc. Underwriter AII3 Morgan Stanley & Co. Incorporated Underwriter UBS Securities LLC Underwriter INDX 2006-AR15 A2 IndyMac MBS, Inc. Depositor/Issuer Mortgage Asset Securitization Depositor/Issuer MABS 2006-NC1 Transactions, Inc. A3 UBS Securities LLC Underwriter UBS Americas Inc. Controlling Person Morgan Stanley ABS Capital I Inc. Depositor/Issuer MSAC 2006-HE5 A2C Morgan Stanley & Co. Incorporated Underwriter Morgan Stanley Controlling Person Morgan Stanley ABS Capital I Inc. Depositor/Issuer Countrywide Securities Corporation Underwriter MSAC 2006-HE6 A2C Morgan Stanley & Co. Incorporated Underwriter Morgan Stanley Controlling Person Bank of America Corporation Successor Morgan Stanley ABS Capital I Inc. Depositor/Issuer MSAC 2006- WMC2 A2C Morgan Stanley & Co. Incorporated Underwriter Morgan Stanley Controlling Person Nomura Home Equity Loan, Inc. Depositor/Issuer NHELI 2006-WF1 Citigroup Global Markets Inc. Underwriter A3 Nomura Securities International, Inc. Underwriter Nomura Holding America Inc. Controlling Person
271 Security Against Defendant As Option One Mortgage Acceptance Corp. Depositor/Issuer Banc of America Securities LLC Underwriter Citigroup Global Markets Inc. Underwriter Greenwich Capital Markets, Inc. Underwriter H&R Block Financial Advisors, Inc. Underwriter HSBC Securities (USA) Inc. Underwriter J.P. Morgan Securities Inc. Underwriter
OOMLT 2005-5 A3
H&R Block, Inc. Controlling Person Option One Mortgage Corporation Controlling Person American Enterprise Investment Services, Inc. Successor Ameriprise Financial Services, Inc. Successor Bank of America Corporation Sucessor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Option One Mortgage Acceptance Corp. Depositor/Issuer Banc of America Securities LLC Underwriter Greenwich Capital Markets, Inc. Underwriter H&R Block Financial Advisors, Inc. Underwriter HSBC Securities (USA) Inc. Underwriter Merrill Lynch, Pierce, Fenner & Smith OOMLT 2006-2 Incorporated Underwriter/Successor 2A3 H&R Block, Inc. Controlling Person Option One Mortgage Corporation Controlling Person American Enterprise Investment Services, Inc. Successor Ameriprise Financial Services, Inc. Successor Bank of America Corporation Successor Residential Asset Securities Corporation Depositor/Issuer Banc of America Securities LLC Underwriter Greenwich Capital Markets, Inc. Underwriter Residential Funding Securities Corporation Underwriter RASC 2005-KS12 A2 GMAC Inc. Controlling Person GMAC Mortgage Group Inc. Controlling Person Bank of America Corporation Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor
272 Security Against Defendant As Residential Funding Mortgage Securities I, Inc. Depositor/Issuer RFMSI 2006-SA2 Goldman, Sachs & Co. Underwriter 2A1 GMAC Inc. Controlling Person GMAC Mortgage Group Inc. Controlling Person Securitized Asset Backed Receivables, SABR 2006-FR3 LLC Depositor/Issuer A2 Barclays Capital Inc. Underwriter Securitized Asset Backed Receivables, SABR 2006-NC3 LLC Depositor/Issuer A2B Barclays Capital Inc. Underwriter SARM 2005-21 3A1 UBS Securities LLC Underwriter Sequoia Residential Funding, Inc. Depositor/Issuer Banc of America Securities LLC Underwriter Countrywide Securities Corporation Underwriter SEMT 2006-1 2A1 Redwood Trust, Inc. Controlling Person Bank of America Corporation Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Sequoia Residential Funding, Inc. Depositor/Issuer Banc of America Securities LLC Underwriter Countrywide Securities Corporation Underwriter SEMT 2006-1 3A1 Redwood Trust, Inc. Controlling Person Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Bank of America Corporation Successor Wells Fargo Asset Securities Corporation Depositor/Issuer WFHET 2006-3 Barclays Capital Inc. Underwriter A2 Wells Fargo & Company Controlling Person Wells Fargo Bank, National Association Controlling Person Wells Fargo Asset Securities Corporation Depositor/Issuer WFMBS 2006- Morgan Stanley & Co. Incorporated Underwriter AR3 A4 Wells Fargo & Company Controlling Person Wells Fargo Bank, National Association Controlling Person
670. The Bank hereby incorporates by reference all of the allegations herein.
671. The Bank expressly excludes from this cause of action any allegation that could be construed as alleging fraud or intentional reckless conduct.
672. In doing the acts alleged in connection with the offer and sale to the Bank of the
Certificates in the securitizations referred to above, the Underwriter and Depositor/Issuer
273 Defendants violated 815 ILCS § 5/12(F) & (G) by: (i) engaging in transactions, practices, or
courses of business which worked or tended to work a fraud or deceit upon the Bank as the
purchaser of these securities; and (ii) obtaining money or property through the sale of securities by means of untrue statements of material fact or by omitting to state material facts necessary in
order to make the statements made, in the light of the circumstances under which they were
made, not misleading.
673. Defendants solicited the sale of these securities in Illinois, the Bank accepted the
offers of sale for these securities in Illinois, and the purchase and sale of these securities was
made in Illinois.
674. In connection with their offer and sale of these securities to the Bank, Defendants
made numerous Offering Documents available to the Bank at its office in Cook County. These
documents included the prospectus and prospectus supplement filed with the SEC for each
securitization, registration statements, summary term sheets, and other documents. In these
Offering Documents, Defendants made untrue or false statements of material fact about the
Certificates they offered and sold to the Bank.
675. In purchasing the Certificates that are the subject of this cause of action, the Bank
reasonably relied on Defendants’ business courses of action and the material misstatements and
material omissions incorporated in the documents provided by Defendants to the Bank.
676. Defendants’ deceptive business practices, misstatements, and omissions alleged
herein were material and were the cause of the Bank’s decision to purchase these Certificates. If
Defendants had not engaged in these materially deceptive practices, material misstatements, or
omission of material information, and had instead provided full and accurate disclosures, the
274 Bank would not have purchased – and in fact its own internal policies would have prevented it from purchasing – the Certificates at issue.
677. The Controlling Person Defendants named in this Count are “controlling persons” as defined by ILCS § 2.4, because these Defendants offered or sold the securities that are the subject of this action, or are members of a group of persons acting in concert in the offer or sale of these securities, and these Defendants own (and did own at the time of sale) beneficially either
(a) 25% or more of the outstanding voting securities of the respective Depositor/Issuer
Defendants as identified above where no other person owns or controls a greater percentage of such securities; and/or (b) such number of outstanding securities of the respective
Depositor/Issuer Defendants as would enable such person, or group of persons, to elect a majority of the board of directors or other managing body of such issuer. In the case of unincorporated Depositor/Issuer Defendants, the Controlling Person Defendants offered or sold the securities that are the subject of this action, or are members of a group of persons acting in concert in the offer or sale of these securities, directly or indirectly control the activities of the respective Depositor/Issuer Defendants as identified above.
678. As controlling persons under ILCS § 2.4, pursuant to ILCS § 13(A), the
Controlling Person Defendants are jointly and severally liable to the Bank for the violations of
815 ILCS § 5/12(F) & (G) by the Depositor/Issuer Defendants alleged herein.
679. With respect to the Successor Liability Defendants, this Count is alleged against:
(1) Successor Liability Defendant American Enterprise Investment Services, Inc. and/or
Ameriprise Financial Services, Inc. as the successor or successors in liability to underwriter
H&R Block Financial Advisors, Inc. with respect to Securities OOMLT 2005-5 A3 and OOMLT
2006-2 2A3; (2) The PNC Financial Services Group, Inc., as the successor in liability to
275 underwriter National City Corporation, d/b/a National City Capital Markets with respect to
Security FFML 2006-FF8 IIA3; (3) PNC Investments LLC, as the successor in liability to
underwriter NatCity Investments, Inc. with respect to Securities FFML 2006-FF14 A5, FFML
2006-FF13 A2C, FFML 2006-FF12 A3, FFML 2006-FF12 A4, and FFML 2006-FF10 A7; (4)
Merrill Lynch, Pierce, Fenner & Smith Inc., as the successor in liability to underwriter Banc of
America Securities LLC with respect to Securities ARSI 2005-W5 A2C, BACF 2006-C 2A1,
BAFC 2006-E 2A2, BAFC 2006-E 3A1, BAFC 2006-F 2A1, BAFC 2006-F 3A1, FHASI 2006-
AR1 2A1, OOMLT 2005-5 A3, OOMLT 2006-2 2A3, RASC 2005-KS12 A2, SEMT 2006-1
2A1 and SEMT 2006-1 3A1; (5) Bank of America Corporation as the successor in liability to underwriters Countrywide Securities Corp. or Merrill Lynch, Pierce, Fenner & Smith Inc., with respect to Securities CBASS 2006-CB4 AV3, HVMLT 2006-2 2A1A, HVMLT 2006-2 3A1A,
MSAC 2006-HE6 A2C, OOMLT 2006-2 2A3, SEMT 2006-1 2A1, SEMT 2006-1 3A1.
Underwriters H&R Block Financial Advisors, Inc., National City Corporation, d/b/a National
City Capital Markets, NatCity Investments, Inc., Countrywide Securities Corp., Merrill Lynch,
Pierce, Fenner & Smith Inc., and Banc of America Securities LLC are collectively referred to
herein as the “Succeeded Underwriters.” The Successor Liability Defendants are named herein by virtue of their assumption of the liabilities of the Succeeded Underwriters, and their status as successors-in-interest to the Succeeded Underwriters.
680. The Successor Liability Defendants are jointly and severally or otherwise vicariously liable for the wrongful conduct of their respective Succeeded Underwriters, as alleged herein, because they are the successors in liability to those entities by virtue of those entities’ merger with and into the respective Successor Liability Defendants and the Successor
276 Liability Defendants’ integration of and assumption of responsibility for the business of the merged entities, including responsibility for pre-merger liabilities.
681. This action is brought within two years after the discovery of the untrue and misleading statements or omissions in the prospectus, prospectus supplements, and other
Offering Documents that the Defendants sent to the Bank, or within two years after notice of facts which in the exercise of reasonable diligence would lead to actual knowledge of the alleged violation, and within five years of the Bank’s purchase of those Certificates, or within any applicable period as tolled by the pendency of other actions. Despite having exercised reasonable diligence, the Bank did not and could not reasonably have discovered earlier the untrue and misleading statements or omissions in the prospectus, prospectus supplements, and other Offering Documents and the other violations of the Illinois Securities Law alleged in this
Count.
682. The Bank has timely given notice in accordance with 815 ILCS § 5/13B to
Defendants of its election to void its purchases of the Certificates listed in this Count, and has offered to tender the securities to the seller or into court.
683. Under 815 ILCS § 5/13A(1), the Bank is entitled to void the transaction and have
Defendants pay the Bank, jointly and severally, the amount paid for each Certificate, plus interest, as set forth in 815 ILCS § 5/13A(1), less any amounts received by the Bank with respect to that Certificate.
SECOND CAUSE OF ACTION
SIGNING OR CIRCULATING SECURITIES DOCUMENTS THAT CONTAINED
MATERIAL MISREPRESENTATIONS
(Illinois Securities Law, 815 ILCS § 5/12(H)
277 684. This cause of action is alleged jointly and severally against the following
Defendants in connection with the sale of the following securities:
Security Against Defendant As Barclays Capital Inc. Underwriter AMSI 2005-R10 A2B Greenwich Capital Markets, Inc. Underwriter J.P. Morgan Securities Inc. Underwriter Banc of America Securities LLC Underwriter Barclays Capital Inc. Underwriter ARSI 2005-W5 Greenwich Capital Markets, Inc. Underwriter A2C Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Bank of America Corporation Successor Banc of America Funding Corporation Depositor/Issuer Banc of America Securities LLC Underwriter BAFC 2006-C Controlling 2A1 Bank of America Corporation Person/Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Banc of America Funding Corporation Depositor/Issuer Banc of America Securities LLC Underwriter BAFC 2006-E 2A2 Controlling Bank of America Corporation Person/Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Banc of America Funding Corporation Depositor/Issuer Banc of America Securities LLC Underwriter BAFC 2006-E 3A1 Controlling Bank of America Corporation Person/Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Banc of America Funding Corporation Depositor/Issuer Banc of America Securities LLC Underwriter BAFC 2006-F 2A1 Controlling Bank of America Corporation Person/Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Banc of America Funding Corporation Depositor/Issuer Banc of America Securities LLC Underwriter BAFC 2006-F 3A1 Controlling Bank of America Corporation Person/Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Merrill Lynch Mortgage Investors, Inc. Depositor/Issuer CBASS 2006-CB4 J.P. Morgan Securities Inc. Underwriter AV3 Merrill Lynch, Pierce, Fenner & Smith Incorporated Underwriter Bank of America Corporation Successor
278 Security Against Defendant As Citigroup Mortgage Loan Trust Inc. Depositor/Issuer CMLTI 2006-NC1 Citigroup Global Markets Inc. Underwriter A2C Citigroup Financial Products, Inc. Controlling Person Citigroup Inc. Controlling Person Citigroup Mortgage Loan Trust Inc. Depositor/Issuer CMLTI 2006-NC2 Citigroup Global Markets Inc. Underwriter A2B Citigroup Financial Products, Inc. Controlling Person Citigroup Inc. Controlling Person Citigroup Mortgage Loan Trust Inc. Depositor/Issuer CMLTI 2006- Citigroup Global Markets Inc. Underwriter WFH2 A2B Citigroup Financial Products, Inc. Controlling Person Citigroup Inc. Controlling Person Citigroup Mortgage Loan Trust Inc. Depositor/Issuer CMLTI 2006- Citigroup Global Markets Inc. Underwriter WFH4 A3 Citigroup Financial Products, Inc. Controlling Person Citigroup Inc. Controlling Person Financial Asset Securities Corp. Depositor/Issuer FFML 2006-FF8 Greenwich Capital Markets, Inc. Underwriter IIA3 National City Corporation Underwriter The PNC Financial Services Group, Inc. Successor NatCity Investments, Inc. Underwriter FFML 2006-FF10 A7 PNC Investments LLC Successor The PNC Financial Services Group, Inc. Successor NatCity Investments, Inc. Underwriter FFML 2006-FF12 A3 PNC Investments LLC Successor The PNC Financial Services Group, Inc. Successor NatCity Investments, Inc. Underwriter FFML 2006-FF12 A4 PNC Investments LLC Successor The PNC Financial Services Group, Inc. Successor GS Mortgage Securities Corp. Depositor/Issuer Goldman, Sachs & Co. Underwriter NatCity Investments, Inc. Underwriter FFML 2006-FF13 A2C Goldman Sachs Mortgage Company Controlling Person The Goldman Sachs Group Inc. Controlling Person PNC Investments LLC Successor The PNC Financial Services Group, Inc. Successor NatCity Investments, Inc. Underwriter FFML 2006-FF14 A5 PNC Investments LLC Successor The PNC Financial Services Group, Inc. Successor First Horizon Asset Securities, Inc. Depositor/Issuer Banc of America Securities LLC Underwriter FHASI 2006-AR1 First Tennessee Bank, National Underwriter/Controlling 2A1 Association Person Bank of America Corporation Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor
279 Security Against Defendant As Barclays Capital Inc. Underwriter Credit Suisse First Boston LLC Underwriter FHLT 2005-E 2A3 Greenwich Capital Markets, Inc. Underwriter UBS Securities LLC Underwriter Residential Asset Mortgage Products, Inc. Depositor/Issuer Residential Funding Securities GMACM 2006- Corporation Underwriter AR2 2A1 GMAC Inc. Controlling Person GMAC Mortgage Group Inc. Controlling Person Residential Asset Mortgage Products, Inc. Depositor/Issuer Residential Funding Securities GMACM 2006- Corporation Underwriter AR2 4A1 GMAC Inc. Controlling Person GMAC Mortgage Group Inc. Controlling Person GS Mortgage Securities Corp. Depositor/Issuer GSAMP 2006- Goldman, Sachs & Co. Underwriter NC2 A2C Goldman Sachs Mortgage Company Controlling Person The Goldman Sachs Group Inc. Controlling Person Greenwich Capital Acceptance, Inc. Depositor/Issuer Countrywide Securities Corporation Underwriter HVMLT 2006-2 2A1A Greenwich Capital Markets, Inc. Underwriter Greenwich Capital Holdings, Inc. Controlling Person Bank of America Corporation Successor Greenwich Capital Acceptance, Inc. Depositor/Issuer Countrywide Securities Corporation Underwriter HVMLT 2006-2 3A1A Greenwich Capital Markets, Inc. Underwriter Greenwich Capital Holdings, Inc. Controlling Person Bank of America Corporation Successor Credit Suisse First Boston LLC Underwriter INABS 2005-D Greenwich Capital Markets, Inc. Underwriter AII3 Morgan Stanley & Co. Incorporated Underwriter UBS Securities LLC Underwriter INDX 2006-AR15 IndyMac MBS, Inc. Depositor/Issuer A2 Mortgage Asset Securitization Depositor/Issuer MABS 2006-NC1 Transactions, Inc. A3 UBS Securities LLC Underwriter UBS Americas Inc. Controlling Person Morgan Stanley ABS Capital I Inc. Depositor/Issuer MSAC 2006-HE5 A2C Morgan Stanley & Co. Incorporated Underwriter Morgan Stanley Controlling Person Morgan Stanley ABS Capital I Inc. Depositor/Issuer Countrywide Securities Corporation Underwriter MSAC 2006-HE6 A2C Morgan Stanley & Co. Incorporated Underwriter Morgan Stanley Controlling Person Bank of America Corporation Successor
280 Security Against Defendant As Morgan Stanley ABS Capital I Inc. Depositor/Issuer MSAC 2006- WMC2 A2C Morgan Stanley & Co. Incorporated Underwriter Morgan Stanley Controlling Person Nomura Home Equity Loan, Inc. Depositor/Issuer NHELI 2006-WF1 Citigroup Global Markets Inc. Underwriter A3 Nomura Securities International, Inc. Underwriter Nomura Holding America Inc. Controlling Person Option One Mortgage Acceptance Corp. Depositor/Issuer Banc of America Securities LLC Underwriter Citigroup Global Markets Inc. Underwriter Greenwich Capital Markets, Inc. Underwriter H&R Block Financial Advisors, Inc. Underwriter HSBC Securities (USA) Inc. Underwriter J.P. Morgan Securities Inc. Underwriter
OOMLT 2005-5 A3
H&R Block, Inc. Controlling Person Option One Mortgage Corporation Controlling Person American Enterprise Investment Services, Inc. Successor Ameriprise Financial Services, Inc. Successor Bank of America Corporation Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Option One Mortgage Acceptance Corp. Depositor/Issuer Banc of America Securities LLC Underwriter Greenwich Capital Markets, Inc. Underwriter H&R Block Financial Advisors, Inc. Underwriter HSBC Securities (USA) Inc. Underwriter Merrill Lynch, Pierce, Fenner & Smith OOMLT 2006-2 Incorporated Underwriter/Successor 2A3 H&R Block, Inc. Controlling Person Option One Mortgage Corporation Controlling Person American Enterprise Investment Services, Inc. Successor Ameriprise Financial Services, Inc. Successor Bank of America Corporation Successor
281 Security Against Defendant As Residential Asset Securities Corporation Depositor/Issuer Banc of America Securities LLC Underwriter Greenwich Capital Markets, Inc. Underwriter Residential Funding Securities Corporation Underwriter RASC 2005-KS12 A2 GMAC Inc. Controlling Person GMAC Mortgage Group Inc. Controlling Person Bank of America Corporation Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Residential Funding Mortgage Securities I, Inc. Depositor/Issuer RFMSI 2006-SA2 Goldman, Sachs & Co. Underwriter 2A1 GMAC Inc. Controlling Person GMAC Mortgage Group Inc. Controlling Person Securitized Asset Backed Receivables, SABR 2006-FR3 LLC Depositor/Issuer A2 Barclays Capital Inc. Underwriter Securitized Asset Backed Receivables, SABR 2006-NC3 LLC Depositor/Issuer A2B Barclays Capital Inc. Underwriter SARM 2005-21 3A1 UBS Securities LLC Underwriter Sequoia Residential Funding, Inc. Depositor/Issuer Banc of America Securities LLC Underwriter Countrywide Securities Corporation Underwriter SEMT 2006-1 2A1 Redwood Trust, Inc. Controlling Person Bank of America Corporation Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Sequoia Residential Funding, Inc. Depositor/Issuer Banc of America Securities LLC Underwriter Countrywide Securities Corporation Underwriter SEMT 2006-1 3A1 Redwood Trust, Inc. Controlling Person Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Bank of America Corporation Successor Wells Fargo Asset Securities Corporation Depositor/Issuer WFHET 2006-3 Barclays Capital Inc. Underwriter A2 Wells Fargo & Company Controlling Person Wells Fargo Bank, National Association Controlling Person Wells Fargo Asset Securities Corporation Depositor/Issuer WFMBS 2006- Morgan Stanley & Co. Incorporated Underwriter AR3 A4 Wells Fargo & Company Controlling Person Wells Fargo Bank, National Association Controlling Person
282 685. The Bank hereby incorporates by reference all of the allegations herein.
686. The Bank expressly excludes from this cause of action any allegation that could
be construed as alleging fraud or intentional reckless conduct.
687. In doing the acts alleged in selling to the Bank the Certificates in the
securitizations referred to above, the Underwriter and Depositor/Issuer Defendants violated 815
ILCS § 5/12(H) by signing or circulating papers or documents pertaining to these securities which it knew, or as to which it reasonably should have known, contained material misrepresentations.
688. Defendants solicited the sale of these securities in Illinois, the Bank accepted the
offers of sale for these securities in Illinois, and the purchase and sale of these securities was
made in Illinois.
689. In connection with their offer and sale of these securities to the Bank, Defendants
made numerous Offering Documents available to the Bank at its office in Cook County. These
documents, which were signed by Defendants, included the prospectus, prospectus supplement
filed with the SEC for each securitization, registration statements, summary term sheets, and
other documents. In these Offering Documents, Defendants made untrue or false statements of
material fact about the Certificates they offered and sold to the Bank.
690. In purchasing the Certificates that are the subject of this cause of action, the Bank
reasonably relied on Defendants’ untrue or false statements of material fact about the Certificates
they offered and sold to the Bank, and which were incorporated in the documents provided by
Defendants to the Bank.
691. Defendants’ false or untrue statements alleged herein were material and were the
cause of the Bank’s decision to purchase these Certificates. If Defendants had made these false
283 or untrue statements, and had instead provided full and accurate disclosures, the Bank would not have purchased – and in fact its own internal policies would have prevented it from purchasing – the Certificates at issue.
692. The Controlling Person Defendants named in this Count are “controlling persons” as defined by ILCS § 2.4, because these Defendants offered or sold the securities that are the subject of this action, or are members of a group of persons acting in concert in the offer or sale of these securities, and these Defendants own (and did own at the time of sale) beneficially either
(a) 25% or more of the outstanding voting securities of the respective Depositor/Issuer
Defendants as identified above where no other person owns or controls a greater percentage of such securities; and/or (b) such number of outstanding securities of the respective
Depositor/Issuer Defendants as would enable such person, or group of persons, to elect a majority of the board of directors or other managing body of such issuer. In the case of unincorporated Depositor/Issuer Defendants, the Controlling Person Defendants offered or sold the securities that are the subject of this action, or are members of a group of persons acting in concert in the offer or sale of these securities, directly or indirectly control the activities of the respective Depositor/Issuer Defendants as identified above.
693. As controlling persons under ILCS § 2.4, pursuant to ILCS § 13(A), the
Controlling Person Defendants are jointly and severally liable to the Bank for the violations of
815 ILCS § 5/12(F) & (G) by the Depositor/Issuer Defendants alleged herein.
694. With respect to the Successor Liability Defendants, this Count is alleged against:
(1) Successor Liability Defendant American Enterprise Investment Services, Inc. and/or
Ameriprise Financial Services, Inc. as the successor or successors in liability to underwriter
H&R Block Financial Advisors, Inc. with respect to Securities OOMLT 2005-5 A3 and OOMLT
284 2006-2 2A3; (2) The PNC Financial Services Group, Inc., as the successor in liability to
underwriter National City Corporation, d/b/a National City Capital Markets with respect to
Security FFML 2006-FF8 IIA3; (3) PNC Investments LLC, as the successor in liability to
underwriter NatCity Investments, Inc. with respect to Securities FFML 2006-FF14 A5, FFML
2006-FF13 A2C, FFML 2006-FF12 A3, FFML 2006-FF12 A4, and FFML 2006-FF10 A7; (4)
Merrill Lynch, Pierce, Fenner & Smith Inc., as the successor in liability to underwriter Banc of
America Securities LLC with respect to Securities ARSI 2005-W5 A2C, BACF 2006-C 2A1,
BAFC 2006-E 2A2, BAFC 2006-E 3A1, BAFC 2006-F 2A1, BAFC 2006-F 3A1, FHASI 2006-
AR1 2A1, OOMLT 2005-5 A3, OOMLT 2006-2 2A3, RASC 2005-KS12 A2, SEMT 2006-1
2A1 and SEMT 2006-1 3A1; (5) Bank of America Corporation as the successor in liability to underwriters Countrywide Securities Corp. or Merrill Lynch, Pierce, Fenner & Smith Inc., with respect to Securities CBASS 2006-CB4 AV3, HVMLT 2006-2 2A1A, HVMLT 2006-2 3A1A,
MSAC 2006-HE6 A2C, OOMLT 2006-2 2A3, SEMT 2006-1 2A1, and SEMT 2006-1 3A1.
Underwriters H&R Block Financial Advisors, Inc., National City Corporation, d/b/a National
City Capital Markets, NatCity Investments, Inc., Countrywide Securities Corp., Merrill Lynch,
Pierce, Fenner & Smith Inc., and Banc of America Securities LLC are collectively referred to
herein as the “Succeeded Underwriters.” The Successor Liability Defendants are named herein by virtue of their assumption of the liabilities of the Succeeded Underwriters, and their status as successors-in-interest to the Succeeded Underwriters.
695. The Successor Liability Defendants are jointly and severally or otherwise vicariously liable for the wrongful conduct of their respective Succeeded Underwriters, as alleged herein, because they are the successors in liability to those entities by virtue of those entities’ merger with and into the respective Successor Liability Defendants and the Successor
285 Liability Defendants’ integration of and assumption of responsibility for the business of the
merged entities, including responsibility for pre-merger liabilities.
696. This action is brought within two years after the discovery of the untrue and
misleading statements or omissions in the prospectus supplements and other documents that the
Defendants sent to the Bank, or within two years after notice of facts which in the exercise of
reasonable diligence would lead to actual knowledge of the alleged violation, and within five
years of the Bank’s purchase of those Certificates, or within any applicable period as tolled by
the pendency of other actions. Despite having exercised reasonable diligence, the Bank did not
and could not reasonably have discovered earlier the untrue and misleading statements or
omissions in the prospectus, prospectus supplements, and other documents and the other
violations of the Illinois Securities Law alleged in this Count.
697. The Bank has timely given notice in accordance with 815 ILCS § 5/13(B) to
Defendants of its election to void its purchases of the Certificates listed in this Count, and has
offered to tender the securities to the seller or into the court.
698. Under 815 ILCS § 5/12(H), the Bank is entitled to void the transaction and have
Defendants pay the Bank, jointly and severally, the amount paid for each Certificate, plus
interest at 10% per annum, less any amounts received by the Bank with respect to that
Certificate.
THIRD CAUSE OF ACTION
UNTRUE OR MISLEADING STATEMENTS IN THE SALE OF SECURITIES
(North Carolina Securities Law, N.C.G.S.A. § 78A-8(2) & § 78A-56(a))
699. This cause of action is alleged against the following Defendants in connection with the sale of the following securities:
286 Security Against Defendant As Bank of America, N.A. Sponsor Banc of America Funding Corporation Depositor/Issuer Banc of America Securities LLC Underwriter BAFC 2006-C 2A1 Controlling Bank of America Corporation Person/Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Bank of America, N.A. Sponsor Banc of America Funding Corporation Depositor/Issuer Banc of America Securities LLC Underwriter BAFC 2006-E 2A2 Controlling Bank of America Corporation Person/Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Bank of America, N.A. Sponsor Banc of America Funding Corporation Depositor/Issuer Banc of America Securities LLC Underwriter BAFC 2006-E 3A1 Controlling Bank of America Corporation Person/Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Bank of America, N.A. Sponsor Banc of America Funding Corporation Depositor/Issuer Banc of America Securities LLC Underwriter BAFC 2006-F 2A1 Controlling Bank of America Corporation Person/Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Bank of America, N.A. Sponsor Banc of America Funding Corporation Depositor/Issuer Banc of America Securities LLC Underwriter BAFC 2006-F 3A1 Controlling Bank of America Corporation Person/Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor
287 Security Against Defendant As Option One Mortgage Corporation Sponsor Option One Mortgage Acceptance Corp. Depositor/Issuer Banc of America Securities LLC Underwriter Citigroup Global Markets Inc. Underwriter Greenwich Capital Markets, Inc. Underwriter H&R Block Financial Advisors, Inc. Underwriter HSBC Securities (USA) Inc. Underwriter J.P. Morgan Securities Inc. Underwriter Bank of America Corporation Controlling OOMLT 2005-5 A3 Person/Successor Citigroup Financial Products, Inc. Controlling Person Citigroup Inc. Controlling Person Greenwich Capital Holdings, Inc. Controlling Person H&R Block, Inc. Controlling Person Option One Mortgage Corporation Controlling Person American Enterprise Investment Services, Inc. Successor Ameriprise Financial Services, Inc. Successor Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor Option One Mortgage Corporation Sponsor Option One Mortgage Acceptance Corp. Depositor/Issuer Banc of America Securities LLC Underwriter Greenwich Capital Markets, Inc. Underwriter H&R Block Financial Advisors, Inc. Underwriter HSBC Securities (USA) Inc. Underwriter Merrill Lynch, Pierce, Fenner & Smith Underwriter/Successor OOMLT 2006-2 2A3 Incorporated Controlling Bank of America Corporation Person/Successor Greenwich Capital Holdings, Inc. Controlling Person H&R Block, Inc. Controlling Person Option One Mortgage Corporation Controlling Person American Enterprise Investment Services, Inc. Successor Ameriprise Financial Services, Inc. Successor
288 Security Against Defendant As Sponsor/Controlling Residential Funding Corporation Person Residential Asset Securities Corporation Depositor/Issuer Banc of America Securities LLC Underwriter Greenwich Capital Markets, Inc. Underwriter Residential Funding Securities RASC 2005-KS12 Corporation Underwriter A2 Controlling Bank of America Corporation Person/Successor GMAC Inc. Controlling Person GMAC Mortgage Group Inc. Controlling Person Greenwich Capital Holdings, Inc. Controlling Person Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor RWT Holdings, Inc. Sponsor Sequoia Residential Funding, Inc. Depositor/Issuer Banc of America Securities LLC Underwriter Countrywide Securities Corporation Underwriter SEMT 2006-1 2A1 Controlling Person/ Bank of America Corporation Successor Countrywide Financial Corporation Controlling Person Redwood Trust, Inc. Controlling Person Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor RWT Holdings, Inc. Sponsor Sequoia Residential Funding, Inc. Depositor/Issuer Banc of America Securities LLC Underwriter Countrywide Securities Corporation Underwriter SEMT 2006-1 3A1 Controlling Bank of America Corporation Person/Successor Countrywide Financial Corporation Controlling Person Redwood Trust, Inc. Controlling Person Merrill Lynch, Pierce, Fenner & Smith Incorporated Successor
700. The Bank hereby incorporates by reference all allegations herein.
701. The Bank expressly excludes from this cause of action any allegation that could be construed as alleging fraud or intentional reckless conduct.
702. In doing the acts alleged in connection with the offer and sale to the Bank of the
Certificates in the securitizations referred to above, the Underwriter and Depositor/Issuer
Defendants violated N.C.G.S.A. § 78A-8(2) and § 78A-56(a)(2) by engaging in the offer and
289 sale of securities by making untrue statements of material fact and omitting to state material facts
necessary in order to make the statements made, in light of the circumstances under which they
are made, not misleading.
703. Defendants offered these certificates for sale in North Carolina in that the offer
originated from a dealer in North Carolina.
704. In connection with their offer and sale of these securities to the Bank, Defendants
originated numerous Offering Documents from North Carolina. These documents included the
prospectus and prospectus supplement filed with the SEC for each securitization, registration
statements, summary term sheets, and other documents. In these Offering Documents,
Defendants made untrue or false statements of material fact about the Certificates they offered and sold to the Bank.
705. In purchasing the Certificates that are the subject of this cause of action, the Bank
reasonably relied on Defendants’ business courses of action and the material misstatements and
material omissions incorporated in the documents provided by Defendants to the Bank.
706. Defendants’ deceptive business practices, misstatements, and omissions alleged herein were material and were the cause of the Bank’s decision to purchase these Certificates. If
Defendants had not engaged in these materially deceptive practices, material misstatements, or omission of material information, and had instead provided full and accurate disclosures, the
Bank would not have purchased – and in fact its own internal policies would have prevented it from purchasing – the Certificates at issue.
707. The Controlling Person Defendants named in this Count are liable in that they directly or indirectly controlled persons that violated N.C.G.S.A. § 78A-8(2) and § 78A-56(a)(2), and knew or should have known of the facts regarding the abandonment of underwriting
290 standards, the manipulation of the appraisal process and the LTV ratios, the unreliability of the
credit ratings, the misrepresentations regarding occupancy status, and the predatory lending
practices that give rise to liability of the controlled persons.
708. As controlling persons pursuant to N.C.G.S.A. § 78A-56(c), the Controlling
Person Defendants are jointly and severally liable with the controlled person to the Bank for the
violations of § 78A-8(2) and § 78A-56(a)(2) by the Depositor/Issuer and Underwriter Defendants
alleged herein.
709. With respect to the Successor Liability Defendants, this Count is alleged against:
(1) Successor Liability Defendant American Enterprise Investment Services, Inc. and/or
Ameriprise Financial Services, Inc. as the successor or successors in liability to underwriter
H&R Block Financial Advisors, Inc. with respect to Securities OOMLT 2005-5 A3 and OOMLT
2006-2 2A3; (2) Merrill Lynch, Pierce, Fenner & Smith Inc., as the successor in liability to
underwriter Banc of America Securities LLC with respect to Securities BACF 2006-C 2A1,
BAFC 2006-E 2A2, BAFC 2006-E 3A1, BAFC 2006-F 2A1, BAFC 2006-F 3A1, OOMLT
2005-5 A3, OOMLT 2006-2 2A3, RASC 2005-KS12 A2, SEMT 2006-1 2A1, and SEMT 2006-
1 3A1; (3) Bank of America Corporation as the successor in liability to underwriters
Countrywide Securities Corp. or Merrill Lynch, Pierce, Fenner & Smith Inc., with respect to
Securities OOMLT 2006-2 2A3, SEMT 2006-1 2A1, and SEMT 2006-1 3A1. Underwriters
H&R Block Financial Advisors, Inc., Countrywide Securities Corp., Merrill Lynch, Pierce,
Fenner & Smith Inc., and Banc of America Securities LLC are collectively referred to herein as the “Succeeded Underwriters.” The Successor Liability Defendants are named herein by virtue of their assumption of the liabilities of the Succeeded Underwriters, and their status as successors-in-interest to the Succeeded Underwriters.
291 710. The Successor Liability Defendants are jointly and severally or otherwise
vicariously liable for the wrongful conduct of their respective Succeeded Underwriters, as
alleged herein, because they are the successors in liability to those entities by virtue of those entities’ merger with and into the respective Successor Liability Defendants and the Successor
Liability Defendants’ integration of and assumption of responsibility for the business of the merged entities, including responsibility for pre-merger liabilities.
711. This action is brought within three years after the discovery of the untrue and misleading statements or omissions in the prospectus, prospectus supplements and other Offering
Documents that the Defendants sent to the Bank and within five years of the Bank’s purchase of those Certificates, or within any applicable period as tolled by the pendency of other actions.
Despite having exercised reasonable diligence, the Bank did not and could not reasonably have discovered earlier the untrue and misleading statements or omissions in the prospectus, prospectus supplements, and other Offering Documents and the other violations of the North
Carolina Securities law alleged in this Count.
712. The Bank has offered, or will offer, to tender the securities to the seller or into
court.
713. Under N.C.G.S.A. § 78A-56(a)(2), the Bank is entitled to void the transaction and have Defendants pay the Bank the amount paid for each Certificate, plus interest, costs and reasonable attorneys’ fees, less any amount of any income received by the Bank with respect to that Certificate.
292
FOURTH CAUSE OF ACTION
UNTRUE OR MISLEADING STATEMENTS IN THE SALE OF SECURITIES
(New Jersey Securities Law N.J.S.A. 49:3-52(b) & (c))
714. This cause of action is alleged against the following Defendants in connection with the sale of the following securities:
Security Against Defendant As Merrill Lynch Mortgage Investors, Inc. Depositor/Issuer J.P. Morgan Securities Inc. Underwriter CBASS 2006-CB4 Merrill Lynch, Pierce, Fenner & Smith AV3 Underwriter Incorporated Bank of America Corporation Successor
715. The Bank hereby incorporates by reference all allegations herein.
716. The Bank expressly excludes from this cause of action any allegation that could
be construed as alleging fraud or intentional reckless conduct.
717. In doing the acts alleged in connection with the offer and sale to the Bank of the
Certificates in the securitization referred to above, the Underwriter and Depositor/Issuer
Defendants violated N.J.S.A. 49:3-52(b) & (c) by: (i) engaging in acts, practices, or courses of
business which operated as a fraud or deceit upon the Bank as the purchaser of this security; and
(ii) engaging in the sale of the security by means of untrue statements of material fact or by
omitting to state material facts necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading. The above referenced Defendants
knew the statements were untrue or omitted material facts necessary to make the statements true,
and intended to deceive the Bank with these statements, and the Bank has suffered a financial detriment as a result of these statements and/or omissions.
293 718. Defendants offered the above security for sale in New Jersey, and the Bank
accepted the offer of sale in New Jersey in that the offer originated in New Jersey and the Bank
communicated its acceptance of the offer to a dealer in New Jersey, reasonably believing the
dealer to be in New Jersey, with the dealer in fact receiving the acceptance in New Jersey.
719. In connection with their offer and sale of this security to the Bank, Defendants
originated numerous Offering Documents to the bank from New Jersey. These documents
included the prospectus and prospectus supplement filed with the SEC for the securitization,
registration statements, summary term sheets, and other documents. In these Offering
Documents, Defendants made untrue or false statements of material fact about the Certificate
they offered and sold to the Bank.
720. In purchasing the Certificates that are the subject of this cause of action, the Bank
reasonably relied on Defendants’ business courses of action and the material misstatements and
material omissions incorporated in the documents provided by Defendants to the Bank.
721. Defendants’ deceptive business practices, misstatements, and omissions alleged
herein were material and were the cause of the Bank’s decision to purchase this Certificate. If
Defendants had not engaged in these materially deceptive practices, material misstatements, or
omission of material information, and had instead provided full and accurate disclosures, the
Bank would not have purchased – and in fact its own internal policies would have prevented it from purchasing – the Certificate at issue.
722. The Controlling Person Defendants named in this Count are liable in that they directly or indirectly controlled persons that violated N.J.S.A. § 49:3-52(b) & (c), and knew or should have known of the facts regarding the abandonment of underwriting standards, the
manipulation of the appraisal process and the LTV ratios, the unreliability of the credit ratings,
294 the misrepresentations regarding occupancy status, and the predatory lending practices that give rise to liability of the controlled persons.
723. As controlling persons pursuant to N.J.S.A. § 49:3-71(d), the Controlling Person
Defendants are jointly and severally liable with the controlled person to the Bank for the violations of N.J.S.A. § 49:3-52(b) & (c) by the Depositor/Issuer and Underwriter Defendants alleged herein.
724. With respect to the Successor Liability Defendant, this Count is alleged against:
(1) Bank of America Corporation as successor in liability to underwriter Merrill Lynch, Pierce
Fenner & Smith Inc. with respect to Security CBASS 2006-CB4 AV3. Underwriter Merrill
Lynch, Pierce, Fenner & Smith Inc. is referred to herein as the “Succeeded Underwriter.” The
Successor Liability Defendant is named herein by virtue of its assumption of the liabilities of the
Succeeded Underwriter, and its status as successors-in-interest to the Succeeded Underwriter.
725. The Successor Liability Defendant is jointly and severally or otherwise vicariously liable for the wrongful conduct of its respective Succeeded Underwriter, as alleged herein, because it is the successor in liability to that entity by virtue of that entity’s merger with and into the respective Successor Liability Defendant and the Successor Liability Defendant’s integration of and assumption of responsibility for the business of the merged entities, including responsibility for pre-merger liabilities.
726. This action is brought within two years after the discovery of the untrue and misleading statements or omissions in the prospectus, prospectus supplements and other Offering
Documents that the Defendants sent to the Bank. Despite having exercised reasonable diligence, the Bank did not and could not reasonably have discovered earlier the untrue and misleading
295 statements or omissions in the prospectus, prospectus supplements and other Offering
Documents and the other violations of the New Jersey Securities Law alleged in this Count.
727. The Bank has offered, or will offer, to tender the security to the seller or into
court.
728. Under N.J.S.A § 49:3-71(a)(2) & (3), the Bank is entitled to void the transaction
and have Defendants pay the Bank the amount paid for the Certificate, plus costs and interest, as
set forth in N.J.S.A. § 49:3-71(c), less any amount of income received by the Bank with respect to the Certificate.
FIFTH CAUSE OF ACTION
NEGLIGENT MISREPRESENTATION
(Under Common Law)
729. This cause of action is alleged against the following Defendants in connection with the sale of the following securities:
In connection with Against Defendant: As Security No.: Banc of America Funding Depositor/Issuer BAFC 2006-C 2A1 Corporation BAFC 2006-E 2A2 BAFC 2006-E 3A1 BAFC 2006-F 2A1 BAFC 2006-F 3A1 Citigroup Mortgage Loan Trust Depositor/Issuer CMLTI 2006-NC1 A2C Inc. CMLTI 2006-WFH2 A2B CMLTI 2006-WFH4 A3 CMLTI 2006-NC2 A2B Financial Asset Securities Corp. Depositor/Issuer FFML 2006-FF8 IIA3 First Horizon Asset Securities, Inc. Depositor/Issuer FHASI 2006-AR1 2A1 Greenwich Capital Acceptance, Depositor/Issuer HVMLT 2006-2 2A1A Inc. HVMLT 2006-2 3A1A GS Mortgage Securities Corp. Depositor/Issuer FFML 2006-FF13 A2C GSAMP 2006-NC2 A2C IndyMac MBS, Inc. Depositor/Issuer INDX 2006-AR15 A2
296 In connection with Against Defendant: As Security No.: Merrill Lynch Mortgage Investors, Depositor/Issuer CBASS 2006-CB4 AV3 Inc. Morgan Stanley ABS Capital I Inc. Depositor/Issuer MSAC 2006-WMC2 A2C MSAC 2006-HE5 A2C MSAC 2006-HE6 A2C Mortgage Asset Securitization Depositor/Issuer MABS 2006-NC1 A3 Transactions, Inc. Nomura Home Equity Loan, Inc. Depositor/Issuer NHELI 2006-WF1 A3 Option One Mortgage Acceptance Depositor/Issuer OOMLT 2005-5 A3 Corp. OOMLT 2006-2 2A3 Residential Asset Mortgage Depositor/Issuer GMACM 2006-AR2 2A1 Products, Inc. GMACM 2006-AR2 4A1 Residential Asset Securities Depositor/Issuer RASC 2005-KS12 A2 Corporation Residential Funding Mortgage Depositor/Issuer RFMSI 2006-SA2 2A1 Securities I, Inc. Securitized Asset Backed Depositor/Issuer SABR 2006-FR3 A2 Receivables, LLC SABR 2006-NC3 A2B Sequoia Residential Funding, Inc. Depositor/Issuer SEMT 2006-1 2A1 SEMT 2006-1 3A1 Wells Fargo Asset Securities Depositor/Issuer WFHET 2006-3 A2 Corporation WFMBS 2006-AR3 A4 Banc of America Securities LLC Underwriter ARSI 2005-W5 A2C BAFC 2006-C 2A1 BAFC 2006-E 2A2 BAFC 2006-E 3A1 BAFC 2006-F 2A1 BAFC 2006-F 3A1 FHASI 2006-AR1 2A1 OOMLT 2005-5 A3 OOMLT 2006-2 2A3 RASC 2005-KS12 A2 SEMT 2006-1 2A1 SEMT 2006-1 3A1 Barclays Capital Inc. Underwriter AMSI 2005-R10 A2B ARSI 2005-W5 A2C FHLT 2005-E 2A3 SABR 2006-FR3 A2 SABR 2006-NC3 A2B WFHET 2006-3 A2
297 In connection with Against Defendant: As Security No.: Citigroup Global Markets Inc. Underwriter CMLTI 2006-NC1 A2C CMLTI 2006-WFH2 A2B CMLTI 2006-WFH4 A3 CMLTI 2006-NC2 A2B NHELI 2006-WF1 A3 OOMLT 2005-5 A3 Countrywide Securities Underwriter HVMLT 2006-2 2A1A Corporation HVMLT 2006-2 3A1A MSAC 2006-HE6 A2C SEMT 2006-1 2A1 SEMT 2006-1 3A1 Credit Suisse First Boston LLC Underwriter FHLT 2005-E 2A3 INABS 2005-D AII3 First Tennessee Bank, National Underwriter FHASI 2006-AR1 2A1 Association d/b/a FTN Financial Capital Markets Goldman, Sachs & Co. Underwriter FFML 2006-FF13 A2C GSAMP 2006-NC2 A2C RFMSI 2006-SA2 2A1 Greenwich Capital Markets, Inc. Underwriter AMSI 2005-R10 A2B ARSI 2005-W5 A2C FFML 2006-FF8 IIA3 FHLT 2005-E 2A3 HVMLT 2006-2 2A1A HVMLT 2006-2 3A1A INABS 2005-D AII3 OOMLT 2005-5 A3 OOMLT 2006-2 2A3 RASC 2005-KS12 A2 H&R Block Financial Advisors, Underwriter OOMLT 2005-5 A3 Inc. OOMLT 2006-2 2A3 HSBC Securities (USA) Inc. Underwriter OOMLT 2005-5 A3 OOMLT 2006-2 2A3 J.P. Morgan Securities Inc. Underwriter AMSI 2005-R10 A2B CBASS 2006-CB4 AV3 OOMLT 2005-5 A3 Merrill Lynch, Pierce, Fenner & Underwriter CBASS 2006-CB4 AV3 Smith Incorporated OOMLT 2006-2 2A3 Morgan Stanley & Co. Underwriter INABS 2005-D AII3 Incorporated MSAC 2006-WMC2 A2C MSAC 2006-HE5 A2C MSAC 2006-HE6 A2C WFMBS 2006-AR3 A4
298 In connection with Against Defendant: As Security No.: NatCity Investments, Inc. Underwriter FFML 2006-FF13 A2C FFML 2006-FF12 A3 FFML 2006-FF12 A4 FFML 2006-FF14 A5 FFML 2006-FF10 A7 National City Corporation Underwriter FFML 2006-FF8 IIA3 Nomura Securities International, Underwriter NHELI 2006-WF1 A3 Inc. Residential Funding Securities Underwriter GMACM 2006-AR2 2A1 Corporation GMACM 2006-AR2 4A1 RASC 2005-KS12 A2 UBS Securities LLC Underwriter FHLT 2005-E 2A3 INABS 2005-D AII3 MABS 2006-NC1 A3 SARM 2005-21 3A1 American Enterprise Investment Successor to H&R OOMLT 2005-5 A3 Services, Inc. Block Financial OOMLT 2006-2 2A3 Advisors, Inc. Ameriprise Financial Services, Inc. Successor to H&R OOMLT 2005-5 A3 Block Financial OOMLT 2006-2 2A3 Advisors, Inc. Bank of America Corporation Successor to SEMT 2006-1 2A1 Countrywide SEMT 2006-1 3A1 Securities Corporation Successor to Merrill ARSI 2005-W5 A2C Lynch, Pierce, BAFC 2006-C 2A1 Fenner & Smith BAFC 2006-E 2A2 Incorporated BAFC 2006-E 3A1 BAFC 2006-F 2A1 BAFC 2006-F 3A1 CBASS 2006-CB4 AV3 FHASI 2006-AR1 2A1 OOMLT 2005-5 A3OOMLT 2006-2 2A3 RASC 2005-KS12 A2 SEMT 2006-1 2A1 SEMT 2006-1 3A1 Successor to Merrill CBASS 2006-CB4 AV3 Lynch Mortgage Investors, Inc.
299 In connection with Against Defendant: As Security No.: Merrill Lynch, Pierce, Fenner & Successor to Banc of ARSI 2005-W5 A2C Smith Incorporated America Securities BAFC 2006-C 2A1 LLC BAFC 2006-E 2A2 BAFC 2006-E 3A1 BAFC 2006-F 2A1 BAFC 2006-F 3A1 FHASI 2006-AR1 2A1 OOMLT 2005-5 A3 OOMLT 2006-2 2A3 RASC 2005-KS12 A2 SEMT 2006-1 2A1 SEMT 2006-1 3A1 PNC Investments LLC Successor to NatCity FFML 2006-FF10 A7 Investments, Inc. FFML 2006-FF12 A3 FFML 2006-FF12 A4 FFML 2006-FF13 A2C FFML 2006-FF14 A5 The PNC Financial Services Successor to NatCity FFML 2006-FF10 A7 Group, Inc. Investments, Inc. FFML 2006-FF12 A3 FFML 2006-FF12 A4 FFML 2006-FF13 A2C FFML 2006-FF14 A5 Successor to FFML 2006-FF8 IIA3 National City Corporation, d/b/a National City Capital Markets
730. The Bank hereby incorporates by reference all allegations herein.
731. The Defendants are and were in the business of providing information for the guidance of others in their business transactions: namely they provided Offering Documents that were central to the business transaction of purchasing the Certificates. The information in the
Offering Documents was provided with full knowledge that it would be used in guiding the Bank in its business transaction of whether to purchase the offered Certificates.
732. In connection with their offer and sale of these securities to the Bank, Defendants
made numerous documents available to the Bank, which documents Defendants drafted and/or
300 signed. The documents that Defendants sent to the Bank included the prospectus and prospectus supplement filed with the SEC for each securitization, registration statements, summary term sheets, and other documents. In these Offering Documents, Defendants negligently misrepresented material facts about the Certificates they offered and sold to the Bank.
733. The Defendants had a duty to make accurate and truthful statements in the information they provided to the Bank.
734. As alleged above and incorporated herein, the Defendants breached this duty by making untrue or misleading statements of material facts in the Offering Documents. These material misrepresentations pertain to the following non-exclusive list: (a) adherence to the originators’ stated underwriting guidelines and related matters; (b) the LTVs of the mortgage loans in the collateral pools of these securitizations; (c) the occupancy status rates of properties that secured the mortgage loans in these securitizations; (d) the rating process by which AAA- ratings were assigned; (e) compliance with predatory lending restrictions; and (f) purported due diligence on the loan pools that backed the PLMBS.
735. When the Defendants made these representations, they had no reasonable ground for believing them to be true. The Bank is informed and believes, and based thereon alleges, that
Defendants had access to the loan files on the mortgage loans in the collateral pools for these securitizations, and, had the Defendants inspected those files, they would have learned that the information they gave the Bank contained untrue or misleading statements. In addition,
Defendants were aware or should have been aware but for their negligence that the “due diligence” review of the loans that were being securitized and sold to the Bank identified serious concerns and that a significant percentage of these loans were identified as defective but were nonetheless bundled and sold to the Bank as part of the securitization. Thus, the Bank is
301 informed and believes, and based thereon alleges, that Defendants had access to information that
either did or should have made the Defendants aware, had they heeded that information, that the representations they made to the Bank contained material untrue or misleading statements about the mortgage loans in the collateral pools. The Defendants were careless or negligent in ascertaining the truth of their statements.
736. In making the representations referred to above, the Defendants intended to
induce the Bank to rely on those representations in making its decision to purchase the
Certificates.
737. The Bank did reasonably and justifiably rely on the truth of the representations
described above and alleged herein in analyzing and decided to purchase these Certificates. The
Bank did not have access to the underlying loan files, and therefore was justified in relying on the Defendants’ statements regarding the credit quality of the mortgage pools. But for the
Defendants making the false and misleading representations alleged herein, the Bank would not have purchased these Certificates.
738. As a direct and proximate result of the negligent misrepresentations by the
Defendants, the Bank was damaged in an amount to be proven at trial.
739. With respect to the Successor Liability Defendants, this Count is alleged against:
(1) Successor Liability Defendant American Enterprise Investment Services, Inc. and/or
Ameriprise Financial Services, Inc. as the successor or successors in liability to underwriter
H&R Block Financial Advisors, Inc. with respect to Securities OOMLT 2005-5 A3 and OOMLT
2006-2 2A3; (2) The PNC Financial Services Group, Inc., as the successor in liability to
underwriter National City Corporation, d/b/a National City Capital Markets with respect to
Security FFML 2006-FF8 IIA3; and (3) PNC Investments LLC, as the successor in liability to
302 underwriter NatCity Investments, Inc. with respect to Securities FFML 2006-FF13 A2C, FFML
2006-FF12 A3, FFML 2006-FF12 A4, FFML 2006-FF14 A5, and FFML 2006-FF10 A7; (4)
Bank of America Corporation as successor in liability to underwriters Countrywide Securities
Corp., Merrill Lynch Mortgage Investors, Inc., and Merrill Lynch, Pierce Fenner & Smith Inc.
with respect to Securities HVMLT 2006-2 2A1A, HVMLT 2006-2 3A1A, MSAC 2006-HE6
A2C, SEMT 2006-1 2A1, SEMT 2006-1 3A1, CBASS 2006-CB4 AV3, and OOMLT 2006-2
2A3, (5) Merrill Lynch, Pierce, Fenner & Smith Inc. as successor in liability to underwriter Banc
of America Securities LLC with respect to Securities ARSI 2005-W5 A2C, BAFC 2006-C 2A1,
BAFC 2006-E 2A2, BAFC 2006-E 3A1, BAFC 2006-F 2A1, BAFC 2006-F 3A1, FHASI 2006-
AR1 2A1, OOMLT 2005-5 A3, OOMLT 2006-2 2A3, RASC 2005-KS12 A2, SEMT 2006-1
2A1, and SEMT 2006-1 3A1. Underwriters H&R Block Financial Advisors, Inc., National City
Corporation, d/b/a National City Capital Markets, NatCity Investments, Inc., Countrywide
Securities Corp., Merrill Lynch Mortgage Investors, Inc., Merrill Lynch, Pierce, Fenner & Smith
Inc., and Banc of America Securities LLC are collectively referred to herein as the “Succeeded
Underwriters.” The Successor Liability Defendants are named herein by virtue of their
assumption of the liabilities of the Succeeded Underwriters, and their status as successors-in-
interest to the Succeeded Underwriters.
740. The Successor Liability Defendants are jointly and severally or otherwise
vicariously liable for the wrongful conduct of their respective Succeeded Underwriters, as
alleged herein, because they are the successors in liability to those entities by virtue of those entities’ merger with and into the respective Successor Liability Defendants and the Successor
Liability Defendants’ integration of and assumption of responsibility for the business of the merged entities, including responsibility for pre-merger liabilities.
303 741. To the extent that 815 ILCS § 5/13(D) may apply, this action is brought within two years after the discovery of Defendants’ negligent misrepresentations, or within two years after notice of facts which in the exercise of reasonable diligence would lead to actual knowledge of the alleged negligent misrepresentations, and within five years of the Bank’s purchase of those
Certificates, or within any applicable period as tolled by the pendency of other actions. Despite having exercised reasonable diligence, the Bank did not and could not reasonably have discovered earlier Defendants’ negligent misrepresentations alleged in this Count.
742. To the extent it was required to do so under Illinois law, the Bank has timely given notice in accordance with 815 ILCS § 5/13B to Defendants of its election to void its purchases of the Certificates listed in this Count, and has offered to tender the securities to the seller or into court.
VII. PRAYER FOR RELIEF
WHEREFORE, the Bank respectfully demands judgment as follows:
A. On the first, second, third, and fourth causes of action, an order voiding the transactions at issue and ordering Defendants to pay the Bank, jointly and severally, the amount paid for each Certificate, plus interest at 10% per annum or at the highest allowable rate, less any amounts received by the Bank with respect to that Certificate;
B. On the fifth cause of action, damages in an amount to be determined at trial, or, in the alternative;
C. On the fifth cause of action, an order of rescission;
D. Reasonable attorneys’ fees and expenses or costs of suit, including expert witness fees; and
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APPENDIX I
PLMBS CERTIFICATES PURCHASED BY FEDERAL HOME LOAN BANK OF CHICAGO AT ISSUE IN THIS ACTION
CUSIP Certificate 03072SS48 AMSI 2005-R10 A2B 040104QN4 ARSI 2005-W5 A2C 058930AD0 BAFC 2006-C 2A1 05950DAE0 BAFC 2006-E 2A2 05950DAF7 BAFC 2006-E 3A1 05950HAD3 BAFC 2006-F 2A1 05950HAF8 BAFC 2006-F 3A1 12498QAC0 CBASS 2006-CB4 AV3 172983AD0 CMLTI 2006-NC1 A2C 17309MAC7 CMLTI 2006-WFH2 A2B 17309SAC4 CMLTI 2006-WFH4 A3 17309TAC2 CMLTI 2006-NC2 A2B 30247DAD3 FFML 2006-FF13 A2C 320278AC8 FFML 2006-FF8 IIA3 32027GAC0 FFML 2006-FF12 A3 32027GAD8 FFML 2006-FF12 A4 32027LAE5 FFML 2006-FF14 A5 32028HAG8 FFML 2006-FF10 A7 32051GY25 FHASI 2006-AR1 2A1 35729PNB2 FHLT 2005-E 2A3 36185MEV0 GMACM 2006-AR2 2A1 36185MEZ1 GMACM 2006-AR2 4A1 362463AD3 GSAMP 2006-NC2 A2C 41161PK44 HVMLT 2006-2 2A1A 41161PK69 HVMLT 2006-2 3A1A 456606JM5 INABS 2005-D AII3 456610AB0 INDX 2006-AR15 A2 57643LNE2 MABS 2006-NC1 A3 61749KAE3 MSAC 2006-WMC2 A2C 61749NAD9 MSAC 2006-HE5 A2C 61750FAE0 MSAC 2006-HE6 A2C 65536RAC0 NHELI 2006-WF1 A3 68389FJW5 OOMLT 2005-5 A3 68402CAD6 OOMLT 2006-2 2A3 749574AC3 RFMSI 2006-SA2 2A1 753910AB4 RASC 2005-KS12 A2 813765AB0 SABR 2006-FR3 A2 81377CAB4 SABR 2006-NC3 A2B
1 CUSIP Certificate 81743QAG9 SEMT 2006-1 2A1 81743QAJ3 SEMT 2006-1 3A1 863579B49 SARM 2005-21 3A1 9497EBAB5 WFHET 2006-3 A2 94983GAD0 WFMBS 2006-AR3 A4
2 APPENDIX IA
PLMBS CERTIFICATES PURCHASED BY FEDERAL HOME LOAN BANK OF CHICAGO SUBJECT TO COUNT THREE UNDER NORTH CAROLINA’S BLUE SKY LAW
CUSIP Certificate 058930AD0 BAFC 2006-C 2A1 05950DAE0 BAFC 2006-E 2A2 05950DAF7 BAFC 2006-E 3A1 05950HAD3 BAFC 2006-F 2A1 05950HAF8 BAFC 2006-F 3A1 68389FJW5 OOMLT 2005-5 A3 68402CAD6 OOMLT 2006-2 2A3 753910AB4 RASC 2005-KS12 A2 81743QAG9 SEMT 2006-1 2A1 81743QAJ3 SEMT 2006-1 3A1
APPENDIX II
A. CLAYTON SERVICES, INC. REPORT ON DUE DILIGENCE REJECTION AND WAIVER TRENDS
B. TESTIMONY OF VICKI BEAL, SENIOR VICE PRESIDENT, CLAYTON HOLDINGS, BEFORE THE FINANCIAL CRISIS INQUIRY COMMISSION, SEPTEMBER 23, 2010
C. TESTIMONY OF KEITH JOHNSON, FORMER PRESIDENT, CLAYTON HOLDINGS, BEFORE THE FINANCIAL CRISIS INQUIRY COMMISSION, SEPTEMBER 23, 2010
TESTIMONY OF VICKI BEAL SENIOR VICE PRESIDENT CLAYTON HOLDINGS
BEFORE THE FINANCIAL CRISIS INQUIRY COMMISSION SEPTEMBER 23, 2010
Good afternoon. I am Vicki Beal, Senior Vice President of Clayton Holdings, a mortgage services outsourcing, analytics and consulting company headquartered in
Shelton, Connecticut.
CLAYTON HISTORY
Clayton pioneered the residential mortgage loan due diligence business with its formation in 1990. In 2005, the company combined with the top credit risk management surveillance firm (which was founded in 1997) creating a leading information and analytics company serving investment banks, commercial banks, mortgage insurance companies, fixed income investors and loan servicers, primarily in the secondary market for non-agency mortgages. With a full suite of outsourced services, information-based analytics and specialty consulting services, Clayton helps its clients enhance liquidity, grow revenues, reduce costs and manage risk.
COMPETITION
The market for due diligence services is highly fragmented, highly competitive and rapidly changing. Because there are very few publicly traded firms specializing in due diligence, little is known about the majority of service providers in terms of loan review volume, market share and revenue. Nevertheless, some of our competitors include
Core Logic’s Bohan Group unit, Fidelity Information Services Watterson Prime unit, 406
Partners, Allonhill, American Mortgage Consultants, Opus Capital Markets Consultants, and RR Donnelly.
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DUE DILIGENCE – INTRODUCTION
We are retained by our clients to review samples of closed loan pools that they are considering for purchase. Clayton is not retained by its clients to provide an opinion as to whether a loan is a good loan or a bad loan. Rather, our clients use Clayton’s due diligence to identify issues with loans, negotiate better prices on pools of loans they are considering for purchase, negotiate expanded representations and warranties in purchase and sale agreements from sellers, and, on occasion, to negotiate an increase in pool sample sizes where the results indicate to the client that a broader review is necessary.
The type and scope of our due diligence work is dictated by our clients based on their individual objectives. Our assessments are performed on a sample of loans being purchased for likely placement in a residential mortgage-backed security (RMBS).
Clients select the samples, generally 10% to 20% of the total pool of loans.
Clayton typically reviews loans against the seller or originating institution’s guidelines and the client’s tolerance. Clayton reviews for: (1) adherence to seller credit underwriting guidelines and client risk tolerances; (2) compliance with federal, state and local regulatory laws, and; (3) the integrity of electronic loan data provided by the seller to the prospective buyer. This review scope is commonly referred to as a credit and compliance review.
Our diligence clients include investment banks, commercial banks and other financial institutions, mortgage and bond insurance companies and more recently government agencies, private equity firms and hedge funds. Clayton’s contractual relationships with its diligence clients are standard, fee for service vendor contract
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arrangements. Clayton’s fees are not contingent on its findings; rather we are typically
compensated with a standard service fee for each loan reviewed.
Accordingly, Clayton is not paid any fees based on: (1) its grading of the loans it
reviews, (2) the ultimate performance of the loans it reviews, (3) the securitization of any
loans it reviews, or (4) the ultimate disposition of the loans in any structured finance
transaction.
The work product produced by Clayton is comprised of reports that include loan-
level data reports and loan exception reports. Such reports are “works for hire”,
the property of our clients and provided exclusively to our clients. When Clayton
provides its reports to its clients, its work on those loans is generally completed —
Clayton is not involved in the further processes of securitizing the loans and does not
review nor opine on the securitization prospectus. To our knowledge, prospectuses do
not refer to Clayton and its due diligence work. Moreover, Clayton does not participate
in the securities sales process, nor does it have knowledge of our loan exception reports
being provided to investors or the rating agencies as part of the securitization process.
DUE DILIGENCE REVIEW STAFFING
The individuals who conduct the due diligence reviews for Clayton consist of (1)
a client services manager, (2) loan underwriters, (3) a lead underwriter and (4) a quality
control specialist. The client services manager works with a client’s transaction manager
to facilitate the flow of information between the operations at Clayton and the client. The
client services manager is responsible for providing the reports that Clayton produces to
its clients.
3
The actual review of the loan files is performed by contract underwriters, who review the loan file, compare tape data with hard copy or scanned file data to verify loan information and identify discrepancies of key data points, calculate income (for full verification loans) and grade loans based on seller guidelines and client tolerances (if applicable to a transaction). These individuals are managed by “lead underwriters,” who are more experienced underwriters. Lead underwriters manage the transaction, coordinate the delivery of the loan files, set up equipment (for deals at a seller or client site), manage underwriters and quality control, and run reports that summarize the daily findings. The lead underwriters communicate with the client services manager and clients about particular loan exceptions. They also clear stipulations, meaning that they will regrade loans after a seller cures a loan exception (such as when a seller provides missing file documentation). A quality control (QC) specialist, helps ensure that the data in the
CLAS system is accurate and complete and verifies that the loan grades and, in particular, exceptions are warranted.
With the deterioration of the non-agency and mortgage market since mid-2007,
Clayton has not had enough due diligence work for many underwriters — forcing them to find other types of work.
THE DUE DILIGENCE REVIEW PROCESS
The loan review process is conducted as follows:
• A client reviews a pool of loans and selects a sample of loans for diligence
review. The sample can be adverse or random – Clayton is generally not told
whether sample is adverse or random. An example of an adverse sample is
4
loans where a certain characteristic (i.e. below x borrower credit score) might
be of concern to a client in their assessment of the pool value.
• Client hires Clayton to perform diligence on the sample. Client gives
Clayton’s Client Services Manager instructions on the type and scope of
review and the time frame for the deal.
• Client sends or has sent to Clayton a tape containing loan information from
the originator, which Clayton programmers “crack” and loads into our CLAS
system.
• At the end of each day, the lead underwriter generates reports for the client
that summarizes Clayton’s findings, including exception reports.
• Exception reports are provided to the client and seller. The seller then begins
process of “stip-clearing” (usually providing additional information to Clayton
on specific loans). The seller tries to cure an exception by providing missing
documentation or otherwise explaining to Clayton why a loan should not be
graded EV-3 (more particularly defined below). This iterative process is on-
going throughout the transaction and continues until a deal “tie-out” call is
conducted between the client and seller.
• Once stips have been cleared by Clayton and reports are given to client,
Clayton’s review is complete.
• Prior to closing date, the seller and client have an independent “tie-out” call
where they discuss EV-3 loans, negotiate prices and additional representations
and warranties, and finalize the purchase of loans. Clayton generally does not
participate in that “tie-out” call unless the client and/or seller have a question
5
about a specific loan. Clayton generally does not know which or how many
loans the client ultimately purchases.
Any time a grade change is made, Clayton documents the basis for the change in
the exception report. Clayton will make changes to loan grades if they are justified,
meaning:
• Clayton clearly made a mistake in grading the loan;
• The seller provided missing documentation; or
• Clayton determines that compensating factors were sufficient or insufficient, thereby warranting a grade change.
Separately, a client can waive an exception, which results in the loan received a
grade of EV-2W.
EXCEPTIONS
An important part of Clayton’s diligence service is the production of exception
reports. Prior to Clayton instituting an exception tracking system across its client base in
late 2005, continuing through 2006, loans were simply graded as follows:
EV-1: Loans that meet guidelines;
EV-2: Loans that do not meet guidelines, but have sufficient compensating factors; and
EV3: Loans that did not meet guidelines and had insufficient compensating factors.
Exceptions to underwriting guidelines can vary from being severe — such as the valuation of a property not being supported by an appraisal, stated income not being reasonable for the job stated, or missing critical documents in a file such as a HUD-1, loan application, or an appraisal — to benign, such as a debt to income ratio exception of
6
less than 5%, or a loan to value exception of 5% or less, or a credit score that is within an
acceptable tolerance (i.e. 650 score required, 640 actual).
Our exception numbers should not be viewed in isolation. Exceptions must be
reviewed in conjunction with the corresponding underwriting guidelines and client
tolerances. Simply stated, a Clayton grade of EV-1 does not mean that a loan is good or is
likely to perform. Nor does a Clayton grade of EV-3 mean that a loan is bad and is not
likely to perform. Moreover, it may not be possible to draw an “apples to apples”
comparison of deals from different clients and/or different sellers.
Beginning in 2003, Clayton worked to develop a more comprehensive scoring
system for its clients, one which would allow Clayton to expand its exception review
system to more specifically identify and track exceptions. The new system was called
Exception Tracking and it allowed our clients to better manage exceptions (E.g., show
client what portfolio would look like if seller cured what it could) and it allowed for
better reporting to clients.
Exception Tracking provided more granularity into the reporting of loan exceptions to its clients. All exceptions to guidelines or client tolerances are tagged with specific exception codes. Underwriter comments and exceptions are then tied together so
they can be reviewed and discussed by relevant parties. Under Exception Tracking
Clayton grades loans as follows:
EV-1: Loans that meet guidelines
EV-2: Loans that do not meet guidelines but have sufficient compensating factors
EV-2W: Loans that are graded EV-3 by Clayton, but waived by the client
7
EV-2T: Loans for which side letters are issued allowing seller 30 days after
closing to cure exceptions
EV-3C: Loans that do not meet guidelines but have curable exceptions
EV-3D: Loans that do not meet guidelines due to missing material documentation
EV-3: Loans that do not meet guidelines and have insufficient compensating
factors
DUE DILIGENCE – WHAT IT IS NOT
It is important to understand what Clayton does not do. Clayton does not:
• Confirm the authenticity of information in the file — the loan has already
closed, and due diligence firms historically have relied on the
documentation within the file for the review
• Know whether a loan was placed into securitization, the type of
securitization or if it was held in portfolio by the client
• Tell clients which loans to buy or not buy
• Participate in the actual trading of or pricing of the loans
• Participate in the structuring or rating of a security
• Participate in deciding which rating agency should be used to rate a
security.
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DUE DILIGENCE IN THE FUTURE
There are many improvements that need to be made throughout the mortgage industry, which will help restore investor confidence and rebuild the mortgage market.
Clayton fully supports the Asset Securitization Forum (ASF) and Securities Industry and
Financial Markets Association (SIFMA) who are making significant contributions to the development of asset securitization markets that investors will have confidence in.
Specifically in the area of due diligence, we have seen the rating agencies adopt specific improvements that relate to mortgage securitization which call for:
1. Independent, third-party pre-securitization review of samples of underlying
mortgage loans, and including disclosure to investors of all exceptions found-
and an assessment of underwriting guidelines
2. Standardized post-securitization forensic reviews
3. Expanded loan-level data reporting of initial mortgage pool and ongoing loan
performance
It should also be noted that the rating agencies in a limited number of mortgage transactions they have recently rated, have taken a more active role in the due diligence review process, reviewing due diligence findings prior to issuing ratings in those transactions. Clayton views this as a significant and positive change that over time will help the market to recover.
We are also hopeful that the SEC will adopt these requirements and others as part of their new Regulation AB, following the enactment of Financial Reform legislation. We believe that such reforms will provide greater disclosure and transparency for investors.
9
Testimony of Keith Johnson
Former President of Clayton Holdings, Inc. and
Former President of Washington Mutual’s Long Beach Mortgage
Before the Financial Crisis Inquiry Commission
September 23, 2010
Chairman Angelides, Vice-Chairman Thomas, and Members of the Commission, my name is Keith Johnson. I have been in the financial services and banking industry for 30 years. From 1986 to 2000, I was employed by Bank United of Texas (“Bank United”) where I held a variety of executive positions involving finance, capital markets, loan origination, securitization and servicing. In 2000, Bank United was sold to Washington
Mutual (“WaMu”) were I became the Chief Operating Officer of WaMu’s Commercial
Segment. In mid-2003, I was asked to assist the existing management of Long Beach
Mortgage. In June 2005, while remaining an employee of WaMu, I became the acting
President of Long Beach Mortgage for approximately 9 months. In May 2006, I left
WaMu and became President and Chief Operating Officer of Clayton Holdings, Inc.
(“Clayton”) the largest residential loan due diligence and securitization surveillance company in the United States and Europe. I left Clayton at the beginning of 2009 shortly after its sale to a private real estate investment fund.
I thank the Commission for the invitation to appear, and I hope that my testimony will assist in your efforts to better understand the causes of the financial crisis. The
Commission has asked me to address several topics related to loan securitization,
1 mortgage brokers and their related impact to the Sacramento region and other
communities in the Central Valley.
In my opinion, this crisis is not the result of a single cause, but a combination of significant factors operating at the same time and feeding each other. Low interest rates, increased housing goals, creative securitization, lack of assignee liability, compromised warehouse lending, flawed Rating Agency process, relaxed and abusive lending practices, rich incentives, shortfalls on regulation and enforcement provided the fuel to inflate home prices and excess borrowings by consumers.
Financial Factories & Securitization
In addition to the factors previously mentioned, improvements in technology, credit scoring and financial engineering transformed traditional lending platforms into large financial factories. Several of these factories were originating, packaging, securitizing and selling at the rate of $1 billion a day. The quality control process failed at a variety of stages during the manufacturing, distribution and on-going servicing. Traditional regulatory examination procedures were not able to evaluate neither processing exceptions nor their resulting cumulative risk. The lack of accountability and failure by many parties to “present value the pain” allowed for the process to continue. Lastly, the lingering impact of this transformation has been the severing of practical solutions between borrowers facing a financial hardship and the investors with principal at risk.
Many have blamed this crisis on the growth of securitization. I believe that mortgage
2 securitization process was flawed and abused, but can and will be beneficial to the public,
as it provides a vehicle for lenders to sell loans in exchange for the capital necessary to
make additional loans. Hopefully, this crisis will lead to reform of common sense
improvements to bring back a prudent robust securitization market.
Mortgage Brokers
As it relates to doing business with mortgage brokers, I can share with you my experience
at Long Beach and observations while at Clayton.
Unlike most large mortgage companies that contain multiple origination channels, retail,
direct mail, telephone and refinance desks, Long Beach was a sub prime lender that relied
100% on mortgage brokers.
Broker originated loans was and can be a viable loan production channel. The model
serves a purpose in helping financial institutions reach out to the unbanked and
underbanked areas.
However, performance data has shown that the broker model became flawed with greed,
fraud and deception. Low barriers of entry, lack of regulatory supervision or
enforcement, coupled with rich incentives for production created an environment that
contributed to the surge in defaults. During my period of time at Clayton, I was able to
observe the operations of close to 40 of the largest mortgage originators and servicers in
the United States. To late to be effective, it became obvious that the only way to correct
the broker model was to shut it down and wait for regulatory reform and enforcement.
Recent regulatory changes have been made to improve the broker channel and I would
3 encourage additional supervision and enforcement. For me, one of the underlying
conflicts with the broker model is the question of “whom does the broker work for?” The
main problem is that, counter to common perception, mortgage brokers do not represent
the borrowers who pay them for advice. Instead, they are more like independent salespeople who are often paid as much by the lenders in addition to the borrowers they represent. When brokers are paid commissions by both parties to a loan transaction, confusion results about whom the brokers actually "work for."
In my opinion, the broker should be acting as a fiduciary of the borrower, and have the responsibility for making sure that the borrower understands and benefits from the transaction by receiving fair terms. A criticism of this approach is that implementing will have an adverse impact on the low to moderate-income applicants. I would suggest to
you that the benefits would tilt toward the consumer, with alternatives to encourage
financial institutions to invest in low to moderate housing.
Issues impacting Sacramento and Central Valley
As it relates to the Sacramento and other communities in the Central Valley, I have three
areas of concern.
Special Servicing
Effective loan servicing, foreclosure avoidance and loss mitigation are necessary to help families work through a financial hardship. Servicer incentive, the borrower’s lack of financial literacy and the threat of investor litigation are limiting effective loan servicing.
4
Current servicing fees provide little to no economic incentive for servicers to spend the
time, money and effort working with a borrower to arrive at a fair solution. For some
servicers, the most profitable path is to move the loan to foreclosure. Special Servicing
should be engaged which has incentives to cure defaults and avoid foreclosure. My
recommendation for all future securitizations (including Fannie Mae, Freddie Mac and
FHA) is that once a loan goes 90 days delinquent it is assigned to a Special Servicer who
will evaluate the collateral and borrower’s financial condition and perform a “Lowest
Cost Solution” that will take into consideration loan modification, short-sale, deed-in-
lieu, foreclosure etc. The Special Servicer will receive a market rate of compensation
based on their results.
As for financial literacy, I have worked with many delinquent borrowers and it clear that
we have not stressed in our education system skills and knowledge necessary to make
financial decisions. There has been much press about the streamlined modification
processes offered during the past two years. I have worked with borrowers in educating them and helping them complete the modification checklists. However, the process is still
complicated by the lack of borrower’s financial knowledge and communication barriers.
The last servicing issue relates to fear of litigation from investors. The legal and loss waterfall structures of legacy securitizations are creating conflicting incentives for investors to resolve delinquent loans via modifications. My recommendation is to follow, the FDIC in their “Low Cost Solution” process for all delinquent loans. The “Lowest
5 Cost Solution” should be followed regardless of the impact to structured waterfall losses.
Servicers who adopt the “Low Cost Solution” methodology should be held harmless from
investor litigation.
Foreclosed Inventory of Homes
The second concern for the Sacramento region and other communities in the Central
Valley is the increased inventories of abandon homes resulting from foreclosure. Empty
homes do not pay the salary of schoolteachers, police and fire departments. The compounding impact of vacant homes is a real threat to the recovery of a community.
The issue of unsold inventory is also linked to my third concern for the area, the availability of credit to purchase homes.
Availability of Credit
Home prices are down, inventory for sale has increased, credit standards have tightened and prospective homebuyers will have difficulty meeting the down payment requirements. One suggestion, which I found to work during the 1980’s Texas recession, is to promote an active “Loans to Facilitate the Sale of Foreclosed Homes” program.
Ironically, this is a program of relaxed underwriting guidelines. Borrowers would qualify based on their existing rental or housing income being equal to or lower then a fully loaded (principal, interest, taxes and insurance) mortgage payment that amortizes over a
30 year period. The program would encourage minimum down payments, but be willing to offer 100%+ financing that rolls in all the closing costs.
6 One would argue that relaxed underwriting and 100% loan to value loans put us into this
mess, why would we ever use this to pull us out? I would offer these factors as defense,
home values have significantly declined reducing the risk on collateral, absorption helps to slow any further price deterioration, communities and neighborhoods become more
stable with higher comparables and real estate taxes are being paid to support
infrastructure.
Again, I thank the Commission for the invitation to appear. I appreciate the opportunity
to share my views, and would be happy to answer any of your questions.
7 APPENDIX III
TABLE OF CONTENTS
DEFENDANTS’ MATERIALLY MISLEADING STATEMENTS AND OMISSIONS REGARDING UNDERWRITING GUIDELINES ...... 1
A. PLMBS backed by mortgages originated by or through Ameriquest Mortgage Company (“Ameriquest”) ...... 1
B. PLMBS backed by mortgages originated by or through Argent Mortgage Company, L.L.C. (“Argent”)...... 5
C. PLMBS backed by mortgages originated by or through Bank of America, National Association (“Bank of America”) ...... 9
D. Representations regarding underwriting of mortgages acquired by Sponsor, Credit-Based Asset Servicing and Securitization LLC (“Sponsor”) ...... 15
E. PLMBS backed by mortgages originated by or through Countrywide Home Loans, Inc. & Countrywide Home Loans Servicing LP (“Countrywide”)...... 18
F. PLMBS backed by mortgages originated by or through Decision One Mortgage Company, LLC (“Decision One”) ...... 24
G. PLMBS backed by mortgages originated by or through Downey Savings and Loan Association, F.A. (“Downey”)...... 27
H. PLMBS backed by mortgages originated by or through First Franklin Financial Corporation (“First Franklin”)...... 30
I. PLMBS backed by mortgages originated by or through First Horizon Home Loan Corporation (“First Horizon”)...... 35
J. PLMBS backed by mortgages originated by or through Fremont Investment & Loan (“Fremont”) ...... 38
K. PLMBS backed by mortgages originated by or through GMAC Mortgage Corporation (“GMAC”)...... 42
L. PLMBS backed by mortgages originated by or through IndyMac Bank F.S.B. (“IndyMac”) ...... 47
M. PLMBS backed by mortgages originated by or through IndyMac Bank F.S.B. (“IndyMac”) ...... 52
N. PLMBS backed by mortgages originated by or through New Century Mortgage & NC Capital Corporation (“New Century”) ...... 57
i O. PLMBS backed by mortgages originated by or through Option One Mortgage Corporation (“Option One”) ...... 62
P. PLMBS backed by mortgages originated by or through Residential Funding Corporation (“Residential Funding”)...... 67
Q. Representations Made by Depositor, Residential Funding Mortgage SecuritiesI , Inc., Regarding the Underwriting of Mortgages Backing Certain PLMBS...... 71
R. PLMBS backed by mortgages originated by or through Wells Fargo Bank, National Association (“Wells Fargo”) ...... 76
S. PLMBS backed by mortgages originated by or through Wells Fargo Bank, National Association (“Wells Fargo”) ...... 81
T. PLMBS backed by mortgages originated by or through WMC Mortgage Corp...... 86
ii APPENDIX III DEFENDANTS’ MATERIALLY MISLEADING STATEMENTS AND OMISSIONS REGARDING UNDERWRITING GUIDELINES
A. PLMBS backed by mortgages originated by or through Ameriquest Mortgage Company (“Ameriquest”)
Security CUSIP AMSI 2005-R10 A2B 03072SS48
Statements Material Misstatements and Omissions 1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.8 and V.A.3 of the Amended Complaint: According to the Prospectus, “[t]he Underwriting Guidelines are primarily intended to evaluate: (1) the applicant's credit standing and repayment ability and (2) the value and 1. Far from following its underwriting guidelines and making adequacy of the mortgaged property as collateral.” Specifically, the Prospectus describes occasional, targeted and justified exceptions when other the following review process: evidence of ability to repay justified a deviation from the
guidelines, in fact at Ameriquest, variance from the stated [T]he Originator reviews and verifies the loan applicant's sources of income standards was the norm, and many loans were made with (except under the Stated Income and Limited Documentation types, under essentially little to no underwriting or effort to evaluate which programs, such information may not be independently verified), ability to repay. Nowhere did any of the Offering Documents calculates the amount of income from all such sources indicated on the loan apprise the Bank of the extent to which Ameriquest deviated application, reviews the credit history of the applicant, calculates the debt-to- from its underwriting guidelines. income ratio to determine the applicant's ability to repay the loan, and reviews the mortgaged property for compliance with the Underwriting Guidelines. 2. The underwriting practices actually followed by Ameriquest, including the widespread use of exceptions to the stated Source: AMSI 2005-R10 Pros. Sup. S-31. underwriting guidelines, were not “primarily intended to evaluate: (1) the applicant's credit standing and repayment The Prospectus asserts that the “Underwriting Guidelines permit loans with combined loan- ability and (2) the value and adequacy of the mortgaged to-value ratios at origination of up to 100%, subject to certain Risk Category limitations.” property as collateral.” The prospectus further states: 3. They omit to state that: These Risk Categories establish the maximum permitted loan-to value ratio • Because many loans were originated according to and loan amount, given the occupancy status of the mortgaged property limited documentation procedures, Ameriquest did not and the mortgagor's credit history and debt ratio. In general, higher credit verify the income for many borrowers. Consequently, risk mortgage loans are graded in Risk Categories which permit higher the resulting calculated debt-to-income ratio did not debt ratios and more (or more recent) major derogatory credit items such accurately “determine the applicant’s ability to repay the
1 as outstanding judgments or prior bankruptcies; however, the Underwriting loan.” Guidelines establish lower maximum loan-to-value ratios and lower maximum loan amounts for loans graded in such Risk Categories.” • Ameriquest did not employ reasonable methods to verify or substantiate borrower income, which rendered decisions based on the purported debt-to-income ratios Source: AMSI 2005-R10 Pros. Sup. S-33. unreliable.
• Ameriquest's underwriters routinely accepted appraisals that were not prepared in accordance with the applicable appraising standards in the underwriting guidelines. Consequently, Ameriquest used unreliable appraisals to determine the value of the collateral, which rendered decisions based on LTV unreliable.
• Ameriquest’s assignment of a borrower’s maximum loan-to-value ratio was based on unreliable methods of evaluating borrower credit risk.
• Due to the industry’s inexperience with lending to borrowers with increased credit risks, Ameriquest lacked sufficient data regarding historical patterns of borrower behavior in relation to default experience for similar types of borrower profiles. Consequently, the assignment of “risk categories,” with their corresponding maximum permitted LTV ratios and loan amounts, had no reliable connection to the actual risk of default presented by borrowers assigned to each category. • Ameriquest lacked adequate procedures and practices to monitor or evaluate its underwriters' exercise of judgment, or to provide appropriate training and education to its underwriters.
2 2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to state that: The Prospectus states that “[o]n a case by case basis, the Originator may determine that, based upon compensating factors, a loan applicant, not strictly qualifying under one of the • Ameriquest routinely granted exceptions to the risk Risk Categories described below, warrants an exception to the requirements set forth in the categories and maximum permitted LTV ratios despite Underwriting Guidelines.” the absence of meaningful compensating factors.
The Prospectus states: • Ameriquest had no reasonable basis on which to Compensating factors may include, but are not limited to, loan-to-value ratio, evaluate alleged compensating factors that might debt-to-income ratio, good credit history, stable employment history, length at warrant exceptions to the underwriting standards. current employment and time in residence at the applicant's current address. It is expected that a substantial number of the Mortgage Loans to be included in the • Ameriquest lacked adequate policies, practices or mortgage pool will represent such underwriting exceptions.” procedures to monitor or evaluate the exercise of underwriter discretion in granting exceptions, or to Source: AMSI 2005-R10 Pros. Sup. S-31. provide training or education to underwriters.
• Ameriquest lacked a reliable factual foundation on which to evaluate certain alleged "compensating factors," including a borrower’s "debt-to-income ratio" and "stable employment history," because income and employment history were not verified for many mortgages in the pool.
3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: The Prospectus represents that:
The Underwriting Guidelines are applied in accordance with a procedure which • Ameriquest routinely accepted appraisals that were not complies with applicable federal and state laws and regulations and requires prepared in accordance with applicable appraisal either (A) (i) an appraisal of the mortgaged property . . . and (ii) a review of standards and were therefore unreliable. such appraisal, which review may be conducted by a representative of the Originator or a fee appraiser and may include a desk review of the original • Ameriquest lacked any reliable basis on which to assess appraisal or a drive-by review appraisal of the mortgaged property or (B) an the accuracy of the values yielded by the described insured automated valuation model. [“Insured AVM”]. appraisal practices. Each appraisal includes a market data analysis based on recent sales of comparable homes in the area and, where deemed appropriate, replacement • Ameriquest lacked adequate policies, practices, and cost analysis based on the current cost of constructing a similar home. procedures to monitor and evaluate compliance with Every independent appraisal is reviewed by a representative of the applicable appraisal standards. Originator or a fee appraiser before the mortgage loan is funded. • Ameriquest lacked adequate policies, practices, and procedures to determine the qualifications of employees
3 Source: AMSI 2005-R10 Pros. Sup. S-31-33. reviewing appraisals or to provide training or education to those employees.
• Ameriquest lacked adequate information upon which to determine whether valuations resulting from the “Insured AVM” were as reliable as valuations resulting from appraisals performed in accordance with accepted practices and standards.
4. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: The Prospectus describes three levels of documentation, “Full,” “Limited,” and “Stated Income,” as follows: • Ameriquest routinely did not obtain the required documentation and did not employ reasonable methods The Full Documentation . . . program is generally based upon current year to to verify or substantiate borrower income and assets as date income documentation as well as income documentation for the previous purportedly required by the various levels of 24 months (i.e., tax returns and/or W-2 forms) or bank statements for the documentation. previous 24 months” and “[t]he applicant's employment and/or business licenses are generally verified. • Ameriquest lacked adequate practices and procedures to monitor or evaluate the compliance by the employees The Limited Documentation . . . program is generally based on bank statements involved with loan origination with the requirements of from the past twelve months supported by additional documentation provided the various levels of documentation or to provide by the applicant or current year to date documentation . . . [and t]he applicant's training or education to those employees. employment and/or business licenses are generally verified.
The Stated Income . . . program requires the applicant's employment and income sources to be stated on the application. The applicant's income as stated must be reasonable for the related occupation in the loan underwriter's discretion. However, the applicant's income as stated on the application is not independently verified.
Source: AMSI 2005-R10 Pros. Sup. S-32.
4 B. PLMBS backed by mortgages originated by or through Argent Mortgage Company, L.L.C. (“Argent”)
Security CUSIP ARSI 2005-W5 A2C 040104QN4
Statements Material Misstatements and Omissions
1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.8 and V.A.3 of the Amended Complaint: According to the Prospectus, “The Underwriting Guidelines are primarily intended to evaluate: (1) the applicant's credit standing and repayment ability and (2) the value and 1. Far from following its underwriting guidelines and making adequacy of the mortgaged property as collateral.” The Prospectus asserts that the occasional, targeted and justified exceptions when other originator: evidence of ability to repay justified a deviation from the guidelines, in fact at Argent, variance from the stated [C]alculates the amount of income from all such sources indicated on the loan standards was the norm, and many loans were made with application, reviews the credit history of the applicant, calculates the debt-to- essentially little to no underwriting or effort to evaluate income ratio to determine the applicant's ability to repay the loan, and reviews ability to repay. Nowhere did any of the Offering Documents the mortgaged property for compliance with the Underwriting Guidelines. apprise the Bank of the extent to which Argent deviated . . . from its underwriting guidelines. The Originator also obtains (or the broker submits) a credit report on each applicant from a credit reporting company. The credit report typically contains 2. The underwriting practices actually followed by Argent, the reported information relating to such matters as credit history with local and including the widespread use of exceptions to the stated national merchants and lenders, installment debt payments and reported records underwriting guidelines, were not “primarily intended to of default, bankruptcy, repossession and judgments. If applicable, the loan evaluate the applicant’s credit standing and repayment application package must also generally include a letter from the applicant ability “nor on the “value and adequacy of the mortgaged explaining all late payments on mortgage debt and, generally, consumer (i.e. property as collateral.” non-mortgage) debt. 3. They omit to state that: The Prospectus also states: • Because many loans were originated according to The Underwriting Guidelines are less stringent than the standards generally limited documentation procedures, Argent did not verify acceptable to more traditional lenders with regard to: (1) the applicant's credit the income for many borrowers. Consequently, the standing and repayment ability and (2) the property offered as collateral. resulting calculated debt-to-income ratio did not Applicants who qualify under the Underwriting Guidelines generally have accurately “determine the applicant’s ability to repay the payment histories and debt ratios which would not satisfy the underwriting loan.” guidelines of more traditional lenders and may have a record of major derogatory credit items such as outstanding judgments or prior bankruptcies. • Argent lacked an adequate basis on which to assess the efficacy of the stated guidelines. Because of the limited Source: ARSI 2005-W5 Pros. Sup. S-26-27. historical data with respect to performance by borrowers
5 who did not meet the guidelines of more traditional The Prospectus states that “[t]he Underwriting Guidelines permit loans with combined lenders, Argent was not in a position to draw any loan-to-value ratios at origination of up to 100%, subject to certain Risk Category reliable conclusions with respect to the ability of its limitations.” According to the prospectus, these “various Risk Categories are used to grade guidelines to predict default or credit risk or otherwise the likelihood that the mortgagor will satisfy the repayment conditions of the mortgage form a foundation for sound lending practices. loan.”
The prospectus further describes that: • Argent did not employ reasonable methods to verify or substantiate borrower income, which rendered decisions The maximum allowable loan-to-value ratio varies based upon the income based on the purported debt-to-income ratios unreliable. documentation, property type, creditworthiness, debt service-to-income ratio of the • Argent's underwriters routinely accepted appraisals that applicant and the overall risks associated with the loan decision. . . . were not prepared in accordance with the applicable appraising standards in the underwriting guidelines. In general, higher credit risk mortgage loans are graded in Risk Categories Consequently, Argent used unreliable appraisals to which permit higher debt ratios and more (or more recent) major derogatory determine the value of the collateral, which rendered credit items such as outstanding judgments or prior bankruptcies; however, the decisions based on LTV unreliable. Underwriting Guidelines establish lower maximum loan-to-value ratios and lower maximum loan amounts for loans graded in such Risk Categories. • Argent lacked an adequate basis upon which to assign borrowers to Risk Categories or to draw conclusions Source: ARSI 2005-W5 Pros. Sup. S-27-28. with respect to “the likelihood that the mortgagor will satisfy the repayment conditions of the mortgage loan.”
• Due to the industry’s inexperience with lending to borrowers with increased credit risks, Argent lacked sufficient data regarding historical patterns of borrower behavior in relation to default experience for similar types of borrower profiles. Consequently, the assignment of borrowers to “risk categories,” with corresponding maximum LTV ratios, had no reliable connection to the actual risk of default presented by borrowers assigned to each classification.
• Argent lacked adequate procedures and practices to monitor or evaluate its underwriters' exercise of judgment, or to provide appropriate training and education to its underwriters.
6
2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to state that: The prospectus states: • Argent routinely granted exceptions to the risk category On a case-by-case basis, the Originator may determine that, based upon limitations despite the absence of meaningful compensating factors, a loan applicant, not strictly qualifying under one of the compensating factors. Moreover, the statements are Risk Categories described below, warrants an exception to the requirements set materially misleading because they fail to disclose that forth in the Underwriting Guidelines. Argent had no reasonable basis on which to evaluate alleged compensating factors that might warrant Compensating factors may include, but are not limited to, loan-to-value ratio, exceptions to the underwriting standards. debt-to-income ratio, good credit history, stable employment history, length at current employment and time in residence at the applicant's current address. It is • Argent lacked adequate practices, policies or procedures expected that a substantial number of the Mortgage Loans to be included in the to monitor or evaluate the exercise of underwriter mortgage pool will represent such underwriting exceptions. discretion in granting exceptions, or to provide training or education to underwriters. Source: ARSI 2005-W5 Pros. Sup. S-26. • Argent lacked a reliable factual foundation on which to evaluate certain alleged "compensating factors," including a borrower’s "debt-to-income ratio" and "stable employment history," because income and employment history were not verified for many mortgages in the pool. 3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: Each Prospectus describes Argent’s appraisal process as follows: • Argent routinely accepted appraisals that were not prepared in accordance with applicable appraisal The Underwriting Guidelines are applied in accordance with a procedure which standards and were therefore unreliable. complies with applicable federal and state laws and regulations and requires (i) an appraisal of the mortgaged property which conforms to the Uniform Standards • Argent lacked any reliable basis on which to assess the of Professional Appraisal Practice and are generally on forms similar to those accuracy of the values yielded by the described acceptable to Fannie Mae and Freddie Mac and (ii) a review of such appraisal, appraisal practices. which review may be conducted by a representative of the Originator or a fee appraiser and may include a desk review of the original appraisal or a drive-by • Argent lacked adequate policies, practices, and review appraisal of the mortgaged property. procedures to monitor and evaluate compliance with applicable appraisal standards. Source: ARSI 2005-W5 Pros. Sup. S-26-29. • Argent lacked adequate policies, practices, and procedures to determine the qualifications of employees reviewing appraisals or to provide training or education to those employees.
7
4. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: Each Prospectus states that “[d]uring the underwriting process, the Originator reviews and verifies the loan applicant's sources of income (except under the Stated Income and Limited • Argent routinely did not obtain the required Documentation types, under which programs such information may not be independently documentation and did not employ reasonable methods verified).” to verify or substantiate borrower income and assets as purportedly required by the various levels of Each Prospectus describes three levels of documentation – Full Documentation; Limited documentation. Documentation; Stated Income – as follows:
• Argent lacked adequate practices and procedures to The Full Documentation residential loan program is generally based upon monitor or evaluate the compliance by the employees current year to date income documentation as well as the previous year's income involved with loan origination with the requirements of documentation (i.e., tax returns and/or W-2 forms and/or written verification of the various levels of documentation, to provide training employment) or bank statements for the previous twelve months. The or education to those employees, or to provide adequate documentation required is specific to the applicant's sources of income. The standards for the exercise of an “underwriter’s applicant's employment and/or business licenses are generally verified. discretion.”
The Limited Documentation residential loan program is generally based on bank statements from the past six months supported by additional documentation provided by the applicant or current year to date documentation. The applicant's employment and/or business licenses are generally verified.
The Stated Income residential loan program requires the applicant's employment and income sources to be stated on the application. The applicant's income as stated must be reasonable for the related occupation in the loan underwriter's discretion. However, the applicant's income as stated on the application is not independently verified.
Source: ARSI 2005-W5 Pros. Sup. S-26-29.
8 C. PLMBS backed by mortgages originated by or through Bank of America, National Association (“Bank of America”)
Security CUSIP BAFC 2006-C 2A1 058930AD0 BAFC 2006-E 2A2 05950DAE0 BAFC 2006-E 3A1 05950DAF7
Statements Material Misstatements and Omissions
1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.15 and V.A.3 of the Amended Complaint: According to each Prospectus, Bank of America’s underwriting standards “are intended to evaluate the Mortgagor's credit standing and repayment ability and the value and 1. Far from following its underwriting guidelines and making adequacy of the mortgaged property as collateral.” occasional, targeted and justified exceptions when other evidence of ability to repay justified a deviation from the Each Prospectus states that: guidelines, in fact at Bank of America, variance from the Each mortgage application is evaluated by either an automated underwriting stated standards was the norm, and many loans were made decision engine and/or a human underwriter to determine the appropriate credit with essentially little to no underwriting or effort to evaluate decision and documentation requirements for the loan transaction. If the loan is ability to repay. Nowhere did any of the Offering Documents not automatically approved or declined by the automated underwriting decision apprise the Bank of the extent to which Bank of America engine, it is directed to an underwriter who evaluates the application against a deviated from its underwriting guidelines. set of specific criteria. 2. The underwriting practices actually followed by Bank of Each Prospectuses states the automated and human underwriters will evaluate the loan-to- America, including the widespread use of exceptions to the value ratio as well as the following factors: stated underwriting guidelines, were not "intended to evaluate the Mortgagor's credit standing and repayment [T]he applicant's credit history and/or Credit Score and/or Custom Mortgage ability and the value and adequacy of the mortgaged property Score, the amount of the applicant's debts (including proposed housing payment as collateral.” and related expenses such as property taxes and hazard insurance) to his or her gross monthly income, the intended occupancy of the subject property, the 3. They omit to state that: property type, and the purpose of the loan transaction to determine whether the mortgage loan generally meets the guidelines established for the program under • Bank of America had no reliable basis on which to which the applicant is applying. conclude that the “Custom Mortgage Score” provided any reliable ability to “assess the likelihood that a mortgage loan will become 60 days or more delinquent within two years of application.” Each Prospectus states that “[i]n addition to a Credit Score, Bank of America may obtain a Custom Mortgage Score,” which is described as follows: • Due to the industry’s inexperience with lending to
9 The "CUSTOM MORTGAGE SCORE" was developed on a population of borrowers with increased credit risks, Bank of America mortgage loans serviced by Bank of America and is designed to assess the lacked sufficient data regarding historical patterns of likelihood that a mortgage loan will become 60 days or more delinquent default experienced by borrowers with similar profiles. within two years of application . . . . The Custom Mortgage Score requires a Therefore, the resulting “custom mortgage score” was Credit Score and utilizes information obtained from one of the three major unreliable. credit bureaus. • Bank of America lacked any reasonable basis upon Each Prospectus states that Bank of America applies “debt-to-income ratio guidelines” which to assign “debt-to-income ratio guidelines.” that “are based on the loan instrument, loan term, Credit Score, loan-to-value ratio, Further, the statements omit to state that Bank of property type, and occupancy characteristics of the subject loan transaction.” America lacked historical performance data with respect to loans issued using equivalent underwriting practices Source: BAFC 2006-C Pros. Sup. S-31-32; BAFC 2006-E Pros. Sup. S-30-31. (including the widespread granting of exceptions to underwriting guidelines), and therefore could not reliably assign maximum debt-to-income ratios based on risk.
• Bank of America did not employ reasonable methods to verify or substantiate borrower income, which rendered decisions based on the purported debt-to-income ratios unreliable.
• Bank of America’s underwriters routinely accepted in accurate appraisals to determine the value of the collateral, which rendered decisions based on LTV unreliable.
• Bank of America lacked adequate procedures and practices to monitor or evaluate its underwriters' exercise of judgment, or to provide appropriate training and education to its underwriters. 2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to Each prospectus states: state that:
The automated underwriting decision engine and/or the underwriter may utilize • Bank of America routinely granted exceptions to the compensating factors to offset one or more features of the loan transaction that required debt-to-income ratio guidelines without may not specifically comply with the product guidelines. Therefore, the meaningful compensating factors. application of the underwriting guidelines for a product type by either an
underwriter or an automated decision engine does not imply that each specific standard was satisfied individually. • Bank of America lacked a reliable factual foundation on which to evaluate certain alleged "compensating Specifically, each Prospectus asserts that debt-to-income ratios may “exceed guidelines factors," including a borrower’s "substantial residual
10 when the applicant has documented compensating factors,” which may include: income," because income was not verified for many mortgages in the pool. [D]ocumented excess funds in reserves after closing, a history of making a
similar sized monthly debt payment on a timely basis, substantial residual
income after monthly obligations are met, evidence that ratios will be reduced shortly after closing when a financed property under contract for sale is sold, or additional income has been verified for one or more applicants that is ineligible for consideration as qualifying income. Additionally, each Prospectus describes the following additional risk assessment programs implemented by Bank of America: Bank of America's "NO RATIO LOAN PROGRAM" provides applicants with a minimum Credit Score and a sufficient asset base the ability to obtain mortgage loans with no income verification or Debt-to-Income Ratio calculation. Under this program, the applicant does not state his or her income at the time of loan application. The applicant must evidence a propensity and capacity to save and to maintain stable employment, defined as a minimum of two years in the same line of work. A verbal verification of employment information provided in the application, without reference to income, takes place under this program. While income information is not provided, the applicant must continue to provide documentation of his or her assets used for down payment, closing costs, and reserves on purchase transactions. Bank of America's "100% LTV PROGRAM" provides applicants the ability to obtain a mortgage loan with no down payment. The 100% LTV Program is only available if the primary borrower has a minimum Credit Score. The 100% LTV Program also permits loan-to-value ratios of up to 103% (including closing costs and prepaid items in an amount up to 3% of the value of the mortgaged property). Under this program, Bank of America uses the Standard Documentation Process. Bank of America's "97% LTV PROGRAM" provides applicants with the opportunity to obtain low down payment mortgage loans. This program allows an applicant to obtain financing for a mortgage loan by requiring only a 3% cash down payment from the applicant's own funds. The 97% LTV Program is only available if the primary borrower has a minimum Credit Score. The 97% LTV Program is a fully amortizing 30-year fixed-rate mortgage that is available on owner-occupied principal residences only. This program is available on purchase and rate or term refinance transactions. Under this program, Bank of America uses the Standard Documentation Process. Bank of America's "80/20 Program" provides applicants with an 80% Loan-to-
11 Value Ratio first lien mortgage that is funded simultaneously with a 20% Loan- to-Value Ratio second lien mortgage so that the Total Loan-to-Value Ratio is 100%. By structuring loans in such a manner, the applicant is able to avoid the cost of primary mortgage insurance on the transaction. The 80/20 Program is only available if the primary borrower has a minimum Credit Score. Bank of America may originate both the first and second lien transactions under an 80/20 transaction or the second lien may be originated by another lender. Source: BAFC 2006-C Pros. Sup. S-32-36; BAFC 2006-E Pros. Sup. S-31-35 3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: Each Prospectus describes Bank of America’s appraisal process as follows: • Bank of America routinely accepted appraisals that were Bank of America conducts a valuation of the mortgaged property as collateral not prepared in accordance with applicable appraisal for each mortgage loan. This collateral valuation may be determined by (i) an standards and were therefore unreliable. interior inspection appraisal, (ii) a tax assessed value, (iii) a desktop appraisal,
(iv) a drive-by appraisal, (v) an automated valuation model, or (vi) reference to the collateral valuation obtained in connection with the origination of the previous loan if the loan is a refinance of a mortgage loan that was previously serviced by Bank of America. An interior inspection appraisal is an appraisal report based on an interior inspection of the subject property. A tax assessed value is a factor applied to the tax value recorded for the subject property that reflects the general relationship between the assessed value and the market value of the property. These factors are established for each county by a third party vendor. A tax assessed value also does not entail any physical inspection of the subject property. A desktop appraisal is a report completed by a certified/licensed appraiser utilizing a sales comparison analysis from a local multiple listing service without conducting a physical inspection of the property. A drive-by appraisal report is a limited, summary appraisal report based on an exterior inspection of the property and comparable sales by a certified/licensed appraiser. An automated valuation model is an electronically generated valuation that utilizes real estate information such as property characteristics, market demographics, sales price data, and regional trends to calculate a value for a specific property. Bank of America utilizes the automated valuation models of several vendors. An automated valuation model does not entail any physical
12 inspection of the subject property. In addition, no updated appraisal valuation may be performed if the loan is a refinance of a loan that was previously serviced by Bank of America and the valuation from the time of origination of the loan being refinanced reflects adequate value for the mortgaged property. In certain instances, the interior, desktop or drive-by appraisal reports may be conducted by an employee of Bank of America or an affiliate. The appraisal report, however, may be performed by an independent appraiser contracted by Bank of America or an affiliate of Bank of America on direct channel originations. Appraisal reports on indirect channel originations are generally performed by an appraiser selected by the originating lender but indirect channel appraisers cannot be performed by appraisers that have been deemed to be ineligible to perform appraisals by Bank of America. Source: BAFC 2006-C Pros. Supp. S-30-36; BAFC 2006-E Pros. Supp. S-29-35 4. Statements Regarding Verification of Borrower Income and Assets: These statements were materially misleading because they omit to state that: Each Prospectus describes the following levels of documentation – Standard
Documentation; Rapid Documentation; Stated Income, Stated Asset; PaperSaver(R) 1 • Bank of America routinely did not obtain the required Documentation – as follows: documentation and did not employ reasonable methods Under Bank of America's standard documentation process (the "STANDARD to verify or substantiate borrower income and assets as DOCUMENTATION PROCESS") the following verifications are required: a purportedly required by the various levels of salaried applicant's income is verified by either having the applicant provide documentation. copies of the previous year's federal withholding form (IRS W-2) and a current payroll earnings statement or by sending a verification of employment form to • Bank of America lacked adequate practices and the applicant's employer. A verification of employment form asks the employer procedures to monitor or evaluate the compliance by the to report the applicant's length of employment with the employer, the current employees involved with loan origination with the salary and an indication as to whether it is expected that the applicant will requirements of the various levels of documentation or continue to be employed in the future. A self-employed applicant is required to to provide training or education to those employees. provide copies of tax returns for the prior two years. Bank of America verifies down payment funds by (i) obtaining bank or other financial statements • Even with respect to "stated income, state asset" covering the most recent 60-day period confirming the existence of these funds, programs, industry standards required that borrower (ii) determining electronically that these funds are on deposit with Bank of income information be reasonable in light of the America, (iii) obtaining documentation that these funds are to be obtained from borrower's occupation. a gift or sale of assets or (iv) asking the applicant's financial institution to complete a verification of deposit form detailing asset information. Asset verifications are not required on refinance transactions. . . . If the applicant
1 Only the Prospectus for bond BAFC 2006-C 2A1 contains a description of the PaperSaver(R) Documentation program.
13 lacks a traditional credit history, then the loan approval may be conditioned upon the documentation of an acceptable alternative credit history consisting of at least four references showing timely payment of utilities, insurance premiums or rent, or other alternative credit references in the prior twelve months. Under Bank of America's "RAPID" documentation program, only the most recent pay stub (if salaried) or first two pages of the most recent tax return (if self-employed) of an applicant is required for income verification and only the most recent bank statement of an applicant is required for asset verification on purchase transactions if the applicant meets the Total Loan-to-Value Ratio and Credit Score requirements for that program. Under Bank of America's "STATED INCOME, STATED ASSET" documentation program, which is only available through the wholesale channel, income or asset verifications are not requested from applicants if they meet the Total Loan-to-Value Ratio, Credit Score and other eligibility requirements for the program. Although the Stated Income, Stated Asset program permits applicants to simply state their income and assets without verification, all applicants are required to sign an IRS form 4506 permitting income verification from tax return data if the file is selected as part of Bank of America's quality assurance audit. Under Bank of America's "PAPERSAVER(R)" documentation program, verification of the applicant's stated income and stated assets is not requested (with the exception of self-employed applicants who are required to sign the IRS form 4506-T (Request for Transcript of Tax Returns)) if the applicant meets the designated Credit Score, Custom Mortgage Score, Loan-to-Value Ratios and other eligibility requirements. An applicant with a designated higher Credit Score and designated higher Custom Mortgage Score which together indicate a favorable credit history is eligible for PaperSaver(R) documentation. The PaperSaver(R) documentation program has certain limitations relating to occupancy, property type, purpose and principal balance. Source: BAFC 2006-C Pros. Supp. S-30-36; BAFC 2006-E Pros. Supp. S-29-35
14 D. Representations regarding underwriting of mortgages acquired by Sponsor, Credit-Based Asset Servicing and Securitization LLC (“Sponsor”)
Security CUSIP CBASS 2006-CB4 AV32 12498QAC0
Statements Material Misstatements and Omissions
1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.8, 13, 17 and V.A.3 of the Amended Complaint: The mortgages were acquired by the sponsor, Credit-Based Asset Servicing and Securitization LLC, who applied these underwriting standards “in connection with the 1. Many loans were issued by the originators and acquired by the acquisition of the Mortgage Loans.” The Prospectus asserts that: sponsor with essentially little to no underwriting or effort to evaluate ability to repay. Nowhere did any of the Offering The Sponsor or a loan reviewer reviewed a substantial majority of the files Documents apprise the Bank of the extent to which the related to the Mortgage Loans in connection with the acquisition of the originators deviated from sound underwriting practices. Mortgage Loans by the Sponsor for credit, compliance and property value considerations. These files may include the documentation pursuant to which 2. The underwriting practices actually followed by the the mortgage loan was originally underwritten, as well as the mortgagor’s originators were not intended to evaluate the “mortgagor’s payment history on the mortgage loan. In its review, the Sponsor evaluates credit standing, repayment ability and willingness to repay the mortgagor’s credit standing, repayment ability and willingness to repay debt,” nor where they intended to evaluate “the value and debt, as well as the value and adequacy of the mortgaged property as adequacy of the mortgaged property as collateral.” collateral. A mortgagor’s ability and willingness to repay debts (including the 3. They omit to state that: Mortgage Loans) in a timely fashion is determined by the quality, quantity and durability of income history, history of debt management, history of debt • Many of the loans had been issued under "exceptions" repayment, and net worth accumulation of the mortgagor. In addition, the from the applicable underwriting standards that were not Sponsor may also obtain and review a current credit report for the mortgagor. based on the borrower’s “repayment ability.”
Source: CBASS 2006-CB4 Pros. Sup. S-21. • Because many loans were originated according to limited documentation procedures, the Sponsor’s assessment of the “mortgagor’s ability and willingness to repay debts” based on the “quality, quantity and durability of income history” is unreliable.
2 The Mortgage loans backing bond CBASS 2006-CB4 AV3 were originated by Encore Credit Corp. (19.83%), First NLC Financial Services, LLC (12.75%), Ameriquest Mortgage Company (12.91%), and Ownit Mortgage Solutions (17.07%). CBASS 2006-CB4 Pros. Sup. S-1.
15 • Due to the industry’s inexperience with lending to borrowers with increased credit risks, the Sponsor lacked sufficient data regarding historical patterns of borrower behavior in relation to default experience for similar types of borrower profiles. Consequently, the Sponsor’s evaluation of “repayment ability” based on the mortgagor’s “quality, quantity and durability of income history, history of debt management, history of debt repayment, and net worth accumulation” was unreliable. 2. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: The Prospectus represents that:
• The originators routinely accepted appraisals that were In determining the adequacy of the property as collateral at origination, an not prepared in accordance with applicable appraisal independent appraisal was made of each property considered for financing. standards and were therefore unreliable. The appraiser inspected the property and verified that it was in good condition
and that construction, if new, had been completed at the time of the loan's The originators and the Sponsor lacked any reliable basis origination. Such appraisal was based on the appraiser's judgment of values, • on which to assess the accuracy of the values yielded by giving appropriate weight to both the then market value of comparable homes the described appraisal practices. and the cost of replacing the property.
Source: CBASS 2006-CB4 Pros. Sup. S-21-23. • The originators lacked adequate policies, practices, and procedures to monitor and evaluate compliance with applicable appraisal standards.
• The originators lacked adequate policies, practices, and procedures to determine the qualifications of employees reviewing appraisals or to provide training or education to those employees.
3. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: The Prospectus describes five levels of documentation – Full Documentation; Limited Documentation; Stated Documentation; No Documentation; Alternative Documentation – • The originators routinely failed to obtain the required as follows: documentation and did not employ reasonable methods to verify or substantiate borrower income and assets as Mortgage loans originally underwritten with "Full Documentation" include a purportedly required by the various levels of detailed application designed to provide pertinent credit information. As part documentation. of the description of the mortgagor's financial condition, the mortgagor was required to fill out a detailed application designed to provide pertinent credit • Even with respect to "stated income documentation"
16 information. As part of the description of the mortgagor's financial condition, programs, industry standards required that borrower the mortgagor provided a balance sheet, current as of the origination of the income information be reasonable in light of the mortgage loan, describing assets and liabilities and a statement of income and borrower's occupation. expenses, as well as authorizing the originator to obtain a credit report which summarizes the mortgagor's credit history with local merchants and lenders • The originators lacked adequate practices and procedures and any record of bankruptcy. In addition, an employment verification was to monitor or evaluate the compliance by the employees obtained wherein the employer reported the length of employment with that involved with loan origination with the requirements of organization, the mortgagor's salary as of the mortgage loan's origination, and the various levels of documentation or to provide training an indication as to whether it is expected that the mortgagor will continue such or education to those employees. employment after the mortgage loan's origination. If a mortgagor was self- employed when such mortgagor's loan was originated, the mortgagor submitted copies of signed tax returns. The originator was also provided with deposit verification at all financial institutions where the mortgagor had demand or savings accounts.
Under a "LIMITED DOCUMENTATION" program, certain underwriting documentation concerning income and employment verification is waived.
Under "STATED DOCUMENTATION" programs, a mortgagor's income is deemed to be that stated on the mortgage application and is not independently verified by the originator.
Under a "NO DOCUMENTATION" program, the originator does not undertake verification of a mortgagor's income or assets.
"ALTERNATIVE DOCUMENTATION" programs allow a mortgagor to provide W-2 forms instead of tax returns, permit bank statements in lieu of verification of deposits and permit alternative methods of employment verification.
"STREAMLINED DOCUMENTATION" programs are used for mortgage loans issued to government entities which are being refinanced by the same originator. The originator verifies current mortgage information, but does not undertake verification of the mortgagor's employment or assets and does not conduct a new appraisal of the property considered for refinancing.
Source: CBASS 2006-CB4 Pros. Sup. S-21-23.
17 E. PLMBS backed by mortgages originated by or through Countrywide Home Loans, Inc. & Countrywide Home Loans Servicing LP3 (“Countrywide”).
Security CUSIP HVMLT 2006-2 2A1A4 41161PK44 HVMLT 2006-2 3A1A4 41161PK69 SEMT 2006-1 2A1 81743QAG9 SEMT 2006-1 3A1 81743QAJ3 SARM 2005-21 3A1 863579B49
Statements Material Misstatements and Omissions
1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.1 and V.A.3 of the Amended Complaint: According to each Prospectus, Countrywide’s “[u]nderwriting standards are applied . . . to evaluate the prospective borrower’s credit standing and repayment ability and the value 1. Far from following its underwriting guidelines and making and adequacy of the mortgaged property as collateral.” Each Prospectus states that occasional, targeted and justified exceptions when other Countrywide applies both its “standard underwriting guidelines . . . , which are consistent evidence of ability to repay justified a deviation from the in many respects with the guidelines applied to mortgage loans purchased by Fannie Mae guidelines, in fact at Countrywide, variance from the stated and Freddie Mac, . . . [and] underwriting guidelines featuring expanded criteria (the standards was the norm, and many loans were made with ‘Expanded Underwriting Guidelines’)” Each Prospectus asserts that “[f]or all mortgage essentially little to no underwriting or effort to evaluate loans originated or acquired by Countrywide,” Countrywide: ability to repay. Nowhere did any of the Offering Documents apprise the Bank of the extent to which Countrywide [O]btains a credit report relating to the applicant from a credit reporting deviated from its underwriting guidelines. company. The credit report typically contains information relating to such matters as credit history with local and national merchants and lenders, 2. In light of the widespread granting of "exceptions" to the installment debt payments and any record of defaults, bankruptcy, guidelines, it was not the case that Countrywide applied
3 Countrywide Home Loans Servicing LP acted as the originator for mortgages backing bonds HVMLT 2006-2 2A1A and HVMLT 2006-2 3A1A. 4 According to the Prospectus Supplement, 10.04% of the mortgages backing bonds HVMLT 2006-2 2A1A and HVMLT 2006-2 3A1A were originated by HSBC Mortgage Corporation. Additionally, 8.85% of the mortgages backing bonds HVMLT 2006-2 2A1A and HVMLT 2006-2 3A1A were originated by Mellon Trust of New England. The underwriting guidelines applied by these originators are not stated in the Prospectus or Prospectus Supplement. However, the Prospectus states that “[u]nless otherwise specified in the related prospectus supplement, the loans acquired by the depositor will have been originated in accordance with the underwriting criteria specified under the heading ‘—Underwriting Standards’ below.” HVMLT 2006-2 Pros. 35.
18 dispossession, suits or judgments. All adverse information in the credit report is standards that were "consistent in many respects with the required to be explained by the prospective borrower to the satisfaction of the guidelines applied to mortgage loans purchased by Fannie lending officer. Mae and Freddie Mac."
Each Prospectus states that: 3. The underwriting practices actually followed by Countrywide, including the widespread use of exceptions to [A] prospective borrower must generally demonstrate that the ratio of the the stated underwriting guidelines, were not “applied . . . to borrower’s monthly housing expenses (including principal and interest on the evaluate the prospective borrower’s credit standing and proposed mortgage loan and, as applicable, the related monthly portion of repayment ability and the value and adequacy of the property taxes, hazard insurance and mortgage insurance) to the borrower’s mortgaged property as collateral.” monthly gross income and the ratio of total monthly debt to the monthly gross income (the “debt-to-income” ratios) are within acceptable limits. 4. They omit to state that:
Under its Standard Underwriting Guidelines, Countrywide Home Loans • Countrywide lacked any standards to guide the lending generally permits a debt-to-income ratio based on the borrower’s monthly officer in determining his/her level of “satisfaction” with housing expenses of up to 33% and a debt-to-income ratio based on the the prospective borrower’s explanation of “all adverse borrower’s total monthly debt of up to 38%. information in the credit report,” and that Countrywide failed to provide training or education to its lending Each Prospectus further explains that, under Countrywide's Standard Underwriting officers with respect thereto. Guidelines: • Countrywide did not employ reasonable methods to The maximum acceptable debt-to-income ratio, which is determined on a loan- verify or substantiate borrower income, which rendered by-loan basis, varies depending on a number of underwriting criteria, including decisions based on the purported debt-to-income ratios the Loan-to-Value Ratio, loan purpose, loan amount and credit history of the unreliable. borrower. • Countrywide used unreliable appraisals to determine the Each Prospectus describes borrower evaluation under the Expanded Underwriting value of the collateral, which rendered decisions based Guidelines as follows: on LTV unreliable.
Mortgage loans which are underwritten pursuant to the Expanded Underwriting • Countrywide lacked any reasonable basis upon which to Guidelines may have higher Loan-to-Value Ratios, higher loan amounts and base a determination of what were appropriate variations different documentation requirements than those associated with the Standard in required debt-to-income ratios. This omission is Underwriting Guidelines. The Expanded Underwriting Guidelines also permit particular significant in light of the unreliability of the higher debt-to-income ratios than mortgage loans underwritten pursuant to the cited underwriting criteria, such as Loan-to-Value Ratio, Standard Underwriting Guidelines. loan purpose and credit history, that resulted from Countrywide's inadequate procedures to verify Under its Expanded Underwriting Guidelines, Countrywide Home Loans borrower-supplied information or otherwise follow generally permits a debt-to-income ratio based on the borrower’s monthly appropriate loan underwriting procedures. housing expenses of up to 36% and a debt-to-income ratio based on the borrower’s total monthly debt of up to 40%; provided, however, that if the
19 Loan-to-Value Ratio exceeds 80%, the maximum permitted debt-to-income • Due to the industry’s inexperience with lending to ratios are 33% and 38%, respectively. borrowers with increased credit risks, Countrywide lacked sufficient data regarding historical patterns of Source: HVMLT 2006-2 Pros. Sup. S-76-79; SEMT 2006-1 Pros. Sup. S-54-57; SARM borrower behavior in relation to default experience for 2005-21 Pros. Sup. S-49-52. similar types of borrower profiles. Consequently, the assignment of “maximum acceptable debt-to-income ratio” had no reliable connection to the actual risk of default presented by borrowers assigned to each classification. 2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to state that: Each prospectus states that “[e]xceptions to Countrywide Home Loans’ underwriting guidelines may be made if compensating factors are demonstrated by a prospective • Countrywide routinely granted exceptions to the borrower.” required debt-to-income levels without demonstrated compensating factors. Source: HVMLT 2006-2 Pros. Sup. S-76; SEMT 2006-1 Pros. Sup. S-54; SARM 2005-21 Pros. Sup. S-49. • Countrywide had no reasonable basis on which to evaluate alleged compensating factors that might warrant exceptions to the underwriting standards.
• Countrywide lacked adequate practices, policies or procedures to monitor or evaluate the exercise of underwriter discretion in granting exceptions, or to provide training or education to underwriters.
20 3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: Each Prospectus describes Countrywide’s appraisal process as follows: • Countrywide routinely accepted appraisals that were not Except with respect to the mortgage loans originated pursuant to its Streamlined prepared in accordance with Fannie Mae or FreddieMac Documentation Program, whose values were confirmed with a Fannie Mae appraisal standards and were therefore unreliable. proprietary automated valuation model, Countrywide Home Loans obtains appraisals from independent appraisers or appraisal services for properties that • Countrywide lacked any reliable basis on which to are to secure mortgage loans. The appraisers inspect and appraise the proposed assess the accuracy of the values yielded by the mortgaged property and verify that the property is in acceptable condition. described appraisal practices. Following each appraisal, the appraiser prepares a report which includes a market data analysis based on recent sales of comparable homes in the area and, • Countrywide lacked adequate policies, practices, and when deemed appropriate, a replacement cost analysis based on the current cost procedures to monitor and evaluate compliance with of constructing a similar home. All appraisals are required to conform to applicable appraisal standards. Fannie Mae or Freddie Mac appraisal standards then in effect. • Countrywide lacked adequate policies, practices, and Source: HVMLT 2006-2 Pros. Sup. S-75-80; SEMT 2006-1 Pros. Sup. S-52-59; SARM procedures to determine the qualifications of employees 2005-21 Pros. Sup. S-50. reviewing appraisals or to provide training or education to those employees. 4. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: Each Prospectus states that: • Countrywide routinely did not obtain the required documentation and did not employ reasonable methods If required by its underwriting guidelines, Countrywide . . . obtains employment to verify or substantiate borrower income and assets as verification providing current and historical income information and/or a purportedly required by the various levels of telephonic employment confirmation. Such employment verification may be documentation. obtained, either through analysis of the prospective borrower’s recent pay stub and/or W-2 forms for the most recent two years, relevant portions of the most • Countrywide lacked adequate practices and procedures recent two years’ tax returns, or from the prospective borrower’s employer, to monitor or evaluate the compliance by the personnel wherein the employer reports the length of employment and current salary with involved with loan origination with the requirements of that organization. the various levels of documentation or to provide training or education to those employees. Each Prospectus describes seven levels of documentation – Full Documentation; Reduced Documentation; Stated Income/Stated Asset; Alternative Documentation; CLUES Plus • Contrary to defendants’ representation in the prospectus, Documentation; No Income/No Asset Documentation; Streamlined Documentation – as mortgage loans originated under “No Income/No Asset” follows: documentation procedures are not “generally eligible for sale to Fannie Mae or Freddie Mac.” In general under the Full Documentation Loan Program (the “Full Documentation Program”), each prospective borrower is required to complete an application which includes information with respect to the applicant’s assets,
21 liabilities, income, credit history, employment history and other personal information. Self-employed individuals are generally required to submit their two most recent federal income tax returns. Under the Full Documentation Program, the underwriter verifies the information contained in the application relating to employment, income, assets and mortgages.
Under the Reduced Documentation Program, some underwriting documentation concerning income, employment and asset verification is waived. Countrywide Home Loans obtains from a prospective borrower either a verification of deposit or bank statements for the two-month period immediately before the date of the mortgage loan application or verbal verification of employment. Because information relating to a prospective borrower’s income and employment is not verified, the borrower’s debt-to-income ratios are calculated based on the information provided by the borrower in the mortgage loan application. The maximum Loan-to-Value Ratio ranges up to 95%.
Under the Stated Income/Stated Asset Documentation Program, the mortgage loan application is reviewed to determine that the stated income is reasonable for the borrower’s employment and that the stated assets are consistent with the borrower’s income. The Stated Income/Stated Asset Documentation Program permits maximum Loan-to-Value Ratios up to 90%. Mortgage loans originated under the Stated Income/Stated Asset Documentation Program are generally eligible for sale to Fannie Mae or Freddie Mac.
The Alternative Documentation Program permits a borrower to provide W-2 forms instead of tax returns covering the most recent two years, permits bank statements in lieu of verification of deposits and permits alternative methods of employment verification.
The CLUES Plus Documentation Program permits the verification of employment by alternative means, if necessary, including verbal verification of employment or reviewing paycheck stubs covering the pay period immediately prior to the date of the mortgage loan application. To verify the borrower’s assets and the sufficiency of the borrower’s funds for closing, Countrywide Home Loans obtains deposit or bank account statements from each prospective borrower for the month immediately prior to the date of the mortgage loan application. Under the CLUES Plus Documentation Program, the maximum Loan-to-Value Ratio is 75% and property values may be based on appraisals comprising only interior and exterior inspections. Cash-out refinances and investor properties are not permitted under the CLUES Plus Documentation
22 Program.
Under the No Income/No Asset Documentation Program, no documentation relating to a prospective borrower’s income, employment or assets is required and therefore debt-to-income ratios are not calculated or included in the underwriting analysis, or if the documentation or calculations are included in a mortgage loan file, they are not taken into account for purposes of the underwriting analysis. This program is limited to borrowers with excellent credit histories. Under the No Income/No Asset Documentation Program, the maximum Loan-to-Value Ratio, including secondary financing, ranges up to 95%. Mortgage loans originated under the No Income/No Asset Documentation Program are generally eligible for sale to Fannie Mae or Freddie Mac.
The Streamlined Documentation Program is available for borrowers who are refinancing an existing mortgage loan that was originated or acquired by Countrywide Home Loans provided that, among other things, the mortgage loan has not been more than 30 days delinquent in payment during the previous twelve-month period. Under the Streamlined Documentation Program, appraisals are obtained only if the loan amount of the loan being refinanced had a Loan-to-Value Ratio at the time of origination in excess of 80% or if the loan amount of the new loan being originated is greater than $650,000. In addition, under the Streamlined Documentation Program, a credit report is obtained but only a limited credit review is conducted, no income or asset verification is required, and telephonic verification of employment is permitted. The maximum Loan-to-Value Ratio under the Streamlined Documentation Program ranges up to 95%.
Source: HVMLT 2006-2 Pros. Sup. S-75-80; SEMT 2006-1 Pros. Sup. S-52-59; SARM 2005-21 Pros. Sup. S-48, S-51-53.
23 F. PLMBS backed by mortgages originated by or through Decision One Mortgage Company, LLC (“Decision One”)
Security CUSIP MSAC 2006-HE5 A2C 61749NAD9 MSAC 2006-HE6 A2C 61750FAE0
Statements Material Misstatements and Omissions
1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.7 and V.A.3 of the Amended Complaint: According to each Prospectus, “[t]he Decision One Underwriting Guidelines are primarily intended to assess the borrower's ability to repay the mortgage loan, to assess the value of 1. Far from following its underwriting guidelines and making the mortgaged property and to evaluate the adequacy of the property as collateral for the occasional, targeted and justified exceptions when other mortgage loan.” Each Prospectus asserts that Decision One balanced the following factors evidence of ability to repay justified a deviation from the in determining a mortgagor’s eligibility for a mortgage: guidelines, in fact at Decision One, variance from the stated standards was the norm, and many loans were made with [A] mortgagor's credit history, repayment ability and debt service to income essentially little to no underwriting or effort to evaluate ratio, as well as the type and use of the mortgaged property. ability to repay. Nowhere did any of the Offering Documents apprise the Bank of the extent to which Decision One Additionally, each Prospectus asserts that: deviated from its underwriting guide.
Each applicant completes an application which includes information with 2. The underwriting practices actually followed by Decision respect to the applicant's liabilities, income, credit history, employment history One, including the widespread use of exceptions to the stated and personal information. underwriting guidelines, were not “primarily intended to . . . assess the borrower's ability to repay the mortgage loan,” nor Each underwriter receives training in Fraud Detection, Red Flag Awareness on an evaluation of “the adequacy of the property as and Investigation. Underwriters have access to internal and external collateral for the mortgage loan.” resources to identify risk and confirm the integrity of data in areas of credit capacity and collateral. 3. They omit to state that:
• Decision One did not employ reasonable methods to Each Prospectus states that “[t]he Decision One Underwriting Guidelines are divided into verify or substantiate borrower income, which rendered two major matrices.” Each Prospectus describes these matrices as follows: decisions based on the purported debt-to-income ratios i. Decision One's Core product is Decision One's all inclusive Alt-A offering unreliable. and traditional Sub Prime lending options. • A+ grade offers Alt-A product offerings and competitive pricing for • Decision One's underwriters routinely accepted high FICO borrowers. appraisals that were not prepared in accordance with the • A through C grades provide lending options for the Sub Prime applicable appraising standards in the underwriting borrower with reductions in LTVs to offset FICO scores. guidelines. Consequently, Decision One used unreliable
24 appraisals to determine the value of the collateral, which Portfolio Plus combines the best features Decision One offers with high LTV rendered decisions based on LTV unreliable. and niche features: • All credit grades targeted for the borrower with proven payment ability • Decision One lacked an adequate basis upon which to by requiring credit depth and limited slow pay mortgage. assign borrowers to the designated grades or from which • Matrix provides High LTV and niche product solutions for borrowers. to reliably determine required LTVs or minimum FICO scores. Source: MSAC 2006-HE5 Pros. Sup. S-36-37; MSAC 2006-HE6 Pros. Sup. S-44-46. • Due to the industry’s inexperience with lending to borrowers with increased credit risks, Decision One lacked sufficient data regarding historical patterns of borrower behavior in relation to default experience for similar types of borrower profiles, which rendered the grading of borrowers unreliable. 2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to state that: Each Prospectus states that “[o]n a case by case basis, exceptions to the Decision One Underwriting Guidelines are made where compensating factors exist.” According to each • Decision One routinely granted exceptions to the Prospectus, such exceptions may include “a debt service-to-income ratio exception, a pricing maximum LTV ratios and other requirements of the exception, a loan-to-value ratio exception, an exception from certain requirements of a underwriting matrices despite the absence of meaningful particular risk category, etc.” compensating factors.
• Decision One had no reasonable basis on which to evaluate alleged compensating factors that might warrant exceptions to the underwriting standards. Each Prospectus lists the following compensating factors: • Decision One lacked a reliable factual foundation on [L]ow loan-to-value ratio, pride of ownership, a maximum of one 30-day late which to evaluate certain alleged "compensating payment on all mortgage loans during the last 12 months, stable employment, factors," including a borrower’s "debt service-to-income and longevity of current residence ownership. ratio" and "stable employment," because income and employment history were not verified for many Source: MSAC 2006-HE5 Pros. Sup. S-37; MSAC 2006-HE6 Pros. Sup. S-46. mortgages in the pool. .
25
3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: Each Prospectus describes Decision One’s appraisal process as follows: • Decision One routinely accepted appraisals that were Mortgaged properties that are to secure mortgage loans are appraised by not prepared in accordance with applicable appraisal qualified independent appraisers. These appraisers inspect and appraise the standards and were therefore unreliable. subject property and verify that the property is in acceptable condition. Following each appraisal, the appraiser prepares a report which includes a • Decision One lacked any reliable basis on which to market value analysis based on recent sales of comparable homes in the area, assess the accuracy of the values yielded by the and when deemed appropriate, replacement cost analysis based on the current described appraisal practices. cost of constructing a similar home. All appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the • Decision One lacked adequate policies, practices, and Appraisal Standards Board of the Appraisal Foundation and are generally on procedures to monitor and evaluate compliance with forms acceptable to Fannie Mae and Freddie Mac. applicable appraisal standards.
Source: MSAC 2006-HE5 Pros. Sup. S-35-37; MSAC 2006-HE6 Pros. Sup. S-44-46. 4. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: Each Prospectus states that “[t]he Decision One Underwriting Guidelines require that the income of each applicant for a mortgage loan be verified.” • Decision One routinely did not obtain the required documentation and did not employ reasonable methods Each Prospectus describes three levels of documentation – Full Documentation; Bank to verify or substantiate borrower income and assets as Statement & Lite Documentation; Stated Income – as follows: purportedly required by the various levels of documentation. [U]nder the full documentation program, applicants are required to submit one • Even with respect to "stated income" programs, industry form of verification from their employer(s) of stable income for at least 24 standards required that borrower income information be months. reasonable in light of the borrower's occupation. [U]nder the Bank Statement and Lite documentation programs, applicants are required to submit verification of stable income for at least 24 months along with consecutive and complete personal checking account bank statements.
[U]nder the stated income documentation program, an applicant may be qualified based upon monthly income as stated on the mortgage loan application/form 1003 if the applicant meets certain criteria.
Source: MSAC 2006-HE5 Pros. Sup. S-35-37; MSAC 2006-HE6 Pros. Sup. S-44-46.
26 G. PLMBS backed by mortgages originated by or through Downey Savings and Loan Association, F.A. (“Downey”)
Security CUSIP HVMLT 2006-2 2A1A 41161PK44 HVMLT 2006-2 3A1A 41161PK69
Statements Material Misstatements and Omissions 1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.9 and V.A.3 of the Amended Complaint: According to the Prospectus, “Downey’s underwriting standards are applied by or on behalf of Downey to evaluate the prospective borrower’s credit standing and repayment ability, 1. Far from following its underwriting guidelines and making and the value and adequacy of the mortgaged property as collateral.” The Prospectus occasional, targeted and justified exceptions when other also asserts that: evidence of ability to repay justified a deviation from the Downey’s underwriting guidelines are applied to evaluate the applicant, the guidelines, in fact at Downey, variance from the stated property and the applicant’s income, employment and credit history, as standards was the norm, and many loans were made with applicable in the context of the loan program and documentation requirements . essentially little to no underwriting or effort to evaluate . . . An applicant’s creditworthiness is determined based on the borrower’s ability to repay. Nowhere did any of the Offering Documents ability and willingness to repay the loan. apprise the Bank of the extent to which Downey deviated from its underwriting guide. The Prospectus states that 2. The underwriting practices actually followed by Downey, [A] prospective borrower must generally demonstrate that the ratio of the including the widespread use of exceptions to the stated borrower’s monthly housing expenses (including principal and interest on the underwriting guidelines, were not “applied . . . to evaluate proposed mortgage loan and, as applicable, the related monthly portion of the prospective borrower’s credit standing and repayment property taxes, hazard insurance, homeowners association dues and mortgage ability, and the value and adequacy of the mortgaged insurance) to the borrower’s monthly gross income and the ratio of total property as collateral.” monthly debt, which includes the proposed monthly housing costs and all other obligations with 10 or more monthly payments remaining, to the borrower’s 3. They omit to state that: monthly gross income (the “debt-to-income ratios”) are within acceptable • Downey's underwriters routinely accepted inaccurate limits. appraisals to determine the value of the collateral, which The maximum acceptable debt-to-income ratios, which are determined on a rendered decisions based on LTV unreliable. loan-by-loan basis, vary depending on a number of underwriting criteria, including the loan-to-value ratio, loan purpose, loan amount and credit history • Due to the industry’s inexperience with lending to of the borrower. In addition to meeting the guidelines for debt-to-income ratios, borrowers with increased credit risks, Downey lacked each prospective borrower is required to have sufficient cash resources to pay sufficient data regarding historical patterns of borrower the down payment and closing costs. behavior in relation to default experience for similar types of borrower profiles. Consequently, the Under its underwriting guidelines, Downey generally permits a housing assignment of maximum debt-to-income ratios had no payment-to-income ratio based on the prospective borrower’s monthly housing reliable connection to the actual risk of default
27 expenses of up to 36% and a debt-to-income ratio based on the prospective presented by various borrower profiles. borrower’s total monthly debt of up to 40%.
Source: HVMLT 2006-2 Pros. Sup. S-84. 2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to state that: The Prospectus states that “[t]hese are guidelines only and each loan is evaluated based upon its own merits. Exceptions to the guidelines may be acceptable if there are mitigating • Downey routinely granted exceptions to its underwriting factors. guidelines despite the absence of meaningful mitigating factors Source: HVMLT 2006-2 Pros. Sup. S-84. 3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: Each Prospectus describes Downey’s appraisal process as follows: • Downey routinely accepted appraisals that were not prepared in accordance with applicable appraisal Under each program, Downey obtains appraisals using staff appraisers, standards and were therefore unreliable. automated valuation models, independent appraisers or appraisal services for properties that are to secure mortgage loans. The appraisal report includes a market data analysis based on recent sales and/or listings of comparable homes in the area; a replacement cost analysis based on the current cost of constructing a similar home. All appraisals are required to conform to Uniform Standards of Professional Appraisal Practices. These are the standards accepted by Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
Source: HVMLT 2006-2 Pros. Sup. S-83-86. 4. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: The Prospectus states that “Downey generally requires a 2-year employment history on the application. Employment and income may be verified with either or a combination of • Downey routinely did not obtain the required paystubs, W-2 forms, Federal tax returns, or verification of employment form completed by documentation and did not employ reasonable methods the employer, or other acceptable means.” to verify or substantiate borrower income, employment, The Prospectus also describes the “Downey Express program,” which is a stated and assets as purportedly required by the various levels income/stated assets program under which “the mortgage loan application is reviewed to of documentation. determine that the stated income is reasonable for the borrower’s employment, and that the stated assets are consistent with the borrower’s income”
The Prospectus describes three levels of documentation – Full/Alternative Documentation; Lite/Reduced Documentation; Express Documentation – as follows:
28 Full/Alternative Documentation (“Full/Alt Doc”): The guidelines for this program require verification of employment, income and assets.
Lite/Reduced Documentation (“Lite Doc”): The guidelines for this program do not require verification of income.
Express Documentation (“Downey Express”): The guidelines for this program do not require verification of income or assets.
Source: HVMLT 2006-2 Pros. Sup. S-83-86.
29 H. PLMBS backed by mortgages originated by or through First Franklin Financial Corporation (“First Franklin”)
Security CUSIP FFML 2006-FF13 A2C5 30247DAD3 FFML 2006-FF8 IIA3 320278AC8 FFML 2006-FF12 A3 32027GAC0 FFML 2006-FF12 A4 32027GAD8 FFML 2006-FF14 A5 32027LAE5 FFML 2006-FF10 A7 32028HAG8
Statements Material Misstatements and Omissions
1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.11 and V.A.3 of the Amended Complaint: According to each Prospectus, First Franklin’s “acquisition underwriting standards are primarily intended to assess the ability and willingness of the borrower to repay the debt 1. Far from following its underwriting guidelines and making and to evaluate the adequacy of the mortgaged property as collateral for the mortgage occasional, targeted and justified exceptions when other loan.” Each Prospectus asserts that, “[i]n accordance with First Franklin Financial’s evidence of ability to repay justified a deviation from the guidelines for acquisition, the third party originators” considered the following factors in guidelines, in fact at First Franklin, variance from the stated determining a mortgagor’s eligibility for a mortgage: standards was the norm, and many loans were made with essentially little to no underwriting or effort to evaluate [A] mortgagor's credit history, repayment ability and debt service to income ability to repay. Nowhere did any of the Offering Documents ratio ("DEBT RATIO"), as well as the value, type and use of the mortgaged apprise the Bank of the extent to which First Franklin property. deviated from its underwriting guide.
Each Prospectus describes First Franklin’s Direct Access Program as follows: 2. The underwriting practices actually followed by First Franklin, including the widespread use of exceptions to the The third party originators may originate mortgage loans for acquisition by First stated underwriting guidelines, were not "primarily intended
5 According to the Prospectus, approximately 1.41% of the mortgages backing bond FFML 2006-FF13 A2C were originated by unaffiliated “third party originators” according to First Franklin's Underwriting Guidelines. All other mortgages were originated by First Franklin in accordance with these underwriting guidelines.
* Page number not included in original; cited number refers to page number in electronic version.
30 Franklin Financial under an underwriting program called the Direct Access to assess the ability and willingness of the borrower to repay Program . . . [which] makes use of credit bureau risk scores (the "CREDIT the debt.” BUREAU RISK SCORE"). The Credit Bureau Risk Score is a statistical 3. They omit to state that: ranking of likely future credit performance . . . . The Credit Bureau Risk Score is used as an aid to, not a substitute for, the underwriter's judgment. The • First Franklin had no reliable basis on which to conclude Direct Access Program was developed to simplify the origination process for that the Direct Access Program, allegedly employed to third party originators. In contrast to assignment of credit grades according to “simplify the origination process,” was a reliable traditional non-agency credit assessment methods, i.e., mortgage and other indicator of “a borrower’s likely future credit credit delinquencies, Direct Access relies upon a borrower's Credit Bureau Risk performance.” Score initially to determine a borrower's likely future credit performance. • First Franklin did not employ reasonable methods to The First Franklin Financial's acquisition guidelines require that the third party verify or substantiate borrower income, which rendered originator approve the mortgage loan using the Direct Access Program risk- decisions based on the purported debt-to-income ratios based pricing matrix . . . . Generally, the minimum Credit Bureau Risk Score unreliable. allowed under the Direct Access Program is 540. The Credit Bureau Risk Score, along with the loan-to-value ratio, is an important tool in assessing the • First Franklin’s underwriters routinely accepted creditworthiness of a Direct Access borrower. However, these two factors are appraisals that were not prepared in accordance with the not the only considerations in underwriting a Direct Access loan. The third applicable appraising standards in the underwriting party originators are required to review each Direct Access loan to determine guidelines. Consequently, First Franklin used unreliable whether the First Franklin Financial's guidelines for income, assets, appraisals to determine the value of the collateral, which employment and collateral are met. rendered decisions based on LTV unreliable.
* Source: FFML 2006-FF13 Pros. Sup. S-37-38; FFML 2006-FF8 Pros. Sup. 74-75; FFML • First Franklin’s assignment of a borrower’s maximum LTV ratio and loan amount was based on unreliable 2006-FF12 Pros. Sup. S-53-54; FFML 2006-FF14 Pros. Sup. S-51-52; FFML 2006-FF10 methods of evaluating borrower credit risk. Pros. Sup. S-54-55.
Each Prospectus states that “various risk categories are used to grade the likelihood that • Due to the industry’s inexperience with lending to the applicant will satisfy the repayment conditions of the loan.” According to each borrowers with increased credit risks, First Franklin Prospectus: lacked sufficient data regarding historical patterns of These risk categories establish the maximum permitted loan-to-value ratio and borrower behavior in relation to default experience for loan amount, given the occupancy status of the mortgaged property and the similar types of borrower profiles. Consequently, the applicant's credit history and Debt Ratio. In general, higher credit risk mortgage “grade” assigned to each applicant, and the loans are graded in categories which permit higher Debt Ratios and more (or corresponding maximum loan-to-value ratio and more recent) major derogatory credit items such as outstanding judgments or maximum loan amount, had no reliable connection to prior bankruptcies; however these loan programs establish lower maximum the actual “likelihood that the applicant will satisfy the loan-to-value ratios and lower maximum loan amounts for loans graded in repayment conditions of the loan.” such categories. Each Prospectus further represents that “[the] Debt Ratio generally may not exceed 50.49% • First Franklin lacked adequate procedures and practices for all credit scores on full documentation and LIV[“limited income verification”] loans. to monitor or evaluate its underwriters' exercise of judgment, or to provide appropriate training and
31 Loans meeting the residual income requirements may have a maximum Debt Ratio of education to its underwriters. 55.49%. The Debt Ratio for NIV [“no income verification”] loans may not exceed 50.49%
Source: FFML 2006-FF13 Pros. Sup. S-40; FFML 2006-FF8 Pros. Sup. *76; FFML 2006- FF12 Pros. Sup. S-56; FFML 2006-FF14 Pros. Sup. S-54; FFML 2006-FF10 Pros. Sup. S-56.
2. Statements Regarding Exceptions to Standards: The statements are materially misleading because:
Each prospectus states: 1. These statements are materially misleading because they indicate that exceptions to the stated underwriting standards Each underwriter is granted a level of authority commensurate with their would be granted only based on "compensating factors" proven judgment, maturity and credit skills. On a case by case basis, a third deemed adequate in light of an underwriter's "proven party originator may determine that, based upon compensating factors, a judgment, maturity and credit skills," when in fact such prospective mortgagor not strictly qualifying under the underwriting risk exceptions were freely granted without regard to category guidelines described below warrants an underwriting exception. compensating factors purely to enable First Franklin to Compensating factors may include, but are not limited to, low loan-to-value increase its lending volume. ratio, low Debt Ratio, substantial liquid assets, good credit history, stable employment and time in residence at the applicant's current address. It is 2. They omit to state that: expected that a substantial portion of the mortgage loans may represent such underwriting exceptions. • First Franklin had no reasonable basis on which to evaluate alleged compensating factors that might Source: FFML 2006-FF13 Pros. Sup. S-38; FFML 2006-FF8 Pros. Sup. *75; FFML 2006- warrant exceptions to the underwriting standards. FF12 Pros. Sup. S-54; FFML 2006-FF14 Pros. Sup. S-53; FFML 2006-FF10 Pros. Sup. S- 55. • First Franklin lacked any reliable practices, policies or procedures to evaluate its underwriters' "proven judgment, maturity and credit skills," to monitor or evaluate the exercise of underwriter discretion in granting exceptions, or to provide training or education to its underwriters.
• First Franklin lacked a reliable factual foundation on which to evaluate certain alleged "compensating factors," including a borrower’s "low debt ratio" and "stable employment," because income and employment history were not verified for many mortgages in the pool. 3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: Each Prospectus describes First Franklin’s appraisal process as follows: • First Franklin routinely accepted appraisals that were not
32 In accordance with First Franklin Financial’s guidelines for acquisition, the prepared in accordance with applicable appraisal third party originators are required to comply with applicable federal and state standards and were therefore unreliable. laws and regulations and generally require an appraisal of the mortgaged property which conforms to Freddie Mac and/or Fannie Mae standards; and • First Franklin lacked any reliable basis on which to if appropriate, a review appraisal. Generally, appraisals are provided by assess the accuracy of the values yielded by the appraisers approved by First Franklin Financial. Review appraisals may only described appraisal practices. be provided by appraisers approved by First Franklin Financial. In some cases, the third party originator may rely on a statistical appraisal methodology • First Franklin lacked adequate policies, practices, and provided by a third party. procedures to monitor and evaluate compliance with applicable appraisal standards. Qualified independent appraisers must meet minimum standards of licensing and provide errors and omissions insurance in states where it is required to • First Franklin lacked adequate policies, practices, and become approved to do business with the third party originators. Each Uniform procedures to determine the qualifications of employees Residential Appraisal Report includes a market data analysis based on recent reviewing appraisals or to provide training or education sales of comparable homes in the area and, where deemed appropriate, to those employees. replacement cost analysis based on the current cost of constructing a similar home. The review appraisal may be an enhanced desk, field review or an • First Franklin lacked adequate information upon which automated valuation report that confirms or supports the original appraiser’s to determine whether valuations resulting from the value of the mortgaged premises. The review appraisal may be waived by a “statistical appraisal methodology” were as reliable as Standard Plus Delegated Underwriter. valuations resulting from appraisals performed in accordance with accepted practices and standards. Source: FFML 2006-FF13 Pros. Sup. S-36-40; FFML 2006-FF8 Pros. Sup. *70-74; FFML 2006-FF12 Pros. Sup. S-52-56; FFML 2006-FF14 Pros. Sup. S-50-54; FFML 2006-FF10 Pros. Sup. S-53-57. 4. Statements Regarding Quality Control and Verification of Borrower Income and The statements are materially misleading because they omit to Assets: state that:
Each Prospectus represents the following regarding quality control requirements: • First Franklin routinely did not obtain the required documentation and did not employ reasonable methods The third party originators are required to conduct a number of quality control to verify or substantiate borrower income and assets as procedures, including a post funding compliance audit as well as a full re- purportedly required by the various levels of underwriting of a random selection of loans to assure asset quality. Under the documentation. compliance audit, all loans are required to be reviewed to verify credit grading, First Franklin lacked adequate practices and procedures documentation compliance and data accuracy. Under the asset quality procedure, a • to monitor or evaluate the compliance by the employees random selection of each month's originations must be reviewed by each third involved with loan origination with the requirements of party originator. The loan review is required to confirm the existence and accuracy the various levels of documentation or to provide of legal documents, credit documentation, appraisal analysis and underwriting training or education to those employees. decision. A report detailing audit findings and level of error is sent monthly to each branch for response. The audit findings and branch responses must then be reviewed by the third party originator's senior management. Adverse findings are • The absence of standards on which to review decisions
33 to be tracked monthly and over a rolling six month period. This review procedure regarding exceptions to underwriting guidelines allows the third party originator to assess programs for potential guideline rendered the compliance audit meaningless as a tool to changes, program enhancements, appraisal policies, areas of risk to be reduced or assess the credit risk of the mortgage pool. eliminated and the need for additional staff training.
Each Prospectus describes four levels of documentation – Full Documentation; Limited Income Verification Program; Stated Plus Program; No Income Verification Program. According to each Prospectus, “the third party originators' underwriters are required to verify the income of each applicant under [the] various documentation programs as follows:
[U]nder the Full Documentation Program, applicants are generally required to submit verification of stable income for the periods of six months to two years preceding the application dependent on credit score range.
[Under the] LIV Program, the borrower is qualified based on the income stated on the application and applicants are generally required to submit verification of adequate cash flow to meet credit obligations for the six month period preceding the application.
[The] Stated Plus Program allows income to be stated, but requires borrowers to provide verification of liquid assets equaling three months of income stated on the mortgage application. [U]nder the NIV Program, applicants are qualified based on monthly income as stated on the mortgage application and the underwriter will determine that the stated income is reasonable and realistic when compared to borrower’s employment type, assets and credit history. Source: FFML 2006-FF13 Pros. Sup. S-36-40; FFML 2006-FF8 Pros. Sup. *70-76; FFML 2006-FF12 Pros. Sup. S-52-56; FFML 2006-FF14 Pros. Sup. S-50-54; FFML 2006-FF10 Pros. Sup. S-53-57.
34 I. PLMBS backed by mortgages originated by or through First Horizon Home Loan Corporation (“First Horizon”)
Security CUSIP
FHASI 2006-AR1 2A1 32051GY25
Statements Material Misstatements and Omissions
1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.14 and V.A.3 of the Amended Complaint: According to the Prospectus, “The First Horizon Underwriting Guidelines are applied to evaluate the prospective borrower’s credit standing and repayment ability and the value 1. Far from following its underwriting guidelines and making and adequacy of the mortgaged property as collateral.” occasional, targeted and justified exceptions when other evidence of ability to repay justified a deviation from the Additionally, the Prospectus asserts that: guidelines, in fact at First Horizon, variance from the stated standards was the norm, and many loans were made with Generally, each mortgagor will have been required to complete an application essentially little to no underwriting or effort to evaluate designed to provide to First Horizon pertinent credit information concerning the ability to repay. Nowhere did any of the Offering Documents mortgagor. The mortgagor will have given information with respect to its assets, apprise the Bank of the extent to which First Horizon liabilities, income (except as described below), credit history, employment deviated from its underwriting guide. history and personal information, and will have furnished First Horizon with authorization to obtain a credit report which summarizes the mortgagor’s credit 2. The underwriting practices actually followed by First history Horizon, including the widespread use of exceptions to the stated underwriting guidelines, were not “applied to evaluate The Prospectus describes the following “Loan-to-Value Requirements:” the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged With respect to purchase money or rate/term refinance loans secured by single property as collateral.” family residences, loan-to-value ratios at origination of up to 95% for mortgage loans secured by single family, primary residences with original principal 3. They omit to state that: balances of up to $400,000, up to 85% for mortgage loans secured by single family, primary residences with original principal balances of up to $650,000 • First Horizon’s underwriters routinely accepted are generally allowed. Mortgage loans with principal balances up to $1,000,000 inaccurate appraisals to determine the value of the (“super jumbos”) are allowed if the loan is secured by the borrower’s primary collateral, which rendered decisions based on LTV residence. The loan-to-value ratio for super jumbos generally may not exceed unreliable. 75%. For cash out refinance loans, the maximum loan-to-value ratio generally is 90% and the maximum “cash out” amount permitted is based in part on the
35 original amount of the related mortgage loan. • First Horizon lacked an adequate basis upon which assign the appropriate debt-to-income ratio for each Generally, each mortgage loan originated by First Horizon with a loan-to-value prospective borrower because such decisions were ratio at origination exceeding 80% has a primary mortgage insurance policy based on unreliable LTV ratios. insuring a portion of the balance of the mortgage loan at least equal to the product of the original principal balance of the mortgage loan and a fraction, the • Due to the industry’s inexperience with lending to numerator of which is the excess of the original principal balance of such borrowers with increased credit risks, First Horizon mortgage loan over 75% of the lesser of the appraised value and the selling lacked sufficient data regarding historical patterns of price of the related mortgaged property and the denominator of which is the borrower behavior in relation to default experience for original principal balance of the related mortgage loan plus accrued interest similar types of borrower profiles, which rendered thereon. assignment of maximum debt-to-income ratios unreliable. Additionally, the prospectus states:
In determining whether a prospective borrower has sufficient monthly income available (i) to meet the borrower’s monthly obligation on their proposed mortgage loan and (ii) to meet the monthly housing expenses and other financial obligation on the proposed mortgage loan, First Horizon generally considers, when required by the applicable documentation program, the ratio of such amounts to the proposed borrower’s acceptable stable monthly gross income. Such ratios vary depending on a number of underwriting criteria, including loan-to-value ratios, and are determined on a loan-by-loan basis.
Source: FHASI 2006-AR1 Pros. Sup. S-32-33. 2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to state that: The Prospectus supplement states that “[e]xceptions to the First Horizon Underwriting Guidelines are permitted where compensating factors are present.” • First Horizon routinely granted exceptions to its underwriting guidelines despite the absence of Additionally, the Prospectus states: meaningful compensating factors.
[T]he application of . . . underwriting standards does not imply that each specific criterion was satisfied individually. Rather, a mortgage loan will be considered to be originated in accordance with a given set of underwriting standards if, based on an overall qualitative evaluation, the loan substantially complies with the underwriting standards. For example, a mortgage loan may be considered to comply with a set of underwriting standards, even if one or more specific criteria included in the underwriting standards were not satisfied, if other factors compensated for the criteria that were not satisfied or if the mortgage loan is considered to be in substantial compliance with the underwriting standards.
36 Source: FHASI 2006-AR1 Pros. Sup. S-32, Pros. 26. 3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: The Prospectus supplement describes First Horizon’s appraisal process as follows: • First Horizon routinely accepted appraisals that were not Each mortgaged property has been appraised by a qualified independent prepared in accordance with applicable appraisal appraiser who is approved by First Horizon. All appraisals are required to standards and were therefore unreliable. conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standard Board of the Appraisal Foundation. Each appraisal must meet the requirements of Fannie Mae and Freddie Mac. The requirements of Fannie Mae and Freddie Mac require, among other things, that the appraiser, or its agent on its behalf, personally inspect the property inside and out, verify whether the property was in good condition and verify that construction, if new, had been substantially completed. The appraisal generally will have been based on prices obtained on recent sales of comparable properties, determined in accordance with Fannie Mae and Freddie Mac guidelines. In certain cases an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property may be used.
Source: FHASI 2006-AR1 Pros. Sup. S- 33.
37 J. PLMBS backed by mortgages originated by or through Fremont Investment & Loan (“Fremont”)
Security CUSIP FHLT 2005-E 2A3 35729PNB2 SABR 2006-FR3 A2 813765AB0
Statements Material Misstatements and Omissions 1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.4 and V.A.3 of the Amended Complaint: According to each Prospectus, “Fremont’s underwriting guidelines are primarily intended to assess the ability and willingness of the borrower to repay the debt and to evaluate the 1. Far from following its underwriting guidelines and making adequacy of the mortgaged property as collateral for the mortgage loan.” Each Prospectus occasional, targeted and justified exceptions when other further asserts that, subject to certain exceptions set forth therein, the Mortgage Loans were evidence of ability to repay justified a deviation from the underwritten in accordance with “Scored Programs” used by Fremont beginning in 2001. guidelines, in fact at Fremont, variance from the stated According to the Prospectus: standards was the norm, and many loans were made with essentially little to no underwriting or effort to evaluate The Scored Programs assess the risk of default by using Credit Scores obtained ability to repay. Nowhere did any of the Offering from third party credit repositories along with, but not limited to, past mortgage Documents apprise the Bank of the extent to which payment history, seasoning on bankruptcy and/or foreclosure and loan-to-value Fremont deviated from its underwriting guide. ratios as an aid to, not a substitute for, the underwriter’s judgment. 2. The underwriting practices actually followed by Fremont, . . . including the widespread use of exceptions to the stated Under the Scored Programs, Fremont requires credit reports for each borrower, underwriting guidelines, were not “primarily intended to using the Credit Score of the primary borrower (the borrower with the highest assess the ability and willingness of the borrower to repay percentage of total income) to determine program eligibility . . . . Generally, the the debt and . . . the adequacy of the mortgaged property as minimum applicable Credit Score allowed is 500, however borrowers with no collateral for the mortgage loan.” Credit Scores are not automatically rejected and may be eligible for certain loan programs in appropriate circumstances. 3. They omit to state that: • Because many loans were originated according to Source: FHLT 2005-E Pros. Sup. S-32; SABR 2006-FR3 Pros. Sup. S-41. reduced documentation procedures, Fremont did not verify the income for many borrowers, and consequently, its assessment of the mortgagor’s “ability to and willingness . . . to repay” is unreliable. According to each Prospectus, “Fremont’s underwriting guidelines under the Scored • Fremont lacked reliable means for ascertaining the
38 Programs with respect to each rating category generally require: properties' loan-to-value ratio. • debt to income ratios of 55% or less on mortgage loans with loan-to-value ratios of • Fremont lacked adequate information from which it 90% or less, however, debt to income ratios of 50% or less are required on loan-to- could reasonably conclude that its Scored Programs value ratios greater than 90%;6 could reliably assess the risk of default. • applicants have a Credit Score of at least 500; • that no liens or judgments affecting title may remain open after the funding of the • Fremont did not employ reasonable methods to verify loan, other than liens in favor of the internal revenue service that are subordinated to or substantiate borrower income, which rendered the loan; and decisions based on the purported debt-to-income ratios • that any collection, charge-off, or judgment not affecting title that is less than 1 year unreliable. old must be paid in connection with closing if either its balance is greater than • Fremont's underwriters routinely accepted appraisals $1,000 or the aggregate balances of all such collections, charge-offs or judgments that were not prepared in accordance with the are greater than $2,500.” applicable appraising standards in the underwriting
guidelines. Consequently, Fremont used unreliable Each Prospectus states that the borrowers meeting the foregoing criteria would be assigned to appraisals to determine the value of the collateral, a “risk category” ranging from D to A+, based on the borrower’s delinquency, bankruptcy which rendered decisions based on LTV unreliable. and foreclosure history. The risk category would then determine the minimum required loan-to-value ratio and credit score. • Fremont’s assignment of a borrower’s maximum loan- to-value ratio was based on unreliable methods of Source: FHLT 2005-E Pros. Sup. S-34; SABR 2006-FR3 Pros. Sup. S-44. evaluating borrower credit risk. • Due to the industry’s inexperience with lending to borrowers with increased credit risks, Fremont lacked sufficient data regarding historical patterns of borrower behavior in relation to default experience for similar types of borrower profiles. Consequently, the assignment “risk categories,” with their corresponding maximum LTV ratios, had no reliable connection to the actual risk of default presented by borrowers assigned to each category. • Fremont lacked adequate procedures and practices to monitor or evaluate its underwriters' exercise of judgment, or to provide appropriate training and education to its underwriters.
6 The Prospectus for bond FHLT 2005-E 2A3 contains text identical to that excerpted herein with the exception that the underwriting guidelines divided the two categories based on loan-to-value ratios of 80% rather than 90% as stated above.
39 2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to state that: Each Prospectus states that “[o]n a case by case basis, Fremont may determine that, based upon compensating factors, a prospective mortgagor not strictly qualifying under the • Fremont routinely granted exceptions to the risk underwriting risk category guidelines described [above] is nonetheless qualified to receive a category guidelines despite the absence of documented loan, i.e., an underwriting exception.” According to each Prospectus, such “underwritings compensating factors. exceptions” would be granted by underwriters with “proven judgment, experience and credit skills.” • Fremont had no reasonable basis on which to evaluate alleged compensating factors that might warrant Each Prospectus states that the: exceptions to the underwriting standards.
Compensating factors may include, but are not limited to, low loan-to-value • Fremont lacked adequate policies, procedures or ratio, low debt to income ratio, substantial liquid assets, good credit history, practices to assess its underwriters' judgment and stable employment and time in residence at the applicant’s current address. It is ability to evaluate exceptions, to monitor or assess its expected that a substantial portion of the mortgage loans may represent such underwriters' exercise of discretion, or to provide underwriting exceptions.” training or education to its underwriters.
Additionally, each prospectus asserts that “[e]ach underwriter is granted a level of • Fremont lacked a reliable factual foundation on which authority commensurate with their proven judgment, experience and credit skills.” to evaluate certain alleged "compensating factors," including a borrower’s "debt-to-income ratio" and Source: FHLT 2005-E Pros. Sup. S-31-32; SABR 2006-FR3 Pros. Sup. S-42. "stable employment," because income and employment history were not verified for many mortgages in the pool.
3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: Each Prospectus represents that “Fremont’s underwriting guidelines are applied in accordance with a procedure which complies with applicable federal and state laws and • Fremont routinely accepted appraisals that were not regulations and require an appraisal of the mortgaged property, and if appropriate, a review prepared in accordance with applicable appraisal appraisal.” Each Prospectus represents Fremont’s appraisal processes as follows: standards and were therefore unreliable.
Generally, initial appraisals are provided by qualified independent appraisers • Fremont lacked any reliable basis on which to assess licensed in their respective states. Review appraisals may only be provided by the accuracy of the values yielded by the described appraisers approved by Fremont. In some cases, Fremont relies on a statistical appraisal practices. appraisal methodology provided by a third-party. Qualified independent appraisers must meet minimum standards of licensing and provide errors and • Fremont lacked adequate policies, practices, and omissions insurance in states where it is required to become approved to do procedures to monitor and evaluate compliance with business with Fremont. Each uniform residential appraisal report includes a applicable appraisal standards. market data analysis based on recent sales of comparable homes in the area and, • Fremont lacked adequate policies, practices, and where deemed appropriate, replacement cost analysis based on the current cost procedures to determine the qualifications of
40 of constructing a similar home. The review appraisal may be a desk review, employees reviewing appraisals or to provide training field review or an automated valuation report that confirms or supports the or education to those employees. original appraiser’s value of the mortgaged premises. • Fremont lacked adequate information upon which to Source: FHLT 2005-E Pros. Sup. S-33; SABR 2006-FR3 Pros. Sup. S-42. determine whether valuations resulting from the “statistical appraisal methodology” were as reliable as valuations resulting from appraisals performed in accordance with accepted practices and standards.
4. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: Each Prospectus describes three levels of documentation, “Full,” “Easy,” and “Stated Income,” as follows: • Fremont routinely did not obtain the required documentation and did not employ reasonable methods Fremont’s underwriters verify the income of each applicant under various to verify or substantiate borrower income and assets as documentation types as follows: under Full Documentation, applicants are purportedly required by the various levels of generally required to submit verification of stable income for the periods of one documentation. to two years preceding the application dependent on credit profile; • Fremont lacked adequate practices and procedures to [U]nder Easy Documentation, the borrower is qualified based on verification of monitor or evaluate the compliance by the employees adequate cash flow by means of personal or business bank statements; involved with loan origination with the requirements of the various levels of documentation or to provide [U]nder Stated Income, applicants are qualified based on monthly income as training or education to those employees. stated on the mortgage application. The income is not verified under the Stated Income program; however, the income stated must be reasonable and customary for the applicant’s line of work.
Source: FHLT 2005-E Pros. Sup. S-33; SABR 2006-FR3 Pros. Sup. S-42.
41 K. PLMBS backed by mortgages originated by or through GMAC Mortgage Corporation7 (“GMAC”)
Security CUSIP GMACM 2006-AR2 2A1 36185MEV0 GMACM 2006-AR2 4A1 36185MEZ1
Statements Material Misstatements and Omissions
1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.5 and V.A.3 of the Amended Complaint: According to the Prospectus, “[t]he depositor expects that the originator of each of the loans will have applied, consistent with applicable federal and state laws and regulations, 1. Far from following its underwriting guidelines and making underwriting procedures intended to evaluate the borrower’s credit standing and occasional, targeted and justified exceptions when other repayment ability and/or the value and adequacy of the related property as collateral.” evidence of ability to repay justified a deviation from the Each Prospectus asserts that, “[o]nce all applicable employment, credit, asset and property guidelines, in fact at GMAC, variance from the stated information is received,” GMAC will make a determination “as to whether the prospective standards was the norm, and many loans were made with borrower has sufficient monthly income available to meet the borrower’s monthly essentially little to no underwriting or effort to evaluate obligations on the proposed mortgage loan and other expenses related to the home (such as ability to repay. Nowhere did any of the Offering Documents property taxes and hazard insurance) and other financial obligations and monthly living apprise the Bank of the extent to which GMAC deviated expenses. from its underwriting guide.
Each Prospectus describes GMAC’s automated underwriting process as follows: 2. The underwriting practices actually followed by GMAC, including the widespread use of exceptions to the stated Recently, GMACM has instituted a proprietary automated underwriting underwriting guidelines, were not “intended to evaluate the decision engine for selected jumbo adjustable rate mortgage products (the “AU borrower’s credit standing and repayment ability and/or the Engine”). The AU Engine provides recommendations on selected GMACM value and adequacy of the related property as collateral.” jumbo adjustable rate mortgage products and provides the ability to validate loans using the AU Engine “Approve” recommendation. The AU Engine 3. They omit to state that: delivers a full underwriting decision that includes GMACM’s product guidelines and customized findings messages. Loans that receive an “Approve” • GMAC did not employ reasonable methods to verify or recommendation from the AU Engine will be considered as having a GMACM substantiate borrower income, which rendered decisions automated conditional approval and will follow the findings documentation based on the purported debt-to-income ratios unreliable.
7 According to the Prospectus, “[a]pproximately 56.44% of the mortgage loans were originated or acquired by GMAC Mortgage Corporation and approximately 43.56% of the mortgage loans were originated or acquired by GMAC Bank, an affiliate of GMAC Mortgage Corporation.” However, “[a]ll of the mortgage loans that GMAC Bank originates were originated in accordance with GMAC Mortgage Corporation’s underwriting standards described [herein].” GMACM 2006-AR2 Pros. Sup. S-5, S-25.
42 report supplied by the AU Engine for all documentation requirements. Loans that receive a “Refer” recommendation from the AU Engine may not follow the • GMAC’s underwriters routinely accepted inaccurate findings documentation report requirements. Instead, a full manual underwrite appraisals to determine the value of the collateral, which must be completed to validate proper documentation requirements. rendered decisions based on LTV unreliable.
Source: GMACM 2006-AR2 Pros. 25, Pros. Sup. S-40. • Due to the industry’s inexperience with lending to borrowers with increased credit risks, GMAC lacked The prospectus states that: sufficient data regarding historical patterns of borrower behavior in relation to default experience for similar The originator’s guidelines for loans will, in most cases, specify that scheduled types of borrower profiles. Consequently, the payments on a loan during the first year of its term plus taxes and insurance, assignment of maximum debt-to-income ratios had no including primary mortgage insurance, and all scheduled payments on reliable connection to the actual risk of default presented obligations that extend beyond one year, including those mentioned above and by borrowers of various profiles. other fixed obligations, would equal no more than specified percentages of the prospective borrower’s gross income. The originator may also consider the amount of liquid assets available to the borrower after origination.
Source: GMACM 2006-AR2 Pros. Sup. S-29-30. 2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to state that: The Prospectus states: • GMAC routinely granted exceptions to the required GMACM’s underwriting standards include a set of specific criteria pursuant to debt-to-income levels despite the absence of which the underwriting evaluation is made. However, the application of compensating factors. GMACM’s underwriting standards does not imply that each specific criterion was satisfied individually. Rather, a mortgage loan will be considered to be • GMAC routinely approved mortgages that were not in originated in accordance with a given set of underwriting standards if, based on “substantial compliance” with its underwriting an overall qualitative evaluation, the loan is in substantial compliance with standards. those underwriting standards. For example, a mortgage loan may be considered to comply with a set of underwriting standards, even if one or more specific criteria included in those underwriting standards were not satisfied, if other factors compensated for the criteria that were not satisfied or if the mortgage loan is considered to be in substantial compliance with the underwriting standards.
The underwriting standards set forth in GMACM’s underwriting guidelines with respect to mortgage loans originated under the GMAC Mortgage Jumbo Adjustable Rate Loan Programs may be varied in appropriate cases. There can be no assurance that every mortgage loan was originated in conformity with the applicable underwriting standards in all material respects, or that the quality or
43 performance of the mortgage loans will be equivalent under all circumstances.
Source: GMACM 2006-AR2 Pros. Sup. S-41; 3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: Each Prospectus describes GMAC’s appraisal process as follows: • GMAC routinely accepted appraisals that were not In determining the adequacy of the mortgaged property as collateral, an prepared in accordance with applicable appraisal appraisal may be required of each property considered for financing. Such standards and were therefore unreliable. appraisals may be performed by appraisers independent from or affiliated with GMACM or its affiliates.
Source: GMACM 2006-AR2 Pros. Sup. S-39-41. 4. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: Each Prospectus describes four levels of documentation – Standard Documentation; • GMAC routinely did not obtain the required Relocation (VIP) Documentation; Stated Income; Select – as follows: documentation and did not employ reasonable methods to verify or substantiate borrower income and assets as For the “Standard” documentation loan program, a prospective borrower is purportedly required by the various levels of required to complete a detailed application providing pertinent credit documentation. information. The application contains a description of borrower’s assets and
liabilities and a statement of income and expenses, as well as an authorization to Even with respect to "stated income" programs, industry apply for a credit report which summarizes the borrower’s credit history with • standards required that borrower income information be merchants and lenders and any record of bankruptcy. In addition, employment reasonable in light of the borrower's occupation. verification is obtained which reports the borrower’s current salary and may contain the length of employment and an indication as to whether it is expected that the borrower will continue such employment in the future. If a prospective borrower is self-employed or if income is received from dividends and interest, rental properties or other income which can be verified from tax returns, the borrower may also be required to submit copies of signed tax returns. In addition, the borrower may be required to authorize verification of deposits at financial institutions where the borrower has accounts. S-39.
Under [the “Relocation” or “Relocation-VIP”] programs, certain items described above are verified using alternative sources. In the case of “Relocation” documentation, a signed employer relocation verification form is acceptable in lieu of a paystub. The “Relocation-VIP” program does not require income verification, however, eligible borrowers must have a minimum annual base salary of $75,000.
44 [T]he “Stated Income” [program does not require] income verification for self- employed and salaried borrowers. For these loans, a credit check, an appraisal, and verification of sufficient assets is required. These loans generally will not exceed a 80% loan-to-value ratio on primary residences and a 70% loan-to- value ratio on second homes.
[“Select”] loans are made to executives of GM or affiliates of GM, dealer principals and general managers with a minimum annual base salary of $75,000 or to GM or GM affiliate retirees with a minimum base retirement annual income of $60,000. In addition, “Super Select” processed loans are made to executives of GM or affiliates of GM and dealer principals with a minimum annual base salary of $200,000. For both “Select” and “Super Select” loan programs, no income and no asset verification is required. A full appraisal is always required on all loan transactions, whether it is a purchase or refinance. Underwriting for both “Select” and “Super Select” is subject to a maximum loan-to-value ratio of 80% for primary residences and second homes on purchase and rate & term refinance transactions. For the “Select” program, no equity refinances are permitted on second homes. The loan-to-value ratio for the “Super Select” program is based on the appraised value. On the “Select” program, a full appraisal is always required on all transactions. For example, if the combined loan amount exceeds $850,000 or if the loan is an equity refinance loan, a full appraisal of the property is required. In addition to the loan-to-value and salary requirements described above, generally, borrower eligibility under the “Select” or “Super Select” documentation program may be determined by use of a credit scoring model, which in most cases requires a minimum credit score of 680.
Additionally, the Prospectus describes the use of Fannie Mae’s “Desktop Underwriter” program as a “streamlined documentation alternative” used to process loan applications for “jumbo loans for loan amounts or combined loan amount less than $850,000.” According to the Prospectus: These automated underwriting systems were developed by Fannie Mae and Freddie Mac and are used to underwrite conventional, governmentally-insured and jumbo loans based on established guidelines. Loans that receive an “Approve/Eligible” or an “Approve/Ineligible” only as a result of parameters acceptable under the specific product that do not meet conforming eligibility guidelines in connection with DU or “Accept Plus” or “Accept” in connection with LP are considered loans eligible for origination or purchase by GMACM and may follow reduced income and asset documentation as noted on the automated underwriting finding report. This streamlined documentation
45 alternative does not apply to loan amounts and combined loan amounts exceeding $850,000. Loan amounts and combined loan amounts over $850,000 are not eligible for submission to automated underwriting or the reduced documentation process. The automated underwriting system is not used as a loan decision tool but, instead, is used only as a reduced documentation alternative for certain qualifying mortgage loans, and jumbo loans are generally subjected to a manual review via the approved delegated underwriting authority. Source: GMACM 2006-AR2 Pros. Sup. S-39-41.
46 L. PLMBS backed by mortgages originated by or through IndyMac Bank F.S.B. (“IndyMac”)
Security CUSIP HVMLT 2006-2 2A1A 41161PK44 HVMLT 2006-2 3A1A 41161PK69 INDX 2006-AR15 A2 456610AB0
Statements Material Misstatements and Omissions
1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.3 and V.A.3 of the Amended Complaint:
Each Prospectus states that “IndyMac acquires mortgage loans principally through four 1. Far from following its underwriting guidelines and making channels: mortgage professionals, consumer direct, correspondent and conduit.” Each occasional, targeted and justified exceptions when other Prospectus describes these channels as follows: evidence of ability to repay justified a deviation from the Mortgage professionals: Mortgage brokers, mortgage bankers, financial institutions guidelines, in fact at IndyMac, variance from the stated and homebuilders who have taken applications from prospective borrowers and standards was the norm, and many loans were made with submitted those applications to IndyMac. essentially little to no underwriting or effort to evaluate ability to repay. Nowhere did any of the Offering Documents Consumer direct: Mortgage loans initiated through direct contact with the borrower. apprise the Bank of the extent to which IndyMac deviated This contact may arise from internet advertising and IndyMac website traffic, from its underwriting guide. affinity relationships, company referral programs, realtors and through its Southern
California retail banking branches. 2. The underwriting practices actually followed by IndyMac, including the widespread use of exceptions to the stated Correspondent: Mortgage brokers, mortgage bankers, financial institutions and underwriting guidelines, did not “include an analysis of the homebuilders who sell previously funded mortgage loans to IndyMac. borrower’s credit history, ability to repay the mortgage loan and the adequacy of the mortgaged property as collateral.” Conduit: IndyMac acquires pools of mortgage loans in negotiated transactions either with the original mortgagee or an intermediate owner of the mortgage loans 3. They omit to state that: Additionally, each Prospectus states: • IndyMac had no reliable basis on which to conclude that “e-MITS” provided the asserted ability to estimate risk Mortgage loans that are acquired by IndyMac are underwritten by “more objectively than traditional underwriting,” that IndyMac according to IndyMac’s underwriting guidelines, which also the resulting underwriting decisions were "consistent" or accept mortgage loans meeting Fannie Mae or Freddie Mac guidelines that the e-MITS system provided a reliable indicator of regardless of whether such mortgage loans would otherwise meet "expected credit loss, interest rate risk [or] prepayment IndyMac’s guidelines, or pursuant to an exception to those guidelines risk." based on IndyMac’s procedures for approving such exceptions.
47 According to each Prospectus, “IndyMac’s underwriting criteria for traditionally • Due to the industry’s inexperience with lending to underwritten mortgage loans include an analysis of the borrower’s credit history, ability to borrowers with increased credit risks, IndyMac lacked repay the mortgage loan and the adequacy of the mortgaged property as collateral.” sufficient data regarding historical patterns of default Each Prospectus asserts that IndyMac balanced the following factors in determining a experienced by borrowers with similar profiles, which mortgagor’s eligibility for a mortgage: rendered unreliable the resulting “risk-based pricing system” (e-MITS) and the assignment of maximum In addition to the FICO Credit Score, other information regarding a borrower’s LTV values based on risk. credit quality is considered in the loan approval process, such as the number and
degree of any late mortgage or rent payments within the preceding 12-month period, the age of any foreclosure action against any property owned by the • Despite the alleged consideration of “other information borrower, the age of any bankruptcy action, the number of seasoned tradelines regarding a borrower’s credit quality,” IndyMac reflected on the credit report and any outstanding judgments, liens, charge-offs routinely relied solely upon a borrower’s FICO score in or collections. assessing credit risk, which, in isolation, is not a reliable indicator of the probability of default on a mortgage. Each Prospectus states that “IndyMac has two principal underwriting methods designed to be responsive to the needs of its mortgage loan customers:” • IndyMac did not employ reasonable methods to verify or substantiate borrower income; therefore, the [T]raditional underwriting and e-MITS (Electronic Mortgage Information and purported ratios of monthly debt to income and other Transaction System) underwriting. E-MITS is an automated, internet-based decisions based on income levels were unreliable. underwriting and risk-based pricing system. IndyMac believes that e-MITS generally enables it to estimate expected credit loss, interest rate risk and • IndyMac's underwriters routinely accepted appraisals prepayment risk more objectively than traditional underwriting and also that were not prepared in accordance with the applicable provides consistent underwriting decisions. IndyMac has procedures to appraising standards in the underwriting guidelines. override an e-MITS decision to allow for compensating factors. Consequently, IndyMac used unreliable appraisals to determine the value of the collateral, which rendered decisions based on LTV unreliable. Each Prospectus states that “[m]aximum loan-to-value and combined loan-to-value ratios and loan amounts are established according to:” • IndyMac did not employ reasonable methods to evaluate borrower assertions regarding the number of properties [T]he occupancy type, loan purpose, property type, FICO Credit Score, number owned or monthly expenses, and therefore decisions of previous late mortgage payments, and the age of any bankruptcy or made based on those factors were unreliable. foreclosure actions. Additionally, maximum total monthly debt payments-to- income ratios and cash-out limits may be applied. • IndyMac’s assignment of a borrower’s maximum LTV ratio was based on unreliable methods of evaluating Additionally, each Prospectus asserts that “[o]ther factors may be considered in borrower credit risk. determining loan eligibility,” including: • IndyMac lacked any reasonable basis upon which to [A] borrower’s residency and immigration status, whether a non-occupying assign “maximum loan-to-value and combined loan-to- borrower will be included for qualification purposes, sales or financing value ratios and amounts.” concessions included in any purchase contract, the acquisition cost of the • IndyMac lacked adequate procedures and practices to property in the case of a refinance transaction, the number of properties owned monitor or evaluate its underwriters' exercise of
48 by the borrower, the type and amount of any subordinate mortgage, the amount judgment, or to provide appropriate training and of any increase in the borrower’s monthly mortgage payment compared to education to its underwriters. previous mortgage or rent payments and the amount of disposable monthly income after payment of all monthly expenses.
Source: HVMLT 2006-2 Pros. Sup. S-81-82; INDX 2006-AR15 Pros. Sup. S-44-45. 2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to state that: Each prospectus states that “[t]raditional underwriting decisions are made by individuals authorized to consider compensating factors that would allow mortgage loans not otherwise • IndyMac routinely granted exceptions to the required meeting IndyMac’s guidelines.” These compensating factors include: “significant financial debt-to-income levels without meaningful compensating reserves, a low loan-to-value ratio, significant decrease in the borrower’s monthly payment factors. and long-term employment with the same employer.” • IndyMac had no reasonable basis on which to evaluate alleged compensating factors that might warrant Source: HVMLT 2006-2 Pros. Sup. S-81-83; INDX 2006-AR15 Pros. Sup. S-44-46. exceptions to the underwriting standards. • IndyMac lacked adequate practices, policies or procedures to monitor or evaluate the exercise of underwriter discretion in granting exceptions, or to provide training or education to underwriters. • IndyMac lacked a reliable factual foundation on which to evaluate certain alleged "compensating factors," including a borrower’s "long-term employment with the same employer," because employment history was not verified for many mortgages in the pool. 3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: Each Prospectus describes IndyMac’s appraisal process as follows: • IndyMac routinely accepted appraisals that were not To determine the adequacy of the property to be used as collateral, an appraisal prepared in accordance with applicable appraisal is generally made of the subject property in accordance with the Uniform standards and were therefore unreliable. Standards of Profession Appraisal Practice. The appraiser generally inspects the property, analyzes data including the sales prices of comparable properties and issues an opinion of value using a Fannie Mae/Freddie Mac appraisal report • IndyMac lacked any reliable basis on which to assess form, or other acceptable form. In some cases, an automated valuation model the accuracy of the values yielded by the described (AVM) may be used in lieu of an appraisal. AVMs are computer programs that appraisal practices. use real estate information, such as demographics, property characteristics, sales prices, and price trends to calculate a value for the specific property. The value • IndyMac lacked adequate policies, practices, and of the property, as indicated by the appraisal or AVM, must support the loan procedures to monitor and evaluate compliance with
49 amount. applicable appraisal standards.
Source: HVMLT 2006-2 Pros. Sup. S-80-83; INDX 2006-AR15 Pros. Sup. S-43-47. • IndyMac lacked adequate policies, practices, and procedures to determine the qualifications of employees reviewing appraisals or to provide training or education to those employees.
• IndyMac lacked adequate information upon which to determine whether valuations resulting from the automated system were as reliable as valuations resulting from appraisals performed in accordance with accepted practices and standards.
4. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: Each Prospectus describes six levels of documentation – Full/Alternate Documentation (FastForward Documentation); Limited Documentation; Stated Income Documentation; No • IndyMac routinely did not obtain the required Ratio Documentation; No Income/No Asset Documentation; No Documentation – as documentation and did not employ reasonable methods follows: to verify or substantiate borrower income and assets as purportedly required by the various levels of Under the Full/Alternate Documentation Program, the prospective borrower’s documentation. employment, income and assets are verified through written documentation
such as tax returns, pay stubs or W-2 forms. Generally, a two-year history of IndyMac lacked adequate practices and procedures to employment or continuous source of income is required to demonstrate • monitor or evaluate the compliance by the employees adequacy and continuance of income. Borrowers applying under the involved with loan origination with the requirements of Full/Alternate Documentation Program may, based on certain loan the various levels of documentation or to provide characteristics and higher credit quality, qualify for IndyMac’s FastForward training or education to those employees. program and be entitled to income and asset documentation relief. Borrowers who qualify for FastForward must state their income, provide a signed Internal Revenue Service Form 4506 (authorizing IndyMac to obtain copies of their tax • Even with respect to "stated income" programs, industry returns), and state their assets; IndyMac does not require any verification of standards required that borrower income information be income or assets under this program. reasonable in light of the borrower's occupation. The Limited Documentation Program is similar to the Full/Alternate Documentation Program except that borrowers generally must document income and employment for one year (rather than two, as required by the Full/Alternate Documentation Program). Borrowers under the Limited Documentation Program may use bank statements to verify their income and employment. If applicable, written verification of a borrower’s assets is required under this program.
50 The Stated Income Documentation Program requires prospective borrowers to provide information regarding their assets and income. Information regarding a borrower’s assets, if applicable, is verified through written communications. Information regarding income is not verified and employment verification may not be written. The No Ratio Program requires prospective borrowers to provide information regarding their assets, which is then verified through written communications. The No Ratio Program does not require prospective borrowers to provide information regarding their income, but employment may not be written. Under the No Income/No Asset Documentation Program and the No Doc Documentation Program, emphasis is placed on the credit score of the prospective borrower and on the value and adequacy of the mortgaged property as collateral, rather than on the income and the assets of the prospective borrower. Prospective borrowers are not required to provide information regarding their assets or income under either program, although under the No Income/No Asset Documentation Program, employment is orally verified. IndyMac generally will re-verify income, assets, and employment for mortgage loans it acquires through the wholesale channel, but not for mortgage loans acquired through other channels. Source: HVMLT 2006-2 Pros. Sup. S-80-83; INDX 2006-AR15 Pros. Sup. S-43-47.
51 M. PLMBS backed by mortgages originated by or through IndyMac Bank F.S.B. (“IndyMac”)
Security CUSIP INABS 2005-D AII3 456606JM5
Statements Material Misstatements and Omissions
1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.3 and V.A.3 of the Amended Complaint: The Propsectus states: 1. Far from following its underwriting guidelines and making Most of the mortgage loans were originated in accordance with IndyMac occasional, targeted and justified exceptions when other Bank’s underwriting standards described [herein]. Mortgage loans not evidence of ability to repay justified a deviation from the originated under these underwriting standards as, for instance, mortgage loans guidelines, in fact at IndyMac, variance from the stated acquired through bulk purchases, were originated in accordance with standards was the norm, and many loans were made with underwriting standards approved by IndyMac Bank at the time of acquisition essentially little to no underwriting or effort to evaluate and generally comparable to IndyMac Bank’s underwriting standards ability to repay. Nowhere did any of the Offering Documents apprise the Bank of the extent to which IndyMac deviated According to the Prospectus, “IndyMac Bank’s underwriting standards for mortgage loans from its underwriting guide. are primarily intended to evaluate the borrower’s creditworthiness and the value and adequacy of the mortgaged property as collateral for the proposed mortgage loan, as well 2. The underwriting practices actually followed by IndyMac, as the type and intended use of the mortgaged property.” including the widespread use of exceptions to the stated underwriting guidelines, were not “primarily intended to The Prospectus describes IndyMac’s automated underwriting systems as follows: evaluate the borrower’s creditworthiness and the value and adequacy of the mortgaged property as collateral for the Electronic Mortgage Information and Transaction System” (or “e-MITS”) [is] a proposed mortgage loan.” proprietary, Internet-based, point-of-sale automated underwriting and risk-based pricing system [used] to underwrite and price the mortgage loans. This system 3. They omit to state that: uses proprietary credit and risk analysis information generated from statistical analysis of IndyMac Bank’s historical database of over 300,000 loans to • Due to the industry’s inexperience with lending to determine the economic levels at which a given loan should be approved. The borrowers with increased credit risks, IndyMac lacked system also incorporates information from models provided by credit rating sufficient data regarding historical patterns of default agencies. e-MITS analyzes over forty data elements relating to the mortgagor experienced by borrowers with similar profiles upon and the mortgaged property before rendering an approval and a risk-based price. which it could accurately derive an evaluation of future As with IndyMac Bank’s traditional underwriting process, this approval is risk based on each borrower’s alleged “forty data subject to full and complete data verification. Loans approved by e-MITS elements.” comply with IndyMac Bank’s underwriting guidelines. • IndyMac routinely granted exceptions from the The Prospectus states that “[e]ach of the mortgage loans were underwritten or re- requirements that would otherwise have been dictated
52 underwritten by IndyMac Bank and assigned to one of six credit levels generally by the credit grades. indicating the severity of the borrower’s derogatory credit items.” The Prospectus further describes the credit levels as follows: • IndyMac did not employ reasonable methods to verify or substantiate borrower income; therefore, the The credit levels are, in order of decreasing creditworthiness, 1++, 1+, 1, 2, 3 purported ratios of monthly debt to income and other and 4. (41)S-29; The maximum loan amount will vary depending on a decisions based on income levels were unreliable. borrower’s credit grade and loan program but will not generally exceed $3,000,000. • IndyMac's underwriters routinely accepted appraisals that were not prepared in accordance with the applicable The Prospectus asserts that the credit levels were derived as follows: appraising standards in the underwriting guidelines. Consequently, IndyMac used unreliable appraisals to Through December 2000, the credit level for mortgage loans purchased or determine the value of the collateral, which rendered originated was primarily based on the prospective mortgagor’s FICO Credit decisions based on LTV unreliable. Score. After December 2000, the credit level was further evaluated based on the prospective mortgagor’s mortgage payment history, foreclosure and bankruptcy • IndyMac’s assignment of “credit levels” and a history. Higher frequency of late mortgage payments and recency of foreclosure borrower’s maximum LTV ratio was based on and bankruptcy cause the loans to be rated with a higher numerical credit level. unreliable methods of evaluating borrower credit risk.
Source: INABS 2005-D Pros. Sup. S-28-29. • IndyMac lacked any reasonable basis upon which to assign “credit levels.” Further, the statements omit to state that IndyMac lacked historical performance data with respect to loans issued using equivalent underwriting practices (including the widespread granting of exceptions to underwriting guidelines), and therefore could not reliably assign borrowers to maximum loan amounts based on risk.
• IndyMac lacked adequate procedures and practices to monitor or evaluate its underwriters' exercise of judgment, or to provide appropriate training and education to its underwriters. 2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to state that: The Prospectus Supplement states that “as is the case with loans that are not underwritten through e-MITS, exceptions to standard underwriting guidelines are permitted where • IndyMac routinely granted exceptions to the required compensating factors are present or in the context of negotiated bulk purchases.” The debt-to-income levels without meaningful compensating Prospectus states that “compensating factors may include low Loan-to-Value Ratio, low factors. debt-to-income ratio, stable employment, favorable credit history and the nature of any underlying first loan.” • IndyMac had no reasonable basis on which to evaluate alleged compensating factors that might warrant
53 Source: INABS 2005-D Pros. 38, Pros. Sup. S-29. exceptions to the underwriting standards.
• IndyMac lacked adequate practices, policies or procedures to monitor or evaluate the exercise of underwriter discretion in granting exceptions, or to provide training or education to underwriters.
• IndyMac lacked a reliable factual foundation on which to evaluate certain alleged "compensating factors," including a borrower’s "debt-to-income ratio" and "stable employment," because income and employment history were not verified for many mortgages in the pool.
3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: Each Prospectus describes IndyMac’s appraisal process as follows: • IndyMac routinely accepted appraisals that were not In determining the adequacy of the property as collateral, an appraisal is made prepared in accordance with applicable appraisal of each property considered for financing. The scope and detail of an appraisal standards and were therefore unreliable. may be limited to a query to a third party valuation service or may be broader and more detailed. At most, the appraiser may be required to inspect the • IndyMac lacked any reliable basis on which to assess property and verify that it is in good repair and that construction, if new, has the accuracy of the values yielded by the described been completed. The appraisal may be based on the market value of comparable appraisal practices. homes, the estimated rental income (if considered applicable by the appraiser) and the cost of replacing the home. • IndyMac lacked adequate policies, practices, and procedures to monitor and evaluate compliance with Source: INABS 2005-D Pros. Sup. S-28-29. applicable appraisal standards. • IndyMac lacked adequate policies, practices, and procedures to determine the qualifications of employees reviewing appraisals or to provide training or education to those employees. 4. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: The Prospectus states that “[i]n most cases, an employment verification is obtained from an • IndyMac routinely did not obtain the required independent source (typically the borrower’s employer). The employment verification documentation and did not employ reasonable methods specifies the length of employment with that organization, the borrower’s current salary and to verify or substantiate borrower income and assets as purportedly required by the various levels of
54 whether it is expected that the borrower will continue employment in the future.” documentation.
The Prospectus Supplement describes seven levels of documentation – Full/Alternate; • IndyMac lacked adequate practices and procedures to Limited; Stated Income; FastForward; No Income/No Asset; No Ratio; No Doc – as monitor or evaluate the compliance by the employees follows: involved with loan origination with the requirements of the various levels of documentation or to provide Under the Full/Alternate Documentation Program, the prospective borrower's training or education to those employees. employment, income and assets are verified through written or telephonic communications. All loans may be submitted under the Full/Alternate • Even with respect to "stated income" programs, industry Documentation Program. The Full/Alternate Documentation Program also standards required that borrower income information be provides for alternative methods of employment verification generally using W- reasonable in light of the borrower's occupation. 2 forms or pay stubs.
The Limited Documentation Program is similar to the Full/Alternate Documentation Program except that borrowers are generally not required to submit copies of their tax returns and only must document income for one year (rather than two, as required by the Full/Alternate Documentation Program).
The Stated Income Documentation Program requires prospective borrowers to provide information regarding their assets and income. Information regarding assets is verified through written communications. Information regarding income is not verified.
Borrowers applying under the Full/Alternate Documentation Program may, based on certain credit and loan characteristics, qualify for IndyMac Bank's FastForward program and be entitled to income and asset documentation relief. Borrowers who qualify for FastForward must state their income, provide a signed Internal Revenue Service Form 4506 (authorizing IndyMac Bank to obtain copies of their tax returns), and state their assets; IndyMac Bank does not require any verification of income or assets under this program.
Under the No Income/No Asset Documentation Program and the No Doc Documentation Program, emphasis is placed on the credit score of the prospective borrower and on the value and adequacy of the mortgaged property as collateral, rather than on the income and the assets of the prospective borrower. Prospective borrowers are not required to provide information regarding their assets or income under either program, although under the No Income/No Asset Documentation Program, employment is orally verified.
The No Ratio Program requires prospective borrowers to provide information
55 regarding their assets, which is then verified through written communications. The No Ratio Program does not require prospective borrowers to provide information regarding their income. Employment is orally verified under both programs.
Under the No Income/No Asset Documentation Program and the No Doc Documentation Program, emphasis is placed on the credit score of the prospective borrower and on the value and adequacy of the mortgaged property as collateral, rather than on the income and the assets of the prospective borrower. Prospective borrowers are not required to provide information regarding their assets or income under either program, although under the No Income/No Asset Documentation Program, employment is orally verified.
Source: INABS 2005-D Pros. Sup. S-28-29.
56 N. PLMBS backed by mortgages originated by or through New Century Mortgage & NC Capital Corporation (“New Century”)
Security CUSIP CMLTI 2006-NC1 A2C 172983AD0 CMLTI 2006-NC2 A2B 17309TAC2 GSAMP 2006-NC2 A2C8 362463AD3 MABS 2006-NC1 A3 57643LNE2 MSAC 2006-HE5 A2C 61749NAD9 MSAC 2006-HE6 A2C8 61750FAE0 SABR 2006-NC3 A2B8 81377CAB4
Statements Material Misstatements and Omissions
1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.2 and V.A.3 of the Amended Complaint: According to each Prospectus, “The New Century Underwriting Guidelines are primarily 1. Far from following its underwriting guidelines and making intended to assess the borrower’s ability to repay the related mortgage loan, to assess the occasional, targeted and justified exceptions when other value of the mortgaged property and to evaluate the adequacy of the property as evidence of ability to repay justified a deviation from the collateral for the mortgage loan.” Each Prospectus asserts that New Century considered guidelines, in fact at New Century, variance from the stated the following factors in determining a mortgagor’s eligibility for a mortgage: “a standards was the norm, and many loans were made with mortgagor’s credit history, repayment ability and debt service-to-income ratio, as well as essentially little to no underwriting or effort to evaluate the type and use of the mortgaged property.” Additionally, each Prospectus asserts the ability to repay. Nowhere did any of the Offering Documents follow regarding additional information considered by New Century in underwriting apprise the Bank of the extent to which New Century mortgages: deviated from its underwriting guide. Each applicant completes an application that includes information with respect 2. The underwriting practices actually followed by New to the applicant’s liabilities, income, credit history, employment history and Century, including the widespread use of exceptions to the personal information. The New Century Underwriting Guidelines require a stated underwriting guidelines, were not "primarily intended credit report on each applicant from a credit reporting company. The report to assess the borrower’s ability to repay the related mortgage typically contains information relating to matters such as credit history with
8 The mortgages backing bonds GSAMP 2006-NC2 A2C, MSAC 2006-HE6 A2C, and SABR 2006-NC3 A2B were acquired by the sponsor from NC Capital Corporation, “which in turn acquired them from its affiliate, New Century Mortgage Corporation.” GSAMP 2006-NC2 Pros. Sup. S-11, MSAC 2006-HE6 Pros. Sup. S-26, SABR 2006-NC3 Pros. Sup. S-8.
57 local and national merchants and lenders, installment debt payments and any loan” or an evaluation of “the adequacy of the property as record of defaults, bankruptcies, repossessions or judgments. collateral for the mortgage loan.” In evaluating the credit quality of borrowers, the originators utilize credit bureau 3. They omit to state that: risk scores, or a FICO score, a statistical ranking of likely future credit performance developed by Fair, Isaac & Company and the three national credit • Despite the alleged consideration of a “a mortgagor’s data repositories: Equifax, TransUnion and Experian. credit history,” New Century routinely relied solely upon a borrower’s FICO score in assessing credit risk, Source: CMLTI 2006-NC1 Pros. Sup. *74-75; CMLTI 2006-NC2 Pros. Sup. *80-81; which, in isolation, is not a reliable indicator of the GSAMP 2006-NC2 Pros. Sup. S-40-41; MABS 2006-NC1 Pros. Sup. S-42-44;MSAC 2006- probability of default on a mortgage. HE5 Pros. Sup. S-31-33; MSAC 2006-HE6 Pros. Sup. S-20-30; SABR 2006-NC3 Pros. Sup. S-47-48. • New Century did not employ reasonable methods to verify or substantiate borrower income, which rendered Each Prospectus states that, according to New Century's Underwriting Guidelines, decisions based on the purported debt-to-income ratios borrowers are assigned to a "risk category" ranging from C- to AA. Each category permits unreliable. a different maximum Loan-to-Value ratio based upon the occupancy of the property and the borrower's credit score, debt-to-income ratio, delinquency, bankruptcy, and foreclosure • New Century's underwriters routinely accepted history. appraisals that were not prepared in accordance with the applicable appraising standards in the underwriting Source: CMLTI 2006-NC1 Pros. Sup. *75-77; CMLTI 2006-NC2 Pros. Sup. *81-83; guidelines. Consequently, Century used unreliable GSAMP 2006-NC2 Pros. Sup. S-41-44; MABS 2006-NC1 Pros. Sup. S-44-46;MSAC 2006- appraisals to determine the value of the collateral, which HE5 Pros. Sup. S-33-35; MSAC 2006-HE6 Pros. Sup. S-30-32; SABR 2006-NC3 Pros. Sup. rendered decisions based on LTV unreliable. S-49-51. • New Century lacked an adequate basis upon which to assign borrowers to the stated risk categories, or upon which to assess the risk of default or determine an appropriate maximum Loan-to-Value ratio based upon those risk categories. • Due to the industry’s inexperience with lending to borrowers with increased credit risks, New Century lacked sufficient data regarding historical patterns of borrower behavior in relation to default experience for similar types of borrower profiles. Consequently, the assignment of maximum LTV ratios had no reliable connection to the actual risk of default presented by borrowers assigned to each “risk category.” • New Century lacked adequate procedures and practices to monitor or evaluate its underwriters' exercise of judgment, or to provide appropriate training and education to its underwriters.
58 2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to state that: Each Prospectus states that “[o]n a case-by-case basis, exceptions to the New Century Underwriting Guidelines are made where compensating factors exist. It is expected that a • New Century routinely granted exceptions to the risk substantial portion of the mortgage loans will represent these exceptions.” According to category criteria despite the absence of meaningful each Prospectus, such exceptions may include “a debt service-to-income ratio exception, a compensating factors. pricing exception, a loan-to-value ratio exception, an exception from certain requirements of a particular risk category, etc.” • New Century had no reasonable basis on which to evaluate alleged compensating factors that might Each Prospectus states that compensating factors include the following: warrant exceptions to the underwriting standards. [L]ow loan-to-value ratio; pride of ownership; a maximum of one 30 day late • New Century lacked adequate practices, policies or payment on all mortgage loans during the last 12 months; and stable employment or procedures to monitor or evaluate the exercise of ownership of current residence of four or more years. An exception may also be underwriter discretion in granting exceptions, or to allowed if the applicant places a down payment through escrow of at least 20% of provide training or education to underwriters. the purchase price of the mortgaged property or if the new loan reduces the applicant’s monthly aggregate mortgage payment by 25% or more. • New Century lacked a reliable factual foundation on which to evaluate certain alleged "compensating Each Prospectus further states: factors," including a borrower’s "debt service-to-income Accordingly, a mortgagor may qualify in a more favorable risk category than, in the ratio" and "stable employment," because income and absence of compensating factors, would satisfy only the criteria of a less favorable employment history were not verified for many risk category. It is expected that a substantial portion of the mortgage loans will mortgages in the pool. represent these kinds of exceptions.
Source: CMLTI 2006-NC1 Pros. Sup. *74,*77; CMLTI 2006-NC2 Pros. Sup. *80,*83; GSAMP 2006-NC2 Pros. Sup. S-40,44; MABS 2006-NC1 Pros. Sup. S-43-47;MSAC 2006- HE5 Pros. Sup. S-31,35; MSAC 2006-HE6 Pros. Sup. S-29,33; SABR 2006-NC3 Pros. Sup. S-47,52. 3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: Each Prospectus describes New Century’s appraisal process as follows:
Mortgaged properties that are to secure mortgage loans generally are appraised • New Century routinely accepted appraisals that were not by qualified independent appraisers. These appraisers inspect and appraise the prepared in accordance with applicable appraisal subject property and verify that the property is in acceptable condition. standards and were therefore unreliable. Following each appraisal, the appraiser prepares a report that includes a market value analysis based on recent sales of comparable homes in the area and, when • New Century lacked any reliable basis on which to deemed appropriate, replacement cost analysis based on the current cost of assess the accuracy of the values yielded by the constructing a similar home. All appraisals are required to conform to the described appraisal practices. Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and are generally on • New Century lacked adequate policies, practices, and
59 forms acceptable to Fannie Mae and Freddie Mac. procedures to monitor and evaluate compliance with applicable appraisal standards. The New Century Underwriting Guidelines require a review of the appraisal
by a qualified employee of the originators or by an appraiser retained by the • New Century lacked adequate policies, practices, and originators. The originators use the value as determined by the review in procedures to determine the qualifications of employees computing the loan-to-value ratio of the related mortgage loan if the appraised reviewing appraisals or to provide training or education value of a mortgaged property, as determined by a review, is (i) more than 10% to those employees. greater but less than 25% lower than the value as determined by the appraisal for mortgage loans having a loan-to-value ratio or a combined loan-to-value ratio of up to 90%, and (ii) more than 5% greater but less than 25% lower than the value as determined by the appraisal for mortgage loans having a loan-to- value ratio or a combined loan-to-value ratio of between 91-95%. For mortgage loans having a loan-to-value ratio or a combined loan-to-value ratio greater than 95%, the appraised value as determined by the review is used in computing the loan-to-value ratio of the related mortgage loan. If the appraised value of a mortgaged property as determined by a review is 25% or more lower than the value as determined by the appraisal, then the originators obtain a new appraisal and repeats the review process. Source: CMLTI 2006-NC1 Pros. Sup. *69-74; CMLTI 2006-NC2 Pros. Sup. *78-83; GSAMP 2006-NC2 Pros. Sup. S-40; MABS 2006-NC1 Pros. Sup. S-42-47;MSAC 2006- HE5 Pros. Sup. S-31-35; MSAC 2006-HE6 Pros. Sup. S-29-33; SABR 2006-NC3 Pros. Sup. S-47-52. 4. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: Each Prospectus states that under each level of documentation, the underwriting guidelines “require that, with respect to salaried employees, there be a telephone verification of the • New Century routinely did not obtain the required applicant’s employment. Verification of the source of funds, if any, required to be documentation and did not employ reasonable methods deposited by the applicant into escrow in the case of a purchase money loan is required.” to verify or substantiate borrower income and assets as purportedly required by the various levels of Each Prospectus describes three levels of documentation – Full Documentation; Limited documentation. Documentation; Stated Income Documentation – as follows: • New Century lacked adequate practices and procedures to monitor or evaluate the compliance by the employees [U]nder the full documentation program, applicants usually are required to involved with loan origination with the requirements of submit one written form of verification of stable income for at least 12 months the various levels of documentation or to provide from the applicant’s employer for salaried employees and 24 months for self- training or education to those employees. employed applicants.
[U]nder the limited documentation program, applicants usually are required to • Even with respect to "stated income" programs, industry submit verification of stable income for at least 6 months, such as 6 consecutive standards required that borrower income information be
60 months of complete personal checking account bank statements. reasonable in light of the borrower's occupation.
[U]nder the stated income documentation program, an applicant may be qualified based upon monthly income as stated on the mortgage loan application if the applicant meets certain criteria.
Source: CMLTI 2006-NC1 Pros. Sup. *69-74; CMLTI 2006-NC2 Pros. Sup. *78-83; GSAMP 2006-NC2 Pros. Sup. S-40; MABS 2006-NC1 Pros. Sup. S-42-47;MSAC 2006- HE5 Pros. Sup. S-31-35; MSAC 2006-HE6 Pros. Sup. S-29-33; SABR 2006-NC3 Pros. Sup. S-47-52.
61 O. PLMBS backed by mortgages originated by or through Option One Mortgage Corporation (“Option One”)
Security CUSIP OOMLT 2005-5 A3 68389FJW5 OOMLT 2006-2 2A3 68402CAD6
Statements Material Misstatements and Omissions
1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.10 and V.A.3 of the Amended Complaint: According to each Prospectus: 1. Far from following its underwriting guidelines and making
occasional, targeted and justified exceptions when other The Mortgage Loans will have been originated generally in accordance with Option evidence of ability to repay justified a deviation from the One’s Guidelines (the “Option One Underwriting Guidelines”). The Option One guidelines, in fact at Option One, variance from the stated Underwriting Guidelines are primarily intended to assess the value of the mortgaged standards was the norm, and many loans were made with property, to evaluate the adequacy of such property as collateral for the mortgage essentially little to no underwriting or effort to evaluate loan and to assess the applicant’s ability to repay the mortgage loan. ability to repay. Nowhere did any of the Offering Documents . . . apprise the Bank of the extent to which Option One deviated Option One Underwriting Guidelines require a reasonable determination of an from its underwriting guide. applicant’s ability to repay the loan. Such determination is based on a review of the applicant’s source of income, calculation of a debt service-to-income ratio based on 2. The underwriting practices actually followed by Option One, the amount of income from sources indicated on the loan application or similar including the widespread use of exceptions to the stated documentation, a review of the applicant’s credit history and the type and intended underwriting guidelines, were not “primarily intended to use of the property being financed. assess . . . the adequacy of [the] property as collateral for the mortgage loan and . . . the applicant’s ability to repay the Each Prospectus further states, “[t]he majority of Option One’s loan originations are mortgage loan.” underwritten using its ‘Latitude Advantage’ program guidelines.” Each Prospectus states that “[u]nder the Latitude Advantage program, the maximum LTV is based on an applicant’s 3. Often loans were originated without a "reasonable credit score, risk grade, income documentation and use and type of property.” determination of the applicant's ability to repay the loan." The failure to make such a reasonable determination resulted
Each Prospectus also states, “[i]n addition to its credit score based origination program, both from the widespread granting of "exceptions" to the Latitude Advantage, Option One offers first lien mortgage loans under the ‘Legacy’ underwriting standards, and from the failure to appropriately verify information provided by borrowers. program.” Each Prospectus states that “[u]nder the Legacy program, LTV limitations are determined based on the applicant’s risk grade, income documentation and use and type 4. They omit to state that: of property.” • Option One lacked reliable means for ascertaining the Each Prospectus describes systems for grading borrowers under the Option One properties' LTVs and for assessing the borrowers' risks "Latitude Advantage" and "Legacy" programs. The Prospectus description indicate grades. that credit scores, delinquency and bankruptcy histories are used to produce a risk • Option One lacked any reliable basis to conclude that
62 grade for the borrower, and the risk grade then determines permitted debt to income the risk grades assigned through the described process ratios and LTVs. were reasonably related to the loan qualification decisions to be made based on those risk grades, or that Source: OOMLT 2005-5 Pros. Sup. S-44-47; OOMLT 2005-2 Pros. Sup. *59-63. the debt-to-income and LTV requirements that resulted from the risk grades bore a reasonable relation to the credit risk indicated by the risk grade or by the data that underlay the risk grade. • The unreliability of the appraisals used to determine LTV, and the lack of appropriate verification of income, rendered decisions based on LTV or debt to income levels unreliable. • Option One’s underwriters routinely accepted appraisals that were not prepared in accordance with the applicable appraising standards in the underwriting guidelines. Consequently, Option One used unreliable appraisals to determine the value of the collateral, which rendered decisions based on LTV unreliable. • Due to the industry’s inexperience with lending to borrowers with increased credit risks, Option One lacked sufficient data regarding historical patterns of borrower behavior in relation to default experience for similar types of borrower profiles. Consequently, the assignment of “risk grades,” with their corresponding maximum LTV and debt-to-income ratios, had no reliable connection to the actual risk of default presented by borrowers assigned to each grade. • Option One lacked adequate procedures and practices to monitor or evaluate its underwriters' exercise of judgment, or to provide appropriate training and education to its underwriters. 2. Statements Regarding Exceptions to Standards: The statements are materially misleading because: Each Prospectus states, “[o]n a case-by-case basis, exceptions to the Option One 1. Although they state that exceptions may be granted "on a Underwriting Guidelines are made where compensating factors exist.” case-by-case basis" and describe various specific considerations, they omit to state that the exceptions were Each Prospectus further states: routinely granted even in the absence of those As described above, the foregoing risk categories and criteria are Underwriting considerations, or that those exceptions were granted without Guidelines only. On a case-by-case basis, it may be determined that an a reasonable basis for evaluating the increased credit risk
63 applicant warrants a debt-to-income ratio exception, a pricing exception, a loan- associated with the subject borrower. to-value exception, a credit score exception or an exception from certain 2. They omit to state that: requirements of a particular risk category. An upgrade will be granted if the application reflects certain compensating • Exceptions were routinely granted despite the absence of factors, among others: a relatively lower LTV; a maximum of one 30-day late meaningful "compensating factors." payment on all mortgage loans during the last 12 months; stable employment; a • Option One had no reasonable basis on which to fixed source of income that is greater than 50% of all income; ownership of evaluate alleged compensating factors that might current residence of four or more years; or cash reserves equal to or in excess of warrant exceptions to the underwriting standards. three monthly payments of principal, interest, taxes and insurance. • Option One lacked adequate practices, policies or An upgrade or exception may also be allowed if the applicant places a down procedures to monitor or evaluate the exercise of payment through escrow of at least 10% of the purchase price of the mortgaged underwriter discretion in granting exceptions, or to property, or if the new loan reduces the applicant’s monthly aggregate mortgage provide training or education to underwriters. payment by 20% or more. Accordingly, certain mortgagors may qualify for a more favorable risk category or for a higher maximum LTV that, in the absence of such compensating factors, would satisfy only the criteria of a less favorable risk category or maximum LTV. Source: OOMLT 2005-5 Pros. Sup. S-44-47; OOMLT 2005-2 Pros. Sup. *59-63.
64
3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: Each Prospectus states, “The Option One Underwriting Guidelines require that mortgage loans be underwritten in a standardized procedure which complies with applicable federal • Option One routinely accepted appraisals that were not and state laws and regulations and require Option One’s underwriters to be satisfied that prepared in accordance with applicable appraisal the value of the property being financed, as indicated by an appraisal supports the loan standards and were therefore unreliable. balance." • Option One did not employ a "standardized procedure" Each Prospectus describes Option One’s appraisal process as follows: that complied with federal and state laws and regulations. Mortgaged properties that are to secure mortgage loans generally are appraised by qualified independent appraisers. Such appraisers inspect and appraise the • The underwriters lacked sufficient information "to be subject property and verify that such property is in acceptable condition. satisfied" with respect to the value of the properties. Following each appraisal, the appraiser prepares a report which includes a market value analysis based on recent sales of comparable homes in the area • Option One lacked any reliable basis on which to assess and, when deemed appropriate, replacement cost analysis based on the current the accuracy of the values yielded by the described cost of constructing a similar home. All appraisals are required to conform to appraisal practices. the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and are generally on • Option One lacked adequate policies, practices, and forms acceptable to Fannie Mae and Freddie Mac. procedures to monitor and evaluate compliance with applicable appraisal standards. Source: OOMLT 2005-5 Pros. Sup. S-44-47; OOMLT 2005-2 Pros. Sup. *59-63. • Option One lacked adequate policies, practices, and procedures to determine the qualifications of employees reviewing appraisals or to provide training or education to those employees. 4. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: Each Prospectus states that “Except with respect to the No Documentation program that is described below, the Option One Underwriting Guidelines require verification or evaluation • Option One routinely did not obtain the required of the income of each applicant and, for purchase transactions, verification of the seasoning documentation and did not employ reasonable methods or source of funds (in excess of $2,500).” to verify or substantiate borrower income and assets as purportedly required by the various levels of Each Prospectus describes four levels of documentation – Full Documentation; Lite documentation. Documentation; Stated Income; No Documentation – as follows:
Full Documentation, the highest level of income documentation, generally • Option One lacked adequate practices and procedures to requires applicants to submit one written form of verification from the employer monitor or evaluate the compliance by the employees of stable income for at least 12 months. A wage-earner may document income involved with loan origination with the requirements of by a current pay stub reflecting year to date income and applicant’s most recent the various levels of documentation or to provide
65 W-2 or IRS Form 1040. A self-employed applicant may document income with training or education to those employees. either the most recent federal tax returns or personal bank statements. • Even with respect to "stated income" and “no Lite Documentation is for applicants who otherwise cannot meet the documentation” programs, industry standards required requirements of the full documentation program and requires applicants to that borrower income information be reasonable in light submit 3 months’ bank statements or a paystub as verification of income. of the borrower's occupation. Stated Income Documentation applicants are qualified based upon monthly income as stated on the mortgage loan application.
No Documentation, which is only available under the AA+ credit grade, does not require any statement or proof of income, employment or assets. The credit decision is based on the borrower’s credit score and credit trade lines.
Source: OOMLT 2005-5 Pros. Sup. S-44-47; OOMLT 2005-2 Pros. Sup. *59-63.
66 P. PLMBS backed by mortgages originated by or through Residential Funding Corporation9 (“Residential Funding”)
Security CUSIP RASC 2005-KS12 A2 753910AB4
Statements Material Misstatements and Omissions
1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.4, 17 and V.A.3 of the Amended Complaint: According to the Prospectus, “Residential Funding’s underwriting of the mortgage loans generally consisted of analyzing the following as standards applicable to the mortgage 1. Far from following its underwriting guidelines and making loans: occasional, targeted and justified exceptions when other evidence of ability to repay justified a deviation from the • the creditworthiness of a mortgagor, guidelines, in fact at Residential Funding, variance from the • the income sufficiency of a mortgagor’s projected family income relative to the stated standards was the norm, and many loans were made mortgage payment and to other fixed obligations, including in certain instances with essentially little to no underwriting or effort to evaluate rental income from investment property, and ability to repay. Nowhere did any of the Offering Documents • the adequacy of the mortgaged property expressed in terms of LTV ratio, to serve apprise the Bank of the extent to which Residential Funding as the collateral for a mortgage loan.” deviated from its underwriting guide.
Each Prospectus asserts: 2. The widespread exceptions to underwriting standards negated any originator's ability to make a "determination" As part of the description of the mortgagor’s financial condition, each that the "mortgagors monthly income would be sufficient to mortgagor would have been required to furnish information with respect to the enable the mortgagor to meet its monthly obligations." mortgagor’s assets, liabilities, income, credit history, employment history and personal information, and furnished an authorization to apply for a credit report 3. The underwriting practices actually followed by the which summarized the borrower’s credit history with local merchants and originators, including the widespread use of exceptions to the lenders and any record of bankruptcy. stated underwriting guidelines, failed to apply “as standards” . . . the “income sufficiency of the mortgagor’s projected family Based on the data provided in the application, certain verifications, if required income relative to the mortgage payment . . . [or] the by the originator of the mortgage loan, and the appraisal or other valuation of adequacy of the mortgaged property . . . to serve as the the mortgaged property, a determination was made by the original lender that collateral for a mortgage loan.”
9 The Prospectus Supplement states that “[p]rior to assignment to the depositor, Residential Funding reviewed the underwriting standards for the mortgage loans and purchased all of the mortgage loans from mortgage collateral sellers who participated in or whose loans were in substantial conformity with the standards set forth in Residential Funding’s AlterNet Program or are otherwise in conformity with the standards set forth in the description of credit grades set forth in this prospectus supplement.” Those underwriting standards are stated in the Prospectus Supplement and excerpted herein.
67 the mortgagor’s monthly income would be sufficient to enable the mortgagor to meet its monthly obligations on the mortgage loan and other expenses 4. They omit to state that: related to the property, including property taxes, utility costs, standard hazard insurance and other fixed obligations other than housing expenses. S-33. • Because many loans were originated according to “stated income” documentation procedures, borrower Source: RASC 2005-KS12 Pros. Sup. S-33 income was not verified for many borrowers, and consequently, the “data provided in the application” According to the Prospectus, borrowers are assigned to one of the following "credit grade failed to provide a reliable basis upon which any categories:" A4, Ax, Am, B, C and Cm. Each category permits a different maximum Loan- determinations could be made. to-Value ratio based upon the occupancy of the property and the borrower's credit score, • Residential Funding did not employ reasonable methods debt-to-income ratio, delinquency, bankruptcy, and foreclosure history. to verify or substantiate borrower income, which rendered decisions based on the purported debt-to- Each Prospectus states that income ratios unreliable.
ARM loans, Buy-Down Mortgage Loans, graduated payment mortgage loans • Residential Funding's underwriters routinely accepted and any other mortgage loans will generally be underwritten on the basis of the appraisals that were not prepared in accordance with the borrower's ability to make monthly payments as determined by reference to the applicable appraising standards in the underwriting mortgage rates in effect at origination or the reduced initial monthly payments, guidelines. Consequently, Residential Funding used as the case may be, and on the basis of an assumption that the borrowers will unreliable appraisals to determine the value of the likely be able to pay the higher monthly payments that may result from later collateral, which rendered decisions based on LTV increases in the mortgage rates or from later increases in the monthly unreliable. payments, as the case may be, at the time of the increase even though the • Residential Funding’s assignment of a borrower’s borrowers may not be able to make the higher payments at the time of maximum debt-to-income ratio was based on unreliable origination. methods of evaluating borrower credit risk,.
Source: RASC 2005-KS12 Pros. Sup. S-34-36; Pros. 13-14. • Due to the industry’s inexperience with lending to borrowers with increased credit risks, Residential Funding lacked sufficient data regarding historical patterns of borrower behavior in relation to default experience for similar types of borrower profiles. Consequently, the assignment of “credit grade categories,” with their corresponding maximum LTV ratios, had no reliable connection to the actual risk of default presented by borrowers assigned to each category.
• With respect to ARMs, Buy-Down Mortgages and graduated payment mortgages, Residential Funding had no basis on which to assume that borrowers would likely be able to pay higher payments in the future.
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• The originators and the sponsor lacked adequate procedures and practices to monitor or evaluate underwriters' exercise of judgment, or to provide appropriate training and education to underwriters. 2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to state that: The prospectus states the following with respect to exceptions to Residential Funding’s underwriting standards: • Exceptions were routinely granted to the standards despite the absence of compensating factors. Exceptions to these standards are made . . . on a case by case basis if it is determined, generally based on compensating factors, that an underwriting • The originators had no reasonable basis on which to exception is warranted. Compensating factors may include, but are not limited evaluate alleged compensating factors that might to, a low LTV ratio, stable employment, a relatively long period of time in the warrant exceptions to the underwriting standards. same residence, a mortgagor’s cash reserves and savings and monthly residual income. • The originators lacked adequate practices, policies or procedures to monitor the exercise of underwriter Source: RASC 2005-KS12 Pros. Sup. S-34. discretion in granting exceptions or to provide training or education to underwriters.
• The originators lacked a reliable factual foundation on which to evaluate certain alleged "compensating factors," including a borrower’s "monthly residual income" and "stable employment," because income and employment history were not verified for many mortgages in the pool. . 3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: Each Prospectus describes Residential Funding’s appraisal process as follows:
The adequacy of a mortgaged property as security for repayment of the related • The originators routinely accepted appraisals that were mortgage loan generally has been determined by an appraisal in accordance not prepared in accordance with applicable appraisal with pre-established appraisal procedure guidelines for appraisals established by standards and were therefore unreliable. or acceptable to the originator. Appraisers were either staff appraisers employed by the originator or independent appraisers selected in accordance with pre- • Neither the Issuer nor any Underwriter took reasonable established guidelines established by the originator. steps to evaluate the appraisal processes used in the origination or the loans in the pool or to assess the credit The appraisal procedure guidelines generally will have required the appraiser or risk associated with the loans as a result thereof. an agent on its behalf to personally inspect the property and to verify whether the property was in good condition and that construction, if new, had been • The originators lacked any reliable basis on which to
69 substantially completed. The appraisal would have considered a market data assess the accuracy of the values yielded by the analysis of recent sales of comparable properties and, when deemed applicable, described appraisal practices. an analysis based on income generated from the property or replacement cost analysis based on the current cost of constructing or purchasing a similar • The originators lacked adequate policies, practices, and property. procedures to monitor and evaluate compliance with applicable appraisal standards. Source: RASC 2005-KS12 Pros. Sup. S-41-45. • The originators lacked adequate policies, practices, and procedures to determine the qualifications of employees reviewing appraisals or to provide training or education to those employees.
4. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: Each Prospectus describes Residential Fundings’ Stated Income documentation program as follows: • Residential Funding routinely did not obtain the required documentation and did not employ reasonable methods Under a “stated income” program, some borrowers with acceptable payment to verify or substantiate borrower income and assets as histories will not be required to provide any information regarding income and purportedly required by the various levels of no other investigation regarding the borrower’s income will be undertaken. documentation.
Source: RASC 2005-KS12 Pros. Sup. S-41-45. • Residential Funding lacked adequate practices and procedures to monitor or evaluate the compliance by the employees involved with loan origination with the requirements of the various levels of documentation or to provide training or education to those employees.
• Even with respect to "stated income" programs, industry standards required that borrower income information be reasonable in light of the borrower's occupation.
70 Q. Representations Made by Depositor, Residential Funding Mortgage SecuritiesI , Inc., Regarding the Underwriting of Mortgages Backing Certain PLMBS.
Security CUSIP RFMSI 2006-SA2 2A110 749574AC3
Statements Material Misstatements and Omissions
1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.5, 16, 17 and V.A.3 of the Amended Complaint: According to the Prospectus, “[a]ll of the mortgage loans in the mortgage pool were originated generally in accordance with the underwriting criteria of Residential Funding 1. Far from following its underwriting guidelines and making [Corporation].” The Prospectus states that the “underwriting standards are generally occasional, targeted and justified exceptions when other intended to provide an underwriter with information to evaluate the borrower's evidence of ability to repay justified a deviation from the repayment ability and the adequacy of the mortgaged property as collateral.” The guidelines, in fact at Residential Funding, variance from the Prospectus further asserts that borrowers were required to provide: stated standards was the norm, and many loans were made [A] current balance sheet describing assets and liabilities and a statement of with essentially little to no underwriting or effort to evaluate income and expenses, as well as an authorization to apply for a credit report ability to repay. Nowhere did any of the Offering Documents which summarizes the borrower's credit history with merchants and lenders and apprise the Bank of the extent to which Residential Funding any record of bankruptcy. deviated from its underwriting guide.
The Prospectus states: 2. The underwriting practices actually followed by the Credit scoring models provide a means for evaluating the information about a originators, including the widespread use of exceptions to prospective borrower that is available from a credit reporting agency. The the stated underwriting guidelines and limited and no underwriting criteria . . . may provide that qualification for the loan, or the documentation procedures, were not “generally intended to availability of various loan features, including maximum loan amount, provide an underwriter with information to evaluate the maximum LTV ratio, property type and use, and documentation level, may borrower's repayment ability and the adequacy of the depend on the borrower's credit score. mortgaged property as collateral.” . . . In its evaluation of mortgage loans that have more than twelve months of 3. They omit to state that: payment experience, Residential Funding Corporation tends to place greater weight on payment history and may take into account market and other • The originator’s had no reliable basis on which to
10 HomeComings Financial Network, Inc. and GMAC Mortgage Corporation originated approximately 33.20% and 25.90% of the mortgages backing bond RFMSI 2006-SA2 2A1, respectively. Neither the Prospectuses nor the Prospectus Supplement contain descriptions of the specific underwriting guidelines applied by these originators. Instead, the Prospectus contains these general representations regarding the underwriting practices applied during the origination of these mortgages.
71 economic trends while placing less weight on underwriting factors traditionally conclude that the “credit scoring models” or the use of applied to newly originated mortgage loans. the “automated underwriting systems” provided a reliable indicator of the probability of default on a The Prospectus further states: mortgage.
Once all applicable employment, credit and property information is received, a • The Originators did not employ reasonable methods to determination is made as to whether the prospective borrower has sufficient verify or substantiate borrower income, which rendered monthly income available to meet the borrower's monthly obligations on the decisions based on the purported debt-to-income ratios proposed mortgage loan and other expenses related to the home, including unreliable. property taxes and hazard insurance, and other financial obligations and monthly living expenses. • With respect to ARMs, Buy-Down Mortgages and graduated payment mortgages, the originators had no ARM loans, Buy-Down Mortgage Loans, graduated payment mortgage loans basis on which to assume that borrowers would likely be and any other mortgage loans will generally be underwritten on the basis of the able to pay higher payments in the future. borrower's ability to make monthly payments as determined by reference to the • mortgage rates in effect at origination or the reduced initial monthly payments, The originators lacked adequate procedures and as the case may be, and on the basis of an assumption that the borrowers will practices to monitor or evaluate its underwriters' likely be able to pay the higher monthly payments that may result from later exercise of judgment, or to provide appropriate training increases in the mortgage rates or from later increases in the monthly and education to its underwriters. payments, as the case may be, at the time of the increase even though the borrowers may not be able to make the higher payments at the time of origination.
Source: RFMSI 2006-SA2 Pros. 9-14. 2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to state that: The Prospectus states: • The originators routinely granted exceptions to the [T]he underwriting standards include a set of specific criteria under which the required debt-to-income levels without compensating underwriting evaluation is made. However, the application of underwriting factors. Moreover, the statements are materially standards does not imply that each specific criterion was satisfied individually. misleading because the originators routinely approved Rather, a mortgage loan will be considered to be originated in accordance with mortgages that were not in “substantial compliance” a given set of underwriting standards if, based on an overall qualitative with its underwriting standards. evaluation, the loan is in substantial compliance with the underwriting standards. For example, a mortgage loan may be considered to comply with a • The Originators had no reasonable basis on which to set of underwriting standards, even if one or more specific criteria included in evaluate the alleged compensating factors that might such underwriting standards were not satisfied, if other factors compensated warrant exceptions to the underwriting standards. for the criteria that were not satisfied or if the mortgage loan is considered to be in substantial compliance with the underwriting standards. . . . • The Originators lacked adequate practices, policies or
72 The [automated] system may make adjustments for some compensating factors, procedures to monitor or evaluate the exercise of which could result in a mortgage loan being approved even if all of the underwriter discretion in granting exceptions, or to specified underwriting criteria in the Client Guide for that underwriting provide training or education to underwriters. program are not satisfied.
Source: RFMSI 2006-SA2 Pros. 10, 13-14. 3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: The Prospectus describes the Originators’ appraisal process as follows: • The Originators routinely accepted appraisals that were not prepared in accordance with applicable appraisal In determining the adequacy of the mortgaged property as collateral, an standards and were therefore unreliable. appraisal is made of each property considered for financing. The appraiser is
required to verify that the property is in good condition and that construction, if The Originators lacked any reliable basis on which to new, has been completed. The appraisal is based on various factors, including • assess the accuracy of the values yielded by the the market value of comparable homes and the cost of replacing the described appraisal practices. improvements. Alternatively, property valuations may be made under various other methods. • The Originators lacked adequate policies, practices, and In some cases, for mortgage loans underwritten through Residential Funding's procedures to monitor and evaluate compliance with automated underwriting system, in lieu of an appraisal, a valuation of the applicable appraisal standards. mortgaged property will be obtained by using an automated valuation platform developed by Residential Funding. There are multiple automated valuation • The Originators lacked adequate policies, practices, and models included in Residential Funding's automated underwriting system. procedures to determine the qualifications of employees Based upon, among other factors, the geographic area, price range and other reviewing appraisals or to provide training or education attributes of a qualifying mortgage loan, a mortgage loan is directed to the to those employees. appropriate automated valuation model for that particular mortgage loan. An automated valuation model evaluates, among other things, various types of • The Originators lacked adequate information upon publicly-available information such as recent sales prices for similar homes which to determine whether valuations resulting from within the same geographic area and within the same price range. Residential the automated system were as reliable as valuations Funding uses automated valuation models in lieu of full appraisals for resulting from appraisals performed in accordance with qualifying first lien mortgage loans which meet specified underwriting criteria accepted practices and standards. and receive an acceptable valuation.
Source: RFMSI 2006-SA2 Pros. Sup. S-54.
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4. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: The Prospectus states: • The Originators routinely did not obtain the required [A]n employment verification is obtained which reports the borrower's current documentation and did not employ reasonable methods salary and may contain the length of employment and an indication as to to verify or substantiate borrower income and assets as whether it is expected that the borrower will continue that employment in the purportedly required by the various levels of future. If a prospective borrower is self-employed, the borrower may be documentation. required to submit copies of signed tax returns. The borrower may also be required to authorize verification of deposits at financial institutions where the • The Originators lacked adequate practices and borrower has accounts. procedures to monitor or evaluate the compliance by the . . . employees involved with loan origination with the requirements of the various levels of documentation or Some mortgage loans seasoned for over twelve months may be underwritten for to provide training or education to those employees. purchase by Residential Funding Corporation based on the borrower's credit score and payment history, with no current income verification, and under • Even with respect to "limited documentation" programs, alternative property valuation methods. industry standards required that borrower income information be reasonable in light of the borrower's The Prospectus describes several “streamlined,” “limited,” and “reduced” levels of occupation. documentation as follows: Approximately 0.4% of the Group I Loans were underwritten pursuant to a streamlined refinancing documentation program, which permits mortgage loans to be refinanced with only limited verification or updating of underwriting information obtained at the time that the refinanced mortgage loan was underwritten. . . . [For such loans,] the mortgagor's income may not be verified, although continued employment is required to be verified. In some cases, the mortgagor may be permitted to borrow up to 100% of the outstanding principal amount of the original mortgage loan. Each mortgage loan underwritten pursuant to this program will be treated as having been underwritten pursuant to the same underwriting documentation program as the mortgage loan that it refinanced, including for purposes of the disclosure in the related prospectus supplement. . . . The underwriting standards set forth in the Client Guide will be varied in appropriate cases, including "limited" or "reduced loan documentation" mortgage loan programs. Some reduced loan documentation programs, for example, do not require income, employment or asset verifications. In most cases, in order to be eligible for a reduced loan documentation program, the
74 LTV ratio must meet applicable guidelines, the borrower must have a good credit history and the borrower's eligibility for this type of program may be determined by use of a credit scoring model. Source: RFMSI 2006-SA2 Pros. 11-13, Pros. Supp. I-4.
75 R. PLMBS backed by mortgages originated by or through Wells Fargo Bank, National Association (“Wells Fargo”)
Security CUSIP BAFC 2006-F 2A1 05950HAD3 BAFC 2006-F 3A1 05950HAF8 WFMBS 2006-AR3 A4 94983GAD0
Statements Material Misstatements and Omissions
1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.6 and V.A.3 of the Amended Complaint: According to each Prospectus, Wells Fargo’s “underwriting standards are applied by or on 1. Far from following its underwriting guidelines and making behalf of Wells Fargo Bank to evaluate the applicant's credit standing and ability to repay occasional, targeted and justified exceptions when other the loan, as well as the value and adequacy of the mortgaged property as collateral.” evidence of ability to repay justified a deviation from the Each Prospectus asserts that Wells Fargo balanced the following factors in determining a guidelines, in fact at Wells Fargo, variance from the stated mortgagor’s eligibility for a mortgage: standards was the norm, and many loans were made with
essentially little to no underwriting or effort to evaluate [T]he amount of the loan, the ratio of the loan amount to the property value ability to repay. Nowhere did any of the Offering Documents (i.e., the lower of the appraised value of the mortgaged property and the apprise the Bank of the extent to which Wells Fargo deviated purchase price), the borrower's means of support and the borrower's credit from its underwriting guide. history. 2. The underwriting practices actually followed by Wells Each Prospectus states that Wells Fargo “supplements the mortgage loan underwriting Fargo, including the widespread use of exceptions to the process with either its own proprietary scoring system or scoring systems developed by stated underwriting guidelines, were not “applied . . . to third parties . . . .” According to each Prospectus, these scoring systems provided evaluate the applicant’s credit standing and ability to repay “consistent, objective measures of borrower credit and certain loan attributes” that were the loan” or the “value and adequacy of the mortgaged then “used to evaluate loan applications and assign each application a ‘mortgage score.’” property as collateral.”
3. They omit to state that: • Wells Fargo had no reliable basis on which to conclude that the scoring systems allegedly employed provided Each Prospectus further asserts that the “borrower credit” portion of the “mortgage score” the asserted "consistent, objective measures of borrower was derived from third party computer models that: credit," or that the resulting "mortgage score" was a reliable indicator of the probability of default. [E]valuate information available from three major credit reporting bureaus regarding historical patterns of consumer credit behavior in relation to • Due to the industry’s inexperience with lending to default experience for similar types of borrower profiles. A particular borrowers with increased credit risks, Wells Fargo borrower's credit patterns are then considered in order to derive a ‘FICO lacked sufficient data regarding “historical patterns of consumer credit behavior in relation to default
76 SCORE’ which indicates a level of default probability over a two-year period. experience for similar types of borrower profiles,” which rendered unreliable the resulting “mortgage Each Prospectus states that “borrowers applying for loans must demonstrate that score” and the assignment of maximum debt-to-income the ratio of their total monthly debt to their monthly gross income does not exceed a certain ratios. maximum level,” which varies depending on the following factors: • Wells Fargo did not employ reasonable methods to
verify or substantiate borrower income, which rendered [L]oan-to-value ratio, a borrower's credit history, a borrower's liquid net worth, decisions based on the purported debt-to-income ratios the potential of a borrower for continued employment advancement or income unreliable. growth, the ability of the borrower to accumulate assets or to devote a greater portion of income to basic needs such as housing expense, a borrower's • Wells Fargo used unreliable appraisals to determine the Mortgage Score and the type of loan for which the borrower is applying. value of the collateral, which rendered decisions based on LTV unreliable. Each Prospectus further asserts that “[t]he Mortgage Score is used to determine the type of underwriting process and which level of underwriter will review the loan file.” Each • Wells Fargo’s assignment of a borrower’s maximum prospectus describes these levels as follows: debt-to-income ratios was based on unreliable methods of evaluating borrower credit risk, including Wells For transactions which are determined to be low-risk transactions, based upon Fargo’s “Mortgage Score the Mortgage Score and other parameters (including the mortgage loan • Wells Fargo had no reasonable basis upon which to production source), the lowest underwriting authority is generally required. For determine whether transactions were "low-risk" or moderate and higher risk transactions, higher level underwriters and a full "moderate and higher risk" and therefore its purported review of the mortgage file are generally required. Borrowers who have a varying degrees of underwriting diligence were satisfactory Mortgage Score (based upon the mortgage loan production source) unreliable. are generally subject to streamlined credit review (which relies on the scoring process for various elements of the underwriting assessments). Such borrowers • Wells Fargo lacked any reasonable basis upon which to may also be eligible for a reduced documentation program and are generally implement the referenced "greater latitude" in the permitted a greater latitude in the application of borrower debt-to-income ratios. application of debt-to-income ratios. • Wells Fargo lacked adequate procedures and practices to Source: BAFC 2006-F Pros. Sup. S-30-32; WFMBS 2006-AR3 Pros. 32-34. monitor or evaluate its underwriters' exercise of judgment, or to provide appropriate training and education to its underwriters.
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2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to state that: Each prospectus states: • Wells Fargo routinely granted exceptions to the required Wells Fargo Bank permits debt-to-income ratios to exceed guidelines when the debt-to-income levels without documented applicant has documented compensating factors for exceeding ratio guidelines compensating factors. such as documented excess funds in reserves after closing, a history of making a • Wells Fargo had no reasonable basis on which to similar sized monthly debt payment on a timely basis, substantial residual evaluate alleged compensating factors that might income after monthly obligations are met, evidence that ratios will be reduced warrant exceptions to the underwriting standards. shortly after closing when a financed property under contract for sale is sold, or additional income has been verified for one or more applicants that is ineligible • Wells Fargo lacked a reliable factual foundation on for consideration as qualifying income. which to evaluate certain alleged "compensating factors," including a borrower’s "substantial residual Each Prospectus describes a program implemented during the second calendar quarter of income," because income was not verified for many 2005 under which underwriters were given significantly more discretion and were mortgages in the pool. encouraged “to prudently, but more aggressively, utilize the underwriting discretion already • Wells Fargo failed to give its underwriters any reliable granted to them under Wells Fargo Bank's underwriting guidelines and policies.” According basis upon which to exercise the additional discretion to each Prospectus: granted in 2005, nor did they disclose that Wells Fargo lacked adequate practices, policies or procedures to This initiative was viewed by management as necessary and desirable to make monitor or evaluate the exercise of underwriter prudent loans available to customers where such loans may have been denied in discretion in granting exceptions, or to provide training the past because of underwriter hesitancy to maximize the use of their ability to or education to underwriters.. consider compensating factors as permitted by the underwriting guidelines. There can be no assurance that the successful implementation of this initiative • The 2005 initiative was motivated not by a desire to will not result in an increase in the incidence of delinquencies and foreclosures, make prudent loans available to customers, but rather by or the severity of losses, among mortgage loans underwritten in accordance a desire to was to enable Wells Fargo to increase the with the updated philosophy, as compared to mortgage loans underwritten prior volume of loans it could originate, regardless of to the commencement of the initiative. prudence. • Not only was Wells Fargo not in a position to give Source: BAFC 2006-F Pros. Sup. S-32, 34; WFMBS 2006-AR3 Pros. 34, 36-37. assurances with respect to the matters referred to in the final sentence, in fact Wells Fargo had available to it a wealth of information that indicated that its 2005 initiative carried a grave risk of substantially higher delinquencies and losses. • The initiative was a dramatic break from Wells Fargo's historical practices, and therefore Wells Fargo lacked historical data upon which to meaningfully assess the likely impact of the initiative.
78 3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: Each Prospectus describes Wells Fargo’s appraisal process as follows: • Wells Fargo routinely accepted appraisals that were not The appraisal of any mortgaged property reflects the individual appraiser's prepared in accordance with applicable appraisal judgment as to value, based on the market values of comparable homes sold standards and were therefore unreliable. within the recent past in comparable nearby locations and on the estimated replacement cost. . . . Because of the unique locations and special features of • Wells Fargo lacked any reliable basis on which to assess certain mortgaged properties, identifying comparable properties in nearby the accuracy of the values yielded by the described locations may be difficult. The appraised values of such mortgaged properties appraisal practices. will be based to a greater extent on adjustments made by the appraisers to the appraised values of reasonably similar properties rather than on objectively • Wells Fargo lacked adequate policies, practices, and verifiable sales data. procedures to monitor and evaluate compliance with applicable appraisal standards. Source: BAFC 2006-F Pros. Sup. S-33; WFMBS 2006-AR3 Pros. 35. • Wells Fargo lacked adequate policies, practices, and procedures to determine the qualifications of employees reviewing appraisals or to provide training or education to those employees. 4. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: Each Prospectus asserts that: • Wells Fargo routinely did not obtain the required “Verifications of employment, income, assets or mortgages may be used to documentation and did not employ reasonable methods supplement the loan application and the credit report in reaching a to verify or substantiate borrower income and assets as determination as to the applicant's ability to meet his or her monthly purportedly required by the various levels of obligations on the proposed mortgage loan . . . . A mortgage verification documentation. involves obtaining information regarding the borrower's payment history with respect to any existing mortgage the applicant may have. . . . • Wells Fargo lacked adequate practices and procedures to monitor or evaluate the compliance by the employees Each Prospectus states that such verification “may be waived under certain programs offered involved with loan origination with the requirements of by Wells Fargo Bank, but Wells Fargo Bank's underwriting guidelines require, in most the various levels of documentation or to provide instances, a verbal or written verification of employment to be obtained.” training or education to those employees.
Each Prospectus further describes the availability of a reduced documentation process as follows:
[T]he loan applicant may be eligible for a loan approval process permitting reduced documentation . . .[which] limit[s] the amount of documentation required for an underwriting decision and ha[s] the effect of increasing the
79 relative importance of the credit report and the appraisal. Documentation requirements vary based upon a number of factors, including the purpose of the loan, the amount of the loan, the ratio of the loan amount to the property value and the mortgage loan production source. Wells Fargo Bank accepts alternative methods of verification, in those instances where verifications are part of the underwriting decision; for example, salaried income may be substantiated either by means of a form independently prepared and signed by the applicant's employer or by means of the applicant's most recent paystub and/or W-2.
Source: BAFC 2006-F Pros. Sup. S-32; WFMBS 2006-AR3 Pros. 33.
80 S. PLMBS backed by mortgages originated by or through Wells Fargo Bank, National Association (“Wells Fargo”)
Security CUSIP CMLTI 2006-WFH2 A2B 17309MAC7 CMLTI 2006-WFH4 A3 17309SAC4 NHELI 2006-WF1 A3 65536RAC0 WFHET 2006-3 A2 9497EBAB5
Statements Material Misstatements and Omissions 1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.6 and V.A.3 of the Amended Complaint: According to each Prospectus, “[t]he underwriting guidelines used by Wells Fargo Bank are primarily intended to evaluate the prospective borrower’s credit standing 1. Far from following its underwriting guidelines and making and ability to repay the loan, as well as the value and adequacy of the proposed occasional, targeted and justified exceptions when other mortgaged property as collateral.” Each Prospectus asserts that, with respect to loans evidence of ability to repay justified a deviation from the originated prior to May 15, 2006, Wells Fargo classified loan applications according to guidelines, in fact at Wells Fargo, variance from the stated the following characteristics: standards was the norm, and many loans were made with essentially little to no underwriting or effort to evaluate [C]ondition and location of the collateral, credit history of the applicant, ability to repay. Nowhere did any of the Offering Documents ability to pay, loan-to-value ratio and general stability of the applicant in terms apprise the Bank of the extent to which Wells Fargo deviated of employment history and time in residence. from its underwriting guide. 2. The underwriting practices actually followed by Wells Fargo, including the widespread use of exceptions to the stated underwriting guidelines, were not “primarily intended to evaluate the prospective borrower’s credit standing and ability to repay the loan, as well as the value and adequacy of the proposed mortgaged property as collateral.” Each Prospectus further asserts that, with respect to loans originated on or after May 15, 3. They omit to state that: 2006, Wells Fargo calculated “the maximum loan amount and loan-to-value ratio allowed for an applicant” according to the following factors: • Because many loans were originated according to reduced documentation procedures, Wells Fargo did not
81 verify the income for many borrowers, and [T]he applicant’s housing payment history for the last twelve months consequently, its assessment of the mortgagor’s “ability (including both mortgage and rental payments), applicant’s credit bureau to pay” is unreliable. score, property type, purpose of the loan and documentation type.11 • Wells Fargo lacked reliable means for ascertaining the properties' loan-to-value ratio. Each Prospectus represents that, with respect to loans originated prior to May 15, 2006, Wells Fargo “established classifications with respect to the credit profile of the applicant, • Wells Fargo had no reliable basis on which to conclude and each loan is placed into one of nine credit levels denoted as ‘Y9’ through ‘Y1.’” Each that a credit bureau score was a reliable indicator of the Prospectus further represents that, with respect to loans originated on or after May 15, probability of default on a mortgage. 2006, Wells Fargo “established classifications with respect to the credit profile of the applicant, and each loan is placed into one of six credit levels denoted as “0x30” through • Wells Fargo did not employ reasonable methods to “1x120+.” Each level is subdivided based on the type of documentation required, with the verify or substantiate borrower income, which rendered maximum loan amounts lessened and the maximum LTV ratio decreased where mortgages decisions based on the purported debt-to-income ratios are based on “stated” or “lite” documentation. For all loans, regardless of origination date, unreliable. each Prospectus asserts that: • Wells Fargo used unreliable appraisals to determine the Terms of subprime mortgage loans made by Wells Fargo Bank, as well as value of the collateral, which rendered decisions based maximum loan-to-value ratios, vary depending on the credit level on LTV unreliable. classification of the applicant. Loan applicants with less favorable credit profiles generally are restricted to consideration for loans with higher • Wells Fargo’s assignment of a borrower’s maximum interest rates, lower maximum loan amounts and lower loan-to-value ratios LTV ratio was based on unreliable methods of than applicants with more favorable credit profiles. . . . Generally, the evaluating borrower “credit profiles.” maximum total debt to gross income ratio for each credit level is 55%. • Due to the industry’s inexperience with lending to Source: CMLTI 2006-WFHE2 Pros. Sup. (page numbers omitted from original); CMLTI borrowers with increased credit risks, Wells Fargo 2006-WFHE4 Pros. Sup. (page numbers omitted from original); NHELI 2006-WF1 Pros. lacked sufficient data regarding historical patterns of Sup. (page numbers omitted from original); WFHET 2006-3 Pros. 35-42. borrower behavior in relation to default experience for similar types of borrower profiles. Consequently, the assignment of LTV ratios, interest rates, and maximum loan amounts had no reliable connection to the actual risk of default presented by borrowers assigned to each classification. • Wells Fargo lacked adequate procedures and practices to monitor or evaluate its underwriters' exercise of judgment, or to provide appropriate training and education to its underwriters.
11 NHELI 2006-WF1 does not contain language related to loans originated on or after May 15, 2006, because the PLMBS were issued on April 18, 2006.
82
2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to state that: Each prospectus states:
Wells Fargo Bank uses the foregoing categories and characteristics as • Wells Fargo routinely granted exceptions to the required guidelines only. On a case-by-case basis, Wells Fargo Bank may make the debt-to-income levels without documented determination that the prospective borrower warrants loan parameters beyond compensating factors. those shown above based upon the presence of acceptable compensating factors. Examples of compensating factors include, but are not limited to, • Wells Fargo had no reasonable basis on which to loan-to-value ratio, debt-to-income ratio, long-term stability of employment evaluate alleged compensating factors that might and/or residence, statistical credit scores, verified cash reserves or reduction in warrant exceptions to the underwriting standards. overall monthly expenses. • Wells Fargo lacked adequate practices, policies or Each prospectus further states: procedures to monitor or evaluate the exercise of underwriter discretion in granting exceptions, or to Wells Fargo Bank permits debt-to-income ratios to exceed guidelines when provide training or education to underwriters. the applicant has documented compensating factors for exceeding ratio guidelines such as documented excess funds in reserves after closing, a history • Wells Fargo lacked a reliable factual foundation on of making a similar sized monthly debt payment on a timely basis, substantial which to evaluate certain alleged "compensating residual income after monthly obligations are met, evidence that ratios will be factors," including a borrower’s "debt-to-income ratio" reduced shortly after closing when a financed property under contract for sale and "long-term stability of employment," because is sold, or additional income has been verified for one or more applicants that income and employment history were not verified for is ineligible for consideration as qualifying income. many mortgages in the pool.
Source: CMLTI 2006-WFHE2 Pros. Sup. (page numbers omitted from original); CMLTI 2006-WFHE4 Pros. Sup. (page numbers omitted from original); NHELI 2006-WF1 Pros. Sup. (page numbers omitted from original); WFHET 2006-3 Pros. 42.
3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: Each Prospectus describes Wells Fargo’s appraisal process as follows: • Wells Fargo routinely accepted appraisals that were not Wells Fargo Bank’s underwriting of every mortgage loan submitted consists prepared in accordance with applicable appraisal of not only a credit review, but also a separate appraisal conducted by (i) a standards and were therefore unreliable. third-party appraiser, (ii) an appraiser approved by Valuation Information Technology, LLC (doing business as RELS Valuation) (“RELS”), an entity • Wells Fargo lacked any reliable basis on which to assess jointly owned by an affiliate of Wells Fargo Bank and an unaffiliated third the accuracy of the values yielded by the described party, or (iii) RELS itself. Appraisals generally conform to current Fannie Mae appraisal practices. and Freddie Mac secondary market requirements for residential property appraisals. All appraisals are subject to an internal appraisal review by the • Wells Fargo lacked adequate policies, practices, and
83 loan underwriter irrespective of the loan-to-value ratio, the mortgage loan procedures to monitor and evaluate compliance with amount or the identity of the appraiser. Certain loans require a third party applicable appraisal standards. review in the form of either a desk review or field review. At the discretion of Wells Fargo Bank, any mortgage loan is subject to further review in the form • Wells Fargo lacked adequate policies, practices, and of a desk review, field review or additional full appraisal. procedures to determine the qualifications of employees reviewing appraisals or to provide training or education Source: CMLTI 2006-WFHE2 Pros. Sup. (page numbers omitted from original); CMLTI to those employees. 2006-WFHE4 Pros. Sup. (page numbers omitted from original); NHELI 2006-WF1 Pros. Sup. (page numbers omitted from original); WFHET 2006-3 Pros. 43.
4. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: Each Prospectus describes three levels of documentation – “full,” “lite,” and “stated income, stated asset” – as follows: • Wells Fargo routinely did not obtain the required Under the full documentation program, loans to borrowers who are salaried documentation and did not employ reasonable methods employees generally must be supported by current employment information in to verify or substantiate borrower income and assets as the form of one current pay-stub with year-to-date information and W-2 tax purportedly required by the various levels of forms for the last year (a complete verification of employment may be documentation. substituted for W-2 forms). As an alternative method of establishing income under the full documentation program, Wells Fargo Bank may review the • Wells Fargo lacked adequate practices and procedures to deposit activity reflected in recent monthly bank statements of the applicant. monitor or evaluate the compliance by the employees Wells Fargo Bank may also perform a telephone verification of employment involved with loan origination with the requirements of for salaried employees prior to funding. . . . Under the full documentation the various levels of documentation or to provide program, at certain loan-to-value ratio levels and under certain circumstances training or education to those employees. not all sources of funds for closing are verified as the borrower’s. Under Wells Fargo Bank’s “stated income, stated asset” program, the applicant’s employment, income sources and assets must be stated on the initial signed application. The applicant's income as stated must be reasonable for the applicant’s occupation as determined in the discretion of the loan underwriter; however, such income is not independently verified. Similarly, the applicant’s assets as stated must be reasonable for the applicant’s occupation as determined in the discretion of the loan underwriter; however, such assets are not independently verified. Maximum loan-to-value ratios within each credit level are lower under the stated income, stated asset program than under the full documentation program.
Under Wells Fargo Bank’s “lite” documentation program, the applicant’s
84 income must be stated on the initial signed application. The applicant’s income as stated must be reasonable and consistent for the applicant’s occupation and reflect an overall ability of the applicant to repay all its debt as determined in the discretion of the loan underwriter. Income is calculated using the most recent and consecutive six-month average of personal bank statements. Maximum loan-to-value ratios within each credit level are lower under the lite documentation program than under the full documentation program.12
Source: CMLTI 2006-WFHE2 Pros. Sup. (page numbers omitted from original); CMLTI 2006-WFHE4 Pros. Sup. (page numbers omitted from original); NHELI 2006-WF1 Pros. Sup. (page numbers omitted from original); WFHET 2006-3 Pros. 42-43.
12 NHELI 2006-WF1 does not reference the “lite” documentation program.
85 T. PLMBS backed by mortgages originated by or through WMC Mortgage Corp.
Security CUSIP MSAC 2006-WMC2 A2C 61749KAE3 MSAC 2006-HE5 A2C13 61749NAD9 MSAC 2006-HE6 A2C 61750FAE0
Statements Material Misstatements and Omissions
1. General Statements Regarding Borrower Evaluation: The statements are materially misleading because, as described in sections IV.C.12 and V.A.3 of the Amended Complaint: According to each Prospectus, “The WMC Underwriting Guidelines are primarily intended to (a) determine that the borrower has the ability to repay the mortgage loan in 1. Far from following its underwriting guidelines and making accordance with its terms and (b) determine that the related mortgaged property will occasional, targeted and justified exceptions when other provide sufficient value to recover the investment if the borrower defaults.” Each evidence of ability to repay justified a deviation from the Prospectus asserts that WMC: guidelines, in fact at WMC Mortgage Corp., variance from the stated standards was the norm, and many loans were made [C]alculates the amount of income from eligible sources indicated on the with essentially little to no underwriting or effort to evaluate loan application, reviews the credit and mortgage payment history of the ability to repay. Nowhere did any of the Offering Documents applicant and calculates the Debt Ratio to determine the applicant's apprise the Bank of the extent to which WMC Mortgage Corp. ability to repay the loan, and reviews the mortgaged property for deviated from its underwriting guide. compliance with the WMC Underwriting Guidelines. 2. The underwriting practices actually followed by WMC Each Prospectus states that: Mortgage Corp., including the widespread use of exceptions to On July 15, 2005, WMC launched a program called WMC Select. Using new the stated underwriting guidelines, were not “primarily credit matrices, WMC Select allows a borrower to choose loan features (such intended to determine that the borrower has the ability to as rate, term, prepayment options, and other important features) based on the repay the mortgage loan in accordance with its terms and . . . borrower's mortgage/housing history, credit depth, loan-to-value ratio ("LTV") that the related mortgaged property will provide sufficient and Debt Ratio. WMC Select allows WMC greater flexibility in qualifying the value to recover the investment if the borrower defaults.” borrower for a loan since the borrower selects the loan features most important 3. They omit to state that: to him. • WMC Mortgage Corp. did not employ reasonable Each Prospectus states: methods to verify or substantiate borrower income, which The WMC Underwriting Guidelines permit mortgage loans with LTVs and rendered decisions based on the purported debt-to-income CLTVs (in the case of mortgaged properties which secure more than one
13 Approximately 5.58% of the Initial Mortgage Loans in bond MSAC 2006-HE5 A2C were originated or acquired by WMC Mortgage Corp. WMC ‘s underwriting standards are not reproduced in the Prospectus or Prospectus Supplement.
86 mortgage loan) of up to 100% (which is subject to reduction depending upon ratios unreliable. credit-grade, loan amount and property type). In general, loans with greater documentation standards are eligible for higher LTV and CLTV limits across • WMC Mortgage Corp.'s underwriters routinely accepted all risk categories. inaccurate appraisals to determine the value of the collateral, which rendered decisions based on LTV . . . unreliable. Under the WMC Underwriting Guidelines, various risk categories are used to • WMC Mortgage Corp.’s assignment of a borrower’s grade the likelihood that the mortgagor will satisfy the repayment conditions maximum debt-to-income ratio was based on unreliable of the mortgage loan. These risk categories [Labeled C through AA] establish methods of evaluating borrower credit risk. the maximum permitted LTV, maximum loan amount and the allowed use of loan proceeds given the borrower's mortgage payment history, the borrower's • Due to the industry’s inexperience with lending to consumer credit history, the borrower's liens/charge-offs/bankruptcy history, borrowers with increased credit risks, WMC Mortgage the borrower's Debt Ratio, the borrower's use of proceeds (purchase or Corp. lacked sufficient data regarding historical patterns refinance), the documentation type and other factors. In general, higher credit of borrower behavior in relation to default experience for risk mortgage loans are graded in categories that require lower Debt Ratios similar types of borrower profiles. Consequently, the and permit more (or more recent) major derogatory credit items such as assignment of risk categories, with their corresponding outstanding judgments or prior bankruptcies. maximum permitted LTV ratios and loan amounts, had no reliable connection to “the likelihood that the mortgagor In addition, variations of the . . . criteria are applicable under the programs will satisfy the repayment conditions of the mortgage established by WMC for the origination of jumbo loans in excess of $650,000 loan.” ($850,000 under WMC Select (for other than interest only loans); $950,000 for interest only loans under WMC Select) and for the origination of mortgage loans secured by mortgages on condominiums, vacation and second homes, manufactured housing and two- to four-family properties. Source: MSAC 2006-WMC2 Pros. Sup.*20-21; MSAC 2006-HE6 Pros. Sup. S-33-36 2. Statements Regarding Exceptions to Standards: The statements are materially misleading because they omit to state that: Each prospectus states: • WMC Mortgage Corp. routinely granted exceptions to the On a case-by-case basis WMC may determine that, based upon compensating risk categories and the maximum LTV ratios despite the factors, a prospective mortgagor not strictly qualifying under the underwriting absence of compensating factors. risk category or other guidelines described below warrants an underwriting exception. Compensating factors may include, but are not limited to, low debt- • WMC Mortgage Corp. lacked a reliable factual to-income ratio ("DEBT RATIO"), good mortgage payment history, an foundation on which to evaluate certain alleged abundance of cash reserves, excess disposable income, stable employment and "compensating factors," including a borrower’s "debt-to- time in residence at the applicant's current address. It is expected that a income ratio" and "stable employment," because income substantial number of the mortgage loans to be included in the trust will and employment history were not verified for many represent such underwriting exceptions. . . . WMC sometimes increases the mortgages in the pool. original principal balance limits if borrowers meet other compensating credit factors.
87 Source: MSAC 2006-WMC2 Pros. Sup. *20; MSAC 2006-HE6 Pros. Sup. S-33-34. 3. Statements Regarding Appraisals: The statements are materially misleading because they omit to state that: Each Prospectus describes WMC Mortgage Corp.’s appraisal process as follows: • WMC Mortgage Corp. routinely accepted appraisals that The general collateral requirements in the WMC Underwriting Guidelines were not prepared in accordance with applicable appraisal specify that a mortgaged property not have a condition rating of lower than standards and were therefore unreliable. "average." Each appraisal includes a market data analysis based on recent sales of comparable homes in the area. The general collateral requirements in the WMC Underwriting Guidelines specify conditions and parameters relating to zoning, land-to-improvement ratio, special hazard zones, neighborhood property value trends, whether the property site is too isolated, whether the property site is too close to commercial businesses, whether the property site is rural, city or suburban, whether the property site is typical for the neighborhood in which it is located and whether the property site is sufficient in size and shape to support all improvements. . . . Underwriting Guidelines are applied in accordance with a procedure which complies with applicable federal and state laws and regulations and requires, among other things, (1) an appraisal of the mortgaged property which conforms to Uniform Standards of Professional Appraisal Practice and (2) an audit of such appraisal by a WMC-approved appraiser or by WMC’s in-house collateral auditors (who may be licensed appraisers) and such audit may in certain circumstances consist of a second appraisal, a field review, a desk review or an automated valuation model.
Source: MSAC 2006-WMC2 Pros. Sup. *20; MSAC 2006-HE6 Pros. Sup. S-33-44.
88
4. Statements Regarding Verification of Borrower Income and Assets: The statements are materially misleading because they omit to state that: Each Prospectus states that “WMC verifies the loan applicant's eligible sources of income for all products . . . .” • WMC Mortgage Corp. routinely did not obtain the required documentation and did not employ reasonable Each Prospectus describes six levels of documentation – Full Documentation; Limited methods to verify or substantiate borrower income and Documentation; Stated Income Documentation; Full-Alternative Documentation; Lite assets as purportedly required by the various levels of Documentation; Stated Income/Verified Assets (Streamlined) Documentation – as documentation. follows: In the case of mortgage loans originated under the Full Documentation category, the WMC Underwriting Guidelines require documentation of income (which may consist of (1) a verification of employment form covering a specified time period which varies with LTV, (2) two most recent pay stubs and two years of tax returns or W-2s, (3) verification of deposits and/or (4) bank statements) and telephonic verification. [U]nder the Limited Documentation category only 12 months of bank statements (or a W-2 for the most current year and a current pay stub) are required. In the case of mortgage loans originated under the Stated Income Documentation and Stated Income/Verified Assets (Streamlined) Documentation categories, the WMC Underwriting Guidelines require (1) that income be stated on the application, accompanied by proof of self employment in the case of self-employed individuals, (2) that a WMC pre-funding auditor conduct telephonic verification of employment, or in the case of self-employed individuals, telephonic verification of business line and (3) that stated income be consistent with type of work listed on the application. Under the Full-Alternative Documentation category, only 24 months of bank statements are required (depending upon the LTV) and telephonic verification of employment [U]nder the Lite Documentation category only six months of bank statements (or a current pay stub covering the six month period) are required. For mortgage loans originated under the Stated Income/Verified Assets (Streamlined) Documentation category, WMC requires verification of funds equal to two months of principal, interest, taxes and insurance, sourced and seasoned for at least sixty days. In the case of mortgage loans originated under the Stated Income Documentation and Stated Income/Verified Assets (Streamlined) Documentation categories, the WMC Underwriting Guidelines
89 require (1) that income be stated on the application, accompanied by proof of self employment in the case of self-employed individuals, (2) that a WMC pre- funding auditor conduct telephonic verification of employment, or in the case of self-employed individuals, telephonic verification of business line and (3) that stated income be consistent with type of work listed on the application. Source: MSAC 2006-WMC2 Pros. Sup. *20; MSAC 2006-HE6 Pros. Sup. S-33-44.
90 APPENDIX IV
TABLE OF CONTENTS
DEFENDANTS’ MATERIALLY MISLEADING STATEMENTS AND OMISSIONS REGARDING THE CREDIT RATING PROCESS AND THE AAA RATING OF THE PLMBS...... 3
A. PLMBS Issued by Depositor Ameriquest Mortgage Securities Inc...... 3
B. PLMBS Issued by Depositor Argent Securities Inc...... 4
C. PLMBS Issued by Depositor Banc of America Funding Corporation...... 5
D. PLMBS Issued by Depositor Citigroup Mortgage Loans Trust, Inc...... 6
E. PLMBS Issued by Depositor Financial Asset Securities Corp...... 6
F. PLMBS Issued by Depositor First Horizon Asset Securities, Inc...... 8
G. PLMBS Issued by Depositor Fremont Mortgage Securities Corporation...... 8
H. PLMBS Issued by Depositor Greenwich Capital Acceptance, Inc...... 9
I. PLMBS Issued by Depositor GS Mortgage Securities Corp...... 9
J. PLMBS Issued by Depositor GS Mortgage Securities Corp...... 11
K. PLMBS Issued by Depositor IndyMac ABS, Inc...... 12
L. PLMBS Issued by Depositor IndyMac MBS, Inc...... 12
M. PLMBS Issued by Depositor Merrill Lynch Mortgage Investors, Inc...... 13
N. PLMBS Issued by Depositor Morgan Stanley ABS Capital I Inc...... 13
O. PLMBS Issued by Depositor Mortgage Asset Securitization Transactions, Inc...... 15
P. PLMBS Issued by Depositor Nomura Home Equity Loan, Inc...... 15
Q. PLMBS Issued by Depositor Option One Mortgage Acceptance Corporation...... 16
1 R. PLMBS Issued by Depositor Residential Asset Mortgage Products, Inc. & GMAC Mortgage Corporation ...... 16
S. PLMBS Issued by Depositor Residential Asset Securities Corporation...... 18
T. PLMBS Issued by Depositor Residential Funding Mortgage Securities I, Inc...... 18
U. PLMBS Issued by Depositor Securitized Asset Backed Receivables, LLC...... 19
V. PLMBS Issued by Depositor Sequoia Residential Funding, Inc...... 20
W. PLMBS Issued by Depositor Structured Assets Securities Corporation...... 20
X. PLMBS Issued by Depositor Structured Assets Securities Corporation...... 21
Y. PLMBS Issued by Depositor Wells Fargo Asset Securities Corporation...... 21
Z. PLMBS Issued by Depositor Wells Fargo Asset Securities Corporation...... 22
2 APPENDIX IV
DEFENDANTS’ MATERIALLY MISLEADING STATEMENTS AND OMISSIONS REGARDING THE CREDIT RATING PROCESS AND THE AAA RATING OF THE PLMBS
A. PLMBS Issued by Depositor Ameriquest Mortgage Securities Inc.
Security CUSIP AMSI 2005-R10 A2B 03072SS48
The Prospectus states the following with respect to the credit ratings received by the bonds:
The ratings of the Rating Agencies assigned to asset-backed pass-through certificates address the likelihood of the receipt by certificateholders of all distributions to which such certificateholders are entitled. The rating process addresses structural and legal aspects associated with the Certificates, including the nature of the underlying Mortgage Loans. The ratings on the Offered Certificates do not, however, constitute statements regarding the likelihood or frequency of prepayments on the Mortgage Loans, the distribution of the Net WAC Rate Carryover Amount or the possibility that a holder of an Offered Certificate might realize a lower than anticipated yield. The ratings do not address the possibility that certificateholders might suffer a lower than anticipated yield due to non-credit events.
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. In the event that the ratings initially assigned to the Offered Certificates are subsequently lowered for any reason, no person or entity is obligated to provide any additional credit support or credit enhancement with respect to the Offered Certificates.
Source: AMSI 2005-R10 Pros. Sup. S-10, S-92.
3 B. PLMBS Issued by Depositor Argent Securities Inc.
Security CUSIP ARSI 2005-W5 A2C 040104QN4
The Prospectus states the following with respect to the credit ratings received by the bonds:
The ratings of the Rating Agencies assigned to asset-backed pass-through certificates address the likelihood of the receipt by certificateholders of all distributions to which such certificateholders are entitled. The rating process addresses structural and legal aspects associated with the Certificates, including the nature of the underlying Mortgage Loans. The ratings on the Offered Certificates do not, however, constitute statements regarding the likelihood or frequency of prepayments on the Mortgage Loans, the distribution of the Net WAC Rate Carryover Amount or the possibility that a holder of an Offered Certificate might realize a lower than anticipated yield. The ratings do not address the possibility that certificateholders might suffer a lower than anticipated yield due to non-credit events.
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. In the event that the ratings initially assigned to the Offered Certificates are subsequently lowered for any reason, no person or entity is obligated to provide any additional credit support or credit enhancement with respect to the Offered Certificates.
Source: ARSI 2005-W5 Pros. Sup. S-9, S-85.
4 C. PLMBS Issued by Depositor Banc of America Funding Corporation.
Security CUSIP BAFC 2006-C 2A1 058930AD0 BAFC 2006-E 2A2 05950DAE0 BAFC 2006-E 3A1 05950DAF7 BAFC 2006-F 2A1 05950HAD3 BAFC 2006-F 3A1 05950HAF8
Each Prospectus states the following with respect to the credit ratings received by the bonds:
Ratings on mortgage pass-through certificates address the likelihood of receipt by certificateholders of payments required under the Pooling and Servicing Agreement.
S&P's and Fitch's ratings take into consideration the credit quality of the Mortgage Pool, including any credit support, structural and legal aspects associated with the Offered Certificates, and the extent to which the payment stream of the Mortgage Pool is adequate to make payments required under the Offered Certificates. S&P's and Fitch's ratings on the Offered Certificates do not, however, constitute a statement regarding frequency of prepayments on the Mortgage Loans.
S&P's and Fitch's ratings on the Class 1-A-R Certificate do not address the likelihood of a return to investors other than to the extent of the principal balance and interest at the pass-through rate thereon.
Source: BAFC 2006-C Pros. Sup. S-68; BAFC 2006-E Pros. 66; BAFC 2006-F Pros. 64-65.
5 D. PLMBS Issued by Depositor Citigroup Mortgage Loans Trust, Inc.
Security CUSIP CMLTI 2006NC1 A2C 172983ADO CMLTI 2006-WFHE2 17309MAC7 A2B CMLTI 2006-WFH4 A3 17309SAC4 CMLTI 2006-NC2 A2B 17309TAC2
Each Prospectus states the following with respect to the credit ratings received by the bonds:
The ratings assigned to mortgage pass-through certificates address the likelihood of the receipt by certificateholders of all distributions to which the certificateholders are entitled. The rating process addresses structural and legal aspects associated with the certificates, including the nature of the underlying mortgage loans. The ratings assigned to mortgage pass-through certificates do not represent any assessment of the likelihood that principal prepayments will be made by the mortgagors or the degree to which these prepayments will differ from that originally anticipated or the corresponding effect on yield to investors. The ratings on the offered certificates do not address the likelihood of any recovery of Net WAC Rate Carryover Amounts by holders of such certificates.
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. In the event that the ratings initially assigned to the offered certificates are subsequently lowered for any reason, no person or entity is obligated to provide any additional credit support or credit enhancement with respect to the offered certificates.
* Source: CMLTI 2006-NC1 Pros. Sup. 13-14, *144-145; CMLTI 2006-WFHE2 Pros. Sup. *9-10, *101; CMLTI 2006- WFHE4 Pros. Sup. *12-13, *128; CMLTI 2006-NC2 Pros. Sup. *14, *153.
E. PLMBS Issued by Depositor Financial Asset Securities Corp.
Security CUSIP FFML 2006-FF8 IIA3 320278AC8
The Prospectus states the following with respect to the credit ratings received by the bonds:
A securities rating addresses the likelihood of the receipt by a certificateholder of distributions on the Mortgage Loans. The rating takes into consideration the characteristics of the Mortgage Loans and the structural, legal and tax aspects associated with the certificates. The ratings on the Offered Certificates do not,
* Page number not included in original; cited number refers to page number in electronic version.
6 however, constitute statements regarding the likelihood or frequency of prepayments on the Mortgage Loans, the payment of the Net WAC Rate Carryover Amount or the possibility that a holder of an Offered Certificate might realize a lower than anticipated yield.
The Depositor has not engaged any rating agency other than the Rating Agencies to provide ratings on the Offered Certificates. However, there can be no assurance as to whether any other rating agency will rate the Offered Certificates, or, if it does, what rating would be assigned by any such other rating agency. Any rating on the Offered Certificates by another rating agency, if assigned at all, may be lower than the ratings assigned to the Offered Certificates by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. In the event that the ratings initially assigned to any of the Offered Certificates by the Rating Agencies are subsequently lowered for any reason, no person or entity is obligated to provide any additional support or credit enhancement with respect to such Offered Certificates.
Source: FFML 2006-FF8 Pros. Sup. *16-17, *149.
7 F. PLMBS Issued by Depositor First Horizon Asset Securities, Inc.
Security CUSIP FHASI 2006-ARI 2A1 32051GY25
The Prospectus states the following with respect to the credit ratings received by the bonds:
The ratings assigned by Fitch and S&P to the mortgage pass-through certificates address the likelihood of the receipt of all distributions on the mortgage loans by the related certificateholders under the agreements pursuant to which the certificates are issued. Fitch and S&P’s ratings take into consideration the credit quality of the related mortgage pool, including any credit support providers, structural and legal aspects associated with the certificates, and the extent to which the payment stream on the mortgage pools is adequate to make payments required by the certificates. If prepayments are faster than anticipated, investors may fail to recover their initial investment. The rating assigned by Fitch and S&P to the Class II-A-R Certificates only addresses the return of their class certificate balance and interest thereon at their pass¬through rate.
The security ratings assigned to the offered certificates should be evaluated independently from similar ratings on other types of securities. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the rating agencies.
Source: FHASI 2006-AR1 Pros. Sup. S-13, S-71.
G. PLMBS Issued by Depositor Fremont Mortgage Securities Corporation.
Security CUSIP FHLT 2005-E 2A3 35729PNB2
The Prospectus states the following with respect to the credit ratings received by the bonds:
A securities rating addresses the likelihood of the receipt by a certificateholder of distributions on the mortgage loans. The rating takes into consideration the characteristics of the mortgage loans and the structural, legal and tax aspects associated with the certificates. The ratings on the Offered Certificates do not, however, constitute statements regarding the likelihood or frequency of prepayments on the mortgage loans, the payment of the Net WAC Rate Carryover Amount or the possibility that a holder of an Offered Certificate might realize a lower than anticipated yield . . . .
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. In the event that the ratings initially assigned to any of the Offered Certificates by S&P, Moody’s or Fitch are subsequently lowered for any reason,
8 no person or entity is obligated to provide any additional support or credit enhancement with respect to such certificates.
Source: FHLT 2005-E Pros. Sup. S-5, S-91.
H. PLMBS Issued by Depositor Greenwich Capital Acceptance, Inc.
Security CUSIP HVMLT 2006-2 2A1A 41161PK44 HVMLT 2006-2 3A1A 41161PK69
The Prospectus states the following with respect to the credit ratings received by the bonds:
The ratings assigned by each rating agency named above address the likelihood of the receipt of all distributions on the mortgage loans by the related certificateholders under the agreement pursuant to which the certificates are issued. The ratings of each rating agency take into consideration the credit quality of the related mortgage pool, including any credit support providers, structural and legal aspects associated with the certificates, and the extent to which the payment stream on that mortgage pool is adequate to make payments required by the certificates. However, ratings of the certificates do not constitute a statement regarding frequency of prepayments on the related mortgage loans.
The ratings do not address the possibility that, as a result of principal prepayments, holders of the offered certificates may receive a lower than anticipated yield, and such ratings do not address the ability of the seller to repurchase certain mortgage loans for which the interest rate or terms have converted.
The ratings assigned to the offered certificates should be evaluated independently from similar ratings on other types of securities. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by such rating agency.
Source: HVMLT 2006-2 Pros. Sup. S-142.
I. PLMBS Issued by Depositor GS Mortgage Securities Corp.
Security CUSIP FFML 2006-FF13 A2C 30247DAD3
The Prospectus states the following with respect to the credit ratings received by the bonds:
A securities rating addresses the likelihood of the receipt by a certificateholder of distributions on the mortgage loans to which they are entitled by the last scheduled distribution date. The rating takes into consideration the characteristics of the mortgage loans and the structural, legal and tax aspects
9 associated with the certificates. The ratings on the Offered Certificates do not, however, constitute statements regarding the likelihood or frequency of prepayments on the mortgage loans, the payment of the Basis Risk Carry Forward Amount or the possibility that a holder of an Offered Certificate might realize a lower than anticipated yield . . . .
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. S&P and Moody's will monitor the ratings assigned to the Offered Certificates while the Offered Certificates remain outstanding. In the event that the ratings initially assigned to any of the Offered Certificates by S&P or Moody's are subsequently lowered for any reason, no person or entity is obligated to provide any additional support or credit enhancement with respect to such Offered Certificates.
Source: FFML 2006-FF13 Pros. Sup. S-12, S-121.
10 J. PLMBS Issued by Depositor GS Mortgage Securities Corp.
Security CUSIP GSAMP 2006-NC2 A2C 362463AD3
The Prospectus states the following with respect to the credit ratings received by the bonds:
A securities rating addresses the likelihood of the receipt by a certificateholder of distributions on the mortgage loans to which they are entitled to by the Final Scheduled Distribution Date. The rating takes into consideration the characteristics of the mortgage loans and the structural, legal and tax aspects associated with the certificates. The ratings on the Offered Certificates do not, however, constitute statements regarding the likelihood or frequency of prepayments on the mortgage loans, the payment of the Basis Risk Carry Forward Amount or the possibility that a holder of an Offered Certificate might realize a lower than anticipated yield . . . .
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. S& P and Moody's will monitor the ratings assigned to the Offered Certificates while the Offered Certificates remain outstanding. In the event that the ratings initially assigned to any of the Offered Certificates by S& P or Moody's are subsequently lowered for any reason, no person or entity is obligated to provide any additional support or credit enhancement with respect to such Offered Certificates.
Source: GSAMP 2006-NC2 Pros. Sup. S-14, S-125.
11 K. PLMBS Issued by Depositor IndyMac ABS, Inc.
Security CUSIP INABS 2005-D AII3 456606JM5
The Prospectus states the following with respect to the credit ratings received by the bonds:
The ratings assigned to mortgage pass-through certificates generally address the likelihood of the receipt of all distributions on the mortgage loans by the related certificateholders under the agreements pursuant to which the certificates are issued. The ratings take into consideration the credit quality of the related mortgage pool, including any credit support providers, structural and legal aspects associated with the certificates, and the extent to which the payment stream on that mortgage pool is adequate to make payments required by the certificates. The ratings on the certificates do not, however, constitute a statement regarding frequency of prepayments on the related mortgage loans, nor do they address the likelihood of the payment of any Net WAC Cap Carry Forward Amount.
The ratings assigned to the offered certificates should be evaluated independently from similar ratings on other types of securities. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the rating agencies.
The ratings of the agencies do not address the possibility that, as a result of principal prepayments, certificateholders may receive a lower than anticipated yield.
Source: INABS 2005-D Pros. Sup. S-96-97;
L. PLMBS Issued by Depositor IndyMac MBS, Inc.
Security CUSIP INDX 2006-AR15 A2 456610AB0
The Prospectus states the following with respect to the credit ratings received by the bonds:
The ratings assigned by S&P to mortgage pass-through certificates address the likelihood of the receipt of all distributions on the Mortgage Loans by the certificateholders under the agreements pursuant to which the certificates are issued. S&P ratings take into consideration the credit quality of the related mortgage pool, including any credit support providers, structural and legal aspects associated with the certificates, and the extent to which the payment stream on the mortgage pool is adequate to make the payments required by the certificates. The ratings assigned by S&P to the Class A-1 Certificates do not address any payments made to the Class A-1 Certificates pursuant to the Class A- 1 Swap Contract.
12 The ratings assigned by Moody's to mortgage pass-through certificates address the likelihood of the receipt by certificateholders of all distributions to which such certificateholders are entitled under the transaction structure. Moody's ratings reflect its analysis of the riskiness of the Mortgage Loans and its analysis of the structure of the transaction as set forth in the operative documents. Moody's ratings do not address the effect on the certificates' yield attributable to prepayments or recoveries on the underlying Mortgage Loans. The ratings of the rating agencies do not address the possibility that, as a result of principal prepayments, certificateholders may receive a lower than anticipated yield. The ratings assigned by Moody's to the Class A-1 Certificates do not address any payments made to the Class A-1 Certificates pursuant to the Class A-1 Swap Contract. . . . The ratings assigned to the Offered Certificates should be evaluated independently from similar ratings on other types of securities. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the rating agencies.
Source: INDX 2006-AR15 Pros. Sup. S-7, S-103.
M. PLMBS Issued by Depositor Merrill Lynch Mortgage Investors, Inc.
Security CUSIP CBASS 2006-CB4 AV3 12498QAC0
The Prospectus states the following with respect to the credit ratings received by the bonds:
The ratings on the certificates indicate the likelihood that you will receive all funds to which you are entitled by the terms of your certificate. The rating agency that issues the rating reviews the nature and credit quality of the mortgage loans and the soundness of the structure which the depositor has created to allow the payments on the mortgage loans to flow to the holders of the certificates. A rating is not a recommendation to buy, sell or hold securities and the rating agency can revise or withdraw it at any time. The ratings do not address the likelihood of the payment of any net WAC carryover amount, the frequency of prepayments on the mortgage loans or the effect of such prepayments on your yield.
Source: CBASS 2006-CB4 Pros. Sup. S-7-8.
N. PLMBS Issued by Depositor Morgan Stanley ABS Capital I Inc.
Security CUSIP MSAC 2006-WMC2 61749KAE3 A2C MSAC 2006-HE5 A2C 61749NAD9 MSAC 2006-HE6 A2C 61750FAE0
13
Each Prospectus states the following with respect to the credit ratings received by the bonds:
A securities rating addresses the likelihood of the receipt by a certificateholder of distributions on the mortgage loans to which they are entitled by the Final Scheduled Distribution Date. The rating takes into consideration the characteristics of the mortgage loans and the structural, legal and tax aspects associated with the certificates. The ratings on the Offered Certificates do not, however, constitute statements regarding the likelihood or frequency of prepayments on the mortgage loans, the payment of the Basis Risk CarryForward Amount or the possibility that a holder of an Offered Certificate might realize a lower than anticipated yield . . . .
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. S&P, Fitch and Moody’s will monitor the ratings assigned to the Offered Certificates while the Offered Certificates remain outstanding. In the event that the ratings initially assigned to any of the Offered Certificates by S&P, Fitch or Moody’s are subsequently lowered for any reason, no person or entity is obligated to provide any additional support or credit enhancement with respect to such Offered Certificates.
Source: MSAC 2006-WMC2 Pros. Sup. *130-31; MSAC 2006-HE5 Pros. Sup. S-127; MSAC 2006-HE6 Pros. Sup. S-130.
14 O. PLMBS Issued by Depositor Mortgage Asset Securitization Transactions, Inc.
Security CUSIP MABS 2006-NC1 A3 57643LNE2
The Prospectus states the following with respect to the credit ratings received by the bonds:
A securities rating addresses the likelihood of the receipt by a certificateholder of distributions on the Mortgage Loans. The rating takes into consideration the characteristics of the Mortgage Loans and the structural, legal and tax aspects associated with the certificates. The ratings on the offered certificates do not, however, constitute statements regarding the likelihood or frequency of prepayments on the Mortgage Loans, the payment of the Net WAC Rate Carryover Amount or the possibility that a holder of an offered certificate might realize a lower than anticipated yield.
Source: MABS 2006-NC1 Pros. Sup. S-15, S-96.
P. PLMBS Issued by Depositor Nomura Home Equity Loan, Inc.
Security CUSIP NHELI 2006-WF1 65536RAC0
The Prospectus states the following with respect to the credit ratings received by the bonds:
The security ratings assigned to the Offered Certificates should be evaluated independently from similar ratings on other types of securities. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the respective rating agency. The ratings on the Offered Certificates do not, however, constitute statements regarding the likelihood or frequency of prepayments on the Mortgage Loans or the anticipated yields in light of prepayments. In addition, the ratings on the Offered Certificates do not address the likelihood of receipt by the holders of such certificates of any amounts in respect of Basis Risk Shortfalls.
Source: NHELI 2006-WF1 Pros. Sup. *97-98.
15 Q. PLMBS Issued by Depositor Option One Mortgage Acceptance Corporation.
Security CUSIP OOMLT 2005-5 A3 68389FJW5 OOMLT 2006-2 2A3 68402CAD6
Each Prospectus states the following with respect to the credit ratings received by the bonds:
A securities rating addresses the likelihood of the receipt by a Certificateholder of distributions on the Mortgage Loans. The rating takes into consideration the characteristics of the Mortgage Loans and the structural, legal and tax aspects associated with the certificates. The ratings on the Offered Certificates do not, however, constitute statements regarding the likelihood or frequency of prepayments on the Mortgage Loans, the payment of the Net WAC Rate Carryover Amount to the Offered Certificates or the possibility that a holder of an Offered Certificate might realize a lower than anticipated yield. . . . A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. In the event that the ratings initially assigned to any of the Offered Certificates by the Rating Agencies are subsequently lowered for any reason, no person or entity is obligated to provide any additional support or credit enhancement with respect to such Offered Certificates.
Source: OOMLT 2005-5 Pros. Sup. S-105; OOMLT 2006-2 Pros. Sup. *138.
R. PLMBS Issued by Depositor Residential Asset Mortgage Products, Inc. & GMAC Mortgage Corporation
Security CUSIP GMACM 2006-AR2 2A1 36185MEV0 GMACM 2006-AR2 4A1 36185MEZ1
The Prospectus states the following with respect to the credit ratings received by the bonds:
A security rating addresses the likelihood of the receipt by the holders of the offered certificates of distributions on the mortgage loans. The rating takes into consideration the structural and legal aspects associated with the offered certificates. The ratings on the offered certificates do not constitute statements regarding the possibility that the holders of the offered certificates might realize a lower than anticipated yield. A security rating does not address the likelihood of the receipt of amounts in respect of Prepayment Interest Shortfalls or Relief Act Shortfalls. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. In the event that the ratings initially
16 assigned to the offered certificates are subsequently lowered for any reason, no person or entity is obligated to provide any additional support or credit enhancement with respect to the offered certificates.
Source: GMACM 2006-AR2 Pros. Sup. S-15, S-97-98.
17 S. PLMBS Issued by Depositor Residential Asset Securities Corporation.
Security CUSIP RASC 2005-KS12 A2 753910AB4
The Prospectus states the following with respect to the credit ratings received by the bonds:
The ratings do not address the possibility that certificateholders might suffer a lower than anticipated yield due to non-credit events. A securities rating addresses the likelihood of the receipt by the holders of the offered certificates of distributions on the mortgage loans. The rating takes into consideration the structural, legal and tax aspects associated with the offered certificates. The ratings on the offered certificates do not constitute statements regarding the possibility that the holders of the offered certificates might realize a lower than anticipated yield. In addition, the ratings do not address the likelihood of the receipt of any amounts in respect of Prepayment Interest Shortfalls, Relief Act Shortfalls or Basis Risk Shortfalls. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. In the event that the ratings initially assigned to the offered certificates are subsequently lowered for any reason, no person or entity is obligated to provide any additional support or credit enhancement with respect to the offered certificates.
Source: RASC 2005-KS12 Pros. Sup. S-11, S-97.
T. PLMBS Issued by Depositor Residential Funding Mortgage Securities I, Inc.
Security CUSIP RFMSI 2006-SA2 2A1 749574AC3
The Prospectus states the following with respect to the credit ratings received by the bonds:
Standard & Poor's ratings on mortgage pass-through certificates address the likelihood of the receipt by certificateholders of payments required under the pooling and servicing agreement. Standard & Poor's ratings take into consideration the credit quality of the mortgage pool, structural and legal aspects associated with the certificates, and the extent to which the payment stream in the mortgage pool is adequate to make payments required under the certificates. Standard & Poor's rating on the certificates does not, however, constitute a statement regarding frequency of prepayments on the mortgages . . . .
The ratings assigned by Fitch to mortgage pass-through certificates address the likelihood of the receipt by certificateholders of all distributions to which they are entitled under the transaction structure. Fitch's ratings reflect its analysis of the riskiness of the underlying mortgage loans and the structure of the transaction as described in the operative documents. Fitch's ratings do not address the effect
18 on the certificates' yield attributable to prepayments or recoveries on the underlying mortgage loans. Further, the ratings on the Interest Only Certificates do not address whether investors therein will recoup their initial investments. . . .
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. The ratings of the Interest Only Certificates do not address the possibility that the holders of those certificates may fail to fully recover their initial investments. In the event that the ratings initially assigned to the offered certificates are subsequently lowered for any reason, no person or entity is obligated to provide any additional support or credit enhancement with respect to the offered certificates.
Source: RFMSI 2006-SA2 Pros. Sup. S-16, S-103.
U. PLMBS Issued by Depositor Securitized Asset Backed Receivables, LLC.
Security CUSIP SABR 2006-FR3 A2 813765AB0 SABR 2006-NC3 A2B 81377CAB4
Each Prospectus states the following with respect to the credit ratings received by the bonds:
A securities rating addresses the likelihood of the receipt by a certificateholder of distributions on the mortgage loans. The rating takes into consideration the characteristics of the mortgage loans and the structural, legal and tax aspects associated with the certificates. The ratings on the Offered Certificates do not constitute statements regarding the likelihood or frequency of prepayments on the mortgage loans, the payment of the Basis Risk Carry Forward Amount or the possibility that a holder of an Offered Certificate might realize a lower than anticipated yield . . . .
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. DBRS, Fitch, Moody's and S&P will monitor the ratings assigned to the Offered Certificates while the Offered Certificates remain outstanding. In the event that the ratings initially assigned to any of the Offered Certificates by DBRS, Fitch, Moody's or S& P are subsequently lowered for any reason, no person or entity is obligated to provide any additional support or credit enhancement with respect to such Offered Certificates.
Source: SABR 2006-FR3 Pros. Sup. S-115; SABR 2006-NC3 Pros. Sup. S-128.
19 V. PLMBS Issued by Depositor Sequoia Residential Funding, Inc.
Security CUSIP SEMT 2006-1 2A1 81743QAG9 SEMT 2006-1 3A1 81743QAJ3
The Prospectus states the following with respect to the credit ratings received by the bonds:
The ratings assigned to mortgage pass-through Certificates address the likelihood of the receipt of all payments on the Mortgage Loans by the related Certificateholders under the agreements pursuant to which such Certificates are issued. Such ratings take into consideration the credit quality of the related mortgage loans, including any credit support providers, structural and legal aspects associated with such Certificates, and the extent to which the payment stream on the trust assets is adequate to make the payments required by such Certificates. Ratings on such Certificates do not, however, constitute a statement regarding frequency of prepayments of the Mortgage Loans.
The ratings do not address the possibility that as a result of principal prepayments, the yield on the Offered Certificates may be lower than anticipated.
The ratings assigned to the Offered Certificates should be evaluated independently from similar ratings on other types of securities. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the Rating Agencies.
Source: SEMT 2006-1 Pros. Sup. S-15, S-105.
W. PLMBS Issued by Depositor Structured Assets Securities Corporation.
Security CUSIP FFML 2006-FF12 A3 32027GAC0 FFML 2006-FF12 A4 32027GAD8 FFML 2006-FF14 A5 32027LAE5 FFML 2006-FF10 A7 32028HAG8
Each Prospectus states the following with respect to the credit ratings received by the bonds:
The ratings of “AAA” and “Aaa” are the highest ratings that the applicable Rating Agency assigns to securities. A securities rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning Rating Agency. A securities rating addresses the likelihood of receipt by holders of Offered Certificates of distributions in the amount of Scheduled Payments on the Mortgage Loans. The rating takes into consideration the characteristics of the Mortgage Loans and the structural and legal aspects associated with the Offered Certificates. The ratings do not take into consideration any of the tax aspects associated with the Offered Certificates. The
20 ratings on the Offered Certificates do not represent any assessment of the likelihood or rate of principal prepayments. The ratings do not address the possibility that holders of Offered Certificates might suffer a lower than anticipated yield due to prepayments.
Source: FFML 2006-FF12 Pros. Sup. S-86; FFML 2006-FF14 Pros. Sup. S-86; FFML 2006- FF10 Pros. Sup. S-89.
X. PLMBS Issued by Depositor Structured Assets Securities Corporation.
Security CUSIP SARM 2005-21 3A1 863579B49
The Prospectus states the following with respect to the credit ratings received by the bonds:
The ratings are not recommendations to buy, sell or hold these certificates. A rating may be changed or withdrawn at any time by the assigning rating agency.
The ratings do not address the possibility that, as a result of principal repayments, the yield on your certificates may be lower than anticipated. . . . A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. A security rating addresses the likelihood of the receipt by Offered Certificateholders of distributions in the amount of scheduled payments on the Mortgage Loans. The rating takes into consideration the characteristics of the Mortgage Loans and the structural, legal and tax aspects associated with the Offered Certificates. . . . The ratings of the Interest-Only Certificates do not address whether investors in those Certificates will fail to recoup their initial investments due to a faster than anticipated rate of prepayments. The rating of the Class R Certificate does not assess the likelihood of return to investors except to the extent of the Class Principal Amount and interest thereon.
The security ratings assigned to the Offered Certificates should be evaluated independently from similar ratings on other types of securities.
Source: SARM 2005-21 Pros. Sup. S-19, S-88-89.
Y. PLMBS Issued by Depositor Wells Fargo Asset Securities Corporation.
Security CUSIP WFHET 2006-3 A2 9497EBAB5
The Prospectus states the following with respect to the credit ratings received by the bonds:
21 The ratings of Fitch on home equity asset-backed certificates address the likelihood of the receipt by certificateholders of all distributions to which such certificateholders are entitled. Fitch’s rating opinions address the structural and legal aspects associated with the certificates, including the nature of the underlying mortgage loans. Fitch’s ratings on home equity asset-backed certificates do not represent any assessment of the likelihood of the payment of any Cap Carryover Amount or the likelihood or rate of principal prepayments and consequently any adverse effect the timing of such prepayments could have on an investor’s anticipated yield.
The ratings of DBRS on home equity asset-backed certificates address the likelihood of the receipt by certificateholders of timely payments of interest and the ultimate return of principal. DBRS’s ratings take into consideration the credit quality of the mortgage pool, including any credit support providers, structural and legal aspects associated with the certificates, and the extent to which the payment stream on the mortgage pool is adequate to make payments required under the certificates. DBRS’s ratings on such certificates do not, however, constitute a statement regarding the likelihood of the payment of any Cap Carryover Amount, the frequency of prepayments on the mortgage loans, or the possibility that investors may suffer a lower than anticipated yield as a result of prepayments of the underlying mortgages.
The ratings of Moody’s on home equity asset-backed certificates address the likelihood of the receipt by certificateholders of all distributions of principal and interest to which such certificateholders are entitled. Moody’s rating opinions address the structural, legal and issuer aspects associated with the certificates, including the nature of the underlying mortgage loans. Moody’s ratings on home equity asset-backed certificates do not represent any assessment of the likelihood of the payment of any Cap Carryover Amount or that principal prepayments may differ from those originally anticipated and consequently any adverse effect the timing of such prepayments could have on an investor’s anticipated yield..
Source: WFHET 2006-3 Pros. Sup. S-10, S-23, S-75-76.
Z. PLMBS Issued by Depositor Wells Fargo Asset Securities Corporation.
Security CUSIP WFMBS 2006-AR3 A4 94983GAD0
The Prospectus states the following with respect to the credit ratings received by the bonds:
The ratings of Fitch on mortgage pass-through certificates address the likelihood of the receipt by certificateholders of all distributions to which such certificateholders are entitled. Fitch’s rating opinions address the structural and legal aspects associated with the certificates, including the nature of the underlying mortgage loans. Fitch’s ratings on mortgage pass-through certificates
22 do not represent any assessment of the likelihood or rate of principal prepayments and consequently any adverse effect the timing of such prepayments could have on an investor’s anticipated yield.
The ratings of S&P on mortgage pass-through certificates address the likelihood of the receipt by certificateholders of timely payments of interest and the ultimate return of principal. S&P’s ratings take into consideration the credit quality of the mortgage pool, including any credit support providers, structural and legal aspects associated with the certificates, and the extent to which the payment stream on the mortgage pool is adequate to make payments required under the certificates. S&P’s ratings on such certificates do not, however, constitute a statement regarding the frequency of prepayments on the mortgage loans. S&P’s ratings do not address the possibility that investors may suffer a lower than anticipated yield as a result of prepayments of the underlying mortgages. In addition, it should be noted that in some structures a default on a mortgage is treated as a prepayment and may have the same effect on yield as a prepayment.
Source: WFMBS 2006-AR3 Pros. Sup. S-7, S-11, S-51.
23 APPENDIX V
TABLE OF CONTENTS
DEFENDANTS’ MATERIALLY MISLEADING STATEMENTS AND OMISSIONS REGARDING THE MORTGAGE ORIGINATORS’ COMPLIANCE WITH PREDATORY LENDING RESTRICTIONS ...... 1
A. PLMBS Issued by Depositor Ameriquest Mortgage Securities Inc...... 1
B. PLMBS Issued by Depositor Argent Securities Inc...... 2
C. PLMBS Issued by Banc of America Funding Corporation...... 2
D. PLMBS Issued by Citigroup Mortgage Loans Trust, Inc...... 3
E. PLMBS Issued by Financial Asset Securities Corp...... 4
F. PLMBS Issued by First Horizon Asset Securities, Inc...... 5
G. PLMBS Issued by Fremont Mortgage Securities Corporation...... 6
H. PLMBS Issued by Greenwich Capital Acceptance, Inc...... 6
I. PLMBS Issued by GS Mortgage Securities Corp...... 7
J. PLMBS Issued by GS Mortgage Securities Corp...... 8
K. PLMBS Issued by IndyMac ABS, Inc...... 9
L. PLMBS Issued by IndyMac MBS, Inc...... 10
M. PLMBS Issued by Merrill Lynch Mortgage Investors, Inc...... 11
N. PLMBS Issued by Morgan Stanley ABS Capital I Inc...... 12
O. PLMBS Issued by Mortgage Asset Securitization Transactions, Inc...... 13
P. PLMBS Issued by Nomura Home Equity Loan, Inc...... 14
Q. PLMBS Issued by Option One Mortgage Acceptance Corporation...... 14
R. PLMBS Issued by Residential Asset Mortgage Products, Inc. & GMAC Mortgage Corporation...... 15
S. PLMBS Issued by Residential Asset Securities Corporation...... 16
i T. PLMBS Issued by Residential Funding Mortgage Securities I, Inc...... 17
U. PLMBS Issued by Securitized Asset Backed Receivables, LLC...... 18
V. PLMBS Issued by Sequoia Residential Funding, Inc...... 19
W. PLMBS Issued by Structured Assets Securities Corporation...... 20
X. PLMBS Issued by Depositor Structured Assets Securities Corporation...... 21
Y. PLMBS Issued by Wells Fargo Asset Securities Corporation...... 22
ii APPENDIX V
DEFENDANTS’ MATERIALLY MISLEADING STATEMENTS AND OMISSIONS REGARDING THE MORTGAGE ORIGINATORS’ COMPLIANCE WITH PREDATORY LENDING RESTRICTIONS
A. PLMBS Issued by Depositor Ameriquest Mortgage Securities Inc.
Security CUSIP AMSI 2005-R10 A2B 03072SS48
The Prospectus states the following with respect to compliance with predatory lending laws:
High Cost Loans
The Seller will represent that none of the Mortgage Loans will be "High Cost Loans" within the meaning of the Home Ownership and Equity Protection Act of 1994 (the "Homeownership Act") and none of the Mortgage Loans will be high cost loans under any state or local law, ordinance or regulation similar to the Homeownership Act . . . . In addition to the Homeownership Act, a number of legislative proposals have been introduced at the federal, state and municipal level that are designed to discourage predatory lending practices. Some states have enacted, or may enact, laws or regulations that prohibit inclusion of some provisions in mortgage loans that have mortgage rates or origination costs in excess of prescribed levels, and require that mortgagors be given certain disclosures prior to the consummation of such mortgage loans. In some cases, state law may impose requirements and restrictions greater than those in the Homeownership Act. The Originator's failure to comply with these laws could subject the Trust, and other assignees of the Mortgage Loans, to monetary penalties and could result in the mortgagors rescinding such Mortgage Loans whether held by the Trust or subsequent holders of the Mortgage Loans. Lawsuits have been brought in various states making claims against assignees of high cost loans for violations of state law. Named defendants in these cases include numerous participants within the secondary mortgage market, including some securitization trusts.
Under the anti-predatory lending laws of some states, the mortgagor is required to meet a net tangible benefits test in connection with the origination of the related mortgage loan. This test may be highly subjective and open to interpretation. As a result, a court may determine that a mortgage loan does not meet the test even if an originator reasonably believed that the test was satisfied. Any determination by a court that a Mortgage Loan does not meet the test will result in a violation of the state anti-predatory lending law, in which case the Seller will be required to purchase such Mortgage Loan from the Trust.
Source: AMSI 2005-R10 Pros. Sup. S-16.
1
B. PLMBS Issued by Depositor Argent Securities Inc.
Security CUSIP ARSI 2005-W5 A2C 040104QN4
The Prospectus states the following with respect to compliance with predatory lending laws:
The Seller will represent that none of the Mortgage Loans will be "High Cost Loans" within the meaning of the Home Ownership and Equity Protection Act of 1994 (the "Homeownership Act") and none of the Mortgage Loans will be high cost loans under any state or local law, ordinance or regulation similar to the Homeownership Act. . . . In addition to the Homeownership Act, a number of legislative proposals have been introduced at the federal, state and municipal level that are designed to discourage predatory lending practices. Some states have enacted, or may enact, laws or regulations that prohibit inclusion of some provisions in mortgage loans that have mortgage rates or origination costs in excess of prescribed levels, and require that mortgagors be given certain disclosures prior to the consummation of such mortgage loans. In some cases, state law may impose requirements and restrictions greater than those in the Homeownership Act. The Originator's failure to comply with these laws could subject the Trust, and other assignees of the Mortgage Loans, to monetary penalties and could result in the mortgagors rescinding such Mortgage Loans whether held by the Trust or subsequent holders of the Mortgage Loans. Lawsuits have been brought in various states making claims against assignees of high cost loans for violations of state law. Named defendants in these cases include numerous participants within the secondary mortgage market, including some securitization trusts.
Under the anti-predatory lending laws of some states, the borrower is required to meet a net tangible benefits test in connection with the origination of the related mortgage loan. This test may be highly subjective and open to interpretation. As a result, a court may determine that a mortgage loan does not meet the test even if an originator reasonably believed that the test was satisfied. Any determination by a court that a Mortgage Loan does not meet the test will result in a violation of the state anti-predatory lending law, in which case the Seller will be required to purchase such Mortgage Loan from the Trust.
Source: ARSI 2005-W5 Pros. Sup. S-14.
C. PLMBS Issued by Banc of America Funding Corporation.
Security CUSIP BAFC 2006-C 2A1 058930AD0 BAFC 2006-E 2A2 05950DAE0 BAFC 2006-E 3A1 05950DAF7
2 BAFC 2006-F 2A1 05950HAD3 BAFC 2006-F 3A1 05950HAF8
Each Prospectus states the following with respect to compliance with predatory lending laws:
[A]s of the closing date for that series of Certificates, . . . any and all requirements of any federal, state or local law including, without limitation, usury, truth in lending, real estate settlement procedures, consumer credit protections, all applicable predatory and abusive lending laws, equal credit opportunity or disclosure laws applicable at the origination and servicing of the Mortgage Loans have been complied with.
Source: 7 – BAFC 2006-C – 59; 8 & 9 – BAFC 2006-E – 59; 10 & 11 – BAFC 2006-F –61
Additionally, the Prospectus for bonds BAFC 2006-F 2A1 and BAFC 2006-F 3A1 states that:
(a) No Mortgage Loan is classified as a high cost mortgage loan under HOEPA; and (b) no Mortgage Loan in the Trust Fund is a “high cost home,” “covered” (excluding home loans defined as “covered home loans” pursuant to clause (1) of the definition of that term in the New Jersey Home Ownership Security Act of 2002), “high risk home” or “predatory” loan under any other applicable state, federal or local law (or a similarly classified loan using different terminology under a law imposing heightened regulatory scrutiny or additional legal liability for residential mortgage loans having high interest rates, points and/or fees).
Source: BAFC 2006-F Pros. Sup. A-IV-6.
D. PLMBS Issued by Citigroup Mortgage Loans Trust, Inc.
Security CUSIP CMLTI 2006NC1 A2C 172983ADO CMLTI 2006-WFHE2 17309MAC7 A2B CMLTI 2006-WFH4 A3 17309SAC4 CMLTI 2006-NC2 A2B 17309TAC2
Each Prospectus states the following with respect to compliance with predatory lending laws:
The responsible party or the sponsor will represent that as of the closing date, each mortgage loan was in compliance with applicable federal and state laws and regulations that were in effect at the time the related mortgage loan was originated. . . . None of the mortgage loans are “High Cost Loans” within the meaning of the Homeownership Act or any state or local law, ordinance or regulation similar to the Homeownership Act. . . . In addition to the Homeownership Act, however, a number of legislative proposals have been introduced at both the federal and
3 state level that are designed to discourage predatory lending practices. Some states have enacted, or may enact, laws or regulations that prohibit inclusion of some provisions in mortgage loans that have mortgage rates or origination costs in excess of prescribed levels, and require that borrowers be given certain disclosures prior to the consummation of such mortgage loans. In some cases, state law may impose requirements and restrictions greater than those in the Homeownership Act. The failure of the responsible party to comply with these laws could subject the trust, and other assignees of the mortgage loans, to monetary penalties and could result in the borrowers rescinding such mortgage loans against either the trust or subsequent holders of the mortgage loans. Lawsuits have been brought in various states making claims against assignees of high cost loans for violations of state law. Named defendants in these cases include numerous participants within the secondary mortgage market, including some securitization trusts.
Under the anti-predatory lending laws of some states, the borrower is required to meet a net tangible benefits test in connection with the origination of the related mortgage loan. This test may be highly subjective and open to interpretation. As a result, a court may determine that a mortgage loan does not meet the test even if an originator reasonably believed that the test was satisfied. Any determination by a court that a mortgage loan does not meet the test will result in a violation of the state anti-predatory lending law, in which case the responsible party will be required to purchase such mortgage loan from the trust.
* Source: CMLTI 2006-NC1 Pros. Sup. 18; CMLTI 2006-WFHE2 Pros. Sup. *13; CMLTI 2006- WFHE4 Pros. Sup. *12; CMLTI 2006-NC2 Pros. Sup. *18.
E. PLMBS Issued by Financial Asset Securities Corp.
Security CUSIP FFML 2006-FF8 IIA3 320278AC8
Each Prospectus states the following with respect to compliance with predatory lending laws:
The Sponsor will represent that as of the Closing Date, each Mortgage Loan originated by the Originator is in compliance with applicable federal, state and local laws and regulations. . . . None of the Mortgage Loans are “High Cost Loans” within the meaning of the Home Ownership and Equity Protection Act of 1994 (the “Homeownership Act”) or any similar applicable state or local law or regulation. . . . In addition to the Homeownership Act, however, a number of legislative proposals have been introduced at both the federal and state level that are designed to discourage predatory lending practices. Some states have enacted, or may enact, laws or
* Page number not included in original; cited number refers to page number in electronic version.
4 regulations that prohibit inclusion of some provisions in mortgage loans that have mortgage rates or origination costs in excess of prescribed levels, and require that borrowers be given certain disclosures prior to the consummation of such mortgage loans. In some cases, state law may impose requirements and restrictions greater than those in the Homeownership Act. The Originator’s failure to comply with these laws could subject the trust, and other assignees of the Mortgage Loans, to monetary penalties and could result in the borrowers rescinding such Mortgage Loans against either the trust or subsequent holders of the Mortgage Loans. Lawsuits have been brought in various states making claims against assignees of High Cost Loans for violations of state law. Named defendants in these cases include numerous participants within the secondary mortgage market, including some securitization trusts.
Under the anti-predatory lending laws of some states, the borrower is required to meet a net tangible benefits test in connection with the origination of the related mortgage loan. This test may be highly subjective and open to interpretation. As a result, a court may determine that a mortgage loan does not meet the test even if the Originator reasonably believed that the test was satisfied. Any determination by a court that a Mortgage Loan does not meet the test will result in a violation of the state anti-predatory lending law, in which case the Originator will be required to purchase such Mortgage Loan from the trust.
Source: FFML 2006-FF8 Pros. Sup. *27.
F. PLMBS Issued by First Horizon Asset Securities, Inc.
Security CUSIP FHASI 2006-ARI 2A1 32051GY25
Each Prospectus states the following with respect to compliance with predatory lending laws:
Each mortgage loan at origination complied in all material respects with applicable local, state and federal laws, including, without limitation, usury, equal credit opportunity, real estate settlement procedures, truth-in-lending and disclosure laws and specifically applicable predatory and abusive lending laws, or any noncompliance does not have a material adverse effect on the value of the related mortgage loan.
No mortgage loan is a “high cost loan” as defined by the specific applicable predatory and abusive lending laws.
Source: FHASI 2006-AR1 Pros. Sup. S-36.
5 G. PLMBS Issued by Fremont Mortgage Securities Corporation.
Security CUSIP FHLT 2005-E 2A3 35729PNB2
Each Prospectus states the following with respect to compliance with predatory lending laws:
The originator will represent with respect to the mortgage loans that: none of the mortgage loans is classified as (a) “high cost” loans under the Home Ownership and Equity Protection Act of 1994 or (b) “high cost,” “threshold,” “covered” or “predatory” loans under any other applicable federal, state or local law (or a similarly classified loan using different terminology under a law imposing heightened regulatory scrutiny or additional legal liability for residential mortgage loans having high interest rates, points and/or fees);
Source: FHLT 2005-E Pros. Sup. S-23-24.
H. PLMBS Issued by Greenwich Capital Acceptance, Inc.
Security CUSIP HVMLT 2006-2 2A1A 41161PK44 HVMLT 2006-2 3A1A 41161PK69
Each Prospectus states the following with respect to compliance with predatory lending laws:
Pursuant to each underlying purchase agreement and each reconstitution agreement, each originator has made to the seller, as direct purchaser or assignee, as of the date such mortgage loans were sold to the seller (the “Original Sale Date”) certain representations and warranties concerning the mortgage loans that generally include the following: . . . Any and all requirements of any federal, state or local law including, without limitation, all applicable predatory and abusive lending, usury, truth in lending, real estate settlement procedures, consumer credit protection, equal credit opportunity or disclosure laws applicable to the mortgage loan have been complied with; . . . No mortgage loan is (a) subject to the provisions of the Homeownership and Equity Protection Act of 1994 as amended (“HOEPA”), (b) a “high cost” mortgage loan, “covered” mortgage loan or “predatory” mortgage loan under any federal, state or local law or (c) subject to any comparable federal, state or local statutes or regulations, including, without limitation, the provisions of the Georgia Fair Lending Act, the City of Oakland, California Anti-Predatory Lending Ordinance No. 12361 or any other statute or regulation providing assignee liability to holders of such mortgage loans;
Source: HVMLT 2006-2 Pros. Sup. S-103-04.
6 I. PLMBS Issued by GS Mortgage Securities Corp.
Security CUSIP FFML 2006-FF13 A2C 30247DAD3
Each Prospectus states the following with respect to compliance with predatory lending laws:
The responsible party will represent that each mortgage loan originated or acquired by it is in compliance with applicable federal, state and local laws and regulations. In addition, the responsible party will also represent that none of the mortgage loans (i) are "high cost loans," (ii) are covered by the Home Ownership and Equity Protection Act of 1994, (iii) are in violation of, or classified as "high cost," "threshold," "predatory" or "covered" loans under, any other applicable state, federal or local law. No predatory or deceptive lending practices, as defined by applicable laws, including, without limitation, the extension of credit without regard to the ability of the mortgagor to repay and the extension of credit which has no apparent benefit to the mortgagor, were employed in the origination of the mortgage loan or (iv) is a High Cost Loan or Covered Loan, as applicable . . . . In the event of a breach of any of such representations, the responsible party will be obligated to cure such breach or repurchase or, for a limited period of time, replace the affected mortgage loan, in the manner and to the extent described in this prospectus supplement.
Source: FFML 2006-FF13 Pros. Sup. S-14.
7 J. PLMBS Issued by GS Mortgage Securities Corp.
Security CUSIP GSAMP 2006-NC2 362463AD3 A2C
Each Prospectus states the following with respect to compliance with predatory lending laws:
Pursuant to the pooling and servicing agreement, the responsible party will make certain representations and warranties as of the closing date (or such other date as set forth below). These representations and warranties include, but are not limited to . . . [a]ny and all requirements of any federal, state or local law, including, without limitation, usury, truth-in-lending, real estate settlement procedures, consumer credit protection, predatory, abusive, fair lending, equal credit opportunity and disclosure laws or unfair and deceptive practices laws applicable to the mortgage loan (including, without limitation, any provisions relating to prepayment penalties), have been complied with, the consummation of the transactions contemplated by the pooling and servicing agreement will not involve the violation of any such laws or regulations; . . . [V]arious states and local governments have enacted . . . laws designed to protect consumers against "predatory lending" practices. Purchasers or assignees of any loans subject to these laws could be liable for all claims and subject to all defenses arising under such provisions that the borrower could assert against the originator of the loan. Remedies available to the borrower include monetary penalties, as well as rescission rights if the appropriate disclosures were not given as required. . . . In addition, substantive requirements are imposed upon mortgage lenders in connection with the origination and the servicing of mortgage loans by numerous federal and some state consumer protection laws. These laws include the federal Truth in Lending Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and related statutes. These federal laws impose specific statutory liabilities upon lenders who originate mortgage loans and who fail to comply with the provisions of the law. In some cases, this liability may affect assignees of the mortgage loans.
Source: GSAMP 2006-NC2 Pros. Sup. S-62, Pros. 74.
8 K. PLMBS Issued by IndyMac ABS, Inc.
Security CUSIP INABS 2005-D AII3 456606JM5
Each Prospectus states the following with respect to compliance with predatory lending laws:
Each seller will have made representations and warranties in respect of the loans sold by it and evidenced by all, or a part, of a series of securities. These representations and warranties generally will include, among other things . . . that each loan was made in compliance with, and is enforceable under, all applicable local, state and federal laws and regulations in all material respects. . . . Federal, state and local laws extensively regulate various aspects of brokering, originating, servicing and collecting mortgage loans secured by consumers' dwellings. Among other things, these laws may regulate interest rates and other charges, require disclosures, impose financial privacy requirements, mandate specific business practices, and prohibit unfair and deceptive trade practices. In addition, licensing requirements may be imposed on persons that broker, originate, service or collect mortgage loans secured by consumers' dwellings.
Additional requirements may be imposed under federal, state or local laws on so- called “high cost” mortgage loans, which typically are defined as loans secured by a consumer's dwelling that have interest rates or origination costs in excess of prescribed levels. These laws may limit certain loan terms, such as prepayment charges, or the ability of a creditor to refinance a loan unless it is in the borrower's interest. In addition, certain of these laws may allow claims against loan brokers or mortgage originators, including claims based on fraud or misrepresentations, to be asserted against persons acquiring the mortgage loans, such as the trust.
The federal laws that may apply to loans held in the trust include the following:
• the Truth in Lending Act and its regulations, which (among other things) require disclosures to borrowers regarding the terms of mortgage loans and provide consumers who pledged their principal dwelling as collateral in a non- purchase money transaction with a right of rescission that generally extends for three days after proper disclosures are given (but in no event more than three years);
• the Home Ownership and Equity Protection Act and its regulations, which (among other things) imposes additional disclosure requirements and limitations on loan terms with respect to non-purchase money, installment loans secured by the consumer's principal dwelling that have interest rates or origination costs in excess of prescribed levels;
• the Home Equity Loan Consumer Protection Act and its regulations, which (among other things) limit changes that may be made to open-end loans
9 secured by the consumer's dwelling, and restricts the ability to accelerate balances or suspend credit privileges on this type of loans;
Source: INABS 2005-D Pros. 39, 98.
L. PLMBS Issued by IndyMac MBS, Inc.
Security CUSIP INDX 2006-AR15 A2 456610AB0
Each Prospectus states the following with respect to compliance with predatory lending laws:
Each seller will have made representations and warranties in respect of the mortgage loans sold by it and evidenced by a series of securities. The applicable prospectus supplement may specify the different representations and warranties, but if it does not, the representations and warranties will generally include, among other things . . . that each loan at the time it was originated and on the date of transfer by the seller to the depositor complied in all material respects with all applicable local, state and federal laws. . . . Federal, state and local laws extensively regulate various aspects of brokering, originating, servicing and collecting mortgage loans secured by consumers' dwellings. Among other things, these laws may regulate interest rates and other charges, require disclosures, impose financial privacy requirements, mandate specific business practices, and prohibit unfair and deceptive trade practices. In addition, licensing requirements may be imposed on persons that broker, originate, service or collect mortgage loans secured by consumers' dwellings.
Additional requirements may be imposed under federal, state or local laws on so- called “high cost” mortgage loans, which typically are defined as loans secured by a consumer's dwelling that have interest rates or origination costs in excess of prescribed levels. These laws may limit certain loan terms, such as prepayment charges, or the ability of a creditor to refinance a loan unless it is in the borrower's interest. In addition, certain of these laws may allow claims against loan brokers or mortgage originators, including claims based on fraud or misrepresentations, to be asserted against persons acquiring the mortgage loans, such as the trust.
The federal laws that may apply to loans held in the trust include the following:
• the Truth in Lending Act and its regulations, which (among other things) require disclosures to borrowers regarding the terms of mortgage loans and provide consumers who pledged their principal dwelling as collateral in a non- purchase money transaction with a right of rescission that generally extends for three days after proper disclosures are given (but in no event more than three years);
10 • the Home Ownership and Equity Protection Act and its regulations, which (among other things) imposes additional disclosure requirements and limitations on loan terms with respect to non-purchase money, installment loans secured by the consumer's principal dwelling that have interest rates or origination costs in excess of prescribed levels;
• the Home Equity Loan Consumer Protection Act and its regulations, which (among other things) limit changes that may be made to open-end loans secured by the consumer's dwelling, and restricts the ability to accelerate balances or suspend credit privileges on this type of loans;
Source: INDX 2006-AR15 Pros. 36, 11-13.
M. PLMBS Issued by Merrill Lynch Mortgage Investors, Inc.
Security CUSIP CBASS 2006-CB4 AV3 12498QAC0
Each Prospectus states the following with respect to compliance with predatory lending laws:
None of the mortgage loans are covered by the Home Ownership and Equity Protection Act of 1994. In addition to the Home Ownership and Equity Protection Act of 1994, however, a number of legislative proposals have been introduced at both the federal and state levels that are designed to discourage predatory lending practices. Some states have enacted, or may enact, laws or regulations that prohibit inclusion of some provisions in mortgage loans that have mortgage rates or origination costs in excess of prescribed levels, and require that borrowers be given certain disclosures prior to the consummation of such mortgage loans. In some cases, state law may impose requirements and restrictions greater than those in the Home Ownership and Equity Protection Act of 1994. The failure to comply with these laws could subject the issuing entity, and other assignees of the mortgage loans, to monetary penalties and could result in the borrowers rescinding such mortgage loans against either the issuing entity or subsequent holders of the mortgage loans. Lawsuits have been brought in various states making claims against assignees of High Cost Loans for violations of state law. Named defendants in these cases include numerous participants within the secondary mortgage market, including some securitization trusts. . . . The Seller hereby represents and warrants to the Purchaser, with respect to the Mortgage Loans, that as of the Closing Date or as of such date specifically provided herein . . . (a) No Mortgage Loan is classified as a high cost mortgage loan under HOEPA; and (b) no Mortgage Loan in the Trust Fund is a "high cost home," "covered" (excluding home loans defined as "covered home loans" pursuant to clause (1) of the definition of that term in the New Jersey Home Ownership Security Act of 2002), "high risk home" or "predatory" loan under any other applicable state, federal or local law (or a similarly classified loan using different terminology under a law imposing heightened regulatory scrutiny
11 or additional legal liability for residential mortgage loans having high interest rates, points and/or fees).
Source: CBASS 2006-CB4 Pros. Sup. S-17, A-IV-6.
N. PLMBS Issued by Morgan Stanley ABS Capital I Inc.
Security CUSIP MSAC 2006-WMC2 A2C 61749KAE3 MSAC 2006-HE5 A2C 61749NAD9 MSAC 2006-HE6 A2C 61750FAE0
Each Prospectus states the following with respect to compliance with predatory lending laws:
Pursuant to the pooling and servicing agreement, each of NC Capital, Decision One and WMC, the responsible parties, will make representations and warranties with respect to each mortgage loan transferred by it as of the closing date . . . , including, but not limited to . . . [a]ny and all requirements of any federal, state or local law, including, without limitation, usury, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity, disclosure and all predatory and abusive lending laws applicable to the mortgage loan have been complied with, including, without limitation, any provisions therein relating to Prepayment Premiums. . . . Some of the mortgage loans, known as High Cost Loans, may be subject to the Home Ownership and Equity Protection Act of 1994, or the Homeownership Act, which amended TILA to provide new requirements applicable to loans that exceed certain interest rates and/or points and fees thresholds. Purchasers or assignees of any High Cost Loan, including any trust, could be liable under federal law for all claims and subject to all defenses that the borrower could assert against the originator of the High Cost Loan. Remedies available to the borrower include monetary penalties, as well as rescission rights if the appropriate disclosures were not given as required. The maximum damages that may be recovered under these provisions from an assignee, including the trust, is the remaining amount of indebtedness, plus the total amount paid by the borrower in connection with the mortgage loan and plus attorneys' fees. In addition to the Homeownership Act, a number of states and local governments have enacted, and other states or local governments may enact, laws that impose requirements and restrictions greater than those in the Homeownership Act. Among other things, these laws prohibit inclusion of some provisions in mortgage loans that have interest rates or origination costs in excess of prescribed levels, and require that borrowers be given certain disclosures prior to the consummation of the mortgage loans. Purchasers or assignees of a mortgage loan, including the related trust, could be exposed to all claims and defenses that the mortgagor could assert against the originator of the mortgage loan for a violation of state law. Claims and defenses available to the borrower could include monetary penalties, rescission and defenses to a foreclosure action or an action to collect.
12 Lawsuits have been brought in various states making claims against assignees of High Cost Loans for violations of federal, state and local law allegedly committed by the originator. Named defendants in these cases include numerous participants within the secondary mortgage market, including some securitization trusts.
Source: MSAC 2006-WMC2 Pros. Sup. *35, 280; MSAC 2006-HE5 Pros. Sup. S-65, Pros. 119- 20; MSAC 2006-HE6 Pros. Sup. S-67, Pros. 119-20.
O. PLMBS Issued by Mortgage Asset Securitization Transactions, Inc.
Security CUSIP MABS 2006-NC1 A3 57643LNE2
Each Prospectus states the following with respect to compliance with predatory lending laws:
None of the mortgage loans are "High Cost Loans" within the meaning of the Homeownership Act or any state or local law, ordinance or regulation similar to the Homeownership Act. . . . In addition to the Homeownership Act, however, a number of legislative proposals have been introduced at both the federal and state level that are designed to discourage predatory lending practices. Some states have enacted, or may enact, laws or regulations that prohibit inclusion of some provisions in mortgage loans that have mortgage rates or origination costs in excess of prescribed levels, and require that borrowers be given certain disclosures prior to the consummation of such mortgage loans. In some cases, state law may impose requirements and restrictions greater than those in the Homeownership Act. The originator's failure to comply with these laws could subject the trust, and other assignees of the mortgage loans, to monetary penalties and could result in the borrowers rescinding such mortgage loans against either the trust or subsequent holders of the mortgage loans. Lawsuits have been brought in various states making claims against assignees of High Cost Loans for violations of state law. Named defendants in these cases include numerous participants within the secondary mortgage market, including some securitization trusts.
Under the anti-predatory lending laws of some states, the borrower is required to meet a net tangible benefits test in connection with the origination of the related mortgage loan. This test may be highly subjective and open to interpretation. As a result, a court may determine that a mortgage loan does not meet the test even if the originator reasonably believed that the test was satisfied. Any determination by a court that a mortgage loan does not meet the test will result in a violation of the state anti-predatory lending law, in which case NC Capital will be required to purchase such mortgage loan from the trust.
Additionally, the Prospectus states that:
Each Unaffiliated Seller made representations and warranties in respect of the residential loans sold by the Unaffiliated Seller. The related prospectus
13 supplement will specify these representations and warranties which may include, among other things . . . that each residential loan was made in compliance with all applicable local, state and federal laws and regulations in all material respects.
Source: MABS 2006-NC1 Pros. Sup. S-24, Pros. 27.
P. PLMBS Issued by Nomura Home Equity Loan, Inc.
Security CUSIP NHELI 2006-WF1 65536RAC0
Each Prospectus states the following with respect to compliance with predatory lending laws:
In addition, the sponsor will represent and warrant, as of the Closing Date, that, among other things . . . each Mortgage Loan complied, at the time of origination, in all material respects with applicable local, state and federal laws including, but not limited to all applicable predatory and abusive lending laws; . . . [and] the Mortgage Loans are not subject to the requirements of the Home Ownership and Equity Protection Act of 1994 and no Mortgage Loan is classified and/or defined as a “high cost”, “covered” or “predatory” loan under any other federal, state or local law or ordinance or regulation including, but not limited to, the States of Georgia or North Carolina, or the City of New York . . . .
Additional requirements may be imposed under federal, state or local laws on so- called “high cost mortgage loans”, which typically are defined as loans secured by consumers’ dwellings that have interest rates or origination costs in excess of prescribed levels. These laws may limit certain loan terms, such as prepayment penalties, or the ability of a creditor to refinance a loan unless it is in the borrower’s interest . . . .
Source: NHELI 2006-WF1 Pros. Sup. *87, 111.
Q. PLMBS Issued by Option One Mortgage Acceptance Corporation.
Security CUSIP OOMLT 2005-5 A3 68389FJW5 OOMLT 2006-2 2A3 68402CAD6
Each Prospectus states the following with respect to compliance with predatory lending laws:
1 The Originator will represent that none of the Mortgage Loans are “High Cost Loans” within the meaning of the federal Truth-in-Lending Act as amended by the Home Ownership and Equity Protection Act of 1994 (the “Homeownership
1 OOMLT 2006-2 – says “sponsor” instead of “originator”
14 Act”) or any state law, ordinance or regulation similar to the Homeownership Act. . . . In addition to the Homeownership Act, a number of legislative proposals have been introduced at both the federal and state level that are designed to discourage predatory lending practices. Some states have enacted, or may enact, laws or regulations that prohibit inclusion of some provisions in mortgage loans that have mortgage rates or origination costs in excess of prescribed levels, and require that borrowers be given certain disclosures prior to the consummation of such mortgage loans. In some cases, state law may impose requirements and restrictions greater than those in the Homeownership Act. The Originator’s failure to comply with these laws could subject the trust, and other assignees of the Mortgage Loans, to monetary penalties and could result in the borrowers rescinding such Mortgage Loans against either the trust or subsequent holders of the Mortgage Loans. Lawsuits have been brought in various states making claims against assignees of High Cost Loans for violations of state law. Named defendants in these cases include numerous participants within the secondary mortgage market, including some securitization trusts.
Under the anti-predatory lending laws of some states, the borrower is required to meet a net tangible benefits test in connection with the origination of the related mortgage loan. This test may be highly subjective and open to interpretation. As a result, a court may determine that a mortgage loan does not meet the test even if the Originator reasonably believed that the test was satisfied. Any determination by a court that a Mortgage Loan does not meet the test will result in a violation of the state anti-predatory lending law, in which case the Seller will be required to purchase such Mortgage Loan from the Trust.
The Originator will represent that none of the Mortgage Loans originated in Georgia are subject to the Georgia Fair Lending Act effective from October 1, 2002 to March 6, 2003. . . . [T]he Originator will represent and warrant, as of the Closing Date, that, among other things . . . each Mortgage Loan complied, at the time of origination, in all material respects with applicable state and federal laws.
Source: OOMLT 2005-5 Pros. Sup. S-21-22, S-49; OOMLT 2006-2 Pros. Sup. *28, *64.
R. PLMBS Issued by Residential Asset Mortgage Products, Inc. & GMAC Mortgage Corporation
Security CUSIP GMACM 2006-AR2 36185MEV0 2A1 GMACM 2006-AR2 36185MEZ1 4A1
Each Prospectus states the following with respect to compliance with predatory lending laws:
15 The representations and warranties of the seller include, among other things, that as of the closing date or such other date as may be specified below . . . [a]ny and all requirements of any federal, state or local law including, without limitation, usury, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity or disclosure laws applicable to each mortgage loan have been complied with in all material respects. . . . In addition to the Homeownership Act, a number of legislative proposals have been introduced at both the federal and state level that are designed to discourage predatory lending practices. Some states have enacted, and other states or local governments may enact, laws that impose requirements and restrictions greater than those in the Homeownership Act. These laws prohibit inclusion of some provisions in mortgage loans that have interest rates or origination costs in excess of prescribed levels, and require that borrowers be given certain disclosures prior to the consummation of the mortgage loans. Purchasers or assignees of such a mortgage loan, including the related trust, could be exposed to all claims and defenses that the mortgagor could assert against the originator of the mortgage loan for a violation of state law. Claims and defenses available to the borrower could include monetary penalties, rescission and defenses to a foreclosure action or an action to collect.
Source: GMACM 2006-AR2 Pros. Sup. S-41, Pros. 117.
S. PLMBS Issued by Residential Asset Securities Corporation.
Security CUSIP RASC 2005-KS12 A2 753910AB4
Each Prospectus states the following with respect to compliance with predatory lending laws:
Residential Funding, as seller, will represent and warrant, as of the date of issuance of the certificates, the following:
• None of the mortgage loans were subject to the Home Ownership and Equity Protection Act of 1994, referred to as the Homeownership Act.
• Each mortgage loan at the time it was made complied in all material respects with applicable local, state and federal laws, including, but not limited to, all applicable anti-predatory lending laws.
• None of the mortgage loans are loans that, under applicable state or local law in effect at the time of origination of the loan, are referred to as (1) “high cost” or “covered” loans or (2) any other similar designation if the law imposes greater restrictions or additional legal liability for residential mortgage loans with high interest rates, points and/or fees . . . .
16 Residential Funding will be required to repurchase or substitute for any mortgage loan that violates any of these representations and warranties, if that violation materially and adversely affects the interests of the certificateholders in that mortgage loan. Residential Funding maintains policies and procedures that are designed to ensure that it does not purchase mortgage loans subject to the Homeownership Act. However, there can be no assurance that these policies and procedures will assure that each and every mortgage loan complies with all applicable origination laws in all material respects.
Residential Funding is opposed to predatory lending practices, as a matter of corporate policy. In addition, Residential Funding’s Servicer Guide requires that each subservicer accurately and fully report its borrower credit files to credit repositories in a timely manner.
Source: RASC 2005-KS12 Pros. Sup. S-25-26.
T. PLMBS Issued by Residential Funding Mortgage Securities I, Inc.
Security CUSIP RFMSI 2006-SA2 2A1 749574AC3
Each Prospectus states the following with respect to compliance with predatory lending laws:
Residential Funding will represent and warrant, as of the date the related mortgage loan was sold to the seller, and the seller will represent and warrant that nothing has occurred or failed to occur between the date the related mortgage loan was sold to the seller and the date of issuance of the certificates, the following:
• Each mortgage loan at the time it was made complied in all material respects with applicable local, state and federal laws, including, but not limited to, all applicable anti-predatory lending laws.
• None of the mortgage loans were subject to the Home Ownership and Equity Protection Act of 1994. None of the mortgage loans are loans that, under applicable state or local law in effect at the time of origination of the loan, are referred to as (A) classified as a “high cost home,” “threshold,” “covered,” “high risk home,” “predatory” or similar loan under any other applicable state, federal or local law (or a similarly classified loan using different terminology under a law imposing heightened regulatory scrutiny or additional legal liability for residential mortgage loans having high interest rates, points and/or fees) or (B) categorized as High Cost or Covered pursuant to Appendix E of Standard & Poor's Glossary . . . .
Source: RFMSI 2006-SA2 Pros. Sup. S-39.
17 U. PLMBS Issued by Securitized Asset Backed Receivables, LLC.
Security CUSIP SABR 2006-FR3 A2 813765AB0 SABR 2006-NC3 A2B 81377CAB4
Each Prospectus states the following with respect to compliance with predatory lending laws:
Pursuant to the pooling and servicing agreement, . . . the responsible party will make representations and warranties with respect to each mortgage loan as of the closing date, the servicing transfer date (July 31, 2006) or another date as specified, including, but not limited to: Any and all requirements of any federal, state or local law including, without limitation, usury, truth in lending, real estate settlement procedures, consumer credit protection, equal credit opportunity, disclosure and all predatory and abusive lending laws applicable to the mortgage loan, including, without limitation, any provisions relating to prepayment charges, have been complied with and the consummation of the transactions contemplated by the pooling and servicing agreement will not involve the violation of any such laws or regulations. . . . Some of the mortgage loans, known as High Cost Loans, may be subject to the Home Ownership and Equity Protection Act of 1994, or Homeownership Act, which amended TILA to provide new requirements applicable to loans that exceed certain interest rates and/or points and fees thresholds. Purchasers or assignees of any High Cost Loan, including any trust, could be liable under federal law for all claims and subject to all defenses that the borrower could assert against the originator of the High Cost Loan. Remedies available to the borrower include monetary penalties, as well as rescission rights if the appropriate disclosures were not given as required. The maximum damages that may be recovered under these provisions from an assignee, including the trust, is the remaining amount of indebtedness plus the total amount paid by the borrower in connection with the mortgage loan and plus attorneys fees.
In addition to the Homeownership Act, a number of states and local governments have enacted, and other states or local governments may enact, laws that impose requirements and restrictions greater than those in the Homeownership Act. Among other things, these laws prohibit inclusion of some provisions in mortgage loans that have interest rates or origination costs in excess of prescribed levels, and require that borrowers be given certain disclosures prior to the consummation of the mortgage loans. Purchasers or assignees of a mortgage loan, including the related trust, could be exposed to all claims and defenses that the mortgagor could assert against the originator of the mortgage loan for a violation of state law. Claims and defenses available to the borrower could include monetary penalties, rescission and defenses to a foreclosure action or an action to collect.
Lawsuits have been brought in various states making claims against assignees of High Cost Loans for violations of federal and state law allegedly committed by
18 the originator. Named defendants in these cases include numerous participants within the secondary mortgage market, including some securitization trusts.
Source: SABR 2006-FR3 Pros. Sup. S-58, Pros. 108; SABR 2006-NC3 Pros. Sup. S-67, Pros.107-08.
V. PLMBS Issued by Sequoia Residential Funding, Inc.
Security CUSIP SEMT 2006-1 2A1 81743QAG9 SEMT 2006-1 3A1 81743QAJ3
Each Prospectus states the following with respect to compliance with predatory lending laws:
Various federal, state and local laws have been enacted that are designed to discourage predatory lending practices. The federal Home Ownership and Equity Protection Act of 1994, commonly known as HOEPA, prohibits inclusion of certain provisions in mortgage loans that have mortgage rates or origination costs in excess of prescribed levels, and requires that borrowers be given certain disclosures prior to the origination of mortgage loans. Some states have enacted, or may enact, similar laws or regulations, which in some cases impose restrictions and requirements greater than those in HOEPA.
In addition, under the anti-predatory lending laws of some states, the origination of certain mortgage loans (including loans that are not classified as “high cost” loans under applicable law) must satisfy a net tangible benefits test with respect to the related borrower. This test may be highly subjective and open to interpretation. As a result, a court may determine that a mortgage loan does not meet the test even if the related originator reasonably believed that the test was satisfied.
Failure to comply with these laws, to the extent applicable to any of the mortgage loans, could subject the issuing entity, as an assignee of the related mortgage loans, to monetary penalties and could result in the borrowers rescinding the affected mortgage loans. Lawsuits have been brought in various states making claims against assignees of high cost loans for violations of state law.
Named defendants in these cases have included numerous participants within the secondary mortgage market, including some securitization trusts.
The seller will represent that the issuing entity does not include any mortgage loans that are subject to HOEPA or that would be classified as “high cost” loans under any similar state or local predatory or abusive lending law. There may be mortgage loans in the issuing entity that are subject to the state or local requirement that the loan provide a net tangible benefit (however denominated) to the borrower; the seller will represent that these mortgage loans are in compliance with applicable requirements. If it is determined that the issuing entity includes
19 loans subject to HOEPA or otherwise classified as high cost loans, or which do not comply with applicable net tangible benefit requirements, the seller will be required to repurchase the affected loans and to pay any liabilities incurred by the issuing entity due to any violations of these laws. If the loans are found to have been originated in violation of predatory or abusive lending laws and the seller does not repurchase the affected loans and pay any related liabilities, securityholders could incur losses.
Source: SEMT 2006-1 Pros. Sup. S-23.
W. PLMBS Issued by Structured Assets Securities Corporation.
Security CUSIP FFML 2006-FF12 A3 32027GAC0 FFML 2006-FF12 A4 32027GAD8 FFML 2006-FF14 A5 32027LAE5 FFML 2006-FF10 A7 32028HAG8
Each Prospectus states the following with respect to compliance with predatory lending laws:
Various federal, state and local laws have been enacted that are designed to discourage predatory lending practices. The federal Home Ownership and Equity Protection Act of 1994, commonly known as HOEPA, prohibits inclusion of certain provisions in mortgage loans that have mortgage rates or origination costs in excess of prescribed levels, and requires that borrowers be given certain disclosures prior to the origination of mortgage loans. Some states have enacted, or may enact, similar laws or regulations, which in some cases impose restrictions and requirements greater than those in HOEPA.
In addition, under the anti-predatory lending laws of some states, the origination of certain mortgage loans (including loans that are not classified as “high cost” loans under applicable law) must satisfy a net tangible benefits test with respect to the related borrower. This test may be highly subjective and open to interpretation. As a result, a court may determine that a mortgage loan does not meet the test even if the related originator reasonably believed that the test was satisfied.
Failure to comply with these laws, to the extent applicable to any of the mortgage loans, could subject the trust fund, as an assignee of the related mortgage loans, to monetary penalties and could result in the borrowers rescinding the affected mortgage loans.
Lawsuits have been brought in various states making claims against assignees of high cost loans for violations of state law. Named defendants in these cases have included numerous participants within the secondary mortgage market, including some securitization trusts.
20 The seller will represent that the trust fund does not include any mortgage loans that are subject to HOEPA or that would be classified as “high cost” loans under any similar state or local predatory or abusive lending law. There may be mortgage loans in the trust fund that are subject to the state or local requirement that the loan provide a net tangible benefit (however denominated) to the borrower; the seller will represent that these mortgage loans are in compliance with applicable requirements. If it is determined that the trust fund includes loans subject to HOEPA or otherwise classified as high cost loans, or which do not comply with applicable net tangible benefit requirements, the seller will be required to repurchase the affected loans and to pay any liabilities incurred by the trust fund due to any violations of these laws. If the loans are found to have been originated in violation of predatory or abusive lending laws and the seller does not repurchase the affected loans and pay any related liabilities, securityholders could incur losses.
Source: FFML 2006-FF12 Pros. 32; FFML 2006-FF14 Pros. 32; FFML 2006-FF10 Pros. 37-38.
X. PLMBS Issued by Depositor Structured Assets Securities Corporation.
Security CUSIP SARM 2005-21 3A1 863579B49
The Prospectus states the following with respect to compliance with predatory lending laws:
Lehman Brothers Holdings Inc. [the sponsor and seller] will represent that none of the mortgage loans in the trust fund will be ‘‘high cost’’ loans under applicable federal, state or local anti-predatory or anti-abusive lending laws. . . . Various federal, state and local laws have been enacted that are designed to discourage predatory lending practices. Failure to comply with these laws, to the extent applicable to any of the mortgage loans, could subject the trust fund, as an assignee of mortgage loans, to monetary penalties and could result in the borrowers rescinding the affected mortgage loans. If the loans are found to have been originated in violation of predatory or abusive lending laws and the seller does not repurchase the affected loans and pay any related liabilities, certificateholders could incur losses. . . . In addition, pursuant to the Sale and Assignment Agreement, the Seller has represented to the Depositor, among other things, that (i) each Mortgage Loan at the time it was made complied in all material respects with applicable local, state and federal laws, including, but not limited to, applicable local, state and federal antipredatory and anti-abusive lending laws and (ii) none of the Mortgage Loans constitute ‘‘high-cost loans’’ as defined by applicable local, state and federal anti-predatory and anti-abusive lending laws.
21 Source: SARM 2005-21 Pros. Sup. S-18, S-27, S-73.
Y. PLMBS Issued by Wells Fargo Asset Securities Corporation.
Security CUSIP WFHET 2006-3 A2 9497EBAB5 WFMBS 2006-AR3 94983GAD0 A4
Each Prospectus states the following with respect to compliance with predatory lending laws:
In connection with the transfer of the Mortgage Loans related to any Series by the Depositor to the Trust Fund, the Depositor will generally make certain representations and warranties as of the Closing Date regarding the Mortgage Loans. In certain cases where Wells Fargo Bank acquired some or all of the Mortgage Loans related to a Series from a Correspondent, if so indicated in the applicable prospectus supplement, the Depositor may, rather than itself making representations and warranties, cause the representations and warranties made by the Correspondent in connection with its sale of Mortgage Loans to the Sponsor to be assigned to the Trust Fund. In such cases, the Correspondent’s representations and warranties may have been made as of a date prior to the Closing Date. Unless otherwise provided in the applicable prospectus supplement, such representations and warranties (whether made by the Depositor or another party) will generally include the following with respect to the Mortgage Loans, or each Mortgage Loan, as the case may be:
. . .
(viii) each Mortgage Loan at the time it was originated complied in all material respects with applicable federal, state and local laws including, without limitation, usury, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity, predatory and abusive lending laws and disclosure laws; and
(ix) no Mortgage Loan is a “high cost” loan as defined under any federal, state or local law applicable to such Mortgage Loan at the time of its origination.
Source: WFHET 2006-3 Pros. 23; WFMBS 2006-AR3 Pros. 81.
22 APPENDIX VI
TABLE OF CONTENTS
DEFENDANTS’ MATERIALLY MISLEADING STATEMENTS AND OMISSIONS REGARDING THE DUE DILIGENCE PERFORMED ON THE MORTGAGE POOLS THAT BACKED THE PLMBS PURCHASED BY THE BANK ...... 1
A. Materially Misleading Statements and Omissions With Respect to Post-Purchase Due Diligence Reviews Allegedly Conducted by the Originators Named in the Offering Documents...... 1
1. PLMBS backed by mortgages acquired by Bank of America, National Association (“Bank of America”) ...... 1
2. PLMBS backed by mortgages acquired by Countrywide Home Loans, Inc. (“Countrywide”)...... 2
3. PLMBS backed by mortgages acquired by First Horizon Home Loan Corporation (“First Horizon”)...... 2
4. PLMBS backed by mortgages acquired by IndyMac Bank F.S.B. (“IndyMac”)...... 4
5. PLMBS backed by mortgages acquired by Wells Fargo Bank, National Association (“Wells Fargo”)...... 5
6. PLMBS backed by mortgages acquired by Wells Fargo Bank, National Association (“Wells Fargo”)...... 6
7. PLMBS backed by mortgages acquired by WMC Mortgage Corp...... 7
B. Materially Misleading Statements and Omissions With Respect to Due Diligence Reviews Allegedly Conducted by Sponsors Prior to the Acquisition and Securitization of Mortgages...... 8
1. PLMBS Issued by Citigroup Mortgage Loans Trust, Inc...... 8
2. PLMBS Issued by Financial Asset Securities Corp...... 9
3. PLMBS Issued by Greenwich Capital Acceptance, Inc...... 9
4. PLMBS Issued by GS Mortgage Securities Corp...... 10
5. PLMBS Issued by GS Mortgage Securities Corp...... 10
i 6. PLMBS Issued by Merrill Lynch Mortgage Investors, Inc...... 11
7. PLMBS Issued by Morgan Stanley ABS Capital I Inc...... 11
8. PLMBS Issued by Residential Asset Securities Corporation...... 12
9. PLMBS Issued by Residential Funding Mortgage Securities I, Inc...... 13
10. PLMBS Issued by Securitized Asset Backed Receivables, LLC...... 14
11. PLMBS Issued by Sequoia Residential Funding, Inc...... 14
ii APPENDIX VI
DEFENDANTS’ MATERIALLY MISLEADING STATEMENTS AND OMISSIONS REGARDING THE DUE DILIGENCE PERFORMED ON THE MORTGAGE POOLS THAT BACKED THE PLMBS PURCHASED BY THE BANK
A. Materially Misleading Statements and Omissions With Respect to Post-Purchase Due Diligence Reviews Allegedly Conducted by the Originators Named in the Offering Documents
1. PLMBS backed by mortgages acquired by Bank of America, National Association (“Bank of America”)
Security CUSIP BAFC 2006-C 2A1 058930AD0 BAFC 2006-E 2A2 05950DAE0 BAFC 2006-E 3A1 05950DAF7
Each Prospectus further asserts the following:
The underwriting of mortgage loans acquired from another lender generally relies on the representations from the originating lender that the mortgage loans were underwritten in accordance with agreed upon underwriting standards that are materially similar to Bank of America's. Generally, Bank of America conducts a post-purchase review of a sampling of all mortgage loans acquired from another lender to determine whether agreed upon requirements were met.
Source: BAFC 2006-C Pros. Sup. S-33; BAFC 2006-E Pros. Sup. S-31.
1 2. PLMBS backed by mortgages acquired by Countrywide Home Loans, Inc. (“Countrywide”).
Security CUSIP HVMLT 2006-2 41161PK44 2A1A HVMLT 2006-2 41161PK69 3A1A SEMT 2006-1 81743QAG9 2A1 SEMT 2006-1 81743QAJ3 3A1 SARM 2005-21 863579B49 3A1
Each Prospectus asserts the following:
Countrywide Home Loans may acquire mortgage loans from approved correspondent lenders under a program pursuant to which Countrywide Home Loans delegates to the correspondent the obligation to underwrite the mortgage loans to Countrywide Home Loans’ standards. Under these circumstances, the underwriting of a mortgage loan may not have been reviewed by Countrywide Home Loans before acquisition of the mortgage loan and the correspondent represents that Countrywide Home Loans’ underwriting standards have been met. After purchasing mortgage loans under those circumstances, Countrywide Home Loans conducts a quality control review of a sample of the mortgage loans. The number of loans reviewed in the quality control process varies based on a variety of factors, including Countrywide Home Loans’ prior experience with the correspondent lender and the results of the quality control review process itself.
Source: HVMLT 2006-2 Pros. Sup. S-76; SEMT 2006-1 Pros. Sup. S-54; SARM 2005- 21 Pros. Sup. S-48-49.
3. PLMBS backed by mortgages acquired by First Horizon Home Loan Corporation (“First Horizon”)
Security CUSIP FHASI 2006-AR1 2A1 32051GY25
The Prospectus states:
The mortgage loans may be underwritten by First Horizon or by a designated third party . . . . First Horizon may perform only sample
2 quality assurance reviews to determine whether the mortgage loans in any mortgage pool were underwritten in accordance with applicable standards.
. . .
The level of review by First Horizon, if any, of any mortgage loan for conformity with the applicable underwriting standards will vary depending on any one of a number of factors, including: factors relating to the experience and status of the seller, characteristics of the specific mortgage loan, including the principal balance, the Loan-to-Value Ratio, the loan type or loan program, and the applicable credit score of the related mortgagor used in connection with the origination . . . .
Source: FHASI 2006-AR1 Pros. Sup. S-32, Pros. 26.
3 4. PLMBS backed by mortgages acquired by IndyMac Bank F.S.B. (“IndyMac”).
Security CUSIP HVMLT 41161PK44 2006-2 2A1A HVMLT 41161PK69 2006-2 3A1A INDX 2006- 456610AB0 AR15 A2
Each Prospectus asserts the following:
Mortgage loans originated through [IndyMac’s] conduit channel were generally initially underwritten by the party from whom IndyMac acquired the mortgage loan to that party’s underwriting guidelines. IndyMac reviews each such party’s guidelines for acceptability, and these guidelines generally meet industry standards and incorporate many of the same factors used by Fannie Mae, Freddie Mac and IndyMac. Each mortgage loan is re-underwritten by IndyMac for compliance with its guidelines based only on the objective characteristics of the mortgage loan, such as FICO, documentation type, loan-to-value ratio, etc., but without reassessing the underwriting procedures originally used.
In addition, a portion of the mortgage loans acquired through the conduit channel are subjected to a full re-underwriting.
Each Prospectus further describes two “mortgage loan purchase programs” operated as part of IndyMac’s “correspondent channel” as follows:
1. Prior Approval Program. Under this program, IndyMac performs a full credit review and analysis of each mortgage loan generally with the same procedures used for mortgage loans originated through the mortgage professionals channel. Only after IndyMac issues an approval notice to a loan originator is a mortgage loan eligible for purchase pursuant to this program.
2. Preferred Delegated Underwriting Program. Under this program, loan originators that meet certain eligibility requirements are allowed to tender mortgage loans for purchase without the need for IndyMac to verify mortgagor information . . . . Under the Preferred Delegated Underwriting Program, each eligible loan originator is required to underwrite mortgage loans in compliance with IndyMac’s underwriting guidelines usually by use of e-MITS or, infrequently, by submission of the mortgage loan to IndyMac for traditional underwriting. A greater percentage of mortgage loans purchased pursuant to this program are selected for post-purchase quality control review than for the other program.
4 Source: HVMLT 2006-2 Pros. Sup. S-80-83; INDX 2006-AR15 Pros. Sup. S-43-46.
5. PLMBS backed by mortgages acquired by Wells Fargo Bank, National Association (“Wells Fargo”).
Security CUSIP BAFC 2006-F 2A1 05950HAD3 BAFC 2006-F 3A1 05950HAF8 WFMBS 2006-AR3 94983GAD0 A4
Each Prospectus states:
The contractual arrangements with Correspondents may . . . involve the delegation of all underwriting functions to . . . Correspondents, which will result in Wells Fargo Bank not performing any underwriting functions prior to acquisition of the loan but instead relying on . . . , in the case of bulk purchase acquisitions from such Correspondents, Wells Fargo Bank's post-purchase reviews of samplings of mortgage loans acquired from such Correspondents regarding the Correspondents' compliance with Wells Fargo Bank's underwriting standards. In all instances, however, acceptance by Wells Fargo Bank is contingent upon the loans being found to satisfy Wells Fargo Bank's program standards or the standards of a pool insurer.
Source: BAFC 2006-F Pros. Sup. S-30; WFMBS 2006-AR3 Pros. 32.
5 6. PLMBS backed by mortgages acquired by Wells Fargo Bank, National Association (“Wells Fargo”).
Security CUSIP CMLTI 2006- 17309MAC7 WFH2 A2B CMLTI 2006- 17309SAC4 WFH4 A3
Each Prospectus states:
All of the Mortgage Loans were originated by Wells Fargo Bank or acquired by Wells Fargo Bank from correspondent lenders after re- underwriting such acquired Mortgage Loans generally in accordance with its underwriting guidelines then in effect.
Source: CMLTI 2006-WFHE2 Pros. Sup.; CMLTI 2006-WFHE4 Pros. Sup.
6 7. PLMBS backed by mortgages acquired by WMC Mortgage Corp.
Security CUSIP MSAC 2006- 61749KAE3 WMC2 A2C MSAC 2006- 61749NAD9 HE5 A2C MSAC 2006- 61750FAE0 HE6 A2C
Each Prospectus states:
The mortgage loans have been either (i) originated generally in accordance with the underwriting guidelines established by WMC (collectively, the "WMC UNDERWRITING GUIDELINES") or (ii) purchased by WMC after re-underwriting the mortgage loans generally in accordance with the WMC Underwriting Guidelines.
* Source: MSAC 2006-WMC2 Pros. Sup. 20; MSAC 2006-HE6 Pros. Sup. S-33.
* Page number not included in original; cited number refers to page number in electronic version.
7 B. Materially Misleading Statements and Omissions With Respect to Due Diligence Reviews Allegedly Conducted by Sponsors Prior to the Acquisition and Securitization of Mortgages
1. PLMBS Issued by Citigroup Mortgage Loans Trust, Inc.
Security CUSIP CMLTI 172983ADO 2006NC1 A2C CMLTI 2006- 17309MAC7 WFHE2 A2B CMLTI 2006- 17309SAC4 WFH4 A3 CMLTI 2006- 17309TAC2 NC2 A2B
Each Prospectus states the following with respect to the Sponsor’s due diligence:
Mortgage loans acquired by the sponsor are subject to varying levels of due diligence prior to purchase. Portfolios may be reviewed for credit, data integrity, appraisal valuation, documentation, as well as compliance with certain laws. Mortgage loans purchased will have been originated pursuant to the related originator’s underwriting guidelines that are acceptable to the sponsor.
Source: CMLTI 2006-NC1 Pros. Sup. *82; CMLTI 2006-WFHE2 Pros. Sup. *53; CMLTI 2006- WFHE4 Pros. Sup. *50; CMLTI 2006-NC2 Pros. Sup. *88.
8 2. PLMBS Issued by Financial Asset Securities Corp.
Security CUSIP FFML 2006- 320278AC8 FF8 IIA3
The Prospectus states the following with respect to the Sponsor’s due diligence:
Residential mortgage loans purchased by the Sponsor include seasoned, performing, program exception, and non-performing residential mortgages. All loans acquired by the Sponsor are subject to due diligence. Portfolios are reviewed for issues including, but not limited to, a thorough credit and compliance review with loan level testing.
Source: FFML 2006-FF8 Pros. Sup. *80.
3. PLMBS Issued by Greenwich Capital Acceptance, Inc.
Security CUSIP HVMLT 2006- 41161PK44 2 2A1A HVMLT 2006- 41161PK69 2 3A1A
The Prospectus states the following with respect to the Sponsor’s due diligence:
All loans acquired by the sponsor are subject to due diligence. Portfolios are reviewed for issues including, but not limited to, a thorough credit and compliance review with loan level testing.
Source: HVMLT 2006-2 Pros. Sup. S-73.
9 4. PLMBS Issued by GS Mortgage Securities Corp.
Security CUSIP FFML 2006- 30247DAD3 FF13 A2C
The Prospectus states the following with respect to the Sponsor’s due diligence:
Prior to acquiring any residential mortgage loans, GSMC will conduct a review of the related mortgage loan seller. GSMC's review process consists of reviewing select financial information for credit and risk assessment and underwriting guideline review, senior level management discussion and background checks. The scope of the mortgage loan due diligence will depend on the credit quality of the mortgage loans.
Source: FFML 2006-FF13 Pros. Sup. S-52.
5. PLMBS Issued by GS Mortgage Securities Corp.
Security CUSIP GSAMP 2006- 362463AD3 NC2 A2C
The Prospectus states the following with respect to the Sponsor’s due diligence:
Prior to acquiring any residential mortgage loans, GSMC will conduct a review of the related mortgage loan seller. GSMC's review process consists of reviewing select financial information for credit and risk assessment and underwriting guideline review, senior level management discussion and background checks. The scope of the mortgage loan due diligence will depend on the credit quality of the mortgage loans.
Source: GSAMP 2006-NC2 Pros. Sup. S-52.
10 6. PLMBS Issued by Merrill Lynch Mortgage Investors, Inc.
Security CUSIP CBASS 2006- 12498QAC0 CB4 AV3
The Prospectus states the following with respect to the Sponsor’s due diligence:
The Sponsor or a loan reviewer reviewed a substantial majority of the files related to the Mortgage Loans in connection with the acquisition of the Mortgage Loans by the Sponsor for credit, compliance and property value considerations. These files may include the documentation pursuant to which the mortgage loan was originally underwritten, as well as the mortgagor’s payment history on the mortgage loan. In its review, the Sponsor evaluates the mortgagor’s credit standing, repayment ability and willingness to repay debt, as well as the value and adequacy of the mortgaged property as collateral. A mortgagor’s ability and willingness to repay debts (including the Mortgage Loans) in a timely fashion is determined by the quality, quantity and durability of income history, history of debt management, history of debt repayment, and net worth accumulation of the mortgagor. In addition, the Sponsor may also obtain and review a current credit report for the mortgagor.
Source: CBASS 2006-CB4 Pros. Sup. S-21.
7. PLMBS Issued by Morgan Stanley ABS Capital I Inc.
Security CUSIP MSAC 2006- 61749KAE3 WMC2 A2C MSAC 2006- 61749NAD9 HE5 A2C MSAC 2006- 61750FAE0 HE6 A2C
Each Prospectus states the following with respect to the Sponsor’s due diligence:
Prior to acquiring any residential mortgage loans, Morgan Stanley Mortgage Capital Inc. conducts a review of the related mortgage loan seller that is based upon the credit quality of the selling institution. Morgan Stanley Mortgage Capital Inc.’s review process may include reviewing select financial information for credit and risk assessment and conducting an underwriting guideline review, senior level management discussion and/or background checks. The scope of the mortgage loan due diligence varies based on the credit quality of the mortgage loans. The underwriting guideline review entails a review of the mortgage loan origination processes and systems. In addition, such review may involve a
11 consideration of corporate policy and procedures relating to state and federal predatory lending, origination practices by jurisdiction, historical loan level loss experience, quality control practices, significant litigation and/or material investors.
Source: MSAC 2006-WMC2 Pros. Sup. *28; MSAC 2006-HE5 Pros. Sup. S-43; MSAC 2006-HE6 Pros. Sup. S-51.
8. PLMBS Issued by Residential Asset Securities Corporation.
Security CUSIP RASC 2005- 753910AB4 KS12 A2
The Prospectus Supplement states:
Prior to assignment to the depositor, Residential Funding reviewed the underwriting standards for the mortgage loans and purchased all of the mortgage loans from mortgage collateral sellers who participated in or whose loans were in substantial conformity with the standards set forth in Residential Funding’s AlterNet Program or are otherwise in conformity with the standards set forth in the description of credit grades set forth in this prospectus supplement. S-32.
Additionally, the Prospectus States the following with respect to the Seller’s due diligence:
The level of review by Residential Funding Corporation, if any, will vary depending on several factors. Residential Funding Corporation, on behalf of the depositor, typically will review a sample of the mortgage loans purchased by Residential Funding Corporation for conformity with the applicable underwriting standards and to assess the likelihood of repayment of the mortgage loan from the various sources for such repayment, including the mortgagor, the mortgaged property, and primary mortgage insurance, if any. Such underwriting reviews will generally not be conducted with respect to any individual mortgage pool related to a series of certificates. In reviewing seasoned mortgage loans, or mortgage loans that have been outstanding for more than 12 months, Residential Funding Corporation may also take into consideration the mortgagor’s actual payment history in assessing a mortgagor’s current ability to make payments on the mortgage loan. In addition, Residential Funding Corporation may conduct additional procedures to assess the current value of the mortgaged properties. Those procedures may consist of drive-by appraisals, automated valuations or real estate broker’s price opinions. The depositor may also consider a specific area’s housing value trends. These alternative valuation methods may not be as reliable as the type of mortgagor financial information or appraisals that are typically obtained at origination. In its underwriting analysis, Residential Funding
12 Corporation may also consider the applicable Credit Score of the related mortgagor used in connection with the origination of the mortgage loan, as determined based on a credit scoring model acceptable to the depositor.
Source: RASC 2005-KS12 Pros. Sup. S-32, Pros. 12-13.
9. PLMBS Issued by Residential Funding Mortgage Securities I, Inc.
Security CUSIP RFMSI 2006- 749574AC3 SA2 2A1
The Prospectus states the following with respect to the Seller’s due diligence:
Prior to acquiring any mortgage loans, GSMC will conduct a review of the related mortgage loan seller. GSMC's review process consists of reviewing select financial information for credit and risk assessment and underwriting guideline review, senior level management discussion and background checks. The scope of the loan due diligence will depend on the credit quality of the mortgage loans.
Additionally, the Prospectus states the following with respect to the Sponsor’s due diligence:
Residential Funding may perform only sample quality assurance reviews to determine whether the mortgage loans in any mortgage pool were underwritten in accordance with applicable standards.
Source: RFMSI 2006-SA2 Pros. Sup. S-36, S-53.
13 10. PLMBS Issued by Securitized Asset Backed Receivables, LLC.
Security CUSIP SABR 2006- 813765AB0 FR3 A2 SABR 2006- 81377CAB4 NC3 A2B
Each Prospectus states the following with respect to the Sponsor’s due diligence:
Prior to acquiring any residential mortgage loans, Barclays, as administrator for Sutton, conducts a review of the related mortgage loan seller that is based upon the credit quality of the selling institution. Barclays' review process may include reviewing select financial information for credit and risk assessment and conducting an underwriting guideline review, senior level management discussion and/or background checks. The scope of the loan due diligence varies based on the credit quality of the mortgage loans.
Source: SABR 2006-FR3 Pros. Sup. S-39; SABR 2006-NC3 Pros. Sup. S-44.
11. PLMBS Issued by Sequoia Residential Funding, Inc.
Security CUSIP SEMT 2006- 81743QAG9 1 2A1 SEMT 2006- 81743QAJ3 1 3A1
The Prospectus states the following with respect to the Sponsor’s due diligence:
Prior to acquiring the mortgage loans, RWT Holdings conducts a review of the related mortgage loan seller and of the mortgage loans. RWT Holdings has developed a quality control program to monitor the quality of loan underwriting at the time of acquisition and on an ongoing basis. All loans purchased will be subject to this quality control program. RWT Holdings in certain cases submits a sample of mortgage loans to a third party nationally recognized underwriting review for a compliance check of underwriting and review of income, asset and appraisal information.
. . .
A quality control program has been developed to monitor the quality of loan underwriting at the time of acquisition and on an ongoing basis. All loans purchased will be subject to this quality control program. A legal document review of each loan acquired will be conducted to verify the accuracy and completeness of the information contained in the mortgage
14 notes, security instruments and other pertinent documents in the file. A sample of loans to be acquired, selected by focusing on those loans with higher risk characteristics, will normally be submitted to a third party nationally recognized underwriting review firm for a compliance check of underwriting and review of income, asset and appraisal information.
Source: SEMT 2006-1 Pros. Sup. S-50, Pros. 49.
15 APPENDIX VII
Loan-to-Value Ratio Definitions as Represented in the Offering Documents
Prospectus Supplement Source Page No. ACE 2006‐FM2 Pros. 8 FFML 2006‐FF8 Pros. *179 GMACM 2006‐AR2 Pros 27 AMSI 2005‐R10 Pros. Supp. III‐1 ARSI 2005‐W5 Pros. Supp. III‐1 BAFC 2006‐C S‐27 BAFC 2006‐E S‐27 BAFC 2006‐F S‐26 CBASS 2006‐CB4 S‐19 CMLTI 2006‐NC1 Pros. *177 CMLTI 2006‐NC2 Pros. *192 CMLTI 2006‐ WFHE2 Pros. *148 CMLTI 2006‐ WFHE4 Pros. *143 FFML 2006‐FF13 S‐31 GSAMP 2006‐NC2 S‐33 FHLT 2005‐E S‐22 FFML 2006‐FF10 S‐98 FFML 2006‐FF12 S‐98 FFML 2006‐FF14 S‐95 FHASI 2006‐AR1 S‐31 HVMLT 2006‐2 S‐24 INABS 2005‐D S‐23 INDX 2006‐AR15 S‐32 MABS 2006‐NC1 Pros. 115‐116 MSAC 2006‐HE5 S‐29 MSAC 2006‐HE6 S‐27 MSAC 2006‐WMC2 Pros. Supp. *19 NHELI 2006‐WF1 Pros. *117 OOMLT 2005‐5 Pros. 14 OOMLT 2006‐2 Pros. *141 RASC 2005‐KS12 Pros. 10 RFMSI 2006‐SA2 Pros. 8 SABR 2006‐FR3 S‐35 SABR 2006‐NC3 S‐37 SEMT 2006‐1 S‐26 WFHET 2006‐3 S‐59 WFMBS 2006‐AR3 Pros. 34‐35
* Page number not included in original; page number cited refers to page number in electronic version.