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All Truth passes thru three stages: First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as self-evident.

Must Watch video!

Very well researched and produced history of the central bankers

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FDIC SUES THE BIG BANKS FOR MASSIVE SECURITIES FRAUD!

 

BANKS FOR MASSIVE SECURITIES FRAUD!

 


But the documentation of the biggest crime spree ever perpetrated on a nation continues to be rolled out….and it continues to be ignored by EVERYONE IN THIS ENTIRE NATION!It’s been a while since I’ve dropped a BOMBSHELL….I’ve frankly been a bit per-occupied with several more important things.

I can only pound on the indictment of insurance fraud documented in the 49 State Attorney General Sellout.  The press refuses to report on how we’ve all been sold out by the government that serves the banks…but I digress.  No one cares about that anymore.

Let’s talk about the THREE SEPARATE NUCLEAR BOMBSHELLS OF FINANCIAL MASS DESTRUCTION.

The FDIC, (that’s the Federal Deposit Insurance Corporation) just filed suit against the big banks alleging in very specific terms A MASSIVE SCHEME TO LIE, CHEAT, STEAL AND DEFRAUD.  You’d think this kind of thing might warrant a story or two in the national press…but then again, they’ve got far more important things to report on. Well, don’t count on The Press to actually report on anything meaningful anymore.

A big hat tip to my friend April Charney who pointed this out to me and much thanks to the Sarasota Council of Neighborhood Associations for inviting me to speak tonight…..anywhoo, just read the allegations in the complaints: (and then ask yourself why no mainstream media will report on any of this):

This is an action for damages caused by violation of the Texas Securities Act
(TSA) and the Securities Act of 1933 (1933 Act) by the defendants. As alleged in detail below,
defendants issued, underwrote, or sold eight securities known as “certificates,” which were
backed by collateral pools of residential mortgage loans. Guaranty Bank (Guaranty) paid
approximately $1.5 billion for the eight certificates. When they issued, underwrote, or sold the
certificates, the defendants made numerous statements of material fact about the certificates and,
in particular, about the credit quality of the mortgage loans that backed them. Many of those
statements were untrue. Moreover, the defendants omitted to state many material facts that were
necessary in order to make their statements not misleading. For example, the defendants made
untrue statements or omitted important information about such material facts as the loan-to-value
ratios of the mortgage loans, the extent to which appraisals of the properties that secured the
loans were performed in compliance with professional appraisal standards, the number of
borrowers who did not live in the houses that secured their loans (that is, the number of
properties that were not primary residences), and the extent to which the entities that made the
loans disregarded their own standards in doing so.

This is an action for damages caused by violation of the Texas Securities Act
(TSA) and the Securities Act of 1933 (1933 Act) by the defendants. As alleged in detail below,
defendants issued, underwrote, or sold eight securities known as “certificates,” which were
backed by collateral pools of residential mortgage loans. Guaranty Bank (Guaranty) paid
approximately $1.5 billion for the eight certificates. When they issued, underwrote, or sold the
certificates, the defendants made numerous statements of material fact about the certificates and,
in particular, about the credit quality of the mortgage loans that backed them. Many of those
statements were untrue. Moreover, the defendants omitted to state many material facts that were
necessary in order to make their statements not misleading. For example, the defendants made
untrue statements or omitted important information about such material facts as the loan-to-value
ratios of the mortgage loans, the extent to which appraisals of the properties that secured the
loans were performed in compliance with professional appraisal standards, the number of
borrowers who did not live in the houses that secured their loans (that is, the number of
properties that were not primary residences), and the extent to which the entities that made the
loans disregarded their own standards in doing so.

 

Click a TAB to view case documents;

Lawsuit 1

PLAINTIFF’S ORIGINAL PETITION Page 1
CAUSE NO. ________
FEDERAL DEPOSIT INSURANCE
CORPORATION AS RECEIVER FOR
GUARANTY BANK,
§
§
§
§
IN THE DISTRICT COURT OF
§
§
Plaintiff, §
§
v. § JUDICIAL DISTRICT
§
§
COUNTRYWIDE SECURITIES
CORPORATION; CWALT, INC.;
COUNTRYWIDE FINANCIAL
CORPORATION; BANK OF AMERICA
CORPORATION; DEUTSCHE BANK
SECURITIES INC.; and GOLDMAN,
SACHS & CO.;
§
§
§
§
§
§
§
Defendants.
§
§
§ TRAVIS COUNTY, TEXAS
PLAINTIFF'S ORIGINAL PETITION FOR DAMAGES
TO THE HONORABLE JUDGES OF SAID COURT:
Comes now Plaintiff, Federal Deposit Insurance Corporation as Receiver for Guaranty
Bank, and files this Petition against Countrywide Securities Corporation (Countrywide
Securities); CWALT, Inc. (CWALT); Countrywide Financial Corporation (CFC); Bank of
America Corporation (BAC); Deutsche Bank Securities Inc. (Deutsche); and Goldman, Sachs &
Co. (Goldman), and as grounds therefor shows as follows:
I. DISCOVERY CONTROL PLAN
1. Plaintiff intends that discovery be conducted under Level 3 of Rule 190.4 of the
Texas Rules of Civil Procedure.
Filed
12 August 17 P3:23
Amalia Rodriguez-Mendoza
District Clerk
Travis District
D-1-GN-12-002516
PLAINTIFF’S ORIGINAL PETITION Page 2
II. NATURE OF THIS ACTION
2. This is an action for damages caused by violation of the Texas Securities Act
(TSA) and the Securities Act of 1933 (1933 Act) by the defendants. As alleged in detail below,
defendants issued, underwrote, or sold eight securities known as “certificates,” which were
backed by collateral pools of residential mortgage loans. Guaranty Bank (Guaranty) paid
approximately $1.5 billion for the eight certificates. When they issued, underwrote, or sold the
certificates, the defendants made numerous statements of material fact about the certificates and,
in particular, about the credit quality of the mortgage loans that backed them. Many of those
statements were untrue. Moreover, the defendants omitted to state many material facts that were
necessary in order to make their statements not misleading. For example, the defendants made
untrue statements or omitted important information about such material facts as the loan-to-value
ratios of the mortgage loans, the extent to which appraisals of the properties that secured the
loans were performed in compliance with professional appraisal standards, the number of
borrowers who did not live in the houses that secured their loans (that is, the number of
properties that were not primary residences), and the extent to which the entities that made the
loans disregarded their own standards in doing so.
3. Based on an analysis of a random sample of the loans that backed the certificates
that Guaranty purchased, the defendants made such untrue or misleading statements about at
least the following numbers of loans.
PLAINTIFF’S ORIGINAL PETITION Page 3
Securitization
No.
Number of Loans about
Which Defendants Made
Material Untrue or
Misleading Statements
1
Number of Loans
that Backed the
Certificates
Percentage of Loans about
Which Defendants Made
Material Untrue or
Misleading Statements
1 2,967 4,107 72.2%
2 1,087 1,489 73.0%
3 859 1,350 63.6%
4 659 987 66.8%
5 1,800 2,608 69.0%
6 635 910 69.8%
7 822 1,222 67.3%
8 3,113 4,902 63.5%
4. The certificates are “securities” within the meaning of the TSA and the 1933 Act.
5. The defendants are liable under the following provisions of the TSA and the 1933
Act:
As issuer: CWALT, which issued the certificates that Guaranty purchased, is liable as an
“issuer” under Section 11 of the 1933 Act.
As underwriters: The following defendants, which underwrote the certificates that
Guaranty purchased, are liable as “underwriters” under Section 11 of the 1933 Act: Countrywide
Securities, which underwrote four certificates; Deutsche, which underwrote three certificates;
and Goldman, which underwrote one certificate.
As sellers: The following defendants, which sold the certificates that Guaranty purchased
when they were initially offered to the public, are liable as “sellers” under Article 581-33 of the
TSA and Section 12(a)(2) of the 1933 Act: Countrywide Securities, which sold four certificates;
Deutsche, which sold three certificates; and Goldman, which sold one certificate.
1
The method of random sampling that Plaintiff used ensures that conclusions about the
entire collateral pool have a margin of error of no more than plus or minus 5% at a confidence
level of 95% (that is, one can be 95% certain that the true percentage in the collateral pool as a
whole is within 5% of the percentage measured in the sample). For example, one can be 95%
certain that the number of loans in Securitization No. 1 about which CWALT and Countrywide
Securities made untrue or misleading statements or omissions is within 5% of 2,967, that is,
between 2,819 and 3,115. (CWALT issued, and Countrywide Securities underwrote and sold, the
certificate in Securitization No. 1 that Guaranty purchased.) The same margin of error should be
applied to all information in this Petition and accompanying Schedules that is based on a random
sample of loans in a collateral pool.
PLAINTIFF’S ORIGINAL PETITION Page 4
CWALT is also liable as a seller under Section 12(a)(2) of the 1933 Act because it issued
the certificates that Guaranty purchased when they were initially offered to the public.
As control person: CFC is liable as a “controlling person” of CWALT and Countrywide
Securities under Section 15 of the 1933 Act.
As successor: BAC is liable as the successor to each of Countrywide Securities, CWALT,
and CFC.
III. PARTIES
6. The Federal Deposit Insurance Corporation (FDIC) is a corporation organized
and existing under the laws of the United States of America. Under the Federal Deposit
Insurance Act, the FDIC is authorized to be appointed as receiver for failed depository
institutions. On August 21, 2009, the FDIC was duly appointed the receiver for Guaranty. Under
the Federal Deposit Insurance Act, the FDIC as receiver succeeds to, and is empowered to sue
and complain in any court of law to pursue, all claims held by banks for which it is the receiver.
12 U.S.C. §§ 1819, 1821(d)(2)(A)(i). Thus, the FDIC as Receiver for Guaranty has authority to
pursue claims held by Guaranty, including the claims made against the defendants in this action.
7. Defendant Countrywide Securities is a corporation organized under the laws of
California. Countrywide Securities may be served through the Texas Secretary of State because
it is a nonresident corporation, it engaged in business in Texas but did not maintain a regular
place of business in Texas nor a designated agent in Texas for service of process, this proceeding
arises out of the business conducted in Texas, and Countrywide Securities is a party to this
proceeding. The Secretary of State may serve Countrywide Securities through its registered
agent, CT Corporation System, 818 West Seventh Street, Los Angeles, California 90017.
8. Defendant CWALT is a corporation organized under the laws of Delaware.
CWALT may be served through the Texas Secretary of State because it is a nonresident
corporation, it engaged in business in Texas but did not maintain a regular place of business in
Texas nor a designated agent in Texas for service of process, this proceeding arises out of the
business conducted in Texas, and CWALT is a party to this proceeding. The Secretary of State
PLAINTIFF’S ORIGINAL PETITION Page 5
may serve CWALT through its registered agent, The Corporation Trust Company, Corporation
Trust Center, 1209 Orange Street, Wilmington, Delaware 19801.
9. Defendant CFC is a corporation organized under the laws of Delaware. It is the
successor by merger to a corporation also named Countrywide Financial Corporation, which will
be referred to in this Petition as Old CFC. Old CFC was the public holding company for the
entire group of Countrywide companies, which will be referred to collectively in this Petition as
Countrywide. Old CFC existed until it was merged on July 1, 2008, into a subsidiary of Bank of
America Corporation, which subsidiary was then renamed Countrywide Financial Corporation.
By that merger, CFC succeeded to all liabilities of Old CFC, which was merged into CFC. CFC
may be served through the Texas Secretary of State because it is a nonresident corporation, it
engaged in business in Texas but did not maintain a regular place of business in Texas nor a
designated agent in Texas for service of process, this proceeding arises out of the business
conducted in Texas, and CFC is a party to this proceeding. The Secretary of State may serve
CFC through its registered agent, The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, Wilmington, Delaware 19801.
10. Plaintiff is informed and believes, and based thereon alleges, that Old CFC
participated in the operations of Countrywide Securities and CWALT and had the power to
control the conduct of Countrywide Securities and CWALT in the transactions involved in this
Petition. Under Section 15 of the 1933 Act, Old CFC directly or indirectly controlled
Countrywide Securities and CWALT and would therefore have been liable (if it still existed) to
Plaintiff jointly and severally with and to the same extent as Countrywide Securities and
CWALT. As a result of the merger of Old CFC into CFC, this liability passed to CFC.
11. Defendant BAC is a corporation organized under the laws of Delaware, is
authorized to do business in Texas, and is the public holding company for a group of Bank of
America companies that will, along with BAC, be referred to collectively in this Petition as
Bank of America. BAC may be served through its registered agent, CT Corporation System,
350 North Saint Paul Street, Suite 2900, Dallas, Texas 75201.
PLAINTIFF’S ORIGINAL PETITION Page 6
12. Defendant Deutsche is a corporation organized under the laws of Delaware and is
authorized to do business in Texas. Deutsche may be served through its registered agent, CT
Corporation System, 350 North Saint Paul Street, Suite 2900, Dallas, Texas, 75201.
13. Defendant Goldman is a corporation organized under the laws of New York and
is authorized to do business in Texas. Goldman may be served through its registered agent, CT
Corporation System, 350 North Saint Paul Street, Suite 2900, Dallas, Texas, 75201.
IV. JURISDICTION AND VENUE
14. The Court has jurisdiction because the amount in controversy in this action falls
within the minimum jurisdictional limits of the Court.
15. All of the defendants are subject to personal jurisdiction in Texas because they
offered and sold, or controlled persons that offered and sold, the certificates to Guaranty in
Texas within the meaning of Article 581-33 of the TSA.
16. Venue is proper in this County under Section 15.002(a)(4) of the Texas Civil
Practice & Remedies Code because Travis County was the principal residence of Guaranty at
the time the claims accrued.
V. SECURITIZATION OF MORTGAGE LOANS
17. The securities that Guaranty purchased are so-called residential mortgage-backed securities, or RMBS, created in a process known as securitization. Securitization
begins with loans on which the borrowers are to make payments, usually monthly. The entity
that makes the loans is known as the originator of the loans. The process by which the originator
decides whether to make particular loans is known as the underwriting of loans. The purpose of
underwriting is to ensure that loans are made only to borrowers of sufficient credit standing to
repay them and only against sufficient collateral. In the loan underwriting process, the originator
applies its underwriting standards.
18. In general, residential mortgage lenders may hold some of the mortgage loans
they originate in their own portfolios and may sell other mortgage loans they originate into
securitizations.
PLAINTIFF’S ORIGINAL PETITION Page 7
19. In a securitization, a large number of loans, usually of a similar type, are grouped
into a collateral pool. The originator of those loans sells them (and, with them, the right to
receive the cash flow from them) to a trust. The trust pays the originator cash for the loans. The
trust raises the cash to pay for the loans by selling securities, usually called certificates, to
investors such as Guaranty. Each certificate entitles its holder to an agreed part of the cash flow
from the loans in the collateral pool.
20. In a simple securitization, the holder of each certificate is entitled to a pro rata
part of the overall monthly cash flow from the loans in the collateral pool.
21. In a more complex securitization, the cash flow is divided into different parts,
usually called tranches (“tranche” is “slice” in French), and the certificates are divided into
different classes, each with different rights. Each class of certificates is entitled to the cash flow
in the tranche corresponding to that class.
22. One way in which the cash flow is divided — and the rights of different classes of
certificates distinguished — is by priority of payment or, put differently, risk of nonpayment.
The most senior class of certificates usually is entitled to be paid in full before the next most
senior class, and so on. Conversely, losses from defaults in payment of the loans in the collateral
pool are allocated first to the most subordinate class of certificates, then to the class above that,
and so on. The interest rate on each class of certificates is usually proportional to the amount of
risk that that class bears; the most senior certificates bear the least risk and thus pay the lowest
rate of interest, the most subordinate, the opposite. This hierarchy of rights to payment is referred
to as the waterfall.
23. The risk of a particular class of certificate is a function of both the riskiness of the
loans in the collateral pool and the seniority of that class in the waterfall. Even if the underlying
loans are quite risky, the certificates may bear so little of that risk that they may be rated as
triple-A. (According to Moody’s, “[o]bligations rated Aaa are judged to be of the highest
quality, with minimal credit risk.”) For example, assume a securitization of $100 million of risky
loans, on which the historical loss rate is 5%. Assume that there are two classes of certificates, a
PLAINTIFF’S ORIGINAL PETITION Page 8
senior class of $50 million and a subordinate class of $50 million. Even though the underlying
loans are quite risky, the senior class of certificates would be paid in full as long as the $100
million of loans produced payments of at least $50 million plus interest, that is, unless the loss
rate on those loans exceeded 50%, fully ten times the historical average. All of the certificates
referred to in this Petition were rated triple-A when Guaranty purchased them.
24. Each securitization has a sponsor, the prime mover of the securitization.
Sometimes the sponsor is the originator or an affiliate. In originator-sponsored securitizations,
the collateral pool usually contains loans made by the originator that is sponsoring the
securitization. Other times, the sponsor may be an investment bank, which purchases loans from
one or more originators, aggregates them into a collateral pool, sells them to a trust, and
securitizes them. The sponsor arranges for title to the loans to be transferred to an entity known
as the depositor, which then transfers title to the loans to the trust.
25. The obligor of the certificates in a securitization is the trust that purchases the
loans in the collateral pool. Because a trust has few assets other than the loans that it purchased,
it may not be able to satisfy the liabilities of an issuer of securities (the certificates). The law
therefore treats the depositor as the issuer of a residential mortgage-backed certificate.
26. Securities underwriters, like Countrywide Securities, Deutsche, and Goldman,
play a critical role in the process of securitization. They underwrite the sale of the certificates,
that is, they purchase the certificates from the trust and then sell them to investors. Equally
important, securities underwriters provide to potential investors the information that they need to
decide whether to purchase certificates.
27. Because the cash flow from the loans in the collateral pool of a securitization is
the source of funds to pay the holders of the certificates issued by the trust, the credit quality of
those certificates is dependent upon the credit quality of the loans in the collateral pool (and upon
the place of each certificate in the waterfall). The most important information about the credit
quality of those loans is contained in the files that the originator develops while making the
loans, the so-called “loan files.” For residential mortgage loans, each loan file normally contains
PLAINTIFF’S ORIGINAL PETITION Page 9
comprehensive information from such important documents as the borrower’s application for the
loan, credit reports on the borrower, and an appraisal of the property that will secure the loan.
The loan file may also include notes from the person who underwrote the loan about whether and
how the loan complied with the originator’s underwriting standards, including documentation of
any “compensating factors” that justified any departure from those standards.
28. Potential investors in certificates are not given access to loan files. Instead, the
securities underwriters are responsible for gathering, verifying, and presenting to potential
investors the information about the credit quality of the loans that will be deposited into the trust.
They do so by using information about the loans that has been compiled into a database known
as a loan tape. The securities underwriters use the loan tape to compile numerous statistics about
the loans, which are presented to potential investors in a prospectus supplement, a disclosure
document that the underwriters are required to file with the Securities and Exchange
Commission. (Guaranty did not have access to the loan tapes before it purchased the certificates,
but Plaintiff has reviewed data from the loan tapes in preparing this Petition.)
29. As alleged in detail below, the information in the prospectus supplements and
other offering documents about the credit quality of the loans in the collateral pools of the trusts
contained many statements that were material to the credit quality of those loans, but were untrue
or misleading.
VI. THE SALES OF THE CERTIFICATES
30. Guaranty purchased certificates in eight securitizations (referred to in this Petition
as Securitizations Nos. 1 through 8). Details of each securitization and each certificate are stated
in Item 30 of Schedules 1 through 8 of this Petition, which correspond to Securitizations Nos. 1
through 8. Plaintiff incorporates into this paragraph 30, and alleges as though fully set forth in
this paragraph, the contents of Item 30 of the Schedules.
31. Countrywide Securities sold four certificates directly to Guaranty; Deutsche sold
three certificates directly to Guaranty; and Goldman sold one certificate directly to Guaranty. For
each of the eight certificates, the defendants sent documents to Guaranty in Texas. These
PLAINTIFF’S ORIGINAL PETITION Page 10
documents included one or more of the following: a term sheet (or its equivalent), the prospectus
supplement for the certificate that was filed with the SEC, and drafts of some of the statistical
tables to be included in the prospectus supplement. In each of these documents, the defendants
made statements of material fact about the certificate that they offered and sold to Guaranty.
VII. DEFENDANTS’ MATERIAL UNTRUE OR MISLEADING STATEMENTS
ABOUT THE CERTIFICATES
32. The prospectus supplement for each of the eight securitizations is available from
the SEC’s website. A URL for each prospectus supplement is included in Item 30 of the
Schedules. The prospectus supplements are incorporated into this Petition by reference.
33. Plaintiff drew and analyzed a random sample of 400 loans from the collateral
pools of each securitization in which Guaranty purchased a certificate.
34. Many of the statements of material fact that the defendants made in the prospectus
supplements were untrue or misleading. These untrue or misleading statements included the
following.
A. Untrue or Misleading Statements About the Loan-to-Value Ratios (LTVs) of
the Mortgage Loans, and the Appraisals of the Properties, in the Collateral
Pools
1. LTVs
(a) The materiality of LTVs
35. The loan-to-value ratio of a mortgage loan, or LTV, is the ratio of the amount of
the mortgage loan to the lower of the appraised value or the sale price of the mortgaged property
when the loan is made. For example, a loan of $300,000 secured by a property valued at
$500,000 has an LTV of 60%; a loan of $450,000 on the same property has an LTV of 90%.
LTV is one of the most crucial measures of the risk of a mortgage loan, and the LTVs of the
mortgage loans in the collateral pool of a securitization are therefore one of the most crucial
measures of the risk of certificates sold in that securitization. LTV is a primary determinant of
the likelihood of default. The lower the LTV, the lower the likelihood of default. For example,
the lower the LTV, the less likely it is that a decline in the value of the property will wipe out the
PLAINTIFF’S ORIGINAL PETITION Page 11
owner’s equity and thereby give the owner an incentive to stop making mortgage payments and
abandon the property, a so-called strategic default. LTV also is a primary determinant of the
severity of losses on a loan that defaults. The lower the LTV, the lower the severity of losses if
the loan defaults. Loans with lower LTVs provide greater “cushion,” thereby increasing the
likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan.
36. Beyond these fundamental effects on the likelihood and severity of default, LTVs
also affect prepayment patterns (that is, the number of borrowers who pay off their mortgage
loans before maturity and when they do so) and therefore the expected lives of the loans.
Prepayment patterns therefore affect many aspects of certificates that are material to the
investors that purchase them, including the life of the certificate and the timing and amount of
cash that the investor will receive during that life.
37. In addition, rating agencies use LTVs to determine the proper structuring and
credit enhancement necessary for securities, such as the certificates that Guaranty purchased, to
receive a particular rating. If the LTVs of the mortgage loans in the collateral pool of a
securitization are incorrect, the ratings of certificates sold in that securitization will also be
incorrect.
38. An accurate denominator (that is, the value of the property) is essential to an
accurate LTV. In particular, an inflated denominator will understate, sometimes greatly, the risk
of a loan. To return to the example above, if the property whose actual value is $500,000 is
valued incorrectly at $550,000, then the ostensible LTV of the $300,000 loan falls from 60% to
54.5%, and the ostensible LTV of the $450,000 loan falls from 90% to 81.8%. In either case, the
LTV based on the incorrect appraised value understates the risk of the loan.
39. For these reasons, a reasonable investor considers LTV critical to the decision
whether to purchase a certificate in a securitization of mortgage loans. Even small differences in
the weighted average LTVs of the mortgage loans in the collateral pool of a securitization have a
significant effect on both the risk and the rating of each certificate sold in that securitization and,
PLAINTIFF’S ORIGINAL PETITION Page 12
thus, are essential to the decision of a reasonable investor whether to purchase any such
certificate.
(b) Untrue or misleading statements about the LTVs of the
mortgage loans in the collateral pools of these securitizations
40. In the prospectus supplements, the defendants made material untrue or misleading
statements about the LTVs of the mortgage loans in the collateral pools of these securitizations.
Each such statement is identified in Item 40 of the Schedules of this Petition. Plaintiff
incorporates into this paragraph 40, and alleges as though fully set forth in this paragraph, the
contents of Item 40 of the Schedules.
41. The defendants made these statements as statements of fact. Plaintiff is informed
and believes, and based thereon alleges, that the defendants intended that these statements be
understood as statements of fact. Guaranty did understand the statements about the LTVs as
statements of fact. Guaranty had no access to appraisal reports or other documents or information
from which it could verify the LTVs of the mortgage loans other than the statements that the
defendants made about those LTVs.
(c) An automated valuation model demonstrates that the
defendants’ statements about the LTVs were untrue because
they were based on overstated valuations of the properties in
the collateral pools.
42. The stated LTVs of many of the mortgage loans in the securitizations were
significantly lower than the true LTVs because the denominators (that is, the value of the
properties that secured those loans) that were used to determine the disclosed LTVs were
overstated to a material extent. The weighted-average LTVs presented in the prospectus
supplements were, therefore, untrue and misleading.
43. Using a comprehensive, industry-standard automated valuation model (AVM), it
is possible to determine the true market value of a certain property as of a specified date. An
AVM is based on objective criteria like the condition of the property and the actual sale prices of
comparable properties in the same locale shortly before the specified date, and is more
PLAINTIFF’S ORIGINAL PETITION Page 13
consistent, independent, and objective than other methods of appraisal. AVMs have been in
widespread use for many years. The AVM on which these allegations are based incorporates a
database of 500 million sales covering ZIP codes that represent more than 97% of the homes,
occupied by more than 99% of the population, in the United States. Independent testing services
have determined that this AVM is the most accurate of all such models.
44. For many of the properties that secured the mortgage loans, the model determined
that the LTVs presented in the prospectus supplements were understated. In particular, for many
of the properties, the model determined that the denominator (that is, the appraised value of the
property as stated in the loan tape and compiled into the tables in the prospectus supplement) that
was used in the disclosed LTV was 105% or more of the true market value as determined by the
model as of the date on which each individual mortgage loan closed. (The model considered no
transactions that occurred after that date.) In contrast, the model determined that the denominator
that was used in the disclosed LTV was 95% or less of the true market value on a much smaller
number of properties. Thus, the number of properties on which the value was overstated
exceeded by far the number on which the value was understated, and the aggregate amount
overstated exceeded by far the aggregate amount understated.
45. For example, in Securitization No. 1, there were 4,107 mortgage loans that backed
the certificate that Guaranty purchased. On 1,633 of the properties that secured those loans, the
model determined that the denominator that was used in the disclosed LTV was 105% or more of
the true market value, and the amount by which the stated values of those properties exceeded
their true market values in the aggregate was $118,940,803. The model determined that the
denominator that was used in the disclosed LTV was 95% or less of true market value on only
359 properties, and the amount by which the true market values of those properties exceeded the
values reported in the denominators was $37,306,713. Thus, the number of properties on which
the value was overstated was four-and-a-half times the number on which the value was
understated, and the aggregate amount overstated was more than three times the aggregate
amount understated.
PLAINTIFF’S ORIGINAL PETITION Page 14
46. On one of the loans in Securitization No. 1, the amount of the loan was $196,000
and the stated value of the property was $245,000, resulting in a stated LTV of 80%. The model,
however, determined that the true value of the property was $186,000, resulting in a true LTV of
105.4%. Thus, the stated value was higher than the true value by 31.7% and the stated LTV was
lower than the true LTV by 25.4%. Both of these were huge discrepancies that were material to
the credit quality of the loan.
47. The overstated values of 1,633 properties in Securitization No. 1 made virtually
every statement by CWALT and Countrywide Securities
2
about the LTVs of the mortgage loans
untrue or misleading. For example, CWALT and Countrywide Securities stated that all mortgage
loans had an LTV of 95% or less. In fact, 616 of the mortgage loans had LTVs of over 95%.
CWALT and Countrywide Securities also stated that the weighted-average LTV of the loans in
the collateral pool was 75.56%. In fact, the weighted-average LTV of the loans was 89.9%.
These differences were material for the reasons stated above.
48. The results of the valuations by the automated model in this example are
summarized in the following table.
Number of loans that backed the certificate 4,107
Number of loans for which the stated value was 105% or more of the true
market value as determined by the model
1,633
Aggregate amount by which the stated values of those properties exceeded
their true market values as determined by the model
$118,940,803
Number of loans for which the stated value was 95% or less of the true market
value as determined by the model
359
Aggregate amount by which the true market values of those properties
exceeded their stated values
$37,306,713
Number of loans with LTVs over 95%, as stated by defendants 0
Number of loans with LTVs over 95%, as determined by the model 616
Weighted-average LTV, as stated by defendants 75.56%
Weighted-average LTV, as determined by the model 86.9%
49. The model produced similar results for the mortgage loans in the collateral pools
of each securitization. Details of the results of the model for each securitization are stated in Item
2
CWALT issued, and Countrywide Securities underwrote and sold, the certificate in
Securitization No. 1 that Guaranty purchased.
PLAINTIFF’S ORIGINAL PETITION Page 15
49 of the Schedules of this Petition. Plaintiff incorporates into this paragraph 49, and alleges as
though fully set forth in this paragraph, the contents of Item 49 of the Schedules.
(d) These statements also were misleading because the defendants
omitted to state that there were additional liens on a material
number of the properties that secured the mortgage loans in
the collateral pools.
50. As mentioned above, the LTV of a mortgage loan is a key determinant of the
likelihood that the mortgagor will default in payment of the mortgage. The lower the LTV, the
less likely that a decline in the value of the property will wipe out the owner’s equity and thereby
give the owner an incentive to stop making mortgage payments and abandon the property.
Because LTV affects the behavior of borrowers so profoundly, accurate LTVs are essential to
predicting defaults and prepayments by borrowers. Also, as mentioned above, LTV affects the
severity of loss on those loans that do default. The power of LTV to predict defaults,
prepayments, and severities is a major reason why reasonable investors consider the LTVs of
mortgage loans important to the decision whether to purchase a certificate in the securitization of
those loans.
51. The predictive power of the LTV of a mortgage loan is much reduced if there are
additional liens on the same property. Additional liens reduce the owner’s equity in the property
and thereby increase the owner’s incentive to stop making mortgage payments and abandon the
property if the value of the property falls below the combined amount of all of the liens on the
property (a strategic default). Additional liens also exacerbate delinquencies and defaults because
they complicate the servicing of mortgage loans and the management of delinquencies and
defaults. Servicers of the first-lien mortgage must then deal not only with the borrower, but also
with the servicer of the second-lien mortgage. For example, the servicer of a single mortgage
may want to grant a borrower forbearance while the borrower is unemployed and allow him or
her to add missed payments to the principal of the loan and to resume payments when he or she
is employed again. But the servicer of the second-lien mortgage may refuse such forbearance and
initiate foreclosure and thereby force the borrower into default on the first mortgage as well.
PLAINTIFF’S ORIGINAL PETITION Page 16
52. According to land records, many of the properties that secured mortgage loans in
the collateral pools of the securitizations were subject to liens in addition to the lien of the
mortgage in the pool at the time of the closing of these securitizations.
3
The defendants failed to
disclose in the prospectus supplements any of these additional liens. These additional liens
increased the risk that those owners would default in payment of the mortgage loans.
53. To take an example, of the 4,107 properties that secured the mortgage loans that
backed the certificate that Guaranty purchased in Securitization No. 1, at least 1,376 were subject
to liens in addition to the lien represented by the mortgage in the collateral pool. CWALT and
Countrywide Securities did not disclose in the prospectus supplement that those liens existed.
CWALT and Countrywide Securities stated that the weighted-average LTV of the properties was
75.56%, when, solely because of the additional liens on these 1,376 properties, the weighted-average combined LTV was 81.7%.
4
This is a significant difference.
54. On one of the loans, the original balance of the mortgage loan was $508,000, the
represented value of the property was $635,000, and the reported LTV was 80%. On the date of
the closing of this securitization, however, there were undisclosed additional liens on this
property of $127,000. Thus, when all liens on the property were taken into account, the
combined LTV of the loan was 100%, which was 20% higher than the stated LTV on that loan.
This was a huge discrepancy that was material to the credit quality of the loan. In many cases,
the amount of the undisclosed additional liens was much greater than the owner’s ostensible
equity, putting the owner “under water” on the day on which this securitization closed.
55. Details of the undisclosed additional liens in the securitizations are stated in Item
55 of the Schedules of this Petition. Plaintiff incorporates into this paragraph 55, and alleges as
though fully set forth in this paragraph, the contents of Item 55 of the Schedules. Plaintiff is
3
In order to ensure that this calculation did not include liens that were paid off but were
not promptly removed from land records, the additional liens referred to in this Petition and the
Schedules do not include liens that were originated on or before the date on which each mortgage
loan in the pools was closed.
4
The combined LTV is the ratio of all loans on a property to the value of the property.
PLAINTIFF’S ORIGINAL PETITION Page 17
informed and believes, and based thereon alleges, that discovery will demonstrate that the
number of loans with additional liens is substantially higher than those disclosed in the
Schedules.
56. Because the defendants did not disclose the existence or the amounts of these
additional liens, all of the statements that they made about the LTVs of the mortgage loans were
misleading.
2. Appraisals
57. As discussed above in paragraph 38, an accurate denominator (value of the
mortgaged property) is essential to calculating an accurate LTV. An accurate appraisal of the
property, in turn, is essential to identifying an accurate denominator.
58. In connection with these securitizations, there was undisclosed upward bias in
appraisals of properties that secured mortgage loans and consequent understatement of the LTVs
of those loans. This upward bias in appraisals caused the denominators that were used to
calculate the LTVs of many mortgage loans to be overstated and, in turn, the LTVs to be
understated. The defendants’ statements regarding the LTVs of the mortgage loans in the
collateral pools were misleading because they omitted to state that the appraisals of a material
number of the properties that secured those loans were biased upwards. In addition, the
defendants stated that the appraisals conformed to the Uniform Standards of Professional
Appraisal Practice (USPAP), the professional standards that govern appraisers and appraisals (or
to the standards of Fannie Mae and Freddie Mac, which required compliance with USPAP).
Those statements were false because upwardly biased appraisals do not conform to USPAP.
(a) The statements that the defendants made about the LTVs of
the mortgage loans in the collateral pools were misleading
because they omitted to state that the appraisals of a large
number of the properties that secured those loans were biased
upward, so that stated LTVs based on those appraisals were
lower than the true LTVs of those mortgage loans.
59. The defendants omitted to state that the appraisals in these securitizations used
inaccurate property descriptions, ignored recent sales of the subject and comparable properties,
PLAINTIFF’S ORIGINAL PETITION Page 18
and used sales of properties that were not comparable, all in order to inflate the values of the
appraised properties. The appraisals used to compute the LTVs of many of the mortgage loans in
the collateral pools were biased upwards. As alleged in paragraphs 43 through 49, in each trust,
the number of properties for which the value was overstated exceeded by far the number for
which the value was understated, and the aggregate amount overstated exceeded by far the
aggregate amount understated. These ratios for each trust are summarized in the following table.
Securitization
No.
Ratio of Number of Properties
Whose Value Was Overstated to
Number Whose Value Was
Understated
Ratio of Amount of
Overvaluation to Amount
of Undervaluation
1 4.5 3.2
2 4.4 5.1
3 2.8 3.4
4 2.7 2.7
5 5.6 5.0
6 5.4 8.1
7 4.0 5.5
8 2.3 2.0
These lopsided results demonstrate the upward bias in appraisals of properties that secured the
mortgage loans in the collateral pools.
60. Plaintiff is informed and believes, and based thereon alleges, that a material
number of the upwardly biased appraisals were not statements of the appraisers’ actual findings
of the values of the properties based on their objective valuations.
(b) The statements by the defendants about compliance with
USPAP were untrue because the appraisals of a large number
of the properties that secured the mortgage loans were biased
upward.
61. Appraisers and appraisals are governed by USPAP, which is promulgated by the
Appraisal Standards Board. The Preamble to USPAP states that its purpose “is to promote and
maintain a high level of public trust in appraisal practice.” Both Fannie Mae and Freddie Mac
require that appraisals comply with USPAP.
62. USPAP includes the following provisions:
PLAINTIFF’S ORIGINAL PETITION Page 19
(a) USPAP Standards Rule 2-1(b)(iii) requires that “Each written or oral real
property appraisal report must clearly and accurately set forth the appraisal in a manner that will
not be misleading.”
(b) USPAP Standards Rule 1-4(a) provides that “When a sales comparison
approach is necessary for credible assignment results, an appraiser must analyze such
comparable sales data as are available to indicate a value conclusion.”
(c) USPAP Standards Rule 1-4(b) provides that “When a cost approach is
necessary for credible assignment results, an appraiser must:
(i) develop an opinion of site value by an appropriate appraisal
method or technique;
(ii) analyze such comparable cost data as are available to estimate
the cost new of the improvements (if any); and
(iii) analyze such comparable data as are available to estimate the
difference between the cost new and the present worth of the
improvements (accrued depreciation).”
63. The Appraisal Standards Board, which promulgates USPAP, also issues Advisory
Opinions. Although the Advisory Opinions do not establish new standards or interpret USPAP,
they “are issued to illustrate the applicability of appraisal standards in specific situations.”
Advisory Opinion 1 discussing “Sales History” states that “The requirement for the appraiser to
analyze and report sales history and related information is fundamental to the appraisal process.
Just as the appraiser must analyze pending and recent sales of comparable properties, the
appraiser must take into account all pending and recent sales of the subject property itself.”
64. In the prospectus supplements, the defendants made statements that the appraisals
of properties that secured the mortgage loans in the collateral pools were made in compliance
with USPAP or with the appraisal standards of Fannie Mae and Freddie Mac, which required
compliance with USPAP. Details of each such statement are stated in Item 64 of the Schedules
PLAINTIFF’S ORIGINAL PETITION Page 20
of this Petition. Plaintiff incorporates into this paragraph 64, and alleges as though fully set forth
in this paragraph, the contents of Item 64 of the Schedules.
65. Plaintiff is informed and believes, and based thereon alleges, that a material
number of mortgage loans in the collateral pools had appraisals conducted that deviated from
USPAP.
66. Each of the statements referred to in paragraph 64 was untrue because the
appraisals of a material number of the properties referred to in each such statement did not
conform to USPAP.
67. By each of the untrue and misleading statements referred to in paragraphs 40 and
64 above, the defendants materially understated the risk of the certificates that they issued,
underwrote, or sold.
B. Untrue or Misleading Statements About the Occupancy Status of the
Properties That Secured the Mortgage Loans in the Collateral Pools
1. The materiality of occupancy status
68. Residential real estate is usually divided into primary residences, second homes,
and investment properties. Mortgages on primary residences are less likely to default than
mortgages on non-owner-occupied residences and therefore are less risky. Occupancy status also
influences prepayment patterns.
69. Occupancy status (that is, whether the property that secures a mortgage is to be
the primary residence of the borrower, a second home, or an investment property) is an important
measure of the risk of a mortgage loan. The percentage of loans in the collateral pool of a
securitization that are not secured by mortgages on primary residences is an important measure
of the risk of certificates sold in that securitization. Other things being equal, the higher the
percentage of loans not secured by primary residences, the greater the risk of the certificates. A
reasonable investor considers occupancy status important to the decision whether to purchase a
certificate in a securitization of mortgage loans.
PLAINTIFF’S ORIGINAL PETITION Page 21
2. Untrue or misleading statements about the occupancy status of the
properties that secured the mortgage loans in the collateral pools of
these securitizations
70. In the prospectus supplements, the defendants made statements about the number
of properties in the collateral pools of the securitizations that were the primary residences of their
owners. To return to the example of Securitization No. 1, CWALT and Countrywide Securities
stated that, of the 4,107 mortgage loans that backed the certificate that Guaranty purchased, at
least 3,177 were secured by primary residences and 930 were not. Details of each such statement
in the securitizations are stated in Item 70 of the Schedules of this Petition. Plaintiff incorporates
into this paragraph 70, and alleges as though fully set forth in this paragraph, the contents of Item
70 of the Schedules.
71. These statements were untrue or misleading because (i) the stated number of
mortgage loans secured by primary residences was higher than the actual number of loans in that
category or (ii) the stated number of mortgage loans not secured by primary residences was
lower than the actual number of loans in that category.
3. Basis of the allegations above that these statements about the
occupancy status of the properties that secured the mortgage loans in
the collateral pools were untrue or misleading
72. Because they are less risky than other mortgage loans, mortgage loans on primary
residences usually have more favorable terms, including lower interest rates and more lenient
underwriting standards, than mortgage loans on second homes and investment properties.
Applicants for loans on second homes and investment properties therefore have an incentive to
state that the property will be their primary residence even when it will not. Plaintiff is informed
and believes, and based thereon alleges, that borrowers of many securitized loans did so.
73. A significant number of the properties in the collateral pools of the securitizations
that were stated to be primary residences actually were not. Moreover, Plaintiff is informed and
believes, and based thereon alleges, that there is additional evidence of occupancy fraud in the
loan files of many more of the mortgage loans in the collateral pools.
PLAINTIFF’S ORIGINAL PETITION Page 22
74. With respect to some of the properties that were stated to be primary residences,
the borrower instructed local tax authorities to send the bills for the taxes on the property to the
borrower at an address other than the property itself. This is strong evidence that the mortgaged
property was not the borrower’s primary residence.
75. In some states and counties, the owner of a property is able to designate whether
that property is his or her “homestead,” which may reduce the taxes on that property or exempt
the property from assets available to satisfy the owner’s creditors, or both. An owner may
designate only one property, which he or she must occupy, as his or her homestead. The fact that
an owner in one of these jurisdictions does not designate a property as his or her homestead
when he or she can do so is strong evidence that the property was not his or her primary
residence. With respect to some of the properties that were stated to be primary residences, the
owner could have but did not designate the property as his or her homestead. That omission is
strong evidence that the property was not the borrower’s primary residence.
76. When a borrower actually occupies a newly mortgaged property, he or she
normally notifies entities that send bills to him or her (such as credit card companies, utility
companies, and local merchants) to send his or her bills to the address of the newly mortgaged
property. Six months after the closing of the mortgage is ample time to complete this process.
Six months after the closing of the mortgage, if the borrower is still receiving his or her bills at a
different address, it is very likely that the borrower does not occupy the mortgaged property. For
each securitization, a credit reporting agency specializing in mortgage loans compared the
addresses in the borrowers’ credit reports to the addresses of the mortgaged properties six
months after the closing of the mortgage loans. Many borrowers whose mortgage loans were
secured by properties that were stated in the loan tapes to be owner-occupied did not receive any
bills at the address of the mortgaged property but did receive their bills at another address or
addresses. It is very likely that each of these borrowers did not occupy the mortgaged property.
77. In Securitization No. 1, 483 owners of properties that were stated to be primary
residences instructed local tax authorities to send the bills for the taxes on those properties to
PLAINTIFF’S ORIGINAL PETITION Page 23
them at different addresses; 893 owners of properties that were stated to be primary residences
could have, but did not, designate those properties as their homesteads; and 175 owners of
properties that were stated to be primary residences did not receive any of their bills there six
months after the mortgages were originated. Eliminating duplicates, for one or more of these
reasons, 1,242 of the 3,177 properties that were stated to be primary residences actually were
not. Thus, the number of properties that were not primary residences was not 930, as CWALT
and Countrywide Securities stated, but at least 2,172, a material difference. The numbers of such
loans in the collateral pools of the securitizations are stated in Item 77 of the Schedules of this
Petition. Plaintiff incorporates into this paragraph 77, and alleges as though fully set forth in this
paragraph, the contents of Item 77 of the Schedules.
78. By each of the untrue and misleading statements referred to in paragraph 70, the
defendants materially understated the risk of the certificates that they issued, underwrote, or sold.
C. Untrue or Misleading Statements About the Underwriting Standards of the
Originator of the Mortgage Loans in the Collateral Pools
1. The materiality of underwriting standards and the extent of an
originator’s disregard of them
79. Originators of mortgage loans have written standards by which they underwrite
applications for loans. An important purpose of underwriting is to ensure that the originator
makes mortgage loans only in compliance with those standards and that its underwriting
decisions are properly documented. An even more fundamental purpose of underwriting
mortgage loans is to ensure that loans are made only to borrowers with credit standing and
financial resources to repay the loans, and only against collateral with value, condition, and
marketability sufficient to secure the loans. An originator’s underwriting standards, and the
extent to which the originator does not follow its standards, are important indicators of the risk of
mortgage loans made by that originator and of certificates sold in a securitization in which
mortgage loans made by that originator are part of the collateral pool. A reasonable investor
considers the underwriting standards of originators of mortgage loans in the collateral pool of a
PLAINTIFF’S ORIGINAL PETITION Page 24
securitization, and whether an originator disregards its standards, important to the decision
whether to purchase a certificate in that securitization.
2. Untrue or misleading statements about the underwriting standards of
the originator of the mortgage loans
80. In the prospectus supplements, the defendants made statements about the
underwriting standards of the originator of the mortgage loans in the collateral pools. Details of
each such statement are stated in Item 80 of the Schedules of this Petition. They included
statements that the originator made mortgage loans in compliance with its underwriting standards
and made exceptions to those standards only when compensating factors were present. Plaintiff
incorporates into this paragraph 80, and alleges as though fully set forth in this paragraph, the
contents of Item 80 of the Schedules.
81. Plaintiff is informed and believes, and based thereon alleges, that these statements
were untrue or misleading because the defendants omitted to state that: (a) the originator was
disregarding those underwriting standards; (b) the originator was making extensive exceptions to
those underwriting standards when no compensating factors were present; (c) the originator was
making wholesale, rather than case-by-case, exceptions to those underwriting standards; (d) the
originator was making mortgage loans that borrowers could not repay; and (e) the originator was
failing frequently to follow quality-assurance practices necessary to detect and prevent fraud
intended to circumvent its underwriting standards.
3. Basis of the allegations that these statements about the underwriting
standards of the originator of the mortgage loans in the collateral
pools were untrue or misleading
(a) The deterioration in undisclosed credit characteristics of
mortgage loans made by the originator
82. Plaintiff is informed and believes, and based thereon alleges, that before and
during the time of these securitizations, Countrywide Home Loans, Inc. (CHL), which originated
or acquired virtually all of the loans in the securitizations, disregarded its stated underwriting
PLAINTIFF’S ORIGINAL PETITION Page 25
standards. As a result, securitized mortgage loans made between 2004 and the dates of these
securitizations have experienced high rates of delinquency and default.
83. The high rates of delinquency and default were caused not so much by any
deterioration in credit characteristics of the loans that were expressly embodied in underwriting
standards and disclosed to investors, but rather by deterioration in credit characteristics that were
not disclosed to investors.
84. Plaintiff is informed and believes that what was true about recently securitized
mortgage loans in general was true in particular of loans originated by the entity that originated
the loans in the collateral pools of these securitizations, as the following figures demonstrate.
Figure 1 shows the rising incidence of early payment defaults (or EPDs), that is, the percent of
loans (by outstanding principal balance) that were originated and sold into securitizations by
CHL and that became 60 or more days delinquent within six months after they were made. An
EPD is strong evidence that the originator did not follow its underwriting standards in making
the loan. Underwriting standards are intended to ensure that loans are made only to borrowers
who can and will make their mortgage payments. Because an EPD occurs so soon after the
mortgage loan was made, it is much more likely that the default occurred because the borrower
could not afford the payments in the first place (and thus that the underwriting standards were
not followed), than because of changed external circumstances unrelated to the underwriting of
the mortgage loan (such as that the borrower lost his or her job). The bars in Figure 1 depict the
incidence of EPDs in loans originated by CHL that were sold into securitizations. The steady
increase in EPDs is further evidence that the deterioration in the credit quality of those loans was
caused by disregard of underwriting standards.
PLAINTIFF’S ORIGINAL PETITION Page 26
85. Figure 2 shows the weighted-average disclosed LTVs of the same loans and
weighted-average disclosed credit scores of the borrowers. These were nearly constant, showing
that the deterioration in the credit quality of the loans was caused not by these disclosed factors,
but rather by undisclosed factors.
PLAINTIFF’S ORIGINAL PETITION Page 27
(b) The poor performance of the loans in these pools demonstrates
that the originator disregarded its underwriting guidelines
when making these loans.
86. As noted above, an EPD is evidence that the originator may have disregarded its
underwriting standards in making the loan. The mortgage loans in some of the collateral pools of
these securitizations experienced EPDs. These EPDs are evidence that the originator of those
loans may have disregarded its underwriting standards when making those loans. The number
and percent of the loans in each pool that suffered EPDs are stated in Item 86 of the Schedules of
this Petition. Plaintiff incorporates into this paragraph 86, and alleges as though fully set forth in
this paragraph, the contents of Item 86 of the Schedules.
87. A high rate of delinquency at any time in a group of mortgage loans is also
evidence that the originator of those loans may have disregarded its underwriting standards in
making the loans. A common measure of serious delinquency is the number of loans on which
the borrowers were ever 90 or more days delinquent in their payments. The mortgage loans in
PLAINTIFF’S ORIGINAL PETITION Page 28
the collateral pools have experienced very high rates of delinquencies by this measure. These
high rates of delinquencies are strong evidence that the originator of those loans may have
disregarded its underwriting standards when making those loans. The number and percent of the
loans in each pool that suffered delinquencies of 90 days or more are stated in Item 87 of the
Schedules of this Petition. Plaintiff incorporates into this paragraph 87, and alleges as though
fully set forth in this paragraph, the contents of Item 87 of the Schedules.
88. A second common measure of delinquency is the number of loans on which the
borrowers are 30 or more days delinquent at a given point in time. The mortgage loans in the
collateral pools have experienced very high rates of delinquencies by this measure. These high
rates of delinquencies are strong evidence that the originator of those loans may have disregarded
its underwriting standards when making those loans. The number and percent of the loans in
each pool that were 30 or more days delinquent on March 31, 2012, are stated in Item 88 of the
Schedules of this Petition. Plaintiff incorporates into this paragraph 88, and alleges as though
fully set forth in this paragraph, the contents of Item 88 of the Schedules.
(c) Other evidence shows that Countrywide Home Loans, Inc.
disregarded its underwriting standards.
89. In addition to the statistical data cited above, other evidence shows that CHL
(which originated or acquired virtually all of the loans in the collateral pools of the eight
securitizations), did not follow its stated underwriting standards.
90. Many loans that Countrywide originated were outside its already lax underwriting
standards, because Countrywide frequently disregarded even those standards and made loans that
borrowers could not afford to pay. See Complaint at 4, S.E.C. v. Mozilo, No. CV 09–3994–JFW
(MANx) (C.D. Cal. 2009). In a memorandum dated December 13, 2007, the enterprise risk
assessment officer at Countrywide stated that “borrower repayment capacity was not adequately
assessed by the bank during the underwriting process for home equity mortgage loans.” Id. at 23-24. In an email dated June 1, 2006, Countrywide’s Chairman and CEO Angelo Mozilo wrote that
PLAINTIFF’S ORIGINAL PETITION Page 29
borrowers “are going to experience a payment shock which is going to be difficult if not
impossible for them to manage.” Id. at 37.
91. Moreover, Countrywide “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, California v. Countrywide Financial Corp., No. LC083076 (Cal.
Super. 2008). Indeed, “to increase market share, [Countrywide] dispensed with many standard
underwriting guidelines . . . to place unqualified borrowers in loans which ultimately they could
not afford.” Complaint at 5, Washington v. Countrywide Financial Corp., No. 09-2-01690-6
(Wash. Super. 2009).
92. Plaintiff is informed and believes, and based thereon alleges, that Countrywide
did not adhere to its own underwriting standards, but instead abandoned, ignored, or disregarded
them. According to internal Countrywide documents, Mozilo admitted that loans “had been
originated ‘through our channels with disregard for process [and] compliance with guidelines.’”
Complaint at 20-21, S.E.C. v. Mozilo, No. CV 09–3994–JFW (MANx) (C.D. Cal. 2009).
Moreover, Countrywide did whatever it took to sell as many loans as it could, as quickly as
possible, including by disregarding its underwriting standards. See Complaint at 5, California v.
Countrywide Financial Corp., No. LC083076 (Cal. Super. 2008).
93. Plaintiff is informed and believes, and based thereon alleges, that Countrywide
made exceptions to its underwriting standards where no compensating factors existed, resulting
in higher rates of default, and used as “compensating factors” variables such as a borrower’s
credit score and LTV, which had already been used to determine that the loan did not fall within
the guidelines. Complaint at 20-21, S.E.C. v. Mozilo, No. CV 09–3994–JFW (MANx) (C.D. Cal.
2009). Such “compensating factors” did not actually compensate for anything and did not
“offset” any risk.
94. According to the Financial Crisis Inquiry Commission, Countrywide made loans
that it knew borrowers could not afford to pay. In its final report, the FCIC noted that
“Countrywide recognized that many of the loans they were originating could result in
PLAINTIFF’S ORIGINAL PETITION Page 30
‘catastrophic consequences’” because the borrowers could not afford to pay. FINANCIAL CRISIS
INQUIRY COMMISSION, THE FINANCIAL INQUIRY REPORT xxii (Public Affairs Reports, 2011).
95. Finally, Plaintiff is informed and believes, and based thereon alleges, that
Countrywide did not apply its underwriting standards in accordance with all federal, state, and
local laws. Countrywide has entered into agreements to settle charges of violation of predatory
lending, unfair competition, false advertising, and banking laws with the attorneys general of at
least 38 states, including Alaska, Arizona, California, Colorado, Connecticut, Delaware, Florida,
Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland,
Michigan, Mississippi, Montana, Nebraska, Nevada, New Jersey, New Mexico, North Carolina,
North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee,
Virginia, Washington, West Virginia, Wisconsin, and Wyoming. The attorneys general of these
states alleged that Countrywide violated state predatory lending laws by (i) making loans it could
not have reasonably expected borrowers to be able to repay; (ii) using high pressure sales and
advertising tactics designed to steer borrowers towards high-risk loans; and (iii) failing to
disclose to borrowers important information about the loans, including the costs and difficulties
of refinancing, the availability of lower cost products, the existence and nature of prepayment
penalties, and that advertised low interest rates were merely “teaser” rates that would adjust
upwards dramatically as soon as one month after closing. Eighty-eight percent of the mortgages
that were covered by the settlement with the attorneys general were sold into securitization
trusts, like the eight in which Guaranty purchased the certificates.
96. By each of the untrue and misleading statements referred to in paragraph 80
above, the defendants materially understated the risk of the certificates that they issued,
underwrote, or sold. Moreover, Plaintiff is informed and believes, and based thereon alleges, that
discovery will yield additional evidence that CHL disregarded its underwriting guidelines when
making the mortgage loans in the collateral pools of these securitizations.
PLAINTIFF’S ORIGINAL PETITION Page 31
D. The Large Number of Mortgage Loans in the Collateral Pools About Which
the Defendants Made Material Untrue or Misleading Statements Made Their
Statements About the Ratings of Guaranty’s Certificates Untrue and
Misleading.
97. In the prospectus supplements, the defendants made statements about the ratings
of the certificates by ratings agencies. They stated that the ratings agencies rated each such
certificate triple-A. Details of each such statement are stated in Item 97 of the Schedules of this
Petition. Plaintiff incorporates into this paragraph 97, and alleges as though fully set forth in this
paragraph, the contents of Item 97 of the Schedules.
98. The ratings were important to the decision of any reasonable investor whether to
purchase the certificates. Many investors, including Guaranty, have investment policies that
require a certain minimum rating for all investments. The policy of Guaranty was to purchase
only certificates that were rated triple-A.
99. These statements by the defendants about the ratings of the certificates they
issued, underwrote, or sold were misleading because the defendants omitted to state that the
ratings were affected by all of the material untrue or misleading statements about specific
mortgage loans in the collateral pools. These include:
(a) loans in which the LTVs were materially understated as shown by the AVM;
(b) loans in which the LTVs were misleading as a result of undisclosed additional
liens;
(c) loans in which the properties were stated to be owner-occupied, but were not; and
(d) loans that suffered EPDs, strong evidence that the originator may have
disregarded its underwriting standards in making those loans.
100. In Securitization No. 1, there were 1,633 loans in which the LTVs were materially
understated as shown by the AVM, 1,376 loans in which the LTVs were misleading because of
undisclosed additional liens, 1,242 loans in which the properties were stated to be owner-occupied but were not, and 17 loans that suffered EPDs. Eliminating duplicates, there were 2,967
loans (or 72.2% of the loans that backed the certificate that Guaranty purchased) about which
PLAINTIFF’S ORIGINAL PETITION Page 32
CWALT and Countrywide Securities made untrue or misleading statements. The numbers of
such loans in the collateral pools of the securitizations are stated in Item 100 of the Schedules of
this Petition. Plaintiff incorporates into this paragraph 100, and alleges as though fully set forth
in this paragraph, the contents of Item 100 of the Schedules.
101. Plaintiff is informed and believes, and based thereon alleges, that loan files and
other documents available only through discovery will prove that those statements were untrue
or misleading with respect to many more loans as well.
102. By these untrue and misleading statements, the defendants materially understated
the risk of the certificates that they issued, underwrote, or sold.
VIII. LIABILITY OF CFC AS CONTROL PERSON
103. CWALT was a special purpose entity formed for the sole purpose of purchasing
mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning
mortgage loans and all of its rights and interests in such mortgage loans to the trustee for the
benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing
trusts.
104. CWALT was responsible for preparing and filing the shelf registration statements
pursuant to which the eight certificates were offered for sale. CWALT was a wholly-owned
subsidiary of Old CFC.
105. Countrywide Securities was a securities broker-dealer and underwriter. It was a
wholly-owned subsidiary of Countrywide Capital Markets, Inc., which in turn was a wholly-owned subsidiary of Old CFC.
106. Old CFC was a publicly-traded holding company which, through its subsidiaries,
engaged in mortgage lending, the securitization of mortgage loans, and other finance-related
businesses. Old CFC managed its mortgage lending and securities businesses in an integrated
fashion. These activities included Old CFC’s practice of originating, purchasing, and
warehousing mortgage loans, using certain Countrywide subsidiaries; securitizing those same
loans into mortgage-backed securities, using depositor CWALT, among other subsidiaries; and
PLAINTIFF’S ORIGINAL PETITION Page 33
underwriting and selling mortgage-backed securities to third parties, using Countrywide
Securities.
107. Countrywide Securities was part of Old CFC’s Capital Markets Segment, which
Old CFC used, among other things, to conduct conduit activities and to trade and underwrite
securities. The operations, expenditures, and revenues of the Capital Markets Segment and
Countrywide Securities were included in Old CFC’s accounting statements and reflected in its
filings with the SEC.
108. At all relevant times, the offices of CWALT and Countrywide Securities were
located in the same building as Old CFC’s corporate headquarters in Calabasas, California.
Officers of Old CFC met frequently with officers and directors of CWALT and Countrywide
Securities to direct and coordinate the subsidiaries’ securitization business and activities.
109. Until September 2006, Stanford L. Kurland was the President and Chief
Operating Officer of Old CFC. He also served as Chairman of the Board and as President and a
director of CWALT. In these roles, Kurland was able to control and exert power over the general
and day-to-day practices and policies of CWALT, including the issuance of the certificates that
are the subject of this Petition. Kurland signed the shelf registration statements pursuant to which
CWALT issued the eight certificates.
110. Ranjit M. Kripalani served as Executive Vice President of Old CFC as well as
President and Executive Managing Director of Old CFC’s Capital Markets Segment. At the same
time, Kripalani served as President of Countrywide Capital Markets, Inc. and as President and
Chief Executive Officer of Countrywide Securities, further ensuring Old CFC’s control and
power over the general and day-to-day practices and policies of Countrywide Securities.
111. Plaintiff is informed and believes, and based thereon alleges, that additional
officers and directors of Old CFC served as officers or directors of CWALT and Countrywide
Securities, and worked closely with those subsidiaries in order to establish and maintain Old
CFC’s control and power over the general and day-to-day practices and policies of the
PLAINTIFF’S ORIGINAL PETITION Page 34
subsidiaries and Countrywide’s conduit business, including the issuance and sale of the
certificates that are the subject of this Petition.
112. In sum, as a result of its structure and the organization of its business, as well as
its ownership and placement of key personnel, Old CFC had the power to control the general
affairs and day-to-day practices and policies of CWALT and Countrywide Securities, including
the power directly or indirectly to control or influence those entities’ policies related to the
issuance, underwriting, and sale of the certificates that are the subject of this Petition.
113. As a result, Old CFC, as control person, was liable to Plaintiff jointly and
severally with and to the same extent as CWALT and Countrywide Securities. This liability
passed to CFC when Old CFC merged into CFC.
IX. LIABILITY OF DEFENDANT BANK OF AMERICA CORPORATION
AND ITS SUBSIDIARIES AS SUCCESSORS TO CFC,
COUNTRYWIDE SECURITIES, AND CWALT
114. Bank of America Corporation (BAC) and its subsidiaries (BAC and its
subsidiaries are referred to together in this Petition as Bank of America) have taken the assets of
CFC and other Countrywide entities into the operating companies of Bank of America while
leaving their liabilities in moribund companies that have few or no operations or assets. The full
extent of BAC’s and Bank of America’s conduct is not known because of the sparse public
disclosures that BAC has made about those transactions. Based on the facts alleged below, BAC
and its subsidiaries are liable for the claims asserted in this Petition as successors to CFC,
Countrywide Securities, and CWALT, because (a) the consideration that Bank of America paid
to Countrywide for the latter’s assets was inadequate, (b) there was continuity of ownership
between Bank of America and Countrywide, (c) Countrywide ceased ordinary business soon
after Bank of America purchased its assets, (d) there was continuity of management, personnel,
physical location, assets, and general business operations between Bank of America and
Countrywide, and (e) Bank of America assumed the liabilities necessary for the uninterrupted
continuation of Countrywide’s business. In addition, Bank of America assumed Countrywide’s
mortgage repurchase and tort liabilities.
PLAINTIFF’S ORIGINAL PETITION Page 35
115. At all relevant times, BAC was a public company whose stock was traded on the
New York Stock Exchange.
116. On January 11, 2008, BAC and Old CFC entered into an Agreement and Plan of
Merger (referred to in this Petition as the Merger Agreement) pursuant to which Old CFC
would be merged into Red Oak Merger Corporation, a wholly-owned subsidiary of BAC formed
to accomplish the merger. Old CFC would then cease to exist, and Red Oak would continue as
the surviving company.
117. Under the Merger Agreement, the shareholders of Old CFC would receive, and
ultimately did receive, 0.1822 shares of BAC stock for each share of Old CFC, thereby
maintaining those shareholders’ ownership interest in the businesses of Old CFC.
118. After the merger, Red Oak was to be renamed Countrywide Financial LLC but
was in fact renamed Countrywide Financial Corporation (which is CFC), the same name as the
publicly-traded Countrywide entity (Old CFC) that ceased to exist upon the completion of the
merger.
119. In a Form 8-K filing also dated January 11, 2008, BAC disclosed that the Merger
Agreement was between Old CFC and BAC, the public company, not any subsidiary or affiliate
of BAC.
120. In a press release accompanying the Form 8-K, BAC stated that Bank of America
intended initially to operate Countrywide separately under the Countrywide brand and that
integration of Countrywide’s operations with the operations of Bank of America would occur in
2009.
121. On February 22, 2008, an article appeared in the periodical Corporate Counsel
about the litigation that Countrywide then faced and its possible implications for Bank of
America. In the article, a spokesperson for Bank of America acknowledged that Bank of
America had “bought the company [Old CFC] and all of its assets and liabilities[,] . . . was aware
of the claims and potential claims against the company and [had] factored these into the
purchase.”
PLAINTIFF’S ORIGINAL PETITION Page 36
122. On May 28, 2008, BAC filed a Form 8-K and issued a press release stating that
Bank of America was creating a new banking management structure and that a long-time Bank
of America officer, Barbara Desoer, would become president of the new consumer real estate
operations of “Countrywide Financial Corporation and Bank of America when they are
combined.” The press release also stated that Desoer would be based in Countrywide’s principal
offices in Calabasas, California.
123. BAC and Old CFC consummated the merger on July 1, 2008. As a result, Old
CFC ceased to exist. By operation of law, as a consequence of the merger, Red Oak (soon
thereafter renamed Countrywide Financial Corporation, which is defendant CFC) assumed the
liabilities of Old CFC.
124. In a July 1, 2008 Form 8-K and press release, Desoer, the president of Bank of
America’s consumer real estate unit, stated that it was time to “begin to combine the two
companies and prepare to introduce our new name and way of operating.” The release also
confirmed that the combined entity would be based in Calabasas, California, the former principal
offices of Countrywide. Plaintiff is informed and believes, and based thereon alleges, that Bank
of America’s consumer real estate unit has been and remains housed in the offices formerly
occupied by Countrywide. For example, Desoer moved into the office formerly used by Angelo
Mozilo, the former CEO of Old CFC. Moreover, Bank of America retained a substantial number
of former employees of Countrywide to operate its consumer real estate unit. Indeed, in October
2008, Desoer stated that the combined company had named a mix of Bank of America and
Countrywide executives to leadership roles.
125. On October 29, 2008, Countrywide Securities withdrew its registration as a
broker dealer from the Financial Industry Regulatory Authority. Without this registration,
Countrywide Securities was unable to continue in the business in which it had primarily been
engaged (securities dealing and underwriting). Therefore, as of October 29, 2008, Countrywide
Securities effectively ceased doing business, too.
PLAINTIFF’S ORIGINAL PETITION Page 37
126. In its annual report for the fiscal year ended December 31, 2008, BAC disclosed
that the fair value of the non-cash assets obtained and liabilities assumed through the merger
with Countrywide were $157.4 billion and $157.8 billion, respectively.
127. Contemporaneously with the merger, BAC announced that certain Countrywide
entities would sell specified assets to specific Bank of America entities. According to BAC, the
consideration paid for these assets was approximately $32 billion in cash or cash equivalents.
According to BAC’s disclosures, approximately $125 billion in non-cash assets would be left in
CFC and not conveyed pursuant to these asset sales, which were completed on or about July 3,
2008.
128. On October 6, 2008, BAC filed a Form 8-K announcing, among other things, that
CFC and another former subsidiary of Old CFC, Countrywide Home Loans, Inc. (CHL), would
transfer all or substantially all of their assets to unnamed subsidiaries of BAC in exchange for the
assumption of approximately $21 billion of Countrywide debt. In contrast to the relatively
detailed disclosures that BAC made about the merger and the first round of asset sales, BAC and
Bank of America offered virtually no details about these contemplated asset sales. Plaintiff is
informed and believes, and based thereon alleges, that the intended effect of these transactions
was to further integrate into the operations of Bank of America the Countrywide assets, while
leaving the liabilities with CFC and CHL.
129. On November 7, 2008, BAC filed a Form 8-K announcing, among other things,
that in connection with the integration of Countrywide’s operations into Bank of America’s other
business operations, CFC and CHL had transferred substantially all of their assets to BAC.
Again, Bank of America disclosed almost no details of these transactions. Plaintiff is informed
and believes, and based thereon alleges, that, primarily as a result of these transfers of assets,
CFC and CHL are now moribund organizations, with few, if any, assets or operations. This
conclusion is confirmed by Bruce Bingham, a business valuation expert who attempted to value
CFC in a report sent to The Bank of New York Mellon, which is the trustee of numerous trusts
containing Countrywide-issued mortgage-backed securities. Mr. Bingham concluded that CFC
PLAINTIFF’S ORIGINAL PETITION Page 38
had negative earnings, minimal operating revenues, and no viable operations. The operational
status of Countrywide Securities (as well as all other Countrywide entities) is comparable to that
of CFC and CHL.
130. Plaintiff is informed and believes, and based thereon alleges, that transferees of
Countrywide’s assets may have included other subsidiaries of BAC rather than, or in addition to,
BAC. Because of the sparse disclosures about these transactions, it is impossible to be certain
which Bank of America entities were involved.
131. As the principal consideration for the asset sales on November 7, 2008, BAC
assumed debt securities and related guarantees of Countrywide in an aggregate amount of $16.6
billion. BAC assumed much of this debt through the amendment of indenture agreements
substituting BAC as the issuer and/or guarantor of the securities subject to the indentures.
132. According to Bank of America’s own figures, Bank of America obtained
approximately $125 billion in assets in exchange for the assumption of $16.6 billion in debt.
Therefore, Plaintiff is informed and believes, and based thereon alleges, that the consideration
given for Countrywide’s assets was not commensurate with the value of the assets that Bank of
America obtained. Presumably, Bank of America will contest these figures. Yet, Bank of
America itself has acknowledged the difficulty in proving the actual value transferred and
received. In MBIA Insurance Corp. v. Countrywide Home Loans, Inc., Index No. 602825/08,
pending in the Supreme Court of the State of New York for the County of New York, at a
hearing held on June 27, 2012, counsel for Bank of America informed the court that to resolve
the “difficult” and “complicated” valuation issue, extensive expert testimony would be required.
133. On April 27, 2009, Bank of America issued a press release announcing the
rebranding of CHL operations as Bank of America Home Loans. Bank of America stated that the
new brand would represent the combined operations of Bank of America’s mortgage and home
equity business and CHL. Bank of America further explained that it was in the process of
rebranding Countrywide’s “locations, account statements, marketing materials and advertising”
and that the “full systems conversion” would be completed later that year.
PLAINTIFF’S ORIGINAL PETITION Page 39
134. As of September 21, 2009, liability for the deposits in Countrywide Bank, N.A.
was assumed by Bank of America, N.A. On November 9, 2009, online account services for
Countrywide mortgages were consolidated with Bank of America’s Online Banking website.
See, e.g., Mortgage Loan Officer Finder, http://home.countrywide.com (last visited August 16,
2012).
135. Old CFC’s website now redirects visitors to the Bank of America website. See
http://countrywide.com, redirected to www8.bankofamerica.com/home-loans/overview.go (last
visited August 16, 2012).
136. By the complex and sparsely-disclosed transactions described above, Bank of
America has combined Countrywide’s operations with its own business operations and
proceeded to operate them.
137. Bank of America operates its combined consumer real estate unit out of the
common headquarters of Old CFC, CHL, Countrywide Securities, and CWALT. Plaintiff is
informed and believes, and based thereon alleges, that Bank of America employs many former
employees of Countrywide to operate this combined unit.
138. Plaintiff is informed and believes, and based thereon alleges, that Bank of
America’s rebranded consumer real estate business, Bank of America Home Loans, now
operates out of more than 1,000 former Countrywide offices nationwide.
139. Public statements by Old CFC and Bank of America reflect that the companies
intended that their business operations be combined and understood and anticipated that Bank of
America would be responsible for the liabilities of Old CFC and Countrywide. In its press
release announcing the merger, BAC declared that it planned to operate Countrywide separately
under the Countrywide brand for a limited period only, with integration to occur in 2009. In its
2008 annual report, BAC stated that as a “combined company,” Bank of America would be
recognized as a responsible lender. Similarly, representatives of Old CFC stated that the
“combination” with Bank of America would create one of the most powerful mortgage
franchises in the world.
PLAINTIFF’S ORIGINAL PETITION Page 40
140. On at least two occasions, two different Chief Executive Officers of BAC
publicly acknowledged that BAC intended to assume the liabilities of Countrywide when it
acquired Countrywide’s assets. One CEO acknowledged in January 2008 that BAC “looked at
every aspect of the deal, from their [Countrywide’s] assets to potential lawsuits.” On an earnings
conference call on November 16, 2010, another CEO stated that BAC “would pay for the things
that Countrywide did.”
141. Bank of America has, in fact, made a practice of taking responsibility for
Countrywide liabilities. For example, on October 6, 2008, Bank of America settled lawsuits
brought against Countrywide companies by state attorneys general by agreeing to modify loans
for 390,000 borrowers, valued at more than $8 billion.
142. Similarly, on January 3, 2011, Bank of America paid $2.8 billion to Fannie Mae
and Freddie Mac to settle claims for billions of dollars on hundreds of thousands of loans that
went sour after Fannie Mae and Freddie Mac bought them from Countrywide. In exchange for
the payments, Fannie Mae and Freddie Mac agreed to drop their demands that Bank of America
buy back Countrywide mortgages.
143. On May 26, 2011, Bank of America agreed to pay approximately $22 million to
settle charges that it improperly had foreclosed on the homes of active-duty members of the
United States military. In a press release announcing the settlement, Bank of America noted that
most of the mortgage loans at issue had been made by Countrywide before Bank of America’s
merger with Countrywide and that most of the improper foreclosure activity also had been
Countrywide’s. Nevertheless, Bank of America said that it was responsible to “make things
right.”
144. In a proposed settlement of Countrywide liabilities announced on June 29, 2011,
Bank of America agreed to pay $8.5 billion for the benefit of investors in Countrywide trusts to
resolve, among other things, claims against Countrywide for breach of representations and
warranties made about the mortgage loans in the trusts and for violating prudent standards of
PLAINTIFF’S ORIGINAL PETITION Page 41
care in servicing those loans. The release of Bank of America contemplated by this settlement
expressly includes claims against Bank of America for successor liability.
145. Because BAC continues to operate the businesses of Countrywide, it had to
assume the liabilities necessary to continue those operations, and Plaintiff is informed and
believes, and based thereon alleges, that it did so.
146. In addition to paying for Countrywide’s liabilities, Bank of America also has
asserted claims as the successor to Countrywide. For example, in a proceeding in the United
States Bankruptcy Court for the District of Nebraska, In re Peter J. Kerby, Case No. 97-81961,
BAC’s attorney-in-fact filed a motion on behalf of “Bank of America Corporation successor to
Countrywide Home Loans.” In the limited power of attorney by which BAC appointed that
attorney-in-fact (which was also submitted to the Bankruptcy Court), a Vice President and Senior
Recovery Manager of BAC executed the power of attorney on behalf of “Bank of America
Corporation successor to Countrywide Home Loans.” Attached to the power of attorney were
several pages, including the signature page, of the Merger Agreement. BAC later filed an
amended motion and again submitted the power of attorney to the Bankruptcy Court. This time,
attached to the power of attorney was a “Bank of America Corporation Hierarchy [R]eport,”
which listed 21 subsidiaries of CFC. There is a handwritten star next to the entry for
“Countrywide Home Loans, Inc.”
147. Similarly, on September 9, 2010, an amended proof of claim for approximately
$21.5 million was filed in In re Alliance Bancorp, Inc., Case No. 07-10943, pending in the
United States Bankruptcy Court for the District of Delaware. In this amended proof of claim, the
creditor is identified as “Countrywide Home Loans, Inc. (through its successor, Bank of
America, NA).” And in the Attachment to the Amended Proof of Claim, which was also filed
with the bankruptcy court, the creditor is identified as “Countrywide Home Loans, Inc.
(‘Countrywide’), through its successor by merger, Bank of America.” Finally, footnote 1 of the
Attachment states that “[r]eference to ‘Countrywide’ includes reference to affiliates thereof and
PLAINTIFF’S ORIGINAL PETITION Page 42
who together have claims against Alliance Inc., through Countrywide’s successor by merger,
Bank of America.”
148. Thus, Bank of America is trying to accomplish exactly what the doctrine of
successor liability is meant to prevent – claiming to be a successor to Countrywide when
asserting claims while simultaneously denying that it is a successor to Countrywide when
resisting claims against it.
X. STATUTES OF LIMITATIONS
149. All of the claims in this Petition are timely. Plaintiff became receiver for Guaranty
on August 21, 2009. Under 12 U.S.C. § 1821(d)(14), the statutes of limitations on all of
Guaranty’s claims asserted in this Petition that had not expired as of August 21, 2009, are
extended to no less than three years from that date. This Petition was filed less than three years
from August 21, 2009.
150. The statutes of limitations applicable to the claims asserted in this Petition had not
expired as of August 21, 2009, because a reasonably diligent plaintiff would not have discovered
until later than August 21, 2008, facts that show that the particular statements referred to in Items
30, 40, 64, 70, 80, and 97 of the Schedules to this Petition were untrue or misleading. Those are
statements about the 17,575 specific mortgage loans in the collateral pools of the securitizations
involved in this action, not about residential mortgage loans or any type of residential mortgage
loan (e.g., prime, Alt-A, subprime, etc.) in general. A reasonably diligent plaintiff did not have
access until after August 21, 2008, to facts about those specific loans that show that the
statements that defendants made about those specific loans were untrue or misleading. A
reasonably diligent plaintiff did not have access to the loan files compiled by the originator of
those specific mortgage loans nor to records maintained by the servicers of those specific
mortgage loans (from either or both of which a reasonably diligent plaintiff may have discovered
facts that show that the statements that defendants made about those specific loans were untrue
or misleading) because originators and servicers of loans and securitization trustees do not make
those files available to certificateholders. Moreover, on and prior to August 21, 2008, there were
PLAINTIFF’S ORIGINAL PETITION Page 43
not available to a reasonably diligent plaintiff, even at considerable expense, data about those
specific loans that show that the statements that defendants made about those specific loans were
untrue or misleading. Such data became available for the first time in early 2010.
151. When Guaranty purchased the certificates involved in this action, all of them were
rated triple-A, the highest possible rating, by at least two of Fitch, Moody’s, and Standard &
Poor’s, all Nationally Recognized Statistical Rating Organizations (NRSROs) accredited by the
SEC. Sponsors of securitizations submitted to the NRSROs the same information about the loans
in the collateral pools of proposed securitizations that they included in the prospectus
supplements for those securitizations, including in particular statements of the type referred to in
Items 30, 40, 64, 70, 80, and 97 of the Schedules to this Petition. The NRSROs used and relied
on that information in rating the certificates to be issued in each securitization.
152. The NRSROs monitored the certificates that they rated after those certificates
were issued. If an NRSRO discovers facts that show that there was an untrue or misleading
statement about a material fact in the information submitted to it for its use in rating a certificate,
then the NRSRO will withdraw its rating of that certificate while it considers the impact of the
untrue or misleading statement, or it will downgrade the rating of the certificate, usually to a
rating below investment grade.
153. As noted above, all of the certificates involved in this action were rated triple-A at
issuance by at least two of Fitch, Moody’s, and Standard & Poor’s. Not one of those NRSROs
withdrew any of those ratings, or downgraded any of them to below investment grade, before
August 21, 2008. The date on which each certificate was first downgraded below investment
grade is stated in Item 30 of the Schedules.
154. If a reasonably diligent plaintiff would have discovered before August 21, 2008,
facts that show that the particular statements referred to in Items 30, 40, 64, 70, 80, and 97 of the
Schedules to this Petition were untrue or misleading, then the NRSROs, which were monitoring
the certificates and are much more sophisticated than a reasonably diligent plaintiff, would also
have discovered such facts and withdrawn or downgraded their ratings on the certificates to
PLAINTIFF’S ORIGINAL PETITION Page 44
below investment grade. The fact that none of the NRSROs did so demonstrates that, before
August 21, 2008, a reasonably diligent plaintiff could not have discovered facts that show that
those statements were untrue or misleading.
155. The claims in this action are also timely for another reason. As a purchaser of the
certificates, Guaranty was, and Plaintiff as Receiver for Guaranty is, a member of the proposed
class in Luther v. Countrywide Financial Corporation, Superior Court of the State of California,
County of Los Angeles, No. BC 380698, filed on November 14, 2007. The pendency of Luther
has tolled the running of the statutes of limitations on the claims in this Petition.
156. Seven of the securitizations from which Guaranty purchased certificates,
Securitizations Nos. 2 through 8, were included in the original Class Action Complaint filed in
Luther on November 14, 2007. None of those securitizations has been dismissed from Luther.
157. One of the securitizations from which Guaranty purchased certificates,
Securitization No. 1, was included in the original Class Action Complaint filed in Washington
State Plumbing & Pipefitting Pension Trust v. Countrywide Financial Corporation, Superior
Court of the State of California, County of Los Angeles, No. BC 392571, filed on June 12, 2008.
That action was consolidated with Luther, and that securitization is included in the Consolidated
Class Action Complaint filed on October 16, 2008. That securitization has not been dismissed
from Luther.
XI. CAUSES OF ACTION
A. Untrue or Misleading Statements in the Sale of Securities Under Article 581-33 of the TSA
158. Plaintiff hereby incorporates by reference, as though fully set forth, paragraphs 1
through 157.
159. Countrywide Securities underwrote and sold four certificates in Securitizations
Nos. 1 through 4 that Guaranty purchased when they were initially offered to the public.
Countrywide Securities sent communications and solicitations to Guaranty in Texas for the
purpose of inducing Guaranty to purchase the certificates. The sale of these certificates occurred
PLAINTIFF’S ORIGINAL PETITION Page 45
in Texas because employees or agents of Countrywide Securities directed communications about
the certificates and solicitations to purchase the certificates to Guaranty there, and because
Guaranty received those communications and solicitations there.
160. In doing the acts alleged in the sale to Guaranty of the certificates in
Securitizations Nos. 1 through 4, Countrywide Securities violated Article 581-33 of the TSA by
offering or selling securities in this State by means of written communications that included
untrue statements of material fact or omitted 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.
161. Goldman underwrote and sold the certificate in Securitization No. 5 that Guaranty
purchased when it was initially offered to the public. Goldman sent communications and
solicitations to Guaranty in Texas for the purpose of inducing Guaranty to purchase the
certificate. The sale of the certificate occurred in Texas because employees or agents of Goldman
directed communications about the certificate and solicitations to purchase the certificate to
Guaranty there, and because Guaranty received those communications and solicitations there.
162. In doing the acts alleged in the sale to Guaranty of the certificate in Securitization
No. 5, Goldman violated Article 581-33 of the TSA by offering or selling a security in this State
by means of written communications that included untrue statements of material fact or omitted
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.
163. Deutsche underwrote and sold three certificates in Securitizations Nos. 6, 7, and 8
that Guaranty purchased when they were initially offered to the public. Deutsche sent
communications and solicitations to Guaranty in Texas for the purpose of inducing Guaranty to
purchase the certificates. The sale of these certificates occurred in Texas because employees or
agents of Deutsche directed communications about the certificates and solicitations to purchase
the certificates to Guaranty there, and because Guaranty received those communications and
solicitations there.
PLAINTIFF’S ORIGINAL PETITION Page 46
164. In doing the acts alleged in the sale to Guaranty of the three certificates in
Securitizations Nos. 6, 7, and 8, Deutsche violated Article 581-33 of the TSA by offering or
selling securities in this State by means of written communications that included untrue
statements of material fact or omitted 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.
165. Plaintiff has disposed of all of the certificates.
166. Under Article 581-33 of the TSA, Plaintiff is entitled to recover the consideration
paid for each of these certificates, plus interest at the legal rate from the date of purchase to the
date on which it recovers the purchase price, minus the amount of income received on the
certificate, minus the greater of the value of the security when the plaintiff disposed of it or the
consideration that the plaintiff received for the security.
B. Untrue or Misleading Statements in the Sale of Securities Under Section
12(a)(2) of the 1933 Act
167. Plaintiff hereby incorporates by reference, as though fully set forth, paragraphs 1
through 166.
168. Guaranty purchased four certificates in Securitizations Nos. 1 through 4 that
Countrywide Securities sold to Guaranty when they were initially offered to the public.
169. Countrywide Securities solicited Guaranty to purchase the certificates, and sold
the certificates to Guaranty, by means of the prospectus supplements and other written offering
materials and oral communications.
170. The prospectus supplements and other written offering materials and oral
communications that Countrywide Securities sent to Guaranty contained untrue statements of
material fact and omitted to state material facts necessary in order to make the statements, in the
light of the circumstances in which they were made, not misleading.
171. Guaranty did not know when it purchased the certificates that the statements in
the prospectus supplements and other written offering materials and oral communications that
Countrywide Securities sent to Guaranty were untrue or misleading.
PLAINTIFF’S ORIGINAL PETITION Page 47
172. In doing the acts alleged in the sale to Guaranty of the certificates in
Securitizations Nos. 1 through 4, Countrywide Securities violated Section 12(a)(2) of the 1933
Act.
173. Guaranty purchased the certificate in Securitization No. 5 that Goldman sold to
Guaranty when it was initially offered to the public.
174. Goldman solicited Guaranty to purchase the certificate, and sold the certificate to
Guaranty, by means of the prospectus supplement and other written offering materials and oral
communications.
175. The prospectus supplement and other written offering materials and oral
communications that Goldman sent to Guaranty contained untrue statements of material fact and
omitted to state material facts necessary in order to make the statements, in the light of the
circumstances in which they were made, not misleading.
176. Guaranty did not know when it purchased the certificate that the statements in the
prospectus supplement and other written offering materials and oral communications that
Goldman sent to Guaranty were untrue or misleading.
177. In doing the acts alleged in the sale to Guaranty of the certificate in Securitization
No. 5, Goldman violated Section 12(a)(2) of the 1933 Act.
178. Guaranty purchased three certificates in Securitizations Nos. 6, 7, and 8 that
Deutsche sold to Guaranty when they were initially offered to the public.
179. Deutsche solicited Guaranty to purchase the certificates, and sold the certificates
to Guaranty, by means of the prospectus supplements and other written offering materials and
oral communications.
180. The prospectus supplements and other written offering materials and oral
communications that Deutsche sent to Guaranty contained untrue statements of material fact and
omitted to state material facts necessary in order to make the statements, in the light of the
circumstances in which they were made, not misleading.
PLAINTIFF’S ORIGINAL PETITION Page 48
181. Guaranty did not know when it purchased the certificates that the statements in
the prospectus supplements and other written offering materials and oral communications that
Deutsche sent to Guaranty were untrue or misleading.
182. In doing the acts alleged in the sale to Guaranty of the certificates in
Securitizations Nos. 6, 7, and 8, Deutsche violated Section 12(a)(2) of the 1933 Act.
183. CWALT is the depositor of the eight securitizations and therefore is the issuer of
the eight certificates that Guaranty purchased.
184. CWALT prepared and signed the registration statements for the certificates for
the purpose of soliciting investors, including Guaranty, to purchase certificates when they were
initially offered to the public, motivated at least in part by its own financial interest or that of the
direct seller.
185. These sales were in the initial offering of the certificates and the certificates were
sold by means of prospectus supplements. Therefore, under 17 C.F.R. § 230.159A(a), CWALT is
considered to have offered or sold the certificates to Guaranty.
186. In doing the acts alleged in the offer or sale to Guaranty of the certificates in
Securitizations Nos. 1 through 8, CWALT violated section 12(a)(2) of the 1933 Act.
187. Plaintiff expressly excludes from this cause of action any allegation that could be
construed as alleging fraud or intentional or reckless conduct. This cause of action is based solely
on allegations of strict liability or negligence under the 1933 Act.
188. When it failed on August 21, 2009, Guaranty had not discovered that the
defendants made untrue or misleading statements about the certificates. Plaintiff discovered that
the defendants made untrue or misleading statements in the sale of each security in the course of
its investigation in 2012.
189. Plaintiff has suffered a loss on each of these certificates.
190. Plaintiff is entitled to recover damages.
PLAINTIFF’S ORIGINAL PETITION Page 49
C. Untrue or Misleading Statements in a Registration Statement Under Section
11 of the 1933 Act
191. Plaintiff hereby incorporates by reference, as though fully set forth, paragraphs 1
through 190.
192. CWALT is the depositor of the eight securitizations and therefore is the issuer of
the eight certificates that Guaranty purchased. In doing the acts alleged, CWALT violated
Section 11 of the 1933 Act in connection with issuing the certificates in the eight securitizations.
193. Countrywide Securities underwrote the certificates in Securitizations Nos. 1
through 4. In doing the acts alleged, Countrywide Securities violated Section 11 of the 1933 Act
in connection with underwriting the certificates in Securitizations Nos. 1 through 4.
194. Goldman underwrote the certificate in Securitization No. 5. In doing the acts
alleged, Goldman violated Section 11 of the 1933 Act in connection with underwriting the
certificate in Securitization No. 5.
195. Deutsche underwrote the certificates in Securitizations Nos. 6, 7, and 8. In doing
the acts alleged, Deutsche violated Section 11 of the 1933 Act in connection with underwriting
the certificates in Securitizations Nos. 6, 7, and 8.
196. The certificates in these securitizations were issued pursuant or traceable to
registration statements. Details of each registration statement and each certificate are stated in
Item 30 of the Schedules.
197. The registration statements, as amended by the prospectus supplements, contained
untrue statements of material fact and omitted to state material facts necessary in order to make
the statements, in the light of the circumstances under which they were made, not misleading.
These untrue and misleading statements included all of the untrue and misleading statements
described in paragraphs 35 through 102.
198. Guaranty purchased each certificate before the issuer made generally available an
earning statement covering a period of at least twelve months.
PLAINTIFF’S ORIGINAL PETITION Page 50
199. Plaintiff expressly excludes from this cause of action any allegation that could be
construed as alleging fraud or intentional or reckless conduct. This cause of action is based solely
on allegations of strict liability or negligence under the 1933 Act.
200. Guaranty did not know when it purchased the certificates that the statements in
the registration statements, as amended by the prospectus supplements, were untrue or
misleading.
201. When it failed on August 21, 2009, Guaranty had not discovered that the
defendants made untrue or misleading statements about the certificates. Plaintiff discovered that
the defendants made untrue or misleading statements about each security in the course of its
investigation in 2012.
202. Plaintiff has suffered a loss on each of these certificates.
203. Plaintiff is entitled to recover damages as described in 15 U.S.C. § 77k(e).
D. Liability as a Controlling Person Under Section 15 of the 1933 Act
204. Plaintiff hereby incorporates by reference, as though fully set forth, paragraphs 1
through 203.
205. Old CFC, by or through stock ownership, agency, and as otherwise described
above, controlled CWALT and Countrywide Securities within the meaning of Section 15 of the
1933 Act.
206. In doing the acts alleged, CWALT violated Sections 11 and 12(a)(2) of the 1933
Act by issuing, offering, or selling the certificates.
207. In doing the acts alleged, Countrywide Securities violated Sections 11 and
12(a)(2) of the 1933 Act by underwriting, offering, or selling the certificates.
208. As a result of the merger of Old CFC and Bank of America, Old CFC’s control
person liability passed to CFC.
209. CFC is therefore jointly and severally liable with and to the same extent as
CWALT and Countrywide Securities.
PLAINTIFF’S ORIGINAL PETITION Page 51
E. Liability as Successor to Countrywide Securities, CWALT, and CFC
210. This cause of action is alleged against defendant BAC.
211. Plaintiff hereby incorporates by reference, as though fully set forth, paragraphs 1
through 209 of this Petition.
212. For the reasons described above, BAC is jointly and severally liable for any and
all injury and damages resulting from the conduct of Countrywide Securities, CWALT, or CFC,
because BAC is the successor-in-interest to Countrywide Securities, CWALT, and CFC.
213. BAC became the successor-in-interest to Countrywide Securities, CWALT, and
CFC because (a) through the transactions that took place between July 1, 2008, and November 7,
2008, it gave inadequate consideration to Countrywide; (b) there was continuity of ownership
between Bank of America and Countrywide; (c) Countrywide ceased ordinary business soon
after the merger transaction was consummated; (d) there was continuity of management,
personnel, physical location, assets, and general business operations between Bank of America
and Countrywide; and (e) Bank of America assumed the liabilities ordinarily necessary for the
uninterrupted continuation of Countrywide’s business. BAC is also a successor-in-interest to
Countrywide because Bank of America assumed Countrywide’s mortgage repurchase and tort
liabilities.
214. BAC is therefore jointly and severally liable with and to the same extent as
Countrywide Securities, CWALT, and CFC.
XII. CONDITIONS PRECEDENT
215. Pursuant to Texas Rule of Civil Procedure 54, all conditions precedent to
Plaintiff’s right to recover on all causes of action pleaded herein have been performed or have
occurred.
XIII. REQUEST FOR A JURY TRIAL
216. Plaintiff requests a jury trial on all allegations and causes of action set forth herein
as allowed by Texas law.

PLAINTIFF’S ORIGINAL PETITION Page 53
Of counsel:
David J. Grais (pro hac vice to be submitted)
Mark B. Holton (pro hac vice to be submitted)
GRAIS & ELLSWORTH LLP
1211 Avenue of the Americas
New York, New York 10036
Telephone: (212) 755-0100
Facsimile: (212) 755 0052

Lawsuit 2

PLAINTIFF’S ORIGINAL PETITION Page 1
CAUSE NO. ________
FEDERAL DEPOSIT INSURANCE
CORPORATION AS RECEIVER FOR
GUARANTY BANK,
§
§
§
§
IN THE DISTRICT COURT OF
§
§
Plaintiff, §
§
v. § JUDICIAL DISTRICT
§
§
J.P. MORGAN SECURITIES LLC;
MERRILL LYNCH, PIERCE, FENNER &
SMITH INC.; RBS SECURITIES INC.;
WAMU ASSET ACCEPTANCE CORP.; and
WAMU CAPITAL CORP.;
§
§
§
§
§
§
§
§
§
§
Defendants. § TRAVIS COUNTY, TEXAS
PLAINTIFF'S ORIGINAL PETITION FOR DAMAGES
TO THE HONORABLE JUDGES OF SAID COURT:
Comes now Plaintiff, Federal Deposit Insurance Corporation as Receiver for Guaranty
Bank, and files this Petition against J.P. Morgan Securities LLC (formerly known as Bear,
Stearns & Co. Inc. and referred to in this Petition as Bear Stearns); Merrill Lynch, Pierce,
Fenner & Smith Inc. (successor by merger to Banc of America Securities LLC, which is referred
to in this Petition as Banc of America); RBS Securities Inc. (formerly known as Greenwich
Capital Markets, Inc. and doing business as RBS Greenwich Capital, and referred to in this
Petition as RBS); WaMu Asset Acceptance Corp. (WaMu Acceptance); and WaMu Capital
Corp. (WaMu Capital), and as grounds therefor shows as follows:
Filed
12 August 17 P3:28
Amalia Rodriguez-Mendoza
District Clerk
Travis District
D-1-GN-12-002517
PLAINTIFF’S ORIGINAL PETITION Page 2
I. DISCOVERY CONTROL PLAN
1. Plaintiff intends that discovery be conducted under Level 3 of Rule 190.4 of the
Texas Rules of Civil Procedure.
II. NATURE OF THIS ACTION
2. This is an action for damages caused by violation of the Texas Securities Act
(TSA) and the Securities Act of 1933 (1933 Act) by the defendants. As alleged in detail below,
defendants issued, underwrote, or sold 20 securities known as “certificates,” which were backed
by collateral pools of residential mortgage loans in 18 securitizations. Guaranty Bank
(Guaranty) paid approximately $2.1 billion for the 20 certificates. When they issued,
underwrote, or sold the certificates, the defendants made numerous statements of material fact
about the certificates and, in particular, about the credit quality of the mortgage loans that backed
them. Many of those statements were untrue. Moreover, the defendants omitted to state many
material facts that were necessary in order to make their statements not misleading. For example,
the defendants made untrue statements or omitted important information about such material
facts as the loan-to-value ratios of the mortgage loans, the extent to which appraisals of the
properties that secured the loans were performed in compliance with professional appraisal
standards, the number of borrowers who did not live in the houses that secured their loans (that
is, the number of properties that were not primary residences), and the extent to which the
entities that made the loans disregarded their own standards in doing so.
3. Based on an analysis of a random sample of the loans that backed the certificates
that Guaranty purchased, the defendants made such untrue or misleading statements about at
least the following numbers of loans.
PLAINTIFF’S ORIGINAL PETITION Page 3
Securitization
No.
1
Number of Loans about
Which Defendants Made
Material Untrue or
Misleading Statements
2
Number of Loans
that Backed the
Certificates
Percentage of Loans about
Which Defendants Made
Material Untrue or
Misleading Statements
1 645 973 66.3%
2 1,470 1,940 75.8%
3 550 714 77.0%
4 328 456 71.9%
5 871 1,216 71.6%
6 1,961 2,742 71.5%
7 1,444 2,591 55.7%
8 938 2,073 45.2%
9 192 401 47.9%
10 210 393 53.4%
11 265 757 35.0%
12 130 263 49.4%
13 162 330 49.1%
14 299 578 51.7%
15 234 473 49.5%
16 410 773 53.0%
17 1,425 2,426 58.7%
18 354 659 53.7%
4. The certificates are “securities” within the meaning of the TSA and the 1933 Act.
5. The defendants are liable under the following provisions of the TSA and the 1933
Act:
As issuer: WaMu Acceptance is liable as an “issuer” under Section 11 of the 1933 Act in
connection with issuing nine certificates that Guaranty purchased.
1
Guaranty purchased two certificates in Securitization No. 11 and two certificates in
Securitization No. 16.
2
The method of random sampling that Plaintiff used ensures that conclusions about the
entire collateral pool have a margin of error of no more than plus or minus 5% at a confidence
level of 95% (that is, one can be 95% certain that the true percentage in the collateral pool as a
whole is within 5% of the percentage measured in the sample). For example, one can be 95%
certain that the number of loans in Securitization No. 1 about which Banc of America, which
sold to Guaranty the certificate in Securitization No. 1, made untrue or misleading statements or
omissions is within 5% of 645, that is, between 613 and 677. The same margin of error should be
applied to all information in this Petition and accompanying Schedules that is based on a random
sample of loans in a collateral pool.
PLAINTIFF’S ORIGINAL PETITION Page 4
As underwriter: WaMu Capital is liable as an “underwriter” under Section 11 of the 1933
Act in connection with underwriting nine certificates that Guaranty purchased.
As sellers: The following defendants, which sold the certificates that Guaranty purchased
when they were initially offered to the public, are liable as “sellers” under Article 581-33 of the
TSA: Banc of America, which sold one certificate; Bear Stearns, which sold five certificates;
RBS, which sold two certificates; and WaMu Capital, which sold 12 certificates.
WaMu Capital is also liable as a seller under Section 12(a)(2) of the 1933 Act in
connection with selling nine certificates that Guaranty purchased when they were initially
offered to the public.
WaMu Acceptance is also liable as a seller under Section 12(a)(2) of the 1933 Act in
connection with issuing nine certificates that Guaranty purchased when they were initially
offered to the public.
III. PARTIES
6. The Federal Deposit Insurance Corporation (FDIC) is a corporation organized
and existing under the laws of the United States of America. Under the Federal Deposit
Insurance Act, the FDIC is authorized to be appointed as receiver for failed depository
institutions. On August 21, 2009, the FDIC was duly appointed the receiver for Guaranty. Under
the Federal Deposit Insurance Act, the FDIC as receiver succeeds to, and is empowered to sue
and complain in any court of law to pursue, all claims held by banks for which it is the receiver.
12 U.S.C. §§ 1819, 1821(d)(2)(A)(i). Thus, the FDIC as Receiver for Guaranty has authority to
pursue claims held by Guaranty, including the claims made against the defendants in this action.
7. Defendant Bear Stearns is a limited liability company organized under the laws of
Delaware and is authorized to do business in Texas. Bear Stearns may be served through its
registered agent, CT Corporation, 350 North Saint Paul Street, Suite 2900, Dallas, Texas 75201.
8. Defendant Merrill Lynch, Pierce, Fenner & Smith Inc. is a corporation organized
under the laws of Delaware and is authorized to do business in Texas. It is the successor by
merger to Banc of America. Merrill Lynch, Pierce, Fenner & Smith Inc. succeeded to all of the
PLAINTIFF’S ORIGINAL PETITION Page 5
liabilities of Banc of America. Merrill Lynch, Pierce, Fenner & Smith Inc. may be served
through its registered agent, CT Corporation, 350 North Saint Paul Street, Suite 2900, Dallas,
Texas 75201.
9. Defendant RBS is a corporation organized under the laws of Delaware and is
authorized to do business in Texas. RBS may be served through its registered agent, Corporation
Service Company d/b/a CSC - Lawyers Incorporating Service Company, 211 East 7th Street,
Suite 620, Austin, Texas 78701.
10. Defendant WaMu Acceptance is a corporation organized under the laws of
Delaware. WaMu Acceptance may be served through the Texas Secretary of State because it is a
nonresident corporation, it engaged in business in Texas but did not maintain a regular place of
business in Texas nor a designated agent in Texas for service of process, this proceeding arises
out of the business conducted in Texas, and WaMu Acceptance is a party to this proceeding. The
Secretary of State may serve WaMu Acceptance through its registered agent, The Corporation
Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801.
11. Defendant WaMu Capital is a corporation organized under the laws of
Washington and is authorized to do business in Texas. WaMu Capital may be served through its
registered agent, CT Corporation, 350 North Saint Paul Street, Suite 2900, Dallas, Texas 75201.
IV. JURISDICTION AND VENUE
12. The Court has jurisdiction because the amount in controversy in this action falls
within the minimum jurisdictional limits of the Court.
13. All of the defendants are subject to personal jurisdiction in Texas because they
offered and sold, or controlled persons that offered and sold, the certificates to Guaranty in
Texas within the meaning of Article 581-33 of the TSA.
PLAINTIFF’S ORIGINAL PETITION Page 6
14. Venue is proper in this County under Section 15.002(a)(4) of the Texas Civil
Practice & Remedies Code because Travis County was the principal residence of Guaranty at
the time the claims accrued.
V. SECURITIZATION OF MORTGAGE LOANS
15. The securities that Guaranty purchased are so-called residential mortgage-backed securities, or RMBS, created in a process known as securitization. Securitization
begins with loans on which the borrowers are to make payments, usually monthly. The entity
that makes the loans is known as the originator of the loans. The process by which the originator
decides whether to make particular loans is known as the underwriting of loans. The purpose of
underwriting is to ensure that loans are made only to borrowers of sufficient credit standing to
repay them and only against sufficient collateral. In the loan underwriting process, the originator
applies its underwriting standards.
16. In general, residential mortgage lenders may hold some of the mortgage loans
they originate in their own portfolios and may sell other mortgage loans they originate into
securitizations.
17. In a securitization, a large number of loans, usually of a similar type, are grouped
into a collateral pool. The originator of those loans sells them (and, with them, the right to
receive the cash flow from them) to a trust. The trust pays the originator cash for the loans. The
trust raises the cash to pay for the loans by selling securities, usually called certificates, to
investors such as Guaranty. Each certificate entitles its holder to an agreed part of the cash flow
from the loans in the collateral pool.
18. In a simple securitization, the holder of each certificate is entitled to a pro rata
part of the overall monthly cash flow from the loans in the collateral pool.
19. In a more complex securitization, the cash flow is divided into different parts,
usually called tranches (“tranche” is “slice” in French), and the certificates are divided into
different classes, each with different rights. Each class of certificates is entitled to the cash flow
in the tranche corresponding to that class.
PLAINTIFF’S ORIGINAL PETITION Page 7
20. One way in which the cash flow is divided — and the rights of different classes of
certificates distinguished — is by priority of payment or, put differently, risk of nonpayment.
The most senior class of certificates usually is entitled to be paid in full before the next most
senior class, and so on. Conversely, losses from defaults in payment of the loans in the collateral
pool are allocated first to the most subordinate class of certificates, then to the class above that,
and so on. The interest rate on each class of certificates is usually proportional to the amount of
risk that that class bears; the most senior certificates bear the least risk and thus pay the lowest
rate of interest, the most subordinate, the opposite. This hierarchy of rights to payment is referred
to as the waterfall.
21. The risk of a particular class of certificate is a function of both the riskiness of the
loans in the collateral pool and the seniority of that class in the waterfall. Even if the underlying
loans are quite risky, the certificates may bear so little of that risk that they may be rated as
triple-A. (According to Moody’s, “[o]bligations rated Aaa are judged to be of the highest
quality, with minimal credit risk.”) For example, assume a securitization of $100 million of risky
loans, on which the historical loss rate is 5%. Assume that there are two classes of certificates, a
senior class of $50 million and a subordinate class of $50 million. Even though the underlying
loans are quite risky, the senior class of certificates would be paid in full as long as the $100
million of loans produced payments of at least $50 million plus interest, that is, unless the loss
rate on those loans exceeded 50%, fully ten times the historical average. All of the certificates
referred to in this Petition were rated triple-A when Guaranty purchased them.
22. Each securitization has a sponsor, the prime mover of the securitization.
Sometimes the sponsor is the originator or an affiliate. In originator-sponsored securitizations,
the collateral pool usually contains loans made by the originator that is sponsoring the
securitization. Other times, the sponsor may be an investment bank, which purchases loans from
one or more originators, aggregates them into a collateral pool, sells them to a trust, and
securitizes them. The sponsor arranges for title to the loans to be transferred to an entity known
as the depositor, which then transfers title to the loans to the trust.
PLAINTIFF’S ORIGINAL PETITION Page 8
23. The obligor of the certificates in a securitization is the trust that purchases the
loans in the collateral pool. Because a trust has few assets other than the loans that it purchased,
it may not be able to satisfy the liabilities of an issuer of securities (the certificates). The law
therefore treats the depositor as the issuer of a residential mortgage-backed certificate.
24. Securities underwriters, like Banc of America, Bear Stearns, RBS, and WaMu
Capital, play a critical role in the process of securitization. They underwrite the sale of the
certificates, that is, they purchase the certificates from the trust and then sell them to investors.
Equally important, securities underwriters provide to potential investors the information that they
need to decide whether to purchase certificates.
25. Because the cash flow from the loans in the collateral pool of a securitization is
the source of funds to pay the holders of the certificates issued by the trust, the credit quality of
those certificates is dependent upon the credit quality of the loans in the collateral pool (and upon
the place of each certificate in the waterfall). The most important information about the credit
quality of those loans is contained in the files that the originator develops while making the
loans, the so-called “loan files.” For residential mortgage loans, each loan file normally contains
comprehensive information from such important documents as the borrower’s application for the
loan, credit reports on the borrower, and an appraisal of the property that will secure the loan.
The loan file may also include notes from the person who underwrote the loan about whether and
how the loan complied with the originator’s underwriting standards, including documentation of
any “compensating factors” that justified any departure from those standards.
26. Potential investors in certificates are not given access to loan files. Instead, the
securities underwriters are responsible for gathering, verifying, and presenting to potential
investors the information about the credit quality of the loans that will be deposited into the trust.
They do so by using information about the loans that has been compiled into a database known
as a loan tape. The securities underwriters use the loan tape to compile numerous statistics about
the loans, which are presented to potential investors in a prospectus supplement, a disclosure
document that the underwriters are required to file with the Securities and Exchange
PLAINTIFF’S ORIGINAL PETITION Page 9
Commission. (Guaranty did not have access to the loan tapes before it purchased the certificates,
but Plaintiff has reviewed data from the loan tapes in preparing this Petition.)
27. As alleged in detail below, the information in the prospectus supplements and
other offering documents about the credit quality of the loans in the collateral pools of the trusts
contained many statements that were material to the credit quality of those loans, but were untrue
or misleading.
VI. THE SALES OF THE CERTIFICATES
28. Guaranty purchased 20 certificates in 18 securitizations (referred to in this
Petition as Securitizations Nos. 1 through 18). Details of each securitization and each certificate
are stated in Item 28 of Schedules 1 through 18 of this Petition, which correspond to
Securitizations Nos. 1 through 18. Plaintiff incorporates into this paragraph 28, and alleges as
though fully set forth in this paragraph, the contents of Item 28 of the Schedules.
29. Banc of America sold one certificate directly to Guaranty; Bear Stearns sold five
certificates directly to Guaranty; RBS sold two certificates directly to Guaranty; and WaMu
Capital sold 12 certificates directly to Guaranty. For each of the 20 certificates, the defendants
sent documents to Guaranty in Texas. These documents included one or more of the following: a
term sheet (or its equivalent), the prospectus supplement for the certificate that was filed with the
SEC, and drafts of some of the statistical tables to be included in the prospectus supplement. In
each of these documents, the defendants made statements of material fact about the certificate
that they offered and sold to Guaranty.
VII. DEFENDANTS’ MATERIAL UNTRUE OR MISLEADING STATEMENTS
ABOUT THE CERTIFICATES
30. The prospectus supplement for each of the 18 securitizations is available from the
SEC’s website. A URL for each prospectus supplement is included in Item 28 of the Schedules.
The prospectus supplements are incorporated into this Petition by reference.
PLAINTIFF’S ORIGINAL PETITION Page 10
31. In general, Plaintiff drew and analyzed a random sample of 400 loans from the
collateral pools of each securitization in which Guaranty purchased a certificate.
3
32. Many of the statements of material fact that the defendants made in the prospectus
supplements were untrue or misleading. These untrue or misleading statements included the
following.
A. Untrue or Misleading Statements About the Loan-to-Value Ratios (LTVs) of
the Mortgage Loans, and the Appraisals of the Properties, in the Collateral
Pools
1. LTVs
(a) The materiality of LTVs
33. The loan-to-value ratio of a mortgage loan, or LTV, is the ratio of the amount of
the mortgage loan to the lower of the appraised value or the sale price of the mortgaged property
when the loan is made. For example, a loan of $300,000 secured by a property valued at
$500,000 has an LTV of 60%; a loan of $450,000 on the same property has an LTV of 90%.
LTV is one of the most crucial measures of the risk of a mortgage loan, and the LTVs of the
mortgage loans in the collateral pool of a securitization are therefore one of the most crucial
measures of the risk of certificates sold in that securitization. LTV is a primary determinant of
the likelihood of default. The lower the LTV, the lower the likelihood of default. For example,
the lower the LTV, the less likely it is that a decline in the value of the property will wipe out the
owner’s equity and thereby give the owner an incentive to stop making mortgage payments and
abandon the property, a so-called strategic default. LTV also is a primary determinant of the
3
The group of loans that backed the certificate that Guaranty purchased in Securitization
No. 9 only had 401 loans. For that group, Plaintiff analyzed the 385 loans on which data were
available. The group of loans that backed the certificate that Guaranty purchased in
Securitization No. 10 only had 393 loans. For that group, Plaintiff analyzed the 375 loans on
which data were available. The group of loans that backed the certificate that Guaranty
purchased in Securitization No. 12 only had 263 loans. For that group, Plaintiff analyzed the 242
loans on which data were available. The group of loans that backed the certificate that Guaranty
purchased in Securitization No. 13 only had 330 loans. For that group, Plaintiff analyzed the 301
loans on which data were available.
PLAINTIFF’S ORIGINAL PETITION Page 11
severity of losses on a loan that defaults. The lower the LTV, the lower the severity of losses if
the loan defaults. Loans with lower LTVs provide greater “cushion,” thereby increasing the
likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan.
34. Beyond these fundamental effects on the likelihood and severity of default, LTVs
also affect prepayment patterns (that is, the number of borrowers who pay off their mortgage
loans before maturity and when they do so) and therefore the expected lives of the loans.
Prepayment patterns therefore affect many aspects of certificates that are material to the
investors that purchase them, including the life of the certificate and the timing and amount of
cash that the investor will receive during that life.
35. In addition, rating agencies use LTVs to determine the proper structuring and
credit enhancement necessary for securities, such as the certificates that Guaranty purchased, to
receive a particular rating. If the LTVs of the mortgage loans in the collateral pool of a
securitization are incorrect, the ratings of certificates sold in that securitization will also be
incorrect.
36. An accurate denominator (that is, the value of the property) is essential to an
accurate LTV. In particular, an inflated denominator will understate, sometimes greatly, the risk
of a loan. To return to the example above, if the property whose actual value is $500,000 is
valued incorrectly at $550,000, then the ostensible LTV of the $300,000 loan falls from 60% to
54.5%, and the ostensible LTV of the $450,000 loan falls from 90% to 81.8%. In either case, the
LTV based on the incorrect appraised value understates the risk of the loan.
37. For these reasons, a reasonable investor considers LTV critical to the decision
whether to purchase a certificate in a securitization of mortgage loans. Even small differences in
the weighted average LTVs of the mortgage loans in the collateral pool of a securitization have a
significant effect on both the risk and the rating of each certificate sold in that securitization and,
thus, are essential to the decision of a reasonable investor whether to purchase any such
certificate.
PLAINTIFF’S ORIGINAL PETITION Page 12
(b) Untrue or misleading statements about the LTVs of the
mortgage loans in the collateral pools of these securitizations
38. In the prospectus supplements, the defendants made material untrue or misleading
statements about the LTVs of the mortgage loans in the collateral pools of these securitizations.
Each such statement is identified in Item 38 of the Schedules of this Petition. Plaintiff
incorporates into this paragraph 38, and alleges as though fully set forth in this paragraph, the
contents of Item 38 of the Schedules.
39. The defendants made these statements as statements of fact. Plaintiff is informed
and believes, and based thereon alleges, that the defendants intended that these statements be
understood as statements of fact. Guaranty did understand the statements about the LTVs as
statements of fact. Guaranty had no access to appraisal reports or other documents or information
from which it could verify the LTVs of the mortgage loans other than the statements that the
defendants made about those LTVs.
(c) An automated valuation model demonstrates that the
defendants’ statements about the LTVs were untrue because
they were based on overstated valuations of the properties in
the collateral pools.
40. The stated LTVs of many of the mortgage loans in the securitizations were
significantly lower than the true LTVs because the denominators (that is, the value of the
properties that secured those loans) that were used to determine the disclosed LTVs were
overstated to a material extent. The weighted-average LTVs presented in the prospectus
supplements were, therefore, untrue and misleading.
41. Using a comprehensive, industry-standard automated valuation model (AVM), it
is possible to determine the true market value of a certain property as of a specified date. An
AVM is based on objective criteria like the condition of the property and the actual sale prices of
comparable properties in the same locale shortly before the specified date, and is more
consistent, independent, and objective than other methods of appraisal. AVMs have been in
widespread use for many years. The AVM on which these allegations are based incorporates a
database of 500 million sales covering ZIP codes that represent more than 97% of the homes,
PLAINTIFF’S ORIGINAL PETITION Page 13
occupied by more than 99% of the population, in the United States. Independent testing services
have determined that this AVM is the most accurate of all such models.
42. For many of the properties that secured the mortgage loans, the model determined
that the LTVs presented in the prospectus supplements were understated. In particular, for many
of the properties, the model determined that the denominator (that is, the appraised value of the
property as stated in the loan tape and compiled into the tables in the prospectus supplement) that
was used in the disclosed LTV was 105% or more of the true market value as determined by the
model as of the date on which each individual mortgage loan closed. (The model considered no
transactions that occurred after that date.) In contrast, the model determined that the denominator
that was used in the disclosed LTV was 95% or less of the true market value on a much smaller
number of properties. Thus, the number of properties on which the value was overstated
exceeded by far the number on which the value was understated, and the aggregate amount
overstated exceeded by far the aggregate amount understated.
43. For example, in Securitization No. 1, there were 973 mortgage loans that backed
the certificate that Guaranty purchased. On 268 of the properties that secured those loans, the
model determined that the denominator that was used in the disclosed LTV was 105% or more of
the true market value, and the amount by which the stated values of those properties exceeded
their true market values in the aggregate was $42,631,023. The model determined that the
denominator that was used in the disclosed LTV was 95% or less of true market value on only
105 properties, and the amount by which the true market values of those properties exceeded the
values reported in the denominators was $12,774,212. Thus, the number of properties on which
the value was overstated was more than two-and-a-half times the number on which the value was
understated, and the aggregate amount overstated was more than three times the aggregate
amount understated.
44. On one of the loans in Securitization No. 1, the amount of the loan was $560,000
and the stated value of the property was $700,000, resulting in a stated LTV of 80%. The model,
however, determined that the true value of the property was $465,000, resulting in a true LTV of
PLAINTIFF’S ORIGINAL PETITION Page 14
120.4%. Thus, the stated value was higher than the true value by 50.5% and the stated LTV was
lower than the true LTV by 40.4%. Both of these were huge discrepancies that were material to
the credit quality of the loan.
45. The overstated values of 268 properties in Securitization No. 1 made virtually
every statement by Banc of America, which sold to Guaranty the certificate in Securitization No.
1, about the LTVs of the mortgage loans untrue or misleading. For example, Banc of America
stated that all mortgage loans had an LTV of 95% or less. In fact, 92 of the mortgage loans had
LTVs of over 95%. Banc of America also stated that the weighted-average LTV of the loans in
the collateral pool was 72.73%. In fact, the weighted-average LTV of the loans was 86.8%.
These differences were material for the reasons stated above.
46. The results of the valuations by the automated model in this example are
summarized in the following table.
Number of loans that backed the certificate 973
Number of loans for which the stated value was 105% or more of the true
market value as determined by the model
268
Aggregate amount by which the stated values of those properties exceeded
their true market values as determined by the model
$42,631,023
Number of loans for which the stated value was 95% or less of the true market
value as determined by the model
105
Aggregate amount by which the true market values of those properties
exceeded their stated values
$12,774,212
Number of loans with LTVs over 95%, as stated by the defendant 0
Number of loans with LTVs over 95%, as determined by the model 92
Weighted-average LTV, as stated by the defendant 72.73%
Weighted-average LTV, as determined by the model 86.8%
47. The model produced similar results for the mortgage loans in the collateral pools
of each securitization. Details of the results of the model for each securitization are stated in Item
47 of the Schedules of this Petition. Plaintiff incorporates into this paragraph 47, and alleges as
though fully set forth in this paragraph, the contents of Item 47 of the Schedules.
PLAINTIFF’S ORIGINAL PETITION Page 15
(d) These statements also were misleading because the defendants
omitted to state that there were additional liens on a material
number of the properties that secured the mortgage loans in
the collateral pools.
48. As mentioned above, the LTV of a mortgage loan is a key determinant of the
likelihood that the mortgagor will default in payment of the mortgage. The lower the LTV, the
less likely that a decline in the value of the property will wipe out the owner’s equity and thereby
give the owner an incentive to stop making mortgage payments and abandon the property.
Because LTV affects the behavior of borrowers so profoundly, accurate LTVs are essential to
predicting defaults and prepayments by borrowers. Also, as mentioned above, LTV affects the
severity of loss on those loans that do default. The power of LTV to predict defaults,
prepayments, and severities is a major reason why reasonable investors consider the LTVs of
mortgage loans important to the decision whether to purchase a certificate in the securitization of
those loans.
49. The predictive power of the LTV of a mortgage loan is much reduced if there are
additional liens on the same property. Additional liens reduce the owner’s equity in the property
and thereby increase the owner’s incentive to stop making mortgage payments and abandon the
property if the value of the property falls below the combined amount of all of the liens on the
property (a strategic default). Additional liens also exacerbate delinquencies and defaults because
they complicate the servicing of mortgage loans and the management of delinquencies and
defaults. Servicers of the first-lien mortgage must then deal not only with the borrower, but also
with the servicer of the second-lien mortgage. For example, the servicer of a single mortgage
may want to grant a borrower forbearance while the borrower is unemployed and allow him or
her to add missed payments to the principal of the loan and to resume payments when he or she
is employed again. But the servicer of the second-lien mortgage may refuse such forbearance and
initiate foreclosure and thereby force the borrower into default on the first mortgage as well.
50. According to land records, many of the properties that secured mortgage loans in
the collateral pools of the securitizations were subject to liens in addition to the lien of the
PLAINTIFF’S ORIGINAL PETITION Page 16
mortgage in the pool at the time of the closing of these securitizations.
4
The defendants failed to
disclose in the prospectus supplements any of these additional liens. These additional liens
increased the risk that those owners would default in payment of the mortgage loans.
51. To take an example, of the 973 properties that secured the mortgage loans that
backed the certificate that Guaranty purchased in Securitization No. 1, at least 294 were subject
to liens in addition to the lien represented by the mortgage in the collateral pool. Banc of
America did not disclose in the prospectus supplement that those liens existed. Banc of America
stated that the weighted-average LTV of the properties was 72.73%, when, solely because of the
additional liens on these 294 properties, the weighted-average combined LTV was 75.8%.
5
This
is a significant difference.
52. On one of the loans, the original balance of the mortgage loan was $344,000, the
represented value of the property was $430,000, and the reported LTV was 80%. On the date of
the closing of this securitization, however, there were undisclosed additional liens on this
property of $64,500. Thus, when all liens on the property were taken into account, the combined
LTV of the loan was 95%, which was 15% higher than the stated LTV on that loan. This was a
huge discrepancy that was material to the credit quality of the loan. In many cases, the amount of
the undisclosed additional liens was much greater than the owner’s ostensible equity, putting the
owner “under water” on the day on which this securitization closed.
53. Details of the undisclosed additional liens in the securitizations are stated in Item
53 of the Schedules of this Petition. Plaintiff incorporates into this paragraph 53, and alleges as
though fully set forth in this paragraph, the contents of Item 53 of the Schedules. Plaintiff is
informed and believes, and based thereon alleges, that discovery will demonstrate that the
4
In order to ensure that this calculation did not include liens that were paid off but were
not promptly removed from land records, the additional liens referred to in this Petition and the
Schedules do not include liens that were originated on or before the date on which each mortgage
loan in the pools was closed.
5
The combined LTV is the ratio of all loans on a property to the value of the property.
PLAINTIFF’S ORIGINAL PETITION Page 17
number of loans with additional liens is substantially higher than those disclosed in the
Schedules.
54. Because the defendants did not disclose the existence or the amounts of these
additional liens, all of the statements that they made about the LTVs of the mortgage loans were
misleading.
2. Appraisals
55. As discussed above in paragraph 36, an accurate denominator (value of the
mortgaged property) is essential to calculating an accurate LTV. An accurate appraisal of the
property, in turn, is essential to identifying an accurate denominator.
56. In connection with these securitizations, there was undisclosed upward bias in
appraisals of properties that secured mortgage loans and consequent understatement of the LTVs
of those loans. This upward bias in appraisals caused the denominators that were used to
calculate the LTVs of many mortgage loans to be overstated and, in turn, the LTVs to be
understated. The defendants’ statements regarding the LTVs of the mortgage loans in the
collateral pools were misleading because they omitted to state that the appraisals of a material
number of the properties that secured those loans were biased upwards. In addition, the
defendants stated that the appraisals conformed to the Uniform Standards of Professional
Appraisal Practice (USPAP), the professional standards that govern appraisers and appraisals (or
to the standards of Fannie Mae and Freddie Mac, which required compliance with USPAP).
Those statements were false because upwardly biased appraisals do not conform to USPAP.
(a) The statements that the defendants made about the LTVs of
the mortgage loans in the collateral pools were misleading
because they omitted to state that the appraisals of a large
number of the properties that secured those loans were biased
upward, so that stated LTVs based on those appraisals were
lower than the true LTVs of those mortgage loans.
57. The defendants omitted to state that the appraisals in these securitizations used
inaccurate property descriptions, ignored recent sales of the subject and comparable properties,
and used sales of properties that were not comparable, all in order to inflate the values of the
PLAINTIFF’S ORIGINAL PETITION Page 18
appraised properties. The appraisals used to compute the LTVs of many of the mortgage loans in
the collateral pools were biased upwards. As alleged in paragraphs 41 through 47, in each trust,
the number of properties for which the value was overstated exceeded by far the number for
which the value was understated, and the aggregate amount overstated exceeded by far the
aggregate amount understated. These ratios for each trust are summarized in the following table.
Securitization
No.
Ratio of Number of Properties
Whose Value Was Overstated to
Number Whose Value Was
Understated
Ratio of Amount of
Overvaluation to Amount
of Undervaluation
1 2.6 3.3
2 4.7 5.1
3 2.9 3.2
4 5.1 6.7
5 2.9 4.9
6 9.6 13.0
7 4.9 8.4
8 2.0 1.5
9 6.5 8.0
10 7.6 8.1
11 2.8 1.9
12 6.5 7.8
13 4.2 4.8
14 4.1 6.8
15 4.7 6.5
16 4.6 4.0
17 2.0 3.7
18 7.0 12.9
These lopsided results demonstrate the upward bias in appraisals of properties that secured the
mortgage loans in the collateral pools.
58. Plaintiff is informed and believes, and based thereon alleges, that a material
number of the upwardly biased appraisals were not statements of the appraisers’ actual findings
of the values of the properties based on their objective valuations.
PLAINTIFF’S ORIGINAL PETITION Page 19
(b) The statements by the defendants about compliance with
USPAP were untrue because the appraisals of a large number
of the properties that secured the mortgage loans were biased
upward.
59. Appraisers and appraisals are governed by USPAP, which is promulgated by the
Appraisal Standards Board. The Preamble to USPAP states that its purpose “is to promote and
maintain a high level of public trust in appraisal practice.” Both Fannie Mae and Freddie Mac
require that appraisals comply with USPAP.
60. USPAP includes the following provisions:
(a) USPAP Standards Rule 2-1(b)(iii) requires that “Each written or oral real
property appraisal report must clearly and accurately set forth the appraisal in a manner that will
not be misleading.”
(b) USPAP Standards Rule 1-4(a) provides that “When a sales comparison
approach is necessary for credible assignment results, an appraiser must analyze such
comparable sales data as are available to indicate a value conclusion.”
(c) USPAP Standards Rule 1-4(b) provides that “When a cost approach is
necessary for credible assignment results, an appraiser must:
(i) develop an opinion of site value by an appropriate appraisal
method or technique;
(ii) analyze such comparable cost data as are available to estimate
the cost new of the improvements (if any); and
(iii) analyze such comparable data as are available to estimate the
difference between the cost new and the present worth of the
improvements (accrued depreciation).”
61. The Appraisal Standards Board, which promulgates USPAP, also issues Advisory
Opinions. Although the Advisory Opinions do not establish new standards or interpret USPAP,
they “are issued to illustrate the applicability of appraisal standards in specific situations.”
Advisory Opinion 1 discussing “Sales History” states that “The requirement for the appraiser to
PLAINTIFF’S ORIGINAL PETITION Page 20
analyze and report sales history and related information is fundamental to the appraisal process.
Just as the appraiser must analyze pending and recent sales of comparable properties, the
appraiser must take into account all pending and recent sales of the subject property itself.”
62. In the prospectus supplements, the defendants made statements that the appraisals
of properties that secured the mortgage loans in the collateral pools were made in compliance
with USPAP or with the appraisal standards of Fannie Mae and Freddie Mac, which required
compliance with USPAP. Details of each such statement are stated in Item 62 of the Schedules
of this Petition. Plaintiff incorporates into this paragraph 62, and alleges as though fully set forth
in this paragraph, the contents of Item 62 of the Schedules.
63. Plaintiff is informed and believes, and based thereon alleges, that a material
number of mortgage loans in the collateral pools had appraisals conducted that deviated from
USPAP.
64. Each of the statements referred to in paragraph 62 was untrue because the
appraisals of a material number of the properties referred to in each such statement did not
conform to USPAP.
65. By each of the untrue and misleading statements referred to in paragraphs 38 and
62 above, the defendants materially understated the risk of the certificates that they issued,
underwrote, or sold.
B. Untrue or Misleading Statements About the Occupancy Status of the
Properties That Secured the Mortgage Loans in the Collateral Pools
1. The materiality of occupancy status
66. Residential real estate is usually divided into primary residences, second homes,
and investment properties. Mortgages on primary residences are less likely to default than
mortgages on non-owner-occupied residences and therefore are less risky. Occupancy status also
influences prepayment patterns.
67. Occupancy status (that is, whether the property that secures a mortgage is to be
the primary residence of the borrower, a second home, or an investment property) is an important
PLAINTIFF’S ORIGINAL PETITION Page 21
measure of the risk of a mortgage loan. The percentage of loans in the collateral pool of a
securitization that are not secured by mortgages on primary residences is an important measure
of the risk of certificates sold in that securitization. Other things being equal, the higher the
percentage of loans not secured by primary residences, the greater the risk of the certificates. A
reasonable investor considers occupancy status important to the decision whether to purchase a
certificate in a securitization of mortgage loans.
2. Untrue or misleading statements about the occupancy status of the
properties that secured the mortgage loans in the collateral pools of
these securitizations
68. In the prospectus supplements, the defendants made statements about the number
of properties in the collateral pools of the securitizations that were the primary residences of their
owners. To return to the example of Securitization No. 1, Banc of America stated that, of the 973
mortgage loans that backed the certificate that Guaranty purchased, 859 were secured by primary
residences and 114 were not. Details of each such statement in the securitizations are stated in
Item 68 of the Schedules of this Petition. Plaintiff incorporates into this paragraph 68, and
alleges as though fully set forth in this paragraph, the contents of Item 68 of the Schedules.
69. These statements were untrue or misleading because (i) the stated number of
mortgage loans secured by primary residences was higher than the actual number of loans in that
category or (ii) the stated number of mortgage loans not secured by primary residences was
lower than the actual number of loans in that category.
3. Basis of the allegations above that these statements about the
occupancy status of the properties that secured the mortgage loans in
the collateral pools were untrue or misleading
70. Because they are less risky than other mortgage loans, mortgage loans on primary
residences usually have more favorable terms, including lower interest rates and more lenient
underwriting standards, than mortgage loans on second homes and investment properties.
Applicants for loans on second homes and investment properties therefore have an incentive to
PLAINTIFF’S ORIGINAL PETITION Page 22
state that the property will be their primary residence even when it will not. Plaintiff is informed
and believes, and based thereon alleges, that borrowers of many securitized loans did so.
71. A significant number of the properties in the collateral pools of the securitizations
that were stated to be primary residences actually were not. Moreover, Plaintiff is informed and
believes, and based thereon alleges, that there is additional evidence of occupancy fraud in the
loan files of many more of the mortgage loans in the collateral pools.
72. With respect to some of the properties that were stated to be primary residences,
the borrower instructed local tax authorities to send the bills for the taxes on the property to the
borrower at an address other than the property itself. This is strong evidence that the mortgaged
property was not the borrower’s primary residence.
73. In some states and counties, the owner of a property is able to designate whether
that property is his or her “homestead,” which may reduce the taxes on that property or exempt
the property from assets available to satisfy the owner’s creditors, or both. An owner may
designate only one property, which he or she must occupy, as his or her homestead. The fact that
an owner in one of these jurisdictions does not designate a property as his or her homestead
when he or she can do so is strong evidence that the property was not his or her primary
residence. With respect to some of the properties that were stated to be primary residences, the
owner could have but did not designate the property as his or her homestead. That omission is
strong evidence that the property was not the borrower’s primary residence.
74. When a borrower actually occupies a newly mortgaged property, he or she
normally notifies entities that send bills to him or her (such as credit card companies, utility
companies, and local merchants) to send his or her bills to the address of the newly mortgaged
property. Six months after the closing of the mortgage is ample time to complete this process.
Six months after the closing of the mortgage, if the borrower is still receiving his or her bills at a
different address, it is very likely that the borrower does not occupy the mortgaged property. For
each securitization, a credit reporting agency specializing in mortgage loans compared the
addresses in the borrowers’ credit reports to the addresses of the mortgaged properties six
PLAINTIFF’S ORIGINAL PETITION Page 23
months after the closing of the mortgage loans. Many borrowers whose mortgage loans were
secured by properties that were stated in the loan tapes to be owner-occupied did not receive any
bills at the address of the mortgaged property but did receive their bills at another address or
addresses. It is very likely that each of these borrowers did not occupy the mortgaged property.
75. In Securitization No. 1, 73 owners of properties that were stated to be primary
residences instructed local tax authorities to send the bills for the taxes on those properties to
them at different addresses; 199 owners of properties that were stated to be primary residences
could have, but did not, designate those properties as their homesteads; and 78 owners of
properties that were stated to be primary residences did not receive any of their bills there six
months after the mortgages were originated. Eliminating duplicates, for one or more of these
reasons, 285 of the 859 properties that were stated to be primary residences actually were not.
Thus, the number of properties that were not primary residences was not 114, as Banc of
America stated, but at least 399, a material difference. The numbers of such loans in the
collateral pools of the securitizations are stated in Item 75 of the Schedules of this Petition.
Plaintiff incorporates into this paragraph 75, and alleges as though fully set forth in this
paragraph, the contents of Item 75 of the Schedules.
76. By each of the untrue and misleading statements referred to in paragraph 68, the
defendants materially understated the risk of the certificates that they issued, underwrote, or sold.
C. Untrue or Misleading Statements About the Underwriting Standards of the
Originators of the Mortgage Loans in the Collateral Pools
1. The materiality of underwriting standards and the extent of an
originator’s disregard of them
77. Originators of mortgage loans have written standards by which they underwrite
applications for loans. An important purpose of underwriting is to ensure that the originator
makes mortgage loans only in compliance with those standards and that its underwriting
decisions are properly documented. An even more fundamental purpose of underwriting
mortgage loans is to ensure that loans are made only to borrowers with credit standing and
financial resources to repay the loans, and only against collateral with value, condition, and
PLAINTIFF’S ORIGINAL PETITION Page 24
marketability sufficient to secure the loans. An originator’s underwriting standards, and the
extent to which the originator does not follow its standards, are important indicators of the risk of
mortgage loans made by that originator and of certificates sold in a securitization in which
mortgage loans made by that originator are part of the collateral pool. A reasonable investor
considers the underwriting standards of originators of mortgage loans in the collateral pool of a
securitization, and whether an originator disregards its standards, important to the decision
whether to purchase a certificate in that securitization.
2. Untrue or misleading statements about the underwriting standards of
originators of the mortgage loans
78. In the prospectus supplements, the defendants made statements about the
underwriting standards of the originators of the mortgage loans in the collateral pools. Details of
each such statement are stated in Item 78 of the Schedules of this Petition. They included
statements that the originators made mortgage loans in compliance with their underwriting
standards and made exceptions to those standards only when compensating factors were present.
Plaintiff incorporates into this paragraph 78, and alleges as though fully set forth in this
paragraph, the contents of Item 78 of the Schedules.
79. Plaintiff is informed and believes, and based thereon alleges, that these statements
were untrue or misleading because the defendants omitted to state that: (a) the originators were
disregarding those underwriting standards; (b) the originators were making extensive exceptions
to those underwriting standards when no compensating factors were present; (c) the originators
were making wholesale, rather than case-by-case, exceptions to those underwriting standards; (d)
the originators were making mortgage loans that borrowers could not repay; and (e) the
originators were failing frequently to follow quality-assurance practices necessary to detect and
prevent fraud intended to circumvent their underwriting standards.
PLAINTIFF’S ORIGINAL PETITION Page 25
3. Basis of the allegations that these statements about the underwriting
standards of the originators of the mortgage loans in the collateral
pools were untrue or misleading
(a) The deterioration in undisclosed credit characteristics of
mortgage loans made by these originators
80. Plaintiff is informed and believes, and based thereon alleges, that before and
during the time of these securitizations, the originators of the loans in these securitizations
disregarded their stated underwriting standards. As a result, securitized mortgage loans made
between 2004 and the dates of these securitizations have experienced high rates of delinquency
and default.
81. The high rates of delinquency and default were caused not so much by any
deterioration in credit characteristics of the loans that were expressly embodied in underwriting
standards and disclosed to investors, but rather by deterioration in credit characteristics that were
not disclosed to investors.
82. Plaintiff is informed and believes that what was true about recently securitized
mortgage loans in general was true in particular of loans originated by the entities that originated
the loans in the collateral pools of these securitizations, as the following figures demonstrate.
Taking the originator Bank of America, N.A., Figure 1 shows the rising incidence of early
payment defaults (or EPDs), that is, the percent of loans (by outstanding principal balance) that
were originated and sold into securitizations by Bank of America, N.A. and that became 60 or
more days delinquent within six months after they were made. An EPD is strong evidence that
the originator did not follow its underwriting standards in making the loan. Underwriting
standards are intended to ensure that loans are made only to borrowers who can and will make
their mortgage payments. Because an EPD occurs so soon after the mortgage loan was made, it is
much more likely that the default occurred because the borrower could not afford the payments
in the first place (and thus that the underwriting standards were not followed), than because of
changed external circumstances unrelated to the underwriting of the mortgage loan (such as that
the borrower lost his or her job). The bars in Figure 1 depict the incidence of EPDs in loans
PLAINTIFF’S ORIGINAL PETITION Page 26
originated by Bank of America, N.A. that were sold into securitizations. The steady increase in
EPDs is further evidence that the deterioration in the credit quality of those loans was caused by
disregard of underwriting standards.
83. Figure 2 shows the weighted-average disclosed LTVs of the same loans and
weighted-average disclosed credit scores of the borrowers. These were nearly constant, showing
that the deterioration in the credit quality of the loans was caused not by these disclosed factors,
but rather by undisclosed factors.
PLAINTIFF’S ORIGINAL PETITION Page 27
84. Substantially the same facts are true of the mortgage loans originated and sold
into securitizations by each of the originators of mortgage loans in the collateral pools of these
securitizations. Figures for Countrywide Home Loans, Inc. are presented in Figures 1 and 2 of
Exhibit A of this Petition.
(b) The poor performance of the loans in these pools demonstrates
that the originators disregarded their underwriting guidelines
when making these loans.
85. As noted above, an EPD is evidence that the originator may have disregarded its
underwriting standards in making the loan. The mortgage loans in some of the collateral pools of
these securitizations experienced EPDs. These EPDs are evidence that the originators of those
loans may have disregarded their underwriting standards when making those loans. The number
and percent of the loans in each pool that suffered EPDs are stated in Item 85 of the Schedules of
PLAINTIFF’S ORIGINAL PETITION Page 28
this Petition. Plaintiff incorporates into this paragraph 85, and alleges as though fully set forth in
this paragraph, the contents of Item 85 of the Schedules.
86. A high rate of delinquency at any time in a group of mortgage loans is also
evidence that the originators of those loans may have disregarded their underwriting standards in
making the loans. A common measure of serious delinquency is the number of loans on which
the borrowers were ever 90 or more days delinquent in their payments. The mortgage loans in
the collateral pools have experienced very high rates of delinquencies by this measure. These
high rates of delinquencies are strong evidence that the originators of those loans may have
disregarded their underwriting standards when making those loans. The number and percent of
the loans in each pool that suffered delinquencies of 90 days or more are stated in Item 86 of the
Schedules of this Petition. Plaintiff incorporates into this paragraph 86, and alleges as though
fully set forth in this paragraph, the contents of Item 86 of the Schedules.
87. A second common measure of delinquency is the number of loans on which the
borrowers are 30 or more days delinquent at a given point in time. The mortgage loans in the
collateral pools have experienced very high rates of delinquencies by this measure. These high
rates of delinquencies are strong evidence that the originators of those loans may have
disregarded their underwriting standards when making those loans. The number and percent of
the loans in each pool that were 30 or more days delinquent on March 31, 2012, are stated in
Item 87 of the Schedules of this Petition. Plaintiff incorporates into this paragraph 87, and
alleges as though fully set forth in this paragraph, the contents of Item 87 of the Schedules.
88. By each of the untrue and misleading statements referred to in paragraph 78
above, the defendants materially understated the risk of the certificates that they issued,
underwrote, or sold. Moreover, Plaintiff is informed and believes, and based thereon alleges, that
discovery will yield additional evidence that the originators disregarded their underwriting
guidelines when making the mortgage loans in the collateral pools of these securitizations.
PLAINTIFF’S ORIGINAL PETITION Page 29
D. The Large Number of Mortgage Loans in the Collateral Pools About Which
the Defendants Made Material Untrue or Misleading Statements Made Their
Statements About the Ratings of Guaranty’s Certificates Untrue and
Misleading.
89. In the prospectus supplements, the defendants made statements about the ratings
of the certificates by ratings agencies. They stated that the ratings agencies rated each such
certificate triple-A. Details of each such statement are stated in Item 89 of the Schedules of this
Petition. Plaintiff incorporates into this paragraph 89, and alleges as though fully set forth in this
paragraph, the contents of Item 89 of the Schedules.
90. The ratings were important to the decision of any reasonable investor whether to
purchase the certificates. Many investors, including Guaranty, have investment policies that
require a certain minimum rating for all investments. The policy of Guaranty was to purchase
only certificates that were rated triple-A.
91. These statements by the defendants about the ratings of the certificates they
issued, underwrote, or sold were misleading because the defendants omitted to state that the
ratings were affected by all of the material untrue or misleading statements about specific
mortgage loans in the collateral pools. These include:
(a) loans in which the LTVs were materially understated as shown by the AVM;
(b) loans in which the LTVs were misleading as a result of undisclosed additional
liens;
(c) loans in which the properties were stated to be owner-occupied, but were not; and
(d) loans that suffered EPDs, strong evidence that the originators may have
disregarded the underwriting standards in making those loans.
92. In Securitization No. 1, there were 268 loans in which the LTVs were materially
understated as shown by the AVM, 294 loans in which the LTVs were misleading because of
undisclosed additional liens, and 285 loans in which the properties were stated to be owner-occupied but were not. Eliminating duplicates, there were 645 loans (or 66.3% of the loans that
backed the certificate that Guaranty purchased) about which Banc of America made untrue or
PLAINTIFF’S ORIGINAL PETITION Page 30
misleading statements. The numbers of such loans in the collateral pools of the securitizations
are stated in Item 92 of the Schedules of this Petition. Plaintiff incorporates into this paragraph
92, and alleges as though fully set forth in this paragraph, the contents of Item 92 of the
Schedules.
93. Plaintiff is informed and believes, and based thereon alleges, that loan files and
other documents available only through discovery will prove that those statements were untrue
or misleading with respect to many more loans as well.
94. By these untrue and misleading statements, the defendants materially understated
the risk of the certificates that they issued, underwrote, or sold.
VIII. STATUTES OF LIMITATIONS
95. All of the claims in this Petition are timely. Plaintiff became receiver for Guaranty
on August 21, 2009. Under 12 U.S.C. § 1821(d)(14), the statutes of limitations on all of
Guaranty’s claims asserted in this Petition that had not expired as of August 21, 2009, are
extended to no less than three years from that date. This Petition was filed less than three years
from August 21, 2009.
96. The statutes of limitations applicable to the claims asserted in this Petition had not
expired as of August 21, 2009, because a reasonably diligent plaintiff would not have discovered
until later than August 21, 2008, facts that show that the particular statements referred to in Items
28, 38, 62, 68, 78, and 89 of the Schedules to this Petition were untrue or misleading. Those are
statements about the 19,758 specific mortgage loans in the collateral pools of the securitizations
involved in this action, not about residential mortgage loans or any type of residential mortgage
loan (e.g., prime, Alt-A, subprime, etc.) in general. A reasonably diligent plaintiff did not have
access until after August 21, 2008, to facts about those specific loans that show that the
statements that defendants made about those specific loans were untrue or misleading. A
reasonably diligent plaintiff did not have access to the loan files compiled by the originators of
those specific mortgage loans nor to records maintained by the servicers of those specific
mortgage loans (from either or both of which a reasonably diligent plaintiff may have discovered
PLAINTIFF’S ORIGINAL PETITION Page 31
facts that show that the statements that defendants made about those specific loans were untrue
or misleading) because originators and servicers of loans and securitization trustees do not make
those files available to certificateholders. Moreover, on and prior to August 21, 2008, there were
not available to a reasonably diligent plaintiff, even at considerable expense, data about those
specific loans that show that the statements that defendants made about those specific loans were
untrue or misleading. Such data became available for the first time in early 2010.
97. When Guaranty purchased the certificates involved in this action, all of them were
rated triple-A, the highest possible rating, by at least two of Fitch, Moody’s, and Standard &
Poor’s, all Nationally Recognized Statistical Rating Organizations (NRSROs) accredited by the
SEC. Sponsors of securitizations submitted to the NRSROs the same information about the loans
in the collateral pools of proposed securitizations that they included in the prospectus
supplements for those securitizations, including in particular statements of the type referred to in
Items 28, 38, 62, 68, 78, and 89 of the Schedules to this Petition. The NRSROs used and relied
on that information in rating the certificates to be issued in each securitization.
98. The NRSROs monitored the certificates that they rated after those certificates
were issued. If an NRSRO discovers facts that show that there was an untrue or misleading
statement about a material fact in the information submitted to it for its use in rating a certificate,
then the NRSRO will withdraw its rating of that certificate while it considers the impact of the
untrue or misleading statement, or it will downgrade the rating of the certificate, usually to a
rating below investment grade.
99. As noted above, all of the certificates involved in this action were rated triple-A at
issuance by at least two of Fitch, Moody’s, and Standard & Poor’s. Not one of those NRSROs
withdrew any of those ratings, or downgraded any of them to below investment grade, before
August 21, 2008. The date on which each certificate was first downgraded below investment
grade is stated in Item 28 of the Schedules.
100. If a reasonably diligent plaintiff would have discovered before August 21, 2008,
facts that show that the particular statements referred to in Items 28, 38, 62, 68, 78, and 89 of the
PLAINTIFF’S ORIGINAL PETITION Page 32
Schedules to this Petition were untrue or misleading, then the NRSROs, which were monitoring
the certificates and are much more sophisticated than a reasonably diligent plaintiff, would also
have discovered such facts and withdrawn or downgraded their ratings on the certificates to
below investment grade. The fact that none of the NRSROs did so demonstrates that, before
August 21, 2008, a reasonably diligent plaintiff could not have discovered facts that show that
those statements were untrue or misleading.
101. The claims on Securitizations Nos. 11 through 15 are also timely for another
reason. As a purchaser of the certificates, Guaranty was, and Plaintiff as Receiver for Guaranty
is, a member of the proposed class in Boilermakers National Annuity Trust Fund v. WaMu
Mortgage Pass Through Certificates, Series AR1 (In re WaMu), United States District Court for
the Western District of Washington, No. C 09-00037 MJP. The pendency of In re WaMu has
tolled the running of the statutes of limitations on the claims in this Petition.
102. Five of the securitizations from which Guaranty purchased certificates,
Securitizations Nos. 11 through 15, were included in the original class action Complaint filed in
In re WaMu on January 12, 2009. Securitizations Nos. 11, 13, 14, and 15 were dismissed from
that action on September 28, 2010. Claims on Securitization No. 12 were narrowed to a tranche
other than the one from which Guaranty purchased a certificate on October 21, 2011.
IX. CAUSES OF ACTION
A. Untrue or Misleading Statements in the Sale of Securities Under Article 581-33 of the TSA
103. Plaintiff hereby incorporates by reference, as though fully set forth, paragraphs 1
through 102.
104. Banc of America sold one certificate in Securitization No. 1 that Guaranty
purchased when it was initially offered to the public. Banc of America sent communications and
solicitations to Guaranty in Texas for the purpose of inducing Guaranty to purchase the
certificate. The sale of the certificate occurred in Texas because employees or agents of Banc of
America directed communications about the certificate and solicitations to purchase the
PLAINTIFF’S ORIGINAL PETITION Page 33
certificate to Guaranty there, and because Guaranty received those communications and
solicitations there.
105. In doing the acts alleged in the sale to Guaranty of the certificate in Securitization
No. 1, Banc of America violated Article 581-33 of the TSA by offering or selling a security in
this State by means of written communications that included untrue statements of material fact or
omitted 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.
106. Bear Stearns sold five certificates in Securitizations Nos. 2, 3, 6, 7, and 8 that
Guaranty purchased when they were initially offered to the public. Bear Stearns sent
communications and solicitations to Guaranty in Texas for the purpose of inducing Guaranty to
purchase the certificates. The sale of these certificates occurred in Texas because employees or
agents of Bear Stearns directed communications about the certificates and solicitations to
purchase the certificates to Guaranty there, and because Guaranty received those
communications and solicitations there.
107. In doing the acts alleged in the sale to Guaranty of the five certificates in
Securitizations Nos. 2, 3, 6, 7, and 8, Bear Stearns violated Article 581-33 of the TSA by
offering or selling securities in this State by means of written communications that included
untrue statements of material fact or omitted 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.
108. RBS sold two certificates in Securitizations Nos. 4 and 5 that Guaranty purchased
when they were initially offered to the public. RBS sent communications and solicitations to
Guaranty in Texas for the purpose of inducing Guaranty to purchase the certificates. The sale of
these certificates occurred in Texas because employees or agents of RBS directed
communications about the certificates and solicitations to purchase the certificates to Guaranty
there, and because Guaranty received those communications and solicitations there.
109. In doing the acts alleged in the sale to Guaranty of the two certificates in
Securitizations Nos. 4 and 5, RBS violated Article 581-33 of the TSA by offering or selling
PLAINTIFF’S ORIGINAL PETITION Page 34
securities in this State by means of written communications that included untrue statements of
material fact or omitted 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.
110. WaMu Capital sold 12 certificates in Securitizations Nos. 9 through 18 that
Guaranty purchased when they were initially offered to the public. WaMu Capital sent
communications and solicitations to Guaranty in Texas for the purpose of inducing Guaranty to
purchase the certificates. The sale of these certificates occurred in Texas because employees or
agents of WaMu Capital directed communications about the certificates and solicitations to
purchase the certificates to Guaranty there, and because Guaranty received those
communications and solicitations there.
111. In doing the acts alleged in the sale to Guaranty of the 12 certificates in
Securitizations Nos. 9 through 18, WaMu Capital violated Article 581-33 of the TSA by offering
or selling securities in this State by means of written communications that included untrue
statements of material fact or omitted 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.
112. Plaintiff has disposed of all of the certificates.
113. Under Article 581-33 of the TSA, Plaintiff is entitled to recover the consideration
paid for each of these certificates, plus interest at the legal rate from the date of purchase to the
date on which it recovers the purchase price, minus the amount of income received on the
certificate, minus the greater of the value of the security when the plaintiff disposed of it or the
consideration that the plaintiff received for the security.
B. Untrue or Misleading Statements in the Sale of Securities Under Section
12(a)(2) of the 1933 Act
114. Plaintiff hereby incorporates by reference, as though fully set forth, paragraphs 1
through 113.
115. Guaranty purchased nine certificates in Securitizations Nos. 9 through 15, and 18,
that WaMu Capital sold to Guaranty when they were initially offered to the public.
PLAINTIFF’S ORIGINAL PETITION Page 35
116. WaMu Capital solicited Guaranty to purchase the certificates, and sold the
certificates to Guaranty, by means of the prospectus supplements and other written offering
materials and oral communications.
117. The prospectus supplements and other written offering materials and oral
communications that WaMu Capital sent to Guaranty contained untrue statements of material
fact and omitted to state material facts necessary in order to make the statements, in the light of
the circumstances in which they were made, not misleading.
118. Guaranty did not know when it purchased the certificates that the statements in
the prospectus supplements and other written offering materials and oral communications that
WaMu Capital sent to Guaranty were untrue or misleading.
119. In doing the acts alleged in the sale to Guaranty of the certificates in
Securitizations Nos. 9 through 15, and 18, WaMu Capital violated Section 12(a)(2) of the 1933
Act.
120. WaMu Acceptance was the depositor of Securitizations Nos. 9 through 15, and
18, and therefore is the issuer of nine certificates that Guaranty purchased.
121. WaMu Acceptance prepared and signed the registration statements for the
certificates for the purpose of soliciting investors, including Guaranty, to purchase certificates
when they were initially offered to the public, motivated at least in part by its own financial
interest or that of the direct seller.
122. These sales were in the initial offering of the certificates and the certificates were
sold by means of prospectus supplements. Therefore, under 17 C.F.R. § 230.159A(a), WaMu
Acceptance is considered to have offered or sold the certificates to Guaranty.
123. In doing the acts alleged in the offer or sale to Guaranty of nine certificates in
Securitizations Nos. 9 through 15, and 18, WaMu Acceptance violated section 12(a)(2) of the
1933 Act.
PLAINTIFF’S ORIGINAL PETITION Page 36
124. Plaintiff expressly excludes from this cause of action any allegation that could be
construed as alleging fraud or intentional or reckless conduct. This cause of action is based solely
on allegations of strict liability or negligence under the 1933 Act.
125. When it failed on August 21, 2009, Guaranty had not discovered that the
defendants made untrue or misleading statements about the certificates. Plaintiff discovered that
the defendants made untrue or misleading statements in the sale of each security in the course of
its investigation in 2012.
126. Plaintiff has suffered a loss on each of these certificates.
127. Plaintiff is entitled to recover damages.
C. Untrue or Misleading Statements in a Registration Statement Under Section
11 of the 1933 Act
128. Plaintiff hereby incorporates by reference, as though fully set forth, paragraphs 1
through 127.
129. WaMu Acceptance is the depositor of Securitizations Nos. 9 through 15, and 18,
and therefore is the issuer of nine certificates that Guaranty purchased. In doing the acts alleged,
WaMu Acceptance violated Section 11 of the 1933 Act in connection with issuing the
certificates in Securitizations Nos. 9 through 15, and 18.
130. WaMu Capital underwrote Securitizations Nos. 9 through 15, and 18. In doing the
acts alleged, WaMu Capital violated Section 11 of the 1933 Act in connection with underwriting
the certificates in Securitizations Nos. 9 through 15, and 18.
131. The certificates in these securitizations were issued pursuant or traceable to
registration statements. Details of each registration statement and each certificate are stated in
Item 28 of the Schedules.
132. The registration statements, as amended by the prospectus supplements, contained
untrue statements of material fact and omitted to state material facts necessary in order to make
the statements, in the light of the circumstances under which they were made, not misleading.
PLAINTIFF’S ORIGINAL PETITION Page 37
These untrue and misleading statements included all of the untrue and misleading statements
described in paragraphs 33 through 94.
133. Guaranty purchased each certificate before the issuer made generally available an
earning statement covering a period of at least twelve months.
134. Plaintiff expressly excludes from this cause of action any allegation that could be
construed as alleging fraud or intentional or reckless conduct. This cause of action is based solely
on allegations of strict liability or negligence under the 1933 Act.
135. Guaranty did not know when it purchased the certificates that the statements in
the registration statements, as amended by the prospectus supplements, were untrue or
misleading.
136. When it failed on August 21, 2009, Guaranty had not discovered that the
defendants made untrue or misleading statements about the certificates. Plaintiff discovered that
the defendants made untrue or misleading statements about each security in the course of its
investigation in 2012.
137. Plaintiff has suffered a loss on each of these certificates.
138. Plaintiff is entitled to recover damages as described in 15 U.S.C. § 77k(e).
X. CONDITIONS PRECEDENT
139. Pursuant to Texas Rule of Civil Procedure 54, all conditions precedent to
Plaintiff’s right to recover on all causes of action pleaded herein have been performed or have
occurred.
XI. REQUEST FOR A JURY TRIAL
140. Plaintiff requests a jury trial on all allegations and causes of action set forth herein
as allowed by Texas law.
XII. ATTORNEYS’ FEES, COSTS, AND INTEREST
141. Plaintiff is entitled to recover reasonable and necessary attorneys’ fees in
accordance with Article 581-33 of the TSA.

PLAINTIFF’S ORIGINAL PETITION Page 39
Of Counsel:
David J. Grais (pro hac vice to be submitted)
Mark B. Holton (pro hac vice to be submitted)
GRAIS & ELLSWORTH LLP
1211 Avenue of the Americas
New York, New York 10036
Telephone: (212) 755-0100
Facsimile: (212) 755 0052
PLAINTIFF’S ORIGINAL PETITION Page 40
EXHIBIT A

Lawsuit 3

PLAINTIFF’S ORIGINAL PETITION Page 1
CAUSE NO. ________
FEDERAL DEPOSIT INSURANCE
CORPORATION AS RECEIVER FOR
GUARANTY BANK,
§
§
§
§
IN THE DISTRICT COURT OF
§
§
Plaintiff, §
§
v. § _______JUDICIAL DISTRICT
§
§
ALLY SECURITIES LLC; GOLDMAN,
SACHS & CO.; DEUTSCHE BANK
SECURITIES INC.; J.P. MORGAN
SECURITIES LLC; STRUCTURED ASSET
MORTGAGE INVESTMENTS II INC.; and
THE BEAR STEARNS COMPANIES LLC;
§
§
§
§
§
§
§
§
§
Defendants. § TRAVIS COUNTY, TEXAS
PLAINTIFF'S ORIGINAL PETITION FOR DAMAGES
TO THE HONORABLE JUDGES OF SAID COURT:
Comes now Plaintiff, Federal Deposit Insurance Corporation as Receiver for Guaranty
Bank, and files this Petition against Ally Securities LLC (formerly known as Residential Funding
Securities, LLC and doing business as GMAC RFC Securities, and referred to in this Petition as
GMAC); Goldman, Sachs & Co. (Goldman); Deutsche Bank Securities Inc. (Deutsche); J.P.
Morgan Securities LLC (formerly known as Bear, Stearns & Co. Inc. and referred to in this
Petition as Bear Stearns); Structured Asset Mortgage Investments II Inc. (SAMI); and The Bear
Stearns Companies LLC (formerly known as The Bear Stearns Companies Inc. and referred to in
this Petition as Bear Stearns Companies), and as grounds therefor shows as follows:
Filed
12 August 17 P3:33
Amalia Rodriguez-Mendoza
District Clerk
Travis District
D-1-GN-12-002522
PLAINTIFF’S ORIGINAL PETITION Page 2
I. DISCOVERY CONTROL PLAN
1. Plaintiff intends that discovery be conducted under Level 3 of Rule 190.4 of the
Texas Rules of Civil Procedure.
II. NATURE OF THIS ACTION
2. This is an action for damages caused by violation of the Texas Securities Act
(TSA) and the Securities Act of 1933 (1933 Act) by the defendants. As alleged in detail below,
defendants issued, underwrote, or sold eight securities known as “certificates,” which were
backed by collateral pools of residential mortgage loans. Guaranty Bank (Guaranty) paid
approximately $1.8 billion for the eight certificates. When they issued, underwrote, or sold the
certificates, the defendants made numerous statements of material fact about the certificates and,
in particular, about the credit quality of the mortgage loans that backed them. Many of those
statements were untrue. Moreover, the defendants omitted to state many material facts that were
necessary in order to make their statements not misleading. For example, the defendants made
untrue statements or omitted important information about such material facts as the loan-to-value
ratios of the mortgage loans, the extent to which appraisals of the properties that secured the
loans were performed in compliance with professional appraisal standards, the number of
borrowers who did not live in the houses that secured their loans (that is, the number of
properties that were not primary residences), and the extent to which the entities that made the
loans disregarded their own standards in doing so.
3. Based on an analysis of a random sample of the loans that backed the certificates
that Guaranty purchased, the defendants made such untrue or misleading statements about at
least the following numbers of loans.
PLAINTIFF’S ORIGINAL PETITION Page 3
Securitization
No.
Number of Loans about
Which Defendants Made
Material Untrue or
Misleading Statements
1
Number of Loans
that Backed the
Certificates
Percentage of Loans about
Which Defendants Made
Material Untrue or
Misleading Statements
1 509 678 75.1%
2 1,058 1,454 72.8%
3 967 1,245 77.7%
4 1,025 1,708 60.0%
5 2,427 3,734 65.0%
6 1,270 2,208 57.5%
7 358 641 55.9%
8 2,192 3,194 68.6%
4. The certificates are “securities” within the meaning of the TSA and the 1933 Act.
5. The defendants are liable under the following provisions of the TSA and the 1933
Act:
As issuer: SAMI is liable as an “issuer” under Section 11 of the 1933 Act in connection
with issuing one certificate that Guaranty purchased.
As underwriters: The following defendants, which underwrote certain of the certificates
that Guaranty purchased, are liable as “underwriters” under Section 11 of the 1933 Act: Bear
Stearns, which is liable in connection with underwriting one certificate; and GMAC, which is
liable in connection with underwriting two certificates.
As sellers: The following defendants, which sold the certificates that Guaranty purchased
when they were initially offered to the public, are liable as “sellers” under Article 581-33 of the
TSA: Bear Stearns, which sold two certificates; Deutsche, which sold three certificates; GMAC,
which sold two certificates; and Goldman, which sold one certificate.
1
The method of random sampling that Plaintiff used ensures that conclusions about the
entire collateral pool have a margin of error of no more than plus or minus 5.6% at a confidence
level of 95% (that is, one can be 95% certain that the true percentage in the collateral pool as a
whole is within 5.6% of the percentage measured in the sample). For example, one can be 95%
certain that the number of loans in Securitization No. 1 about which GMAC, which underwrote
and sold to Guaranty the certificate in Securitization No. 1, made untrue or misleading
statements or omissions is within 5.6% of 509, that is, between 480 and 538. The same margin of
error should be applied to all information in this Petition and accompanying Schedules that is
based on a random sample of loans in a collateral pool.
PLAINTIFF’S ORIGINAL PETITION Page 4
The following defendants are also liable as sellers under Section 12(a)(2) of the 1933
Act: Bear Stearns, which is liable in connection with selling one certificate that Guaranty
purchased when it was initially offered to the public; and GMAC, which is liable in connection
with selling two certificates that Guaranty purchased when they were initially offered to the
public.
SAMI is also liable as a seller under Section 12(a)(2) of the 1933 Act in connection with
issuing one certificate that Guaranty purchased when it was initially offered to the public.
As control person: Bear Stearns Companies is liable as a “controlling person” of SAMI
under Section 15 of the 1933 Act.
III. PARTIES
6. The Federal Deposit Insurance Corporation (FDIC) is a corporation organized
and existing under the laws of the United States of America. Under the Federal Deposit
Insurance Act, the FDIC is authorized to be appointed as receiver for failed depository
institutions. On August 21, 2009, the FDIC was duly appointed the receiver for Guaranty. Under
the Federal Deposit Insurance Act, the FDIC as receiver succeeds to, and is empowered to sue
and complain in any court of law to pursue, all claims held by banks for which it is the receiver.
12 U.S.C. §§ 1819, 1821(d)(2)(A)(i). Thus, the FDIC as Receiver for Guaranty has authority to
pursue claims held by Guaranty, including the claims made against the defendants in this action.
7. Defendant Bear Stearns is a limited liability company organized under the laws of
Delaware and is authorized to do business in Texas. Bear Stearns may be served through its
registered agent, CT Corporation, 350 North Saint Paul Street, Suite 2900, Dallas, Texas, 75201.
8. Defendant Bear Stearns Companies is a limited liability company organized under
the laws of Delaware. Bear Stearns Companies may be served through the Texas Secretary of
State because it is a nonresident corporation, it engaged in business in Texas but did not maintain
a regular place of business in Texas nor a designated agent in Texas for service of process, this
proceeding arises out of the business conducted in Texas, and Bear Stearns Companies is a party
to this proceeding. The Secretary of State may serve Bear Stearns Companies through its
PLAINTIFF’S ORIGINAL PETITION Page 5
registered agent, The Corporation Trust Company, Corporation Trust Center, 1209 Orange
Street, Wilmington, Delaware 19801.
9. Defendant Deutsche is a corporation organized under the laws of Delaware and is
authorized to do business in Texas. Deutsche may be served through its registered agent, CT
Corporation, 350 North Saint Paul Street, Suite 2900, Dallas, Texas, 75201.
10. Defendant GMAC is a limited liability company organized under the laws of
Delaware. GMAC may be served through the Texas Secretary of State because it is a nonresident
corporation, it engaged in business in Texas but did not maintain a regular place of business in
Texas nor a designated agent in Texas for service of process, this proceeding arises out of the
business conducted in Texas, and GMAC is a party to this proceeding. The Secretary of State
may serve GMAC through its registered agent, Corporation Service Company, 2711 Centerville
Road, Suite 400, Wilmington, Delaware 19808.
11. Defendant Goldman is a corporation organized under the laws of New York and
is authorized to do business in Texas. Goldman may be served through its registered agent, CT
Corporation, 350 North Saint Paul Street, Suite 2900, Dallas, Texas, 75201.
12. Defendant SAMI is a corporation organized under the laws of Delaware. SAMI
may be served through the Texas Secretary of State because it is a nonresident corporation, it
engaged in business in Texas but did not maintain a regular place of business in Texas nor a
designated agent in Texas for service of process, this proceeding arises out of the business
conducted in Texas, and SAMI is a party to this proceeding. The Secretary of State may serve
SAMI through its registered agent, The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, Wilmington, Delaware 19801.
IV. JURISDICTION AND VENUE
13. The Court has jurisdiction because the amount in controversy in this action falls
within the minimum jurisdictional limits of the Court.
PLAINTIFF’S ORIGINAL PETITION Page 6
14. All of the defendants are subject to personal jurisdiction in Texas because they
offered and sold, or controlled persons that offered and sold, the certificates to Guaranty in
Texas within the meaning of Article 581-33 of the TSA.
15. Venue is proper in this County under Section 15.002(a)(4) of the Texas Civil
Practice & Remedies Code because Travis County was the principal residence of Guaranty at
the time the claims accrued.
V. SECURITIZATION OF MORTGAGE LOANS
16. The securities that Guaranty purchased are so-called residential mortgage-backed securities, or RMBS, created in a process known as securitization. Securitization
begins with loans on which the borrowers are to make payments, usually monthly. The entity
that makes the loans is known as the originator of the loans. The process by which the originator
decides whether to make particular loans is known as the underwriting of loans. The purpose of
underwriting is to ensure that loans are made only to borrowers of sufficient credit standing to
repay them and only against sufficient collateral. In the loan underwriting process, the originator
applies its underwriting standards.
17. In general, residential mortgage lenders may hold some of the mortgage loans
they originate in their own portfolios and may sell other mortgage loans they originate into
securitizations.
18. In a securitization, a large number of loans, usually of a similar type, are grouped
into a collateral pool. The originator of those loans sells them (and, with them, the right to
receive the cash flow from them) to a trust. The trust pays the originator cash for the loans. The
trust raises the cash to pay for the loans by selling securities, usually called certificates, to
investors such as Guaranty. Each certificate entitles its holder to an agreed part of the cash flow
from the loans in the collateral pool.
19. In a simple securitization, the holder of each certificate is entitled to a pro rata
part of the overall monthly cash flow from the loans in the collateral pool.
PLAINTIFF’S ORIGINAL PETITION Page 7
20. In a more complex securitization, the cash flow is divided into different parts,
usually called tranches (“tranche” is “slice” in French), and the certificates are divided into
different classes, each with different rights. Each class of certificates is entitled to the cash flow
in the tranche corresponding to that class.
21. One way in which the cash flow is divided — and the rights of different classes of
certificates distinguished — is by priority of payment or, put differently, risk of nonpayment.
The most senior class of certificates usually is entitled to be paid in full before the next most
senior class, and so on. Conversely, losses from defaults in payment of the loans in the collateral
pool are allocated first to the most subordinate class of certificates, then to the class above that,
and so on. The interest rate on each class of certificates is usually proportional to the amount of
risk that that class bears; the most senior certificates bear the least risk and thus pay the lowest
rate of interest, the most subordinate, the opposite. This hierarchy of rights to payment is referred
to as the waterfall.
22. The risk of a particular class of certificate is a function of both the riskiness of the
loans in the collateral pool and the seniority of that class in the waterfall. Even if the underlying
loans are quite risky, the certificates may bear so little of that risk that they may be rated as
triple-A. (According to Moody’s, “[o]bligations rated Aaa are judged to be of the highest
quality, with minimal credit risk.”) For example, assume a securitization of $100 million of risky
loans, on which the historical loss rate is 5%. Assume that there are two classes of certificates, a
senior class of $50 million and a subordinate class of $50 million. Even though the underlying
loans are quite risky, the senior class of certificates would be paid in full as long as the $100
million of loans produced payments of at least $50 million plus interest, that is, unless the loss
rate on those loans exceeded 50%, fully ten times the historical average. All of the certificates
referred to in this Petition were rated triple-A when Guaranty purchased them.
23. Each securitization has a sponsor, the prime mover of the securitization.
Sometimes the sponsor is the originator or an affiliate. In originator-sponsored securitizations,
the collateral pool usually contains loans made by the originator that is sponsoring the
PLAINTIFF’S ORIGINAL PETITION Page 8
securitization. Other times, the sponsor may be an investment bank, which purchases loans from
one or more originators, aggregates them into a collateral pool, sells them to a trust, and
securitizes them. The sponsor arranges for title to the loans to be transferred to an entity known
as the depositor, which then transfers title to the loans to the trust.
24. The obligor of the certificates in a securitization is the trust that purchases the
loans in the collateral pool. Because a trust has few assets other than the loans that it purchased,
it may not be able to satisfy the liabilities of an issuer of securities (the certificates). The law
therefore treats the depositor as the issuer of a residential mortgage-backed certificate.
25. Securities underwriters, like Bear Stearns and GMAC, play a critical role in the
process of securitization. They underwrite the sale of the certificates, that is, they purchase the
certificates from the trust and then sell them to investors. Equally important, securities
underwriters provide to potential investors the information that they need to decide whether to
purchase certificates.
26. Because the cash flow from the loans in the collateral pool of a securitization is
the source of funds to pay the holders of the certificates issued by the trust, the credit quality of
those certificates is dependent upon the credit quality of the loans in the collateral pool (and upon
the place of each certificate in the waterfall). The most important information about the credit
quality of those loans is contained in the files that the originator develops while making the
loans, the so-called “loan files.” For residential mortgage loans, each loan file normally contains
comprehensive information from such important documents as the borrower’s application for the
loan, credit reports on the borrower, and an appraisal of the property that will secure the loan.
The loan file may also include notes from the person who underwrote the loan about whether and
how the loan complied with the originator’s underwriting standards, including documentation of
any “compensating factors” that justified any departure from those standards.
27. Potential investors in certificates are not given access to loan files. Instead, the
securities underwriters are responsible for gathering, verifying, and presenting to potential
investors the information about the credit quality of the loans that will be deposited into the trust.
PLAINTIFF’S ORIGINAL PETITION Page 9
They do so by using information about the loans that has been compiled into a database known
as a loan tape. The securities underwriters use the loan tape to compile numerous statistics about
the loans, which are presented to potential investors in a prospectus supplement, a disclosure
document that the underwriters are required to file with the Securities and Exchange
Commission. (Guaranty did not have access to the loan tapes before it purchased the certificates,
but Plaintiff has reviewed data from the loan tapes in preparing this Petition.)
28. As alleged in detail below, the information in the prospectus supplements and
other offering documents about the credit quality of the loans in the collateral pools of the trusts
contained many statements that were material to the credit quality of those loans, but were untrue
or misleading.
VI. THE SALES OF THE CERTIFICATES
29. Guaranty purchased certificates in eight securitizations (referred to in this Petition
as Securitizations Nos. 1 through 8). Details of each securitization and each certificate are stated
in Item 29 of Schedules 1 through 8 of this Petition, which correspond to Securitizations Nos. 1
through 8. Plaintiff incorporates into this paragraph 29, and alleges as though fully set forth in
this paragraph, the contents of Item 29 of the Schedules.
30. Bear Stearns sold two certificates directly to Guaranty; Deutsche sold three
certificates directly to Guaranty; GMAC sold two certificates directly to Guaranty; and Goldman
sold one certificate directly to Guaranty. For each of the eight certificates, the defendants sent
documents to Guaranty in Texas. These documents included one or more of the following: a term
sheet (or its equivalent), the prospectus supplement for the certificate that was filed with the
SEC, and drafts of some of the statistical tables to be included in the prospectus supplement. In
each of these documents, the defendants made statements of material fact about the certificate
that they offered and sold to Guaranty.
PLAINTIFF’S ORIGINAL PETITION Page 10
VII. DEFENDANTS’ MATERIAL UNTRUE OR MISLEADING STATEMENTS
ABOUT THE CERTIFICATES
31. The prospectus supplement for each of the eight securitizations is available from
the SEC’s website. A URL for each prospectus supplement is included in Item 29 of the
Schedules. The prospectus supplements are incorporated into this Petition by reference.
32. In general, Plaintiff drew and analyzed a random sample of 400 loans from the
collateral pools of each securitization in which Guaranty purchased a certificate.
2
33. Many of the statements of material fact that the defendants made in the prospectus
supplements were untrue or misleading. These untrue or misleading statements included the
following.
A. Untrue or Misleading Statements About the Loan-to-Value Ratios (LTVs) of
the Mortgage Loans, and the Appraisals of the Properties, in the Collateral
Pools
1. LTVs
(a) The materiality of LTVs
34. The loan-to-value ratio of a mortgage loan, or LTV, is the ratio of the amount of
the mortgage loan to the lower of the appraised value or the sale price of the mortgaged property
when the loan is made. For example, a loan of $300,000 secured by a property valued at
$500,000 has an LTV of 60%; a loan of $450,000 on the same property has an LTV of 90%.
LTV is one of the most crucial measures of the risk of a mortgage loan, and the LTVs of the
mortgage loans in the collateral pool of a securitization are therefore one of the most crucial
measures of the risk of certificates sold in that securitization. LTV is a primary determinant of
the likelihood of default. The lower the LTV, the lower the likelihood of default. For example,
the lower the LTV, the less likely it is that a decline in the value of the property will wipe out the
owner’s equity and thereby give the owner an incentive to stop making mortgage payments and
abandon the property, a so-called strategic default. LTV also is a primary determinant of the
2
For the group of loans that backed the certificate that Guaranty purchased in
Securitization No. 3, the sample size was 246 loans.
PLAINTIFF’S ORIGINAL PETITION Page 11
severity of losses on a loan that defaults. The lower the LTV, the lower the severity of losses if
the loan defaults. Loans with lower LTVs provide greater “cushion,” thereby increasing the
likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan.
35. Beyond these fundamental effects on the likelihood and severity of default, LTVs
also affect prepayment patterns (that is, the number of borrowers who pay off their mortgage
loans before maturity and when they do so) and therefore the expected lives of the loans.
Prepayment patterns therefore affect many aspects of certificates that are material to the
investors that purchase them, including the life of the certificate and the timing and amount of
cash that the investor will receive during that life.
36. In addition, rating agencies use LTVs to determine the proper structuring and
credit enhancement necessary for securities, such as the certificates that Guaranty purchased, to
receive a particular rating. If the LTVs of the mortgage loans in the collateral pool of a
securitization are incorrect, the ratings of certificates sold in that securitization will also be
incorrect.
37. An accurate denominator (that is, the value of the property) is essential to an
accurate LTV. In particular, an inflated denominator will understate, sometimes greatly, the risk
of a loan. To return to the example above, if the property whose actual value is $500,000 is
valued incorrectly at $550,000, then the ostensible LTV of the $300,000 loan falls from 60% to
54.5%, and the ostensible LTV of the $450,000 loan falls from 90% to 81.8%. In either case, the
LTV based on the incorrect appraised value understates the risk of the loan.
38. For these reasons, a reasonable investor considers LTV critical to the decision
whether to purchase a certificate in a securitization of mortgage loans. Even small differences in
the weighted average LTVs of the mortgage loans in the collateral pool of a securitization have a
significant effect on both the risk and the rating of each certificate sold in that securitization and,
thus, are essential to the decision of a reasonable investor whether to purchase any such
certificate.
PLAINTIFF’S ORIGINAL PETITION Page 12
(b) Untrue or misleading statements about the LTVs of the
mortgage loans in the collateral pools of these securitizations
39. In the prospectus supplements, the defendants made material untrue or misleading
statements about the LTVs of the mortgage loans in the collateral pools of these securitizations.
Each such statement is identified in Item 39 of the Schedules of this Petition. Plaintiff
incorporates into this paragraph 39, and alleges as though fully set forth in this paragraph, the
contents of Item 39 of the Schedules.
40. The defendants made these statements as statements of fact. Plaintiff is informed
and believes, and based thereon alleges, that the defendants intended that these statements be
understood as statements of fact. Guaranty did understand the statements about the LTVs as
statements of fact. Guaranty had no access to appraisal reports or other documents or information
from which it could verify the LTVs of the mortgage loans other than the statements that the
defendants made about those LTVs.
(c) An automated valuation model demonstrates that the
defendants’ statements about the LTVs were untrue because
they were based on overstated valuations of the properties in
the collateral pools.
41. The stated LTVs of many of the mortgage loans in the securitizations were
significantly lower than the true LTVs because the denominators (that is, the value of the
properties that secured those loans) that were used to determine the disclosed LTVs were
overstated to a material extent. The weighted-average LTVs presented in the prospectus
supplements were, therefore, untrue and misleading.
42. Using a comprehensive, industry-standard automated valuation model (AVM), it
is possible to determine the true market value of a certain property as of a specified date. An
AVM is based on objective criteria like the condition of the property and the actual sale prices of
comparable properties in the same locale shortly before the specified date, and is more
consistent, independent, and objective than other methods of appraisal. AVMs have been in
widespread use for many years. The AVM on which these allegations are based incorporates a
database of 500 million sales covering ZIP codes that represent more than 97% of the homes,
PLAINTIFF’S ORIGINAL PETITION Page 13
occupied by more than 99% of the population, in the United States. Independent testing services
have determined that this AVM is the most accurate of all such models.
43. For many of the properties that secured the mortgage loans, the model determined
that the LTVs presented in the prospectus supplements were understated. In particular, for many
of the properties, the model determined that the denominator (that is, the appraised value of the
property as stated in the loan tape and compiled into the tables in the prospectus supplement) that
was used in the disclosed LTV was 105% or more of the true market value as determined by the
model as of the date on which each individual mortgage loan closed. (The model considered no
transactions that occurred after that date.) In contrast, the model determined that the denominator
that was used in the disclosed LTV was 95% or less of the true market value on a much smaller
number of properties. Thus, the number of properties on which the value was overstated
exceeded by far the number on which the value was understated, and the aggregate amount
overstated exceeded by far the aggregate amount understated.
44. For example, in Securitization No. 1, there were 678 mortgage loans that backed
the certificate that Guaranty purchased. On 363 of the properties that secured those loans, the
model determined that the denominator that was used in the disclosed LTV was 105% or more of
the true market value, and the amount by which the stated values of those properties exceeded
their true market values in the aggregate was $39,584,959. The model determined that the
denominator that was used in the disclosed LTV was 95% or less of true market value on only 24
properties, and the amount by which the true market values of those properties exceeded the
values reported in the denominators was $2,974,847. Thus, the number of properties on which
the value was overstated was more than 15 times the number on which the value was
understated, and the aggregate amount overstated was more than 13 times the aggregate amount
understated.
45. On one of the loans in Securitization No. 1, the amount of the loan was $424,000
and the stated value of the property was $530,000, resulting in a stated LTV of 80%. The model,
however, determined that the true value of the property was $387,000, resulting in a true LTV of
PLAINTIFF’S ORIGINAL PETITION Page 14
109.6%. Thus, the stated value was higher than the true value by 37% and the stated LTV was
lower than the true LTV by 29.6%. Both of these were huge discrepancies that were material to
the credit quality of the loan.
46. The overstated values of 363 properties in Securitization No. 1 made virtually
every statement by GMAC, which underwrote and sold to Guaranty the certificate in
Securitization No. 1, about the LTVs of the mortgage loans untrue or misleading. For example,
GMAC stated that all mortgage loans had an LTV of 95% or less. In fact, 225 of the mortgage
loans had LTVs of over 95%. GMAC also stated that the weighted-average LTV of the loans in
the collateral pool was 76.70%. In fact, the weighted-average LTV of the loans was 100.8%.
These differences were material for the reasons stated above.
47. The results of the valuations by the automated model in this example are
summarized in the following table.
Number of loans that backed the certificate 678
Number of loans for which the stated value was 105% or more of the true
market value as determined by the model
363
Aggregate amount by which the stated values of those properties exceeded
their true market values as determined by the model
$39,584,959
Number of loans for which the stated value was 95% or less of the true market
value as determined by the model
24
Aggregate amount by which the true market values of those properties
exceeded their stated values
$2,974,847
Number of loans with LTVs over 95%, as stated by the defendant 0
Number of loans with LTVs over 95%, as determined by the model 225
Weighted-average LTV, as stated by the defendant 76.70%
Weighted-average LTV, as determined by the model 100.8%
48. The model produced similar results for the mortgage loans in the collateral pools
of each securitization. Details of the results of the model for each securitization are stated in Item
48 of the Schedules of this Petition. Plaintiff incorporates into this paragraph 48, and alleges as
though fully set forth in this paragraph, the contents of Item 48 of the Schedules.
PLAINTIFF’S ORIGINAL PETITION Page 15
(d) These statements also were misleading because the defendants
omitted to state that there were additional liens on a material
number of the properties that secured the mortgage loans in
the collateral pools.
49. As mentioned above, the LTV of a mortgage loan is a key determinant of the
likelihood that the mortgagor will default in payment of the mortgage. The lower the LTV, the
less likely that a decline in the value of the property will wipe out the owner’s equity and thereby
give the owner an incentive to stop making mortgage payments and abandon the property.
Because LTV affects the behavior of borrowers so profoundly, accurate LTVs are essential to
predicting defaults and prepayments by borrowers. Also, as mentioned above, LTV affects the
severity of loss on those loans that do default. The power of LTV to predict defaults,
prepayments, and severities is a major reason why reasonable investors consider the LTVs of
mortgage loans important to the decision whether to purchase a certificate in the securitization of
those loans.
50. The predictive power of the LTV of a mortgage loan is much reduced if there are
additional liens on the same property. Additional liens reduce the owner’s equity in the property
and thereby increase the owner’s incentive to stop making mortgage payments and abandon the
property if the value of the property falls below the combined amount of all of the liens on the
property (a strategic default). Additional liens also exacerbate delinquencies and defaults because
they complicate the servicing of mortgage loans and the management of delinquencies and
defaults. Servicers of the first-lien mortgage must then deal not only with the borrower, but also
with the servicer of the second-lien mortgage. For example, the servicer of a single mortgage
may want to grant a borrower forbearance while the borrower is unemployed and allow him or
her to add missed payments to the principal of the loan and to resume payments when he or she
is employed again. But the servicer of the second-lien mortgage may refuse such forbearance and
initiate foreclosure and thereby force the borrower into default on the first mortgage as well.
51. According to land records, many of the properties that secured mortgage loans in
the collateral pools of the securitizations were subject to liens in addition to the lien of the
PLAINTIFF’S ORIGINAL PETITION Page 16
mortgage in the pool at the time of the closing of these securitizations.
3
The defendants failed to
disclose in the prospectus supplements any of these additional liens. These additional liens
increased the risk that those owners would default in payment of the mortgage loans.
52. To take an example, of the 678 properties that secured the mortgage loans that
backed the certificate that Guaranty purchased in Securitization No. 1, at least 186 were subject
to liens in addition to the lien represented by the mortgage in the collateral pool. GMAC did not
disclose in the prospectus supplement that those liens existed. GMAC stated that the weighted-average LTV of the properties was 76.70%, when, solely because of the additional liens on these
186 properties, the weighted-average combined LTV was 81.3%.
4
This is a significant
difference.
53. On one of the loans, the original balance of the mortgage loan was $168,000, the
represented value of the property was $210,000, and the reported LTV was 80%. On the date of
the closing of this securitization, however, there were undisclosed additional liens on this
property of $42,000. Thus, when all liens on the property were taken into account, the combined
LTV of the loan was 100%, which was 20% higher than the stated LTV on that loan. This was a
huge discrepancy that was material to the credit quality of the loan. In many cases, the amount of
the undisclosed additional liens was much greater than the owner’s ostensible equity, putting the
owner “under water” on the day on which this securitization closed.
54. Details of the undisclosed additional liens in the securitizations are stated in Item
54 of the Schedules of this Petition. Plaintiff incorporates into this paragraph 54, and alleges as
though fully set forth in this paragraph, the contents of Item 54 of the Schedules. Plaintiff is
informed and believes, and based thereon alleges, that discovery will demonstrate that the
3
In order to ensure that this calculation did not include liens that were paid off but were
not promptly removed from land records, the additional liens referred to in this Petition and the
Schedules do not include liens that were originated on or before the date on which each mortgage
loan in the pools was closed.
4
The combined LTV is the ratio of all loans on a property to the value of the property.
PLAINTIFF’S ORIGINAL PETITION Page 17
number of loans with additional liens is substantially higher than those disclosed in the
Schedules.
55. Because the defendants did not disclose the existence or the amounts of these
additional liens, all of the statements that they made about the LTVs of the mortgage loans were
misleading.
2. Appraisals
56. As discussed above in paragraph 37, an accurate denominator (value of the
mortgaged property) is essential to calculating an accurate LTV. An accurate appraisal of the
property, in turn, is essential to identifying an accurate denominator.
57. In connection with these securitizations, there was undisclosed upward bias in
appraisals of properties that secured mortgage loans and consequent understatement of the LTVs
of those loans. This upward bias in appraisals caused the denominators that were used to
calculate the LTVs of many mortgage loans to be overstated and, in turn, the LTVs to be
understated. The defendants’ statements regarding the LTVs of the mortgage loans in the
collateral pools were misleading because they omitted to state that the appraisals of a material
number of the properties that secured those loans were biased upwards. In addition, the
defendants stated that the appraisals conformed to the Uniform Standards of Professional
Appraisal Practice (USPAP), the professional standards that govern appraisers and appraisals (or
to the standards of Fannie Mae and Freddie Mac, which required compliance with USPAP).
Those statements were false because upwardly biased appraisals do not conform to USPAP.
(a) The statements that the defendants made about the LTVs of
the mortgage loans in the collateral pools were misleading
because they omitted to state that the appraisals of a large
number of the properties that secured those loans were biased
upward, so that stated LTVs based on those appraisals were
lower than the true LTVs of those mortgage loans.
58. The defendants omitted to state that the appraisals in these securitizations used
inaccurate property descriptions, ignored recent sales of the subject and comparable properties,
and used sales of properties that were not comparable, all in order to inflate the values of the
PLAINTIFF’S ORIGINAL PETITION Page 18
appraised properties. The appraisals used to compute the LTVs of many of the mortgage loans in
the collateral pools were biased upwards. As alleged in paragraphs 42 through 48, in each trust,
the number of properties for which the value was overstated exceeded by far the number for
which the value was understated, and the aggregate amount overstated exceeded by far the
aggregate amount understated. These ratios for each trust are summarized in the following table.
Securitization
No.
Ratio of Number of Properties
Whose Value Was Overstated to
Number Whose Value Was
Understated
Ratio of Amount of
Overvaluation to Amount
of Undervaluation
1 15.3 13.3
2 11.1 12.7
3 1.6 1.7
4 1.8 2.3
5 4.7 6.3
6 2.7 3.3
7 5.3 4.8
8 16.3 9.5
These lopsided results demonstrate the upward bias in appraisals of properties that secured the
mortgage loans in the collateral pools.
59. Plaintiff is informed and believes, and based thereon alleges, that a material
number of the upwardly biased appraisals were not statements of the appraisers’ actual findings
of the values of the properties based on their objective valuations.
(b) The statements by the defendants about compliance with
USPAP were untrue because the appraisals of a large number
of the properties that secured the mortgage loans were biased
upward.
60. Appraisers and appraisals are governed by USPAP, which is promulgated by the
Appraisal Standards Board. The Preamble to USPAP states that its purpose “is to promote and
maintain a high level of public trust in appraisal practice.” Both Fannie Mae and Freddie Mac
require that appraisals comply with USPAP.
61. USPAP includes the following provisions:
PLAINTIFF’S ORIGINAL PETITION Page 19
(a) USPAP Standards Rule 2-1(b)(iii) requires that “Each written or oral real
property appraisal report must clearly and accurately set forth the appraisal in a manner that will
not be misleading.”
(b) USPAP Standards Rule 1-4(a) provides that “When a sales comparison
approach is necessary for credible assignment results, an appraiser must analyze such
comparable sales data as are available to indicate a value conclusion.”
(c) USPAP Standards Rule 1-4(b) provides that “When a cost approach is
necessary for credible assignment results, an appraiser must:
(i) develop an opinion of site value by an appropriate appraisal
method or technique;
(ii) analyze such comparable cost data as are available to estimate
the cost new of the improvements (if any); and
(iii) analyze such comparable data as are available to estimate the
difference between the cost new and the present worth of the
improvements (accrued depreciation).”
62. The Appraisal Standards Board, which promulgates USPAP, also issues Advisory
Opinions. Although the Advisory Opinions do not establish new standards or interpret USPAP,
they “are issued to illustrate the applicability of appraisal standards in specific situations.”
Advisory Opinion 1 discussing “Sales History” states that “The requirement for the appraiser to
analyze and report sales history and related information is fundamental to the appraisal process.
Just as the appraiser must analyze pending and recent sales of comparable properties, the
appraiser must take into account all pending and recent sales of the subject property itself.”
63. In the prospectus supplements, the defendants made statements that the appraisals
of properties that secured the mortgage loans in the collateral pools were made in compliance
with USPAP or with the appraisal standards of Fannie Mae and Freddie Mac, which required
compliance with USPAP. Details of each such statement are stated in Item 63 of the Schedules
PLAINTIFF’S ORIGINAL PETITION Page 20
of this Petition. Plaintiff incorporates into this paragraph 63, and alleges as though fully set forth
in this paragraph, the contents of Item 63 of the Schedules.
64. Plaintiff is informed and believes, and based thereon alleges, that a material
number of mortgage loans in the collateral pools had appraisals conducted that deviated from
USPAP.
65. Each of the statements referred to in paragraph 63 was untrue because the
appraisals of a material number of the properties referred to in each such statement did not
conform to USPAP.
66. By each of the untrue and misleading statements referred to in paragraphs 39 and
63 above, the defendants materially understated the risk of the certificates that they issued,
underwrote, or sold.
B. Untrue or Misleading Statements About the Occupancy Status of the
Properties That Secured the Mortgage Loans in the Collateral Pools
1. The materiality of occupancy status
67. Residential real estate is usually divided into primary residences, second homes,
and investment properties. Mortgages on primary residences are less likely to default than
mortgages on non-owner-occupied residences and therefore are less risky. Occupancy status also
influences prepayment patterns.
68. Occupancy status (that is, whether the property that secures a mortgage is to be
the primary residence of the borrower, a second home, or an investment property) is an important
measure of the risk of a mortgage loan. The percentage of loans in the collateral pool of a
securitization that are not secured by mortgages on primary residences is an important measure
of the risk of certificates sold in that securitization. Other things being equal, the higher the
percentage of loans not secured by primary residences, the greater the risk of the certificates. A
reasonable investor considers occupancy status important to the decision whether to purchase a
certificate in a securitization of mortgage loans.
PLAINTIFF’S ORIGINAL PETITION Page 21
2. Untrue or misleading statements about the occupancy status of the
properties that secured the mortgage loans in the collateral pools of
these securitizations
69. In the prospectus supplements, the defendants made statements about the number
of properties in the collateral pools of the securitizations that were the primary residences of their
owners. To return to the example of Securitization No. 1, GMAC stated that, of the 678
mortgage loans that backed the certificate that Guaranty purchased, 531 were secured by primary
residences and 147 were not. Details of each such statement in the securitizations are stated in
Item 69 of the Schedules of this Petition. Plaintiff incorporates into this paragraph 69, and
alleges as though fully set forth in this paragraph, the contents of Item 69 of the Schedules.
70. These statements were untrue or misleading because (i) the stated number of
mortgage loans secured by primary residences was higher than the actual number of loans in that
category or (ii) the stated number of mortgage loans not secured by primary residences was
lower than the actual number of loans in that category.
3. Basis of the allegations above that these statements about the
occupancy status of the properties that secured the mortgage loans in
the collateral pools were untrue or misleading
71. Because they are less risky than other mortgage loans, mortgage loans on primary
residences usually have more favorable terms, including lower interest rates and more lenient
underwriting standards, than mortgage loans on second homes and investment properties.
Applicants for loans on second homes and investment properties therefore have an incentive to
state that the property will be their primary residence even when it will not. Plaintiff is informed
and believes, and based thereon alleges, that borrowers of many securitized loans did so.
72. A significant number of the properties in the collateral pools of the securitizations
that were stated to be primary residences actually were not. Moreover, Plaintiff is informed and
believes, and based thereon alleges, that there is additional evidence of occupancy fraud in the
loan files of many more of the mortgage loans in the collateral pools.
73. With respect to some of the properties that were stated to be primary residences,
the borrower instructed local tax authorities to send the bills for the taxes on the property to the
PLAINTIFF’S ORIGINAL PETITION Page 22
borrower at an address other than the property itself. This is strong evidence that the mortgaged
property was not the borrower’s primary residence.
74. In some states and counties, the owner of a property is able to designate whether
that property is his or her “homestead,” which may reduce the taxes on that property or exempt
the property from assets available to satisfy the owner’s creditors, or both. An owner may
designate only one property, which he or she must occupy, as his or her homestead. The fact that
an owner in one of these jurisdictions does not designate a property as his or her homestead
when he or she can do so is strong evidence that the property was not his or her primary
residence. With respect to some of the properties that were stated to be primary residences, the
owner could have but did not designate the property as his or her homestead. That omission is
strong evidence that the property was not the borrower’s primary residence.
75. When a borrower actually occupies a newly mortgaged property, he or she
normally notifies entities that send bills to him or her (such as credit card companies, utility
companies, and local merchants) to send his or her bills to the address of the newly mortgaged
property. Six months after the closing of the mortgage is ample time to complete this process.
Six months after the closing of the mortgage, if the borrower is still receiving his or her bills at a
different address, it is very likely that the borrower does not occupy the mortgaged property. For
each securitization, a credit reporting agency specializing in mortgage loans compared the
addresses in the borrowers’ credit reports to the addresses of the mortgaged properties six
months after the closing of the mortgage loans. Many borrowers whose mortgage loans were
secured by properties that were stated in the loan tapes to be owner-occupied did not receive any
bills at the address of the mortgaged property but did receive their bills at another address or
addresses. It is very likely that each of these borrowers did not occupy the mortgaged property.
76. In Securitization No. 1, 61 owners of properties that were stated to be primary
residences instructed local tax authorities to send the bills for the taxes on those properties to
them at different addresses; 85 owners of properties that were stated to be primary residences
could have, but did not, designate those properties as their homesteads; and 78 owners of
PLAINTIFF’S ORIGINAL PETITION Page 23
properties that were stated to be primary residences did not receive any of their bills there six
months after the mortgages were originated. Eliminating duplicates, for one or more of these
reasons, 170 of the 531 properties that were stated to be primary residences actually were not.
Thus, the number of properties that were not primary residences was not 147, as GMAC stated,
but at least 317, a material difference. The numbers of such loans in the collateral pools of the
securitizations are stated in Item 76 of the Schedules of this Petition. Plaintiff incorporates into
this paragraph 76, and alleges as though fully set forth in this paragraph, the contents of Item 76
of the Schedules.
77. By each of the untrue and misleading statements referred to in paragraph 69, the
defendants materially understated the risk of the certificates that they issued, underwrote, or sold.
C. Untrue or Misleading Statements About the Underwriting Standards of the
Originators of the Mortgage Loans in the Collateral Pools
1. The materiality of underwriting standards and the extent of an
originator’s disregard of them
78. Originators of mortgage loans have written standards by which they underwrite
applications for loans. An important purpose of underwriting is to ensure that the originator
makes mortgage loans only in compliance with those standards and that its underwriting
decisions are properly documented. An even more fundamental purpose of underwriting
mortgage loans is to ensure that loans are made only to borrowers with credit standing and
financial resources to repay the loans, and only against collateral with value, condition, and
marketability sufficient to secure the loans. An originator’s underwriting standards, and the
extent to which the originator does not follow its standards, are important indicators of the risk of
mortgage loans made by that originator and of certificates sold in a securitization in which
mortgage loans made by that originator are part of the collateral pool. A reasonable investor
considers the underwriting standards of originators of mortgage loans in the collateral pool of a
securitization, and whether an originator disregards its standards, important to the decision
whether to purchase a certificate in that securitization.
PLAINTIFF’S ORIGINAL PETITION Page 24
2. Untrue or misleading statements about the underwriting standards of
originators of the mortgage loans
79. In the prospectus supplements, the defendants made statements about the
underwriting standards of the originators of the mortgage loans in the collateral pools. Details of
each such statement are stated in Item 79 of the Schedules of this Petition. They included
statements that the originators made mortgage loans in compliance with their underwriting
standards and made exceptions to those standards only when compensating factors were present.
Plaintiff incorporates into this paragraph 79, and alleges as though fully set forth in this
paragraph, the contents of Item 79 of the Schedules.
80. Plaintiff is informed and believes, and based thereon alleges, that these statements
were untrue or misleading because the defendants omitted to state that: (a) the originators were
disregarding those underwriting standards; (b) the originators were making extensive exceptions
to those underwriting standards when no compensating factors were present; (c) the originators
were making wholesale, rather than case-by-case, exceptions to those underwriting standards; (d)
the originators were making mortgage loans that borrowers could not repay; and (e) the
originators were failing frequently to follow quality-assurance practices necessary to detect and
prevent fraud intended to circumvent their underwriting standards.
3. Basis of the allegations that these statements about the underwriting
standards of the originators of the mortgage loans in the collateral
pools were untrue or misleading
(a) The deterioration in undisclosed credit characteristics of
mortgage loans made by these originators
81. Plaintiff is informed and believes, and based thereon alleges, that before and
during the time of these securitizations, the originators of the loans in these securitizations
disregarded their stated underwriting standards. As a result, securitized mortgage loans made
between 2004 and the dates of these securitizations have experienced high rates of delinquency
and default.
PLAINTIFF’S ORIGINAL PETITION Page 25
82. The high rates of delinquency and default were caused not so much by any
deterioration in credit characteristics of the loans that were expressly embodied in underwriting
standards and disclosed to investors, but rather by deterioration in credit characteristics that were
not disclosed to investors.
83. Plaintiff is informed and believes that what was true about recently securitized
mortgage loans in general was true in particular of loans originated by the entities that originated
the loans in the collateral pools of these securitizations, as the following figures demonstrate.
Taking the originator American Home Mortgage Corp., Figure 1 shows the rising incidence of
early payment defaults (or EPDs), that is, the percent of loans (by outstanding principal balance)
that were originated and sold into securitizations by American Home Mortgage Corp. and that
became 60 or more days delinquent within six months after they were made. An EPD is strong
evidence that the originator did not follow its underwriting standards in making the loan.
Underwriting standards are intended to ensure that loans are made only to borrowers who can
and will make their mortgage payments. Because an EPD occurs so soon after the mortgage loan
was made, it is much more likely that the default occurred because the borrower could not afford
the payments in the first place (and thus that the underwriting standards were not followed), than
because of changed external circumstances unrelated to the underwriting of the mortgage loan
(such as that the borrower lost his or her job). The bars in Figure 1 depict the incidence of EPDs
in loans originated by American Home Mortgage Corp. that were sold into securitizations. The
steady increase in EPDs is further evidence that the deterioration in the credit quality of those
loans was caused by disregard of underwriting standards.
PLAINTIFF’S ORIGINAL PETITION Page 26
84. Figure 2 shows the weighted-average disclosed LTVs of the same loans and
weighted-average disclosed credit scores of the borrowers. These were nearly constant, showing
that the deterioration in the credit quality of the loans was caused not by these disclosed factors,
but rather by undisclosed factors.
PLAINTIFF’S ORIGINAL PETITION Page 27
85. Substantially the same facts are true of the mortgage loans originated and sold
into securitizations by each of the originators of mortgage loans in the collateral pools of these
securitizations. Figures for some of them are presented in Figures 1 and 2 of Exhibits A through
D of this Petition:
Exhibit Originator
A Countrywide Home Loans, Inc.
B First Horizon Home Loan Corporation
C National City Mortgage Co.
D Wells Fargo Bank, N.A.
PLAINTIFF’S ORIGINAL PETITION Page 28
(b) The poor performance of the loans in these pools demonstrates
that the originators disregarded their underwriting guidelines
when making these loans.
86. As noted above, an EPD is evidence that the originator may have disregarded its
underwriting standards in making the loan. The mortgage loans in some of the collateral pools of
these securitizations experienced EPDs. These EPDs are evidence that the originators of those
loans may have disregarded their underwriting standards when making those loans. The number
and percent of the loans in each pool that suffered EPDs are stated in Item 86 of the Schedules of
this Petition. Plaintiff incorporates into this paragraph 86, and alleges as though fully set forth in
this paragraph, the contents of Item 86 of the Schedules.
87. A high rate of delinquency at any time in a group of mortgage loans is also
evidence that the originators of those loans may have disregarded their underwriting standards in
making the loans. A common measure of serious delinquency is the number of loans on which
the borrowers were ever 90 or more days delinquent in their payments. The mortgage loans in
the collateral pools have experienced very high rates of delinquencies by this measure. These
high rates of delinquencies are strong evidence that the originators of those loans may have
disregarded their underwriting standards when making those loans. The number and percent of
the loans in each pool that suffered delinquencies of 90 days or more are stated in Item 87 of the
Schedules of this Petition. Plaintiff incorporates into this paragraph 87, and alleges as though
fully set forth in this paragraph, the contents of Item 87 of the Schedules.
88. A second common measure of delinquency is the number of loans on which the
borrowers are 30 or more days delinquent at a given point in time. The mortgage loans in the
collateral pools have experienced very high rates of delinquencies by this measure. These high
rates of delinquencies are strong evidence that the originators of those loans may have
disregarded their underwriting standards when making those loans. The number and percent of
the loans in each pool that were 30 or more days delinquent on March 31, 2012, are stated in
Item 88 of the Schedules of this Petition. Plaintiff incorporates into this paragraph 88, and
alleges as though fully set forth in this paragraph, the contents of Item 88 of the Schedules.
PLAINTIFF’S ORIGINAL PETITION Page 29
89. By each of the untrue and misleading statements referred to in paragraph 79
above, the defendants materially understated the risk of the certificates that they issued,
underwrote, or sold. Moreover, Plaintiff is informed and believes, and based thereon alleges, that
discovery will yield additional evidence that the originators disregarded their underwriting
guidelines when making the mortgage loans in the collateral pools of these securitizations.
D. The Large Number of Mortgage Loans in the Collateral Pools About Which
the Defendants Made Material Untrue or Misleading Statements Made Their
Statements About the Ratings of Guaranty’s Certificates Untrue and
Misleading.
90. In the prospectus supplements, the defendants made statements about the ratings
of the certificates by ratings agencies. They stated that the ratings agencies rated each such
certificate triple-A. Details of each such statement are stated in Item 90 of the Schedules of this
Petition. Plaintiff incorporates into this paragraph 90, and alleges as though fully set forth in this
paragraph, the contents of Item 90 of the Schedules.
91. The ratings were important to the decision of any reasonable investor whether to
purchase the certificates. Many investors, including Guaranty, have investment policies that
require a certain minimum rating for all investments. The policy of Guaranty was to purchase
only certificates that were rated triple-A.
92. These statements by the defendants about the ratings of the certificates they
issued, underwrote, or sold were misleading because the defendants omitted to state that the
ratings were affected by all of the material untrue or misleading statements about specific
mortgage loans in the collateral pools. These include:
(a) loans in which the LTVs were materially understated as shown by the AVM;
(b) loans in which the LTVs were misleading as a result of undisclosed additional
liens;
(c) loans in which the properties were stated to be owner-occupied, but were not; and
(d) loans that suffered EPDs, strong evidence that the originators may have
disregarded the underwriting standards in making those loans.
PLAINTIFF’S ORIGINAL PETITION Page 30
93. In Securitization No. 1, there were 363 loans in which the LTVs were materially
understated as shown by the AVM, 186 loans in which the LTVs were misleading because of
undisclosed additional liens, 170 loans in which the properties were stated to be owner-occupied
but were not, and 14 loans that suffered EPDs. Eliminating duplicates, there were 509 loans (or
75.1% of the loans that backed the certificate that Guaranty purchased) about which GMAC
made untrue or misleading statements. The numbers of such loans in the collateral pools of the
securitizations are stated in Item 93 of the Schedules of this Petition. Plaintiff incorporates into
this paragraph 93, and alleges as though fully set forth in this paragraph, the contents of Item 93
of the Schedules.
94. Plaintiff is informed and believes, and based thereon alleges, that loan files and
other documents available only through discovery will prove that those statements were untrue
or misleading with respect to many more loans as well.
95. By these untrue and misleading statements, the defendants materially understated
the risk of the certificates that they issued, underwrote, or sold.
VIII. STATUTES OF LIMITATIONS
96. All of the claims in this Petition are timely. Plaintiff became receiver for Guaranty
on August 21, 2009. Under 12 U.S.C. § 1821(d)(14), the statutes of limitations on all of
Guaranty’s claims asserted in this Petition that had not expired as of August 21, 2009, are
extended to no less than three years from that date. This Petition was filed less than three years
from August 21, 2009.
97. The statutes of limitations applicable to the claims asserted in this Petition had not
expired as of August 21, 2009, because a reasonably diligent plaintiff would not have discovered
until later than August 21, 2008, facts that show that the particular statements referred to in Items
29, 39, 63, 69, 79, and 90 of the Schedules to this Petition were untrue or misleading. Those are
statements about the 14,862 specific mortgage loans in the collateral pools of the securitizations
involved in this action, not about residential mortgage loans or any type of residential mortgage
loan (e.g., prime, Alt-A, subprime, etc.) in general. A reasonably diligent plaintiff did not have
PLAINTIFF’S ORIGINAL PETITION Page 31
access until after August 21, 2008, to facts about those specific loans that show that the
statements that defendants made about those specific loans were untrue or misleading. A
reasonably diligent plaintiff did not have access to the loan files compiled by the originators of
those specific mortgage loans nor to records maintained by the servicers of those specific
mortgage loans (from either or both of which a reasonably diligent plaintiff may have discovered
facts that show that the statements that defendants made about those specific loans were untrue
or misleading) because originators and servicers of loans and securitization trustees do not make
those files available to certificateholders. Moreover, on and prior to August 21, 2008, there were
not available to a reasonably diligent plaintiff, even at considerable expense, data about those
specific loans that show that the statements that defendants made about those specific loans were
untrue or misleading. Such data became available for the first time in early 2010.
98. When Guaranty purchased the certificates involved in this action, all of them were
rated triple-A, the highest possible rating, by at least two of Fitch, Moody’s, and Standard &
Poor’s, all Nationally Recognized Statistical Rating Organizations (NRSROs) accredited by the
SEC. Sponsors of securitizations submitted to the NRSROs the same information about the loans
in the collateral pools of proposed securitizations that they included in the prospectus
supplements for those securitizations, including in particular statements of the type referred to in
Items 29, 39, 63, 69, 79, and 90 of the Schedules to this Petition. The NRSROs used and relied
on that information in rating the certificates to be issued in each securitization.
99. The NRSROs monitored the certificates that they rated after those certificates
were issued. If an NRSRO discovers facts that show that there was an untrue or misleading
statement about a material fact in the information submitted to it for its use in rating a certificate,
then the NRSRO will withdraw its rating of that certificate while it considers the impact of the
untrue or misleading statement, or it will downgrade the rating of the certificate, usually to a
rating below investment grade.
100. As noted above, all of the certificates involved in this action were rated triple-A at
issuance by at least two of Fitch, Moody’s, and Standard & Poor’s. Not one of those NRSROs
PLAINTIFF’S ORIGINAL PETITION Page 32
withdrew any of those ratings, or downgraded any of them to below investment grade, before
August 21, 2008. The date on which each certificate was first downgraded below investment
grade is stated in Item 29 of the Schedules.
101. If a reasonably diligent plaintiff would have discovered before August 21, 2008,
facts that show that the particular statements referred to in Items 29, 39, 63, 69, 79, and 90 of the
Schedules to this Petition were untrue or misleading, then the NRSROs, which were monitoring
the certificates and are much more sophisticated than a reasonably diligent plaintiff, would also
have discovered such facts and withdrawn or downgraded their ratings on the certificates to
below investment grade. The fact that none of the NRSROs did so demonstrates that, before
August 21, 2008, a reasonably diligent plaintiff could not have discovered facts that show that
those statements were untrue or misleading.
102. The claims on Securitizations Nos. 1 and 2 are also timely for another reason. As
a purchaser of the certificates, Guaranty was, and Plaintiff as Receiver for Guaranty is, a member
of the proposed class in New Jersey Carpenters Health Fund v. Residential Capital, LLC, United
States District Court for the Southern District of New York, No. 08-CV-8781. The pendency of
New Jersey Carpenters has tolled the running of the statutes of limitations on the claims in this
Petition.
103. Securitization No. 1 was included in the original class action Complaint filed in
New Jersey Carpenters on September 22, 2008, in New York Supreme Court and removed on
October 14, 2008. Securitization No. 2 was included in the Consolidated First Amended
Securities Class Action Complaint filed in New Jersey Carpenters on May 18, 2009. These
securitizations were dismissed from that action on March 31, 2010.
IX. CAUSES OF ACTION
A. Untrue or Misleading Statements in the Sale of Securities Under Article 581-33 of the TSA
104. Plaintiff hereby incorporates by reference, as though fully set forth, paragraphs 1
through 103.
PLAINTIFF’S ORIGINAL PETITION Page 33
105. GMAC sold two certificates in Securitizations Nos. 1 and 2 that Guaranty
purchased when they were initially offered to the public. GMAC sent communications and
solicitations to Guaranty in Texas for the purpose of inducing Guaranty to purchase the
certificates. The sale of these certificates occurred in Texas because employees or agents of
GMAC directed communications about the certificates and solicitations to purchase the
certificates to Guaranty there, and because Guaranty received those communications and
solicitations there.
106. In doing the acts alleged in the sale to Guaranty of the two certificates in
Securitizations Nos. 1 and 2, GMAC violated Article 581-33 of the TSA by offering or selling
securities in this State by means of written communications that included untrue statements of
material fact or omitted 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.
107. Goldman sold a certificate in Securitization No. 3 that Guaranty purchased when
it was initially offered to the public. Goldman sent communications and solicitations to Guaranty
in Texas for the purpose of inducing Guaranty to purchase the certificate. The sale of this
certificate occurred in Texas because employees or agents of Goldman directed communications
about the certificate and solicitations to purchase the certificate to Guaranty there, and because
Guaranty received those communications and solicitations there.
108. In doing the acts alleged in the sale to Guaranty of the certificate in Securitization
No. 3, Goldman violated Article 581-33 of the TSA by offering or selling a security in this State
by means of written communications that included untrue statements of material fact or omitted
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.
109. Deutsche sold three certificates in Securitizations Nos. 4, 5, and 6 that Guaranty
purchased when they were initially offered to the public. Deutsche sent communications and
solicitations to Guaranty in Texas for the purpose of inducing Guaranty to purchase the
certificates. The sale of these certificates occurred in Texas because employees or agents of
PLAINTIFF’S ORIGINAL PETITION Page 34
Deutsche directed communications about the certificates and solicitations to purchase the
certificates to Guaranty there, and because Guaranty received those communications and
solicitations there.
110. In doing the acts alleged in the sale to Guaranty of the three certificates in
Securitizations Nos. 4, 5, and 6, Deutsche violated Article 581-33 of the TSA by offering or
selling securities in this State by means of written communications that included untrue
statements of material fact or omitted 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.
111. Bear Stearns sold two certificates in Securitizations Nos. 7 and 8 that Guaranty
purchased when they were initially offered to the public. Bear Stearns sent communications and
solicitations to Guaranty in Texas for the purpose of inducing Guaranty to purchase the
certificates. The sale of these certificates occurred in Texas because employees or agents of Bear
Stearns directed communications about the certificates and solicitations to purchase the
certificates to Guaranty there, and because Guaranty received those communications and
solicitations there.
112. In doing the acts alleged in the sale to Guaranty of the two certificates in
Securitizations Nos. 7 and 8, Bear Stearns violated Article 581-33 of the TSA by offering or
selling securities in this State by means of written communications that included untrue
statements of material fact or omitted 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.
113. Plaintiff has disposed of all of the certificates.
114. Under Article 581-33 of the TSA, Plaintiff is entitled to recover the consideration
paid for each of these certificates, plus interest at the legal rate from the date of purchase to the
date on which it recovers the purchase price, minus the amount of income received on the
certificate, minus the greater of the value of the security when the plaintiff disposed of it or the
consideration that the plaintiff received for the security.
PLAINTIFF’S ORIGINAL PETITION Page 35
B. Untrue or Misleading Statements in the Sale of Securities Under Section
12(a)(2) of the 1933 Act
115. Plaintiff hereby incorporates by reference, as though fully set forth, paragraphs 1
through 114.
116. Guaranty purchased two certificates in Securitizations Nos. 1 and 2 that GMAC
sold to Guaranty when they were initially offered to the public.
117. GMAC solicited Guaranty to purchase the certificates, and sold the certificates to
Guaranty, by means of the prospectus supplements and other written offering materials and oral
communications.
118. The prospectus supplements and other written offering materials and oral
communications that GMAC sent to Guaranty contained untrue statements of material fact and
omitted to state material facts necessary in order to make the statements, in the light of the
circumstances in which they were made, not misleading.
119. Guaranty did not know when it purchased the certificates that the statements in
the prospectus supplements and other written offering materials and oral communications that
GMAC sent to Guaranty were untrue or misleading.
120. In doing the acts alleged in the sale to Guaranty of the certificates in
Securitizations Nos. 1 and 2, GMAC violated Section 12(a)(2) of the 1933 Act.
121. Guaranty purchased one certificate in Securitization No. 8 that Bear Stearns sold
to Guaranty when it was initially offered to the public.
122. Bear Stearns solicited Guaranty to purchase the certificate, and sold the certificate
to Guaranty, by means of the prospectus supplement and other written offering materials and oral
communications.
123. The prospectus supplement and other written offering materials and oral
communications that Bear Stearns sent to Guaranty contained untrue statements of material fact
and omitted to state material facts necessary in order to make the statements, in the light of the
circumstances in which they were made, not misleading.
PLAINTIFF’S ORIGINAL PETITION Page 36
124. Guaranty did not know when it purchased the certificate that the statements in the
prospectus supplement and other written offering materials and oral communications that Bear
Stearns sent to Guaranty were untrue or misleading.
125. In doing the acts alleged in the sale to Guaranty of the certificate in Securitization
No. 8, Bear Stearns violated Section 12(a)(2) of the 1933 Act.
126. SAMI was the depositor of Securitization No. 8, and therefore is the issuer of one
certificate that Guaranty purchased.
127. SAMI prepared and signed the registration statement for the certificate for the
purpose of soliciting investors, including Guaranty, to purchase certificates when they were
initially offered to the public, motivated at least in part by its own financial interest or that of the
direct seller.
128. This sale was in the initial offering of the certificates and the certificate was sold
by means of a prospectus supplement. Therefore, under 17 C.F.R. § 230.159A(a), SAMI is
considered to have offered or sold the certificate to Guaranty.
129. In doing the acts alleged in the offer or sale to Guaranty of the certificate in
Securitization No. 8, SAMI violated section 12(a)(2) of the 1933 Act.
130. Plaintiff expressly excludes from this cause of action any allegation that could be
construed as alleging fraud or intentional or reckless conduct. This cause of action is based solely
on allegations of strict liability or negligence under the 1933 Act.
131. When it failed on August 21, 2009, Guaranty had not discovered that the
defendants made untrue or misleading statements about the certificates. Plaintiff discovered that
the defendants made untrue or misleading statements in the sale of each security in the course of
its investigation in 2012.
132. Plaintiff has suffered a loss on each of these certificates.
133. Plaintiff is entitled to recover damages.
PLAINTIFF’S ORIGINAL PETITION Page 37
C. Untrue or Misleading Statements in a Registration Statement Under Section
11 of the 1933 Act
134. Plaintiff hereby incorporates by reference, as though fully set forth, paragraphs 1
through 133.
135. SAMI is the depositor of Securitization No. 8, and therefore is the issuer of one
certificate that Guaranty purchased. In doing the acts alleged, SAMI violated Section 11 of the
1933 Act in connection with issuing the certificate in Securitization No. 8.
136. GMAC underwrote Securitizations Nos. 1 and 2. In doing the acts alleged,
GMAC violated Section 11 of the 1933 Act in connection with underwriting the certificates in
Securitizations Nos. 1 and 2.
137. Bear Stearns underwrote Securitization No. 8. In doing the acts alleged, Bear
Stearns violated Section 11 of the 1933 Act in connection with underwriting the certificate in
Securitization No. 8.
138. The certificates in these securitizations were issued pursuant or traceable to
registration statements. Details of each registration statement and each certificate are stated in
Item 29 of the Schedules.
139. The registration statements, as amended by the prospectus supplements, contained
untrue statements of material fact and omitted to state material facts necessary in order to make
the statements, in the light of the circumstances under which they were made, not misleading.
These untrue and misleading statements included all of the untrue and misleading statements
described in paragraphs 34 through 95.
140. Guaranty purchased each certificate before the issuer made generally available an
earning statement covering a period of at least twelve months.
141. Plaintiff expressly excludes from this cause of action any allegation that could be
construed as alleging fraud or intentional or reckless conduct. This cause of action is based solely
on allegations of strict liability or negligence under the 1933 Act.
PLAINTIFF’S ORIGINAL PETITION Page 38
142. Guaranty did not know when it purchased the certificates that the statements in
the registration statements, as amended by the prospectus supplements, were untrue or
misleading.
143. When it failed on August 21, 2009, Guaranty had not discovered that the
defendants made untrue or misleading statements about the certificates. Plaintiff discovered that
the defendants made untrue or misleading statements about each security in the course of its
investigation in 2012.
144. Plaintiff has suffered a loss on each of these certificates.
145. Plaintiff is entitled to recover damages as described in 15 U.S.C. § 77k(e).
D. Liability as a Controlling Person Under Section 15 of the 1933 Act
146. Plaintiff hereby incorporates by reference, as though fully set forth, paragraphs 1
through 145.
147. Bear Stearns Companies, by or through stock ownership, agency, and as
otherwise described above, controlled SAMI within the meaning of Section 15 of the 1933 Act.
148. In doing the acts alleged, SAMI violated Sections 11 and 12(a)(2) of the 1933 Act
by issuing, offering, or selling one certificate.
149. Bear Stearns Companies is therefore jointly and severally liable with and to the
same extent as SAMI.
X. CONDITIONS PRECEDENT
150. Pursuant to Texas Rule of Civil Procedure 54, all conditions precedent to
Plaintiff’s right to recover on all causes of action pleaded herein have been performed or have
occurred.
XI. REQUEST FOR A JURY TRIAL
151. Plaintiff requests a jury trial on all allegations and causes of action set forth herein
as allowed by Texas law.

PLAINTIFF’S ORIGINAL PETITION Page 40
Of Counsel:
David J. Grais (pro hac vice to be submitted)
Mark B. Holton (pro hac vice to be submitted)
GRAIS & ELLSWORTH LLP
1211 Avenue of the Americas
New York, New York 10036
Telephone: (212) 755-0100
Facsimile: (212) 755 0052
PLAINTIFF’S ORIGINAL PETITION Page 41
EXHIBIT A
PLAINTIFF’S ORIGINAL PETITION Page 42
EXHIBIT B
PLAINTIFF’S ORIGINAL PETITION Page 43
EXHIBIT C
PLAINTIFF’S ORIGINAL PETITION Page 44
EXHIBIT D

 

 

 

 

 

 

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