SUPREME COURT OF THE STATE OF NEW ... - New York Times

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exceeded the value of the mortgaged properties themselves and were “underwater” from the date of origination. • Defendants grossly misrepresented the properties backing the mortgages as owner-occupied. It is a well known fact in the mortgage industry that loan default rates on owner-occupied homes are much lower than second or third homes or investment properties. On average, Defendants overstated owner-occupancy by 14.1 percentage points. • Defendants’ misrepresentations in the Offering Materials were based on false metrics in a staggering 40.2% of the sampled loans. Of the 262,322 loans tested, 105,568 were inconsistent with one or more of Defendants’ metrics by 10 percentage points or more. The enormity of these numbers demonstrates that Defendants were engaged in a massive scheme to manipulate and deceive investors, like AIG, who had no alternative but to rely on the lies and omissions made by Defendants. 7. The results of AIG’s forensic analysis are just the tip of the iceberg. The systemic misrepresentations regarding LTV, CLTV, and owner-occupancy address only a subset, albeit an important subset, of the representations Defendants made concerning the quality of the loan pools. These are the representations that AIG was able to analyze using forensic tools outside of the information in the loan files themselves. A myriad of other key factors that further address the integrity (or lack thereof) of Defendants’ loan underwriting process—such as borrowers’ income, employment verification, and the supposed compensating factors that were considered in approving “exceptions” to stated guidelines—can only be scrutinized by reviewing the actual loan files. AIG is confident that a review of the complete loan files in discovery will demonstrate that the fraud perpetrated by Defendants was even more rampant than AIG’s forensic analysis reveals. 8. Despite multiple requests by AIG, AIG has been unable to gain access to the loan files for nearly all of the RMBS underwritten by Defendants. A sample of loan files in a deal 4
underwritten by Bank of America and for which AIG has been able to obtain loan files shows that a staggering 82% of the loans did not comply with underwriting guidelines, including examples such as these: • Misrepresentation of Employment. The borrower stated on the loan application that she was self-employed as a builder for 25 years, earning $35,000 per month, and the co-borrower stated that he was also self-employed as a builder earning $30,000 per month. The borrower also listed on the application that she had been the owner of her building/construction business for 25 years; however, her year of birth was 1971, which would have made the borrower 10 years old when she became the owner of the business. Additionally, the loan file contained letters of incorporation for both the borrower and co-borrower’s businesses with inception dates of 9/28/1993 and 2/26/2002, respectively. A reasonably prudent underwriter should have noticed that the age discrepancy was a red flag and questioned the validity of the information contained on the loan application. The loan defaulted. • Misrepresentation of Income. The borrower stated on the application that she was self-employed as a personal chef with a monthly income of $10,166.67, or $122,000.00 annually. The borrower’s tax returns, contained in the loan file, showed a gross income for the entire year of 2007 of $3,126.00 for services as a personal chef, and $27,225 as a self-employed personal assistant. The borrower earned monthly income that was $675 less than the amount of the subject loan mortgage payment in the year following the mortgage closing. The borrower made only one payment on the mortgage, and defaulted. • Misrepresentation of Debt Obligations. The application failed to disclose that the borrower simultaneously closed on a second mortgage, originated by the same lender, in the same condominium complex. Public records show that the Borrower acquired a mortgage on the same day as the subject loan for $414,000 with a monthly payment of $4,995 for a property located in Dallas, Texas. The origination underwriter failed to include the monthly payment in the borrower’s debt-to-income ratio (“DTI”) for the subject loan, resulting in an imprudent underwriting decision. A recalculation of DTI based on the borrower’s undisclosed debt, and recalculated income of $1,200 per month, yields a DTI of 1,129.08%, which exceeds the guideline maximum allowable DTI of 55%. The loan defaulted. 9. Not only did Defendants create RMBS with shoddy loans, but they also engineered unduly positive credit ratings for these securities. Defendants knew that investors like AIG required RMBS to meet stringent credit ratings criteria, and thus duped the rating agencies into rating the senior tranches of these securities AAA. Defendants gave the rating 5
Page 1 and 2: SUPREME COURT OF THE STATE OF NEW Y
Page 3 and 4: TABLE OF CONTENTS Page NATURE OF AC
Page 5 and 6: (b) (c) Merrill Instructed Subprime
Page 7 and 8: Plaintiffs American International G
Page 9: losses as a result of Defendants’
Page 13 and 14: America face both Martin Act liabil
Page 15 and 16: Heretofore that has been a challeng
Page 17 and 18: 19. Intense industry competition le
Page 19 and 20: America’s “aggressive move into
Page 21 and 22: program (the “Global Securities L
Page 23 and 24: 42. Plaintiff Lexington Insurance C
Page 25 and 26: California with its principal place
Page 27 and 28: mortgage-backed certificates purcha
Page 29 and 30: offerings at issue, as detailed in
Page 31 and 32: the issuer of the certificates with
Page 33 and 34: 81. The issuing trust then “secur
Page 35 and 36: 87. The Wall Street Journal has sum
Page 37 and 38: III. DEFENDANTS OPERATED ON EVERY L
Page 39 and 40: Home Loans thus knew that its loans
Page 41 and 42: Exhibits 1 to 349 set forth the dat
Page 43 and 44: B. Defendants’ Misrepresentations
Page 45 and 46: Defendant Misrepresentations made i
Page 47 and 48: CLTVs based on the relevant underwr
Page 49 and 50: Defendant Misrepresentations cannot
Page 51 and 52: its investments. Some investors, li
Page 53 and 54: the samples AIG tested is clear evi
Page 55 and 56: 132. Defendants’ aggregated mortg
Page 57 and 58: 12.7 percentage points to 82.3 perc
Page 59 and 60: Asset Weighted Average LTV Ratio as
Page 61 and 62:
144. Further, the Offering Material
Page 63 and 64:
evidence that the borrower does not
Page 65 and 66:
y misrepresenting to the rating age
Page 67 and 68:
160. In her testimony to the SPSI,
Page 69 and 70:
which Defendants demanded be rated
Page 71 and 72:
omitted that they were systematical
Page 73 and 74:
• In State of Indiana v. Countryw
Page 75 and 76:
“Going for 30% mortgage share her
Page 77 and 78:
184. In November 2007, Countrywide
Page 79 and 80:
chief concern on [the matching stra
Page 81 and 82:
195. According to the SEC, Countryw
Page 83 and 84:
performing so much worse is strong
Page 85 and 86:
2007 internal memo from Countrywide
Page 87 and 88:
Non-Conforming 1st lien loans that
Page 89 and 90:
216. In addition to outright fabric
Page 91 and 92:
the normal underwriting process. Fo
Page 93 and 94:
229. According to Francisco San Ped
Page 95 and 96:
encounter resistance to my efforts
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subsidiaries or otherwise subject t
Page 99 and 100:
maintained a database titled the
Page 101 and 102:
using properties outside of the imm
Page 103 and 104:
(i) Countrywide Developed Toxic “
Page 105 and 106:
put a bigger percentage of our pay
Page 107 and 108:
defective loans, the investment ban
Page 109 and 110:
that Countrywide omitted material i
Page 111 and 112:
income would have produced a debt-t
Page 113 and 114:
285. With its securitization operat
Page 115 and 116:
years. (Id. at 194.) These huge pro
Page 117 and 118:
296. Former Merrill executives have
Page 119 and 120:
elationship” with the appraisers.
Page 121 and 122:
favorable (and overstated) appraisa
Page 123 and 124:
y the seller to the prospective buy
Page 125 and 126:
intense to approve as many loans as
Page 127 and 128:
were subprime and Alt-A mortgages,
Page 129 and 130:
324. In May 2011, the New York Atto
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2005 and 2006, Bank of America’s
Page 133 and 134:
predatory lending laws related to t
Page 135 and 136:
show that the Borrower acquired a m
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Transaction Number of Months Since
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and 191, also shows that the compan
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345. According to a former employee
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350. Countrywide’s attempt to con
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357. Merrill’s relationships with
Page 147 and 148:
362. In addition to showing that Ba
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characteristics of these securities
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373. An active secondary market for
Page 153 and 154:
credit characteristics that were un
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subsidiary of the Corporation . . .
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from CHL to the Bank.” By transfe
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America. However, Countrywide’s o
Page 161 and 162:
stated that the bank “anticipates
Page 163 and 164:
America website, while the integrat
Page 165 and 166:
New York Times article published in
Page 167 and 168:
419. On June 28, 2011, Bank of Amer
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usiness, and (e) Bank of America as
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easonably and justifiably relied on
Page 173 and 174:
mortgage banking remained Countrywi
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directors and officers. Revenues fl
Page 177 and 178:
10-K for the years ended December 2
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securities in its financial stateme
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THIRD CAUSE OF ACTION (Violation of
Page 183 and 184:
482. The Section 11 Defendants caus
Page 185 and 186:
Defendants”) arising from AIG’s
Page 187 and 188:
498. Each of the Section 12(a)(2) D
Page 189 and 190:
to influence and control, and did i
Page 191 and 192:
518. AIG reasonably relied on the i
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