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Federal Housing Finance Agency The Lawsuits

9-2-2011

1. Ally Financial Inc. f/k/a GMAC, LLC 2. Bank of America Corporation 3. Barclays Bank PLC 4. Citigroup, Inc. 5. Countrywide Financial Corporation 6. Credit Suisse Holdings (USA), Inc. 7. Deutsche Bank AG 8. First Horizon National Corporation 9. General Electric Company 10. Goldman Sachs & Co. 11. HSBC North America Holdings, Inc. 12. JPMorgan Chase & Co. 13. Merrill Lynch & Co. / First Franklin Financial Corp. 14. Morgan Stanley 15. Nomura Holding America Inc. 16. The Royal Bank of Scotland Group PLC 17. Socit Gnrale

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstALLY FINANCIAL INC. f/k/a GMAC, LLC, GMAC MORTGAGE GROUP, INC., RESIDENTIAL CAPITAL LLC f/k/a RESIDENTIAL CAPITAL CORPORATION, GMAC-RFC HOLDING COMPANY, LLC d/b/a GMAC RESIDENTIAL FUNDING CORPORATION, RESIDENTIAL FUNDING COMPANY, LLC f/k/a RESIDENTIAL FUNDING CORPORATION, ALLY SECURITIES, LLC f/k/a RESIDENTIAL FUNDING SECURITIES, LLC d/b/a GMAC RFC SECURITIES AND f/k/a RESIDENTIAL FUNDING SECURITIES CORPORATION, RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC., RESIDENTIAL ASSET SECURITIES CORPORATION, AND RESIDENTIAL ACCREDIT LOANS, INC., J.P. MORGAN SECURITIES LLC f/k/a J.P. MORGAN SECURITIES, INC. AND AS SUCCESSORIN-INTEREST TO BEAR, STEARNS & CO. INC., CREDIT SUISSE SECURITIES (USA) LLC f/k/a CREDIT SUISSE FIRST BOSTON LLC, RBS SECURITIES, INC. d/b/a RBS GREENWICH CAPITAL AND f/k/a GREENWICH CAPITAL MARKETS, INC., CITIGROUP GLOBAL MARKETS INC., BARCLAYS CAPITAL INC., UBS SECURITIES LLC, GOLDMAN, SACHS & CO., Defendants. Plaintiff designates New York County as the place of trial The basis of venue is the residence of one or more of the parties pursuant to CPLR 503

Index No._______________ Date Purchased:

SUMMONS

TO THE ABOVE NAMED DEFENDANTS: YOU ARE HEREBY SUMMONED to answer the Complaint in this action and to serve a copy of your answer, or if the Complaint is not served with this summons, to serve a notice of appearance on Plaintiffs attorneys within 20 days after the service of this summons, exclusive of the day of service (or within 30 days after the service is complete if this summons is not personally delivered to your within the State of New York); and in the case of your failure to appear or answer, judgment will be taken against you by default for the relief demanded in the Complaint. Dated: New York, New York September 2, 2011 KASOWITZ, BENSON, TORRES & FRIEDMAN LLP

By:_/s/ Marc E. Kasowitz Marc E. Kasowitz (mkasowitz@kasowitz.com) Hector Torres (htorres@kasowitz.com) Michael S. Shuster (mshuster@kasowitz.com) Christopher P. Johnson (cjohnson@kasowitz.com) Charles M. Miller (cmiller@kasowitz.com) Michael A. Hanin (mhanin@kasowitz.com) 1633 Broadway New York, New York 10019 (212) 506-1700 Attorneys for Plaintiff Federal Housing Finance Agency, as Conservator for the Federal Home Loan Mortgage Corporation

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstALLY FINANCIAL INC. f/k/a GMAC, LLC, GMAC MORTGAGE GROUP, INC., RESIDENTIAL CAPITAL LLC f/k/a RESIDENTIAL CAPITAL CORPORATION, GMAC-RFC HOLDING COMPANY, LLC d/b/a GMAC RESIDENTIAL FUNDING CORPORATION, RESIDENTIAL FUNDING COMPANY, LLC f/k/a RESIDENTIAL FUNDING CORPORATION, ALLY SECURITIES, LLC f/k/a RESIDENTIAL FUNDING SECURITIES, LLC d/b/a GMAC RFC SECURITIES and f/k/a RESIDENTIAL FUNDING SECURITIES CORPORATION, RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC., RESIDENTIAL ASSET SECURITIES CORPORATION, and RESIDENTIAL ACCREDIT LOANS, INC., J.P. MORGAN SECURITIES LLC f/k/a J.P. MORGAN SECURITIES, INC. and as successor-in-interest to BEAR, STEARNS & CO. INC., CREDIT SUISSE SECURITIES (USA) LLC f/k/a CREDIT SUISSE FIRST BOSTON LLC, RBS SECURITIES, INC. d/b/a RBS GREENWICH CAPITAL and f/k/a GREENWICH CAPITAL MARKETS, INC., CITIGROUP GLOBAL MARKETS INC., BARCLAYS CAPITAL INC., UBS SECURITIES LLC, and GOLDMAN, SACHS & CO., Defendants.

Index No.________

COMPLAINT

TABLE OF CONTENTS Page NATURE OF ACTION........................................................................................................................1 PARTIES...............................................................................................................................................4 Plaintiff .....................................................................................................................................4 Defendants................................................................................................................................5 GMAC Defendants...................................................................................................................5 Non-GMAC Defendants..........................................................................................................7 Non-Party Originators............................................................................................................10 JURISDICTION AND VENUE ........................................................................................................11 FACTUAL ALLEGATIONS ............................................................................................................11 I. FACTUAL ALLEGATIONS APPLICABLE TO ALL CLAIMS .....................................11 A. The Securitizations ....................................................................................................12 1. 2. 3. Residential Mortgage-Backed Securitizations Generally...........................12 Securitizations at Issue in this Case .............................................................13 Securitization Process ...................................................................................16 a. b. B. The Sponsors Grouped Mortgage Loans in Special-Purpose Trusts .................................................................................................16 The Trusts Issued Securities Backed by the Loans ........................17

Defendants Participation in the Securitization Process .........................................20 1. 2. 3. 4. 5. 6. Ally.................................................................................................................21 RFC ................................................................................................................21 RALI, RASC and RAMP .............................................................................23 RFS.................................................................................................................23 GMAC-RFC ..................................................................................................24 Ally, GMACM and ResCap .........................................................................24

7. C.

Non-GMAC Underwriters ............................................................................25

Statements in the Prospectus Supplements ..............................................................26 1. 2. 3. 4. Compliance with Underwriting Guidelines.................................................26 Occupancy Status of Borrower.....................................................................29 Loan-to-Value Ratios....................................................................................31 Credit Ratings ................................................................................................34

D.

Falsity of Statements in the Registration Statements and Prospectus Supplements...............................................................................................................36 1. The Statistical Data Provided in the Prospectus Supplements Concerning Owner-Occupancy and Loan-to-Value Ratios was Materially False .............................................................................................36 a. b. 2. Owner-Occupancy Data was Materially False ...............................36 Loan-to-Value Data was Materially False ......................................38

The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines ...............................................41 a. Government and Private Investigations Confirm That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines..........................................................................................42 i. ii. iii. b. New Century Violated Its Underwriting Guidelines..........43 HFN Violated Its Underwriting Guidelines........................46 MLN Violated Its Underwriting Guidelines.......................48

The Collapse of the Certificates Credit Ratings Further Shows that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines .........................49 The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines.....................50

c.

E. F.

Freddie Macs Purchases of the Certificates............................................................52 Freddie Mac was Damaged by Defendants Violations of Sections 11, 12 and 15 of the Securities Act ......................................................................................53

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II.

ADDITIONAL FACTUAL ALLEGATIONS .....................................................................54 A. B. C. D. Defendants Were Incentivized to Fund Risky Residential Mortgage Loans and to Securitize and Sell Them to Investors..........................................................54 Defendants Material Misrepresentations and Omissions in the Offering Materials.....................................................................................................................58 The Fraud Defendants Knew or were Reckless in not Knowing that Their Representations were False and Misleading ............................................................62 Freddie Mac Justifiably Relied on the Misrepresentations and Omissions in the Offering Materials and was Damaged by Defendants Fraudulent Conduct ......................................................................................................................70

FIRST CAUSE OF ACTION ............................................................................................................72 Violation of Section 11 of the Securities Act of 1933 (Against Defendants RALI, RASC, RAMP, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs).........................................................................................................72 SECOND CAUSE OF ACTION .......................................................................................................75 Violation of Section 12(a)(2) of the Securities Act of 1933 (Against Defendants RALI, RASC, RAMP, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs).........................................................................................75 THIRD CAUSE OF ACTION ...........................................................................................................78 Violation of Section 15 of the Securities Act of 1933 (Against RFC, GMAC-RFC, ResCap, GMACM and Ally) ....................................................................................78 FOURTH CAUSE OF ACTION .......................................................................................................81 Primary Violations of the Virginia Securities Act (Against RALI, RASC, RAMP, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs) .........81 FIFTH CAUSE OF ACTION ............................................................................................................84 Controlling Person Liability Under the Virginia Securities Act (Against RFC, GMAC-RFC, ResCap, GMACM and Ally).............................................................84 SIXTH CAUSE OF ACTION ...........................................................................................................88 (Common Law Fraud Against RALI, RAMP, RASC, RFC, RFS JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs).........................................88 SEVENTH CAUSE OF ACTION.....................................................................................................89

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(Aiding and Abetting Fraud Against Ally, GMACM, GMAC-MG, ResCap, GMAC-RFC, RFC, RALI, RASC and RAMP).......................................................89 EIGHTH CAUSE OF ACTION ........................................................................................................91 (Negligent Misrepresentation Against RALI, RASC, RAMP, RFC, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs)..............................91 PRAYER FOR RELIEF.....................................................................................................................93

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Plaintiff Federal Housing Finance Agency (Plaintiff or FHFA), as Conservator of the Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys Kasowitz, Benson, Torres & Friedman LLP, for its Complaint against the defendants named herein (Defendants), alleges as follows: NATURE OF ACTION 1. This action arises from false and misleading statements and omissions in

registration statements, prospectuses, and other offering materials pursuant to which certain residential mortgage-backed securities (RMBS) were purchased by Freddie Mac. Among other things, these documents falsely represented that the mortgage loans underlying the RMBS complied with certain underwriting guidelines and standards, and presented a false picture of the characteristics and riskiness of those loans. These representations were material to Freddie Mac, as they would have been to any reasonable investor, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., as well as Sections 13.1522(A)(ii) and 13.1-522(C) of the Virginia Code. Freddie Mac justifiably relied on Defendants misrepresentations and omissions of material fact to its detriment. In addition to its strict statutory liability under federal securities law and liability under state law, Defendants statements and omissions give rise to liability under state common law. 2. Between September 23, 2005 and May 30, 2007, Freddie Mac purchased over $6

billion in Certificates issued in connection with 21 securitizations that were virtually all sponsored and underwritten by Defendants.1

For purposes of this Complaint, the securities issued under the Registration Statements (as defined in note 2, infra) are referred to as Certificates. Holders of Certificates are referred to as Certificateholders.

3.

The Certificates were offered for sale pursuant to one of six shelf registration

statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC). For each of the 21 securitizations sold to Freddie Mac (the Securitizations), a prospectus (Prospectus) and prospectus supplement (Prospectus Supplement) were filed with the SEC as part of the Registration Statement for that Securitization. 2 The Certificates were marketed and sold to Freddie Mac pursuant to the Registration Statements. 4. The Registration Statements contained representations concerning, among other

things, the characteristics and credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers on those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such representations were material to a reasonable investors decision to invest in the Certificates, and they were material to Freddie Mac. Unbeknownst to Freddie Mac, those representations were false because, among other reasons, many of material percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices, and did not have the credit and other characteristics set forth in the Registration Statements. 5. Among other things, the Registration Statements presented the loan origination

guidelines of the mortgage loan originators who originated the loans that underlay the Certificates. The Registration Statements falsely represented that those guidelines were adhered to except in specified circumstances, when in fact the guidelines systematically were disregarded in that the loans were not originated in accordance therewith.

The term Registration Statement as used herein incorporates the Shelf Registration Statement, the Prospectus, and the Prospectus Supplement and in Appendix A for each referenced Securitization, except where otherwise indicated.

6.

The Registration Statements also set forth for each Securitization statistical

summaries of the characteristics of the underlying mortgage loans, such as the percentage of loans secured by owner-occupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was material to reasonable investors, and it was material to Freddie Mac. However, a loan-level analysis of a sample of loans for each Securitization -- a review that encompassed in the aggregate thousands of mortgages across all of the Securitizations -- has revealed that for each Securitization these statistical summaries were false and misleading. The statistics reflected or were based upon misrepresentations of other key characteristics of the mortgage loans and inflated property values. 7. For example, the percentage of owner-occupied properties in the loan pool

underlying a RMBS is a material risk factor to the purchasers of certificates, such as Freddie Mac, because a borrower who actually lives in a mortgaged property is generally less likely to stop paying the mortgage and more likely to take care of the property. The loan-level review revealed that the true percentage of owner-occupied properties for the loans supporting the Certificates was materially lower than that represented in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented such material information as loan-to-value ratios -that is, the relationship between the principal amount of the loans and the true value of the mortgaged properties securing those loans -- and the ability of the individual mortgage holders to satisfy their debts. 8. The Registration Statements also set forth ratings for each of the Securitizations.

Those AAA ratings were material to a reasonable investors decision to purchase the Certificates, and they were material to Freddie Mac. The ratings for the Securitizations were materially

inaccurate and were based upon false information supplied by Defendants. Upon information and belief, neither the Defendants nor the rating agencies who issued the ratings believed or had any sound basis to believe in their truthfulness. 9. Defendants, who are issuers, sponsors, and/or underwriters of the Certificates

purchased by Freddie Mac are liable for the misstatements and omissions of material fact contained in the Registration Statements and other offering materials because they prepared, filed, and/or used these documents to market and sell the Certificates to Freddie Mac, or because they directed and controlled the entities that did so.3 10. Defendants misstatements and omissions of material facts have caused loss and

injury to Freddie Mac. Freddie Mac purchased the highest tranches of Certificates offered for sale by Defendants. Freddie Mac would not have purchased these Certificates but for Defendants material misrepresentations and omissions concerning the mortgage loans underlying the RMBS. As the truth concerning the misrepresented and omitted facts has come to light, and as the hidden risks have materialized, the market value of the Certificates purchased by Freddie Mac has declined. Freddie Mac has suffered enormous financial losses as a result of Defendants misrepresentations and omissions. FHFA, as Conservator for Freddie Mac, now seeks rescission and damages for those losses. PARTIES Plaintiff 11. Plaintiff the Federal Housing Finance Agency is a federal agency located at

1700 G Street, NW in Washington, D.C. FHFA was created on July 30, 2008, pursuant to the Housing and Economic Recovery Act of 2008 (HERA), Pub L. No. 110-289, 122 Stat. 2654,
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The Certificates purchased by Freddie Mac are identified below in paragraph 130 and are listed infra in Table 10.

codified at 12 U.S.C. 4617 et seq. (HERA), to oversee the Federal National Mortgage Association (Fannie Mae), Freddie Mac and the Federal Home Loan Banks. On September 6, 2008, the Director of FHFA, also pursuant to HERA, placed Freddie Mac into conservatorship and appointed FHFA as Conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of Freddie Mac, including, but not limited to, the authority to bring suits on behalf of and/or for the benefit of Freddie Mac. 12 U.S.C. 4617(b)(2). 12. Freddie Mac is a government-sponsored enterprise chartered by Congress with a

mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Freddie Mac invested in RMBS. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. Defendants GMAC Defendants 13. Defendant Ally Financial Inc. (Ally), a leading, multi-national financial

services firm with a corporate center in New York, has approximately $179 billion of assets and operations in approximately 25 countries. Ally is the parent and sole owner of Defendants GMAC Mortgage Group, Inc. and Residential Funding Services, LLC. Prior to 2010, Ally was known as GMAC, LLC. 14. Defendant GMAC Mortgage Group, Inc. (GMACM) is a wholly-owned

subsidiary and the mortgage arm of Ally. GMACM is a Delaware corporation with its principal place of business at 1100 Virginia Drive, Fort Washington, Pennsylvania 19034. GMACM transacted business in New York. 15. Defendant Residential Capital LLC (ResCap) is a wholly-owned subsidiary of

GMACM and originates, services, and securitizes mortgage loans in the United States, including New York. ResCap was incorporated in the State of Delaware and its principal office is located

at One Meridian Crossings, Minneapolis, Minnesota 55423. Prior to 2007, ResCap was known as Residential Capital Corporation. 16. Defendant GMAC-RFC Holding Company, LLC, doing business as GMAC

Residential Funding Corporation (GMAC-RFC), is a wholly-owned subsidiary of ResCap and acquires residential mortgages and loans, which it then packages as mortgage-backed securities and sells to institutional investors. GMAC-RFC was incorporated in the State of Delaware and its principal office is located at 8400 Normandale Lake Boulevard, Minneapolis, Minnesota 55437. GMAC-RFC transacted business in New York. 17. Defendant Residential Funding Company, LLC (RFC) is a wholly-owned

subsidiary of GMAC-RFC. RFC, a Delaware corporation, has an office in New York, has appointed an agent for service of process in New York, and has consented to the jurisdiction of the New York courts. Prior to October 2006, RFC was known as Residential Funding Corporation. RFC was the sponsor of all 21 of the Securitizations. Defendant RFC is the parent and sole owner of Homecomings Financials, LLC (HFN), the originator of loans underlying the Certificates for 13 of the 21 Securitizations and, upon information and belief, the only Ally subsidiary that originated residential mortgage loans during the relevant time period. Prior to 2006, HFN was known as Homecomings Financials Network, Inc. 18. Defendant Ally Securities, LLC is an SEC-registered broker-dealer and is

registered to do business in New York. Prior to August 1, 2011, Ally Securities, LLC was known as Residential Funding Securities, LLC, which was doing business as GMAC RFC Securities and prior to 2007, Residential Funding Securities, LLC was known as Residential Funding Securities Corporation (collectively, RFS). RFS is a wholly-owned subsidiary of Ally, and was registered to do business in New York. RFS was the co-lead underwriter for five

of the Securitizations and was an underwriter for an additional six of the Securitizations. Freddie Mac purchased five of the Securitizations from RFS in its capacity as co-lead underwriter of those Securitizations. 19. Defendant Residential Asset Mortgage Products, Inc. (RAMP) is a wholly-

owned subsidiary of GMAC-RFC and its principal office is located at 8400 Normandale Lake Boulevard, Minneapolis, Minnesota 55437. RAMP was the depositor for five of the Securitizations and transacted business in New York. RAMP, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934 with respect to the Securitizations. 20. Defendant Residential Asset Securities Corporation (RASC) is a wholly-owned

subsidiary of GMAC-RFC and its principal office is located at 8400 Normandale Lake Boulevard, Minneapolis, Minnesota 55437. RASC was the depositor for 10 of the Securitizations and transacted business in New York. RASC, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 21. Defendant Residential Accredit Loans, Inc. (RALI) is a wholly-owned

subsidiary of GMAC-RFC and its principal office is located at 8400 Normandale Lake Boulevard, Minneapolis, Minnesota 55437. RALI was the depositor for 6 of the Securitizations and transacted business in New York. RALI, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. Defendants Ally, GMACM, ResCap, GMAC-RFC, RFS, RAMP, RASC and RALI are referred to together herein as GMAC. Non-GMAC Defendants 22. Defendant Barclays Capital Inc. (Barclays) is a Connecticut corporation with its

principal place of business located at 200 Park Avenue, New York, New York 10166. Barclays

is an SEC-registered broker-dealer and served as underwriter or co-underwriter for one Securitization. 23. Defendant Citigroup Global Markets Inc. (Citi) is an SEC-registered broker-

dealer. Citi is a corporation organized and existing under the laws of the State of New York with its principal place of business located at 388 Greenwich Street, New York, New York 10013. Citi served as underwriter or co-underwriter for one Securitization. 24. Defendant Credit Suisse Securities (USA) LLC (Credit Suisse) is a corporation

organized and existing under the laws of the State of Delaware with its principal place of business at 11 Madison Ave., New York, New York 10010. Prior to January 16, 2006, Credit Suisse was known as Credit Suisse First Boston LLC. Credit Suisse is an SEC-registered brokerdealer, and was the co-lead underwriter for four of the Securitizations. Credit Suisse was counderwriter for three of the Securitizations. 25. Defendant Goldman, Sachs & Co. (Goldman) is a corporation organized and

existing under the laws of the State of New York with its principal place of business located at 200 West Street, New York, New York 10282. Goldman is an SEC-registered broker-dealer and served as underwriter or co-underwriter for one Securitization. 26. Defendant J.P. Morgan Securities, LLC, f/k/a J.P. Morgan Securities, Inc.

(JPM), is a limited liability company organized and existing under the laws of Delaware with its principal place of business located at 277 Park Avenue, New York, New York 10172. JPM is an SEC-registered broker-dealer and was co-lead underwriter for two of the Securitizations. 27. JPM is also the successor-in-interest to Bear, Stearns & Co., Inc. (Bear Stearns)

because on March 16, 2008, Bear Stearns parent company, Bear Stearns Companies, Inc. (BSCI), entered into an Agreement and Plan of Merger with Bear Stearns Merger Corporation,

a wholly-owned subsidiary of JPMorgan Chase & Co. (JPMorgan Chase), making Bear Stearns a wholly-owned indirect subsidiary of JPMorgan Chase. Following the merger, on or about October 1, 2008, Bear Stearns merged with J.P. Morgan Securities Inc., a subsidiary of JPMorgan Chase, which subsequently changed its name to J.P. Morgan Securities LLC. Thus, BSCI is now doing business as Defendant JPM. 28. In a June 30, 2008 press release describing internal restructuring to be undertaken

pursuant to the Merger, JPMorgan Chase stated its intent to assume Bear Stearns and its debts, liabilities, and obligations as follows: Following completion of this transaction, Bear Stearns plans to transfer its broker-dealer subsidiary Bear, Stearns & Co. Inc. to JPMorgan Chase, resulting in a transfer of substantially all of Bear Stearns assets to JPMorgan Chase. In connection with such transfer, JPMorgan Chase will assume (1) all of Bear Stearns then-outstanding registered U.S. debt securities; (2) Bear Stearns obligations relating to trust preferred securities; (3) Bear Stearns then-outstanding foreign debt securities; and (4) Bear Stearns guarantees of then-outstanding foreign debt securities issued by subsidiaries of Bear Stearns, in each case, in accordance with the agreements and indentures governing these securities. Further, the former Bear Stearns website, www.bearstearns.com, redirects Bear Stearns visitors to J.P. Morgan Securities Inc.s website. 29. J.P. Morgan Securities Inc. was fully aware of the pending and potential claims

against Bear Stearns when it consummated the merger. J.P. Morgan Securities Inc. has further evinced its intent to assume Bear Stearns liabilities by paying to defend and settle lawsuits against Bear Stearns. JPM announced its intention to convert to a limited liability company, effective September 1, 2010, as part of which it changed its name to J.P. Morgan Securities LLC. As a result of the Merger, Defendant JPM Securities is the successor-in-interest to Bear Stearns and is jointly and severally liable for the misstatements and omissions of material fact alleged herein of Bear Stearns. This action is brought against JPM Securities as successor to

Bear Stearns. Prior to acquisition, Bear Stearns was an SEC-registered broker-dealer and served as an underwriter for one Securitization. 30. Defendant RBS Securities, Inc., doing business as RBS Greenwich Capital

(RBS), is an SEC-registered broker-dealer incorporated in the State of Delaware with offices located at 101 Park Avenue, New York, New York 10178. Prior to April 2009, RBS was known as Greenwich Capital Markets, Inc. RBS served as underwriter or co-underwriter for two of the Securitizations. 31. Defendant UBS Securities LLC (UBS) is a Delaware limited liability company

with its principal place of business located at 677 Washington Blvd., Stamford, Connecticut 06901. UBS is an SEC-registered broker-dealer and served as underwriter or co-underwriter for one Securitization. 32. Defendants Barclays, Citi, Credit Suisse, Goldman, JPM, RBS, and UBS are

referred to together herein as the Non-GMAC Defendants, and together with RFS as the Underwriter Defendants. Non-Party Originators 33. The loans underlying the Certificates were acquired by the sponsor RFC for each

Securitization from the following mortgage originators: Homecomings Financials Network Inc. (HFN); Aegis Mortgage Corporation; Decision One Mortgage Company, LLC; EFC Holdings Corporation and its subsidiary EquiFirst Corporation; Finance America, LLC; First National Bank of Nevada; Home123 Corporation; Homefield Financial Inc.; Mortgage Lenders Network USA, Inc.; New Century Mortgage Corporation; Ownit Mortgage Solutions Inc.; Peoples Choice Home Loan, Inc.; Pinnacle Financial Corporation; and SCME Mortgage Bankers, Inc. HFN -- a subsidiary of Defendant Ally and an affiliate of Defendant RFC -- originated loans

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underlying the Certificates for 13 of the 21 Securitizations. Together, the entities identified in this paragraph are referred to as the Non-Party Originators. JURISDICTION AND VENUE 34. This Court has jurisdiction over this action pursuant to Section 22 of the

Securities Act of 1933, 15 U.S.C. 77v and Section 7 of Article VI of the New York State Constitution. 35. 301 and 302. 36. Venue is proper in this district pursuant to C.P.L.R. 503 because one or more of This Court has personal jurisdiction over the Defendants pursuant to C.P.L.R.

the parties resides in this county. The underwriters reside or have their principal place of business in this county and many of the alleged acts and transactions, including the preparation and dissemination of the Registration Statements, occurred in substantial part within New York County, New York. FACTUAL ALLEGATIONS I. FACTUAL ALLEGATIONS APPLICABLE TO ALL CLAIMS 37. The factual allegations set forth in paragraphs 38 through 134 below are made

with respect to all causes of action against Defendants and are sufficient to establish Defendants strict statutory liability under the federal Securities Act and the Securities Act of Virginia. With respect to such liability, no allegations are made or intended, and none are necessary, concerning Defendants state of mind. Defendants are strictly liable, without regard to intent on their part or reliance on Freddie Macs part, for the misstatements in, and material omissions from, the Registration Statements under Sections 11 and 12 and, for control person defendants, under Section 15, of the Securities Act, and Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code.

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A.

The Securitizations 1. Residential Mortgage-Backed Securitizations Generally

38.

Asset-backed securitization involves pooling cash-producing financial assets and

issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 39. In the most common form of securitization of mortgage loans, a sponsor -- the

entity that acquires or originates the mortgage loans and initiates the securitization -- directly or indirectly transfers a portfolio of mortgage loans to a trust. In many instances, the transfer of assets to the trust is a two-step process in which the sponsor first transfers the financial assets to an intermediate entity, typically referred to as a depositor, and then the depositor transfers the assets to a trust. The trust is established pursuant to a pooling and servicing agreement or trust indenture entered into by, among others, the depositor for that securitization. 40. RMBS are the securities backed by the underlying mortgage loans in the trust.

Some residential mortgage-backed securitizations are created from more than one cohort of loans, called collateral groups, in which case the trust issues different tranches of securities backed by different groups of loans. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities (in the form of certificates) acquire an ownership interest in the assets of the trust, which in turn owns the loans. These purchasers are thus dependent for repayment of principal and payment of interest upon the cash flows from the designated group of mortgage loans -- primarily mortgagors payments of principal and interest on the mortgage loans held by the related trust. 41. RMBS are generally issued and sold pursuant to registration statements filed with

the SEC. These registration statements include prospectuses, which describe the general

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structure of the investment, and prospectus supplements, which set forth detailed descriptions of, among other things, the mortgage groups underlying the certificates. Certificates are issued by the trust and sold pursuant to the registration statement, the prospectus and prospectus supplement. Underwriters purchase the certificates from the trust and then offer, sell or distribute the certificates to investors. 42. A mortgage servicer manages the collection of proceeds from the mortgage loans.

The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trust funds and delivers payments due each month on the certificates to the investors. 2. 43. Securitizations at Issue in this Case

This case involves the following 21 Securitizations: i. ii. iii. iv. v. vi. vii. Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2005-EMX3 (RASC 2005-EMX3); Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2005-KS10 (RASC 2005-KS10); Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2005-KS11 (RASC 2005-KS11); Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2006-EMX8 (RASC 2006-EMX8); Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2006-EMX9 (RASC 2006-EMX9); Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2006-KS3 (RASC 2006-KS3); Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2006-KS9 (RASC 2006-KS9);

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viii. ix. x. xi. xii. xiii. xiv. xv. xvi. xvii. xviii. xix. xx. xxi.

Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2007-EMX1 (RASC 2007-EMX1); Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2007-KS2 (RASC 2007-KS2); Home Equity Mortgage Asset-Backed Pass-Through Certificates, Series 2007-KS3 (RASC 2007-KS3); Mortgage Asset-Backed Pass-Through Certificates, Series 2005-EFC6 (RAMP 2005-EFC6); Mortgage Asset-Backed Pass-Through Certificates, Series 2005-EFC7 (RAMP 2005-EFC7); Mortgage Asset-Backed Pass-Through Certificates, Series 2005-NC1 (RAMP 2005-NC1); Mortgage Asset-Backed Pass-Through Certificates, Series 2005-RS9 (RAMP 2005-RS9); Mortgage Asset-Backed Pass-Through Certificates, Series 2006-RS1 (RAMP 2006-RS1); Mortgage Asset-Backed Pass-Through Certificates, Series 2005-QO4 (RALI 2005-QO4); Mortgage Asset-Backed Pass-Through Certificates, Series 2006-QO4 (RALI 2006-ii. QO4); Mortgage Asset-Backed Pass-Through Certificates, Series 2006-QO5 (RALI 2006-QO5); Mortgage Asset-Backed Pass-Through Certificates, Series 2006-QO8 (RALI 2006-QO8); Mortgage Asset-Backed Pass-Through Certificates, Series 2006-QO9 (RALI 2007-QO9); and Mortgage Asset-Backed Pass-Through Certificates, Series 2007-QH5 (RALI 2007-QH5).

44.

For each of the 21 Securitizations, Table 1 identifies the: (1) sponsor; (2)

depositor; (3) underwriter; (4) principal amount issued for the tranches4 purchased by Freddie

A tranche is one of the classes of debt securities issued as part of a single bond or instrument. Securities are often issued in tranches to meet different investor objectives for portfolio diversification. Freddie Mac purchased two tranches of Certificates from the RALI 2006-Q04 Securitization, which is why the tables have 22 entries for 21 Securitizations.

14

Mac; (5) date of issuance; and (6) the loan group or groups backing the Certificate for that Securitization (referred to as the Supporting Loan Groups). Table 1
Transaction RALI 2005-QO4 RALI 2006-QO4 RALI 2006-QO4 RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9 RALI 2007-QH5 RAMP 2005-EFC6 RAMP 2005-EFC7 RAMP 2005-NC1 RAMP 2005-RS9 Tranche IA1 IA1 IA2 IA1 IIA IIA AII AII AII AII AII Sponsor RFC RFC RFC RFC RFC RFC RFC RFC RFC RFC RFC Depositor RALI RALI RALI RALI RALI RALI RALI RAMP RAMP RAMP RAMP Underwriters RBS RBS RBS UBS Lehman Brothers Lehman Brothers Goldman RFS JPM RFS RFS Barclays RFS Credit Suisse Bear Credit Suisse RFS RBS RFS Credit Suisse RBS BOA RFS Credit Suisse JPM RFS BOA Credit Suisse RFS RBS Principal Amount Issued ($) 143,428,800.00 327,356,000.00 81,838,000.00 179,443,000.00 409,198,000.00 284,637,000.00 143,007,000.00 163,581,000.00 199,376,000.00 405,004,000.00 494,922,000.00 Date of Issuance 11/29/05 04/27/06 04/27/06 05/30/06 10/30/06 11/29/06 05/30/07 11/22/05 12/28/05 12/28/05 11/29/05 Supporting Loan Groups Group I Group I Group I Group I Group II Group II Group II Group II Group II Group II Group II

RAMP 2006-RS1

AII

RFC

RAMP

409,790,000.00

01/25/06

Group II

RASC 2005-EMX3

AII

RFC

RASC

267,481,000.00

09/23/05

Group II

RASC 2005-KS10

AII

RFC

RASC

495,741,000.00

10/28/05

Group II

RASC 2005-KS11

AII

RFC

RASC

547,641,000.00

11/29/05

Group II

15

Transaction RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3

Tranche AII AII AII AII AII AII AII

Sponsor RFC RFC RFC RFC RFC RFC RFC

Depositor RASC RASC RASC RASC RASC RASC RASC

Underwriters RFS Barclays Barclays RFS Citi Barclays RFS Credit Suisse JPM JPM BOA RFS

Principal Amount Issued ($) 236,806,000.00 197,896,000.00 232,006,000.00 153,311,000.00 326,812,000.00 164,400,000.00 167,618,000.00

Date of Issuance 09/28/06 10/27/06 03/29/06 10/27/06 03/12/07 02/23/07 03/29/07

Supporting Loan Groups Group II Group II Group II Group II Group II Group II Group II

3.

Securitization Process a. The Sponsors Grouped Mortgage Loans in Special-Purpose Trusts

45.

In each case, the sponsor purchased the mortgage loans underlying the

Certificates purchased by Freddie Mac for its Securitizations either directly from the originators or through affiliates of the originators. RFC sponsored 21 Securitizations and sold the acquired loans to one of three depositors, all of which are RFC-affiliated entities: RALI, RAMP and RASC. 46. RALI, RAMP and RASC were wholly-owned, limited-purpose financial

subsidiaries of GMAC-RFC and affiliates of RFC. The sole purpose of RALI, RAMP and RASC as depositors was to act as a conduit through which loans acquired by the sponsor could be securitized and sold to investors. 47. As depositors for all 21 of the Securitizations, RALI, RAMP and RASC

transferred the relevant mortgage loans to the respective trusts for each of those Securitizations, in each case pursuant to Assignment and Recognition Agreements or Mortgage Loan Purchase

16

Agreements that contained various representations and warranties regarding the mortgage loans for the Securitizations. 48. As part of each Securitization, the trustee for that Securitization, on behalf of the

Certificateholders, executed a Pooling and Service Agreement (PSA) with the relevant depositor and the relevant servicer. In each case, the trust, administered by the trustee, was required to hold the mortgage loans, pursuant to the related PSA and issued certificates, including the Certificates, backed by such loans. Freddie Mac purchased the Certificates, through which it obtained an ownership interest in the assets of the trust, including the mortgage loans. b. 49. The Trusts Issued Securities Backed by the Loans

Once the mortgage loans were transferred to the trusts in accordance with the

PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors, including Freddie Mac. Each Certificate entitles its holder to a specified portion of the cash flows from the underlying mortgages in the supporting loan group for that certificate. Therefore, the value of the Certificates, derived in part from the likelihood of payment of principal and interest on the Securitizations, depends upon the credit quality of the underlying mortgages, i.e., the risk of default by borrowers and the recovery value upon default of foreclosed-upon properties. 50. The Certificates purchased by Freddie Mac were issued and sold pursuant to Shelf

Registration Statements filed with the SEC on a Form S-3.5 The Shelf Registration Statements (S-3) were amended by one or more Form S-3/A (the Amendments or S-3/A) filed with
5

Defendant RALI filed three Shelf Registration Statements that were used to market six of the Securitizations; Defendant RAMP filed one Shelf Registration Statement that was used to market five of the Securitizations; and Defendant RASC filed two Registration Statements that were used to market 10 of the Securitizations.

17

the SEC. The Individual Defendants signed the six Shelf Registration Statements (and amendments thereto) that were filed, in each case, by RALI, RAMP or RASC. The SEC filing number, registrants, signatories, and filing dates for all six Shelf Registration Statements with Amendments, as well as the Certificates purchased by Freddie Mac covered by each Shelf Registration Statement, are reflected in Table 2 below.

Table 2
Date(s) S-3/A(s) Filed

SEC File No.

Date S-3 Filed

Registrants

Covered Certificates RAMP 2005-EFC6 RAMP 2005-EFC7 RAMP 2005-NC1 RAMP 2005-RS9 RAMP 2006-RS1 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RASC 2006-KS3

Signatories of S-3

Signatories of S-3/A(s)6 Bruce Paradis Kenneth Duncan Ralph Flees David Walker Diane Wold Bruce Paradis Davee Olson Jack Katzmark David Walker Lisa Lundsten Bruce Paradis Kenneth Duncan Ralph Flees David Walker Lisa Lundsten Bruce Paradis Kenneth Duncan Ralph Flees Davee Olson Lisa Lundsten Bruce Paradis Kenneth Duncan Ralph Flees Davee Olson Lisa Lundsten

333-125485

06/03/05

07/07/05

RAMP

Bruce Paradis Kenneth Duncan Ralph Flees David Walker Bruce Paradis Davee Olson Ralph Flees David Walker Bruce Paradis Kenneth Duncan Ralph Flees David Walker

333-122688

02/10/05

04/19/05

RASC

333-126732

07/20/05

08/09/05

RALI

RALI 2005-QO4

333-131209

01/20/06

02/23/06 03/21/06 03/30/06

RASC

RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS9 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 RALI 2006-QO4 RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9

Bruce Paradis Kenneth Duncan Ralph Flees Davee Olson

333-131213

01/23/06

03/03/06 03/06/06

RALI

Bruce Paradis Kenneth Duncan Ralph Flees Davee Olson

Some Individual Defendants signed certain S-3/As through a power of attorney.

18

SEC File No.

Date S-3 Filed

Date(s) S-3/A(s) Filed

Registrants

Covered Certificates

Signatories of S-3

Signatories of S-3/A(s)6 James Jones David Bricker Ralph Flees James Young Lisa Lundsten

333-140610

02/12/07

04/03/07

RALI

RALI 2007-QH5

David Applegate David M. Bricker Ralph Flees James Young

51.

The Prospectus Supplement for each Securitization describes the loan

underwriting guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including: the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value (LTV) ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debt-to-income ratios of the borrowers, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes, information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property, and information concerning whether the loans were delinquent. 52. The Prospectus Supplement for each Securitization was filed with the SEC as part

of the Registration Statements. The Form 8-Ks attaching the PSAs for each Securitization were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below.

19

Table 3
Filing No. of Related Registration Statement 333-125485 333-125485 333-122688 333-122688 333-122688 333-125485 333-126732 333-125485 333-131209 333-131209 333-122688 333-131209 333-131213 333-131213 333-131213 333-131213 333-125485 333-131209 333-131209 333-131209 333-140610

Transaction RAMP 2005-EFC6 RAMP 2005-EFC7 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RAMP 2005-NC1 RALI 2005-QO4 RAMP 2005-RS9 RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RALI 2006-QO4 RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9 RAMP 2006-RS1 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 RALI 2007-QH5

Date Prospectus Supplement Filed 11/21/05 12/22/05 09/23/05 10/28/05 11/28/05 12/27/05 11/28/05 11/29/05 09/27/06 10/27/06 03/29/06 10/30/06 04/28/06 05/31/06 11/01/06 11/30/06 01/25/06 03/09/07 02/23/07 03/28/07 05/30/07

Date Form 8-K Attaching PSA 12/07/05 01/13/06 10/14/05 11/14/05 12/14/05 01/13/06 12/15/05 12/12/05 10/13/06 11/13/06 04/13/06 11/13/06 05/15/06 06/14/06 11/14/06 12/14/06 02/09/06 03/27/07 03/09/07 04/13/07 06/14/07

B. 53.

Defendants Participation in the Securitization Process Each of the Defendants played a role in the securitization process and the

marketing for some or all of the Certificates purchased by Freddie Mac, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to Freddie Mac. 54. The Defendants are liable, jointly and severally, as participants in the registration,

issuance and offering of the Certificates purchased by Freddie Mac, including issuing, causing, or making materially misleading statements in the Registration Statements, and omitting material

20

facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 55. Ally

Defendant Ally wholly owns GMACM and RFS and is also the ultimate parent of

GMACM, ResCap, GMAC-RFC, RFC, RALI, RASC and RAMP. The chart below indicates the corporate structure of the relevant GMAC entities. Ally j RFS
(underwriter)

GMACM ResCap GMAC-RFC

RALI (depositor) 2. 56. RFC

RAMP (depositor)

RASC (depositor)

RFC
(sponsor)

RFC was formed in 1985 as a wholly-owned subsidiary of GMAC-RFC for the

purpose of issuing mortgage-backed securities through its affiliates RALI, RASC and RAMP. RFC was a leading sponsor of mortgage-backed securities at all relevant times based largely in part on GMAC-RFC becoming one of the largest issuers of mortgage-backed securities in the world. According to Inside Mortgage Finance, GMAC-RFC issued (i) $42.336 billion of nonagency mortgage-backed securities in 2004, (ii) $56.93 billion in 2005, making it the fifth largest issuer in 2005; (iii) $66.19 billion in 2006, making it the fourth largest issuer in 2006; and

21

(iv) $32.4 billion in 2007, which still made GMAC-RFC the eighth largest issuer in 2007. 7 2011 Mortgage Market Statistical Annual, Vol. II (Inside Mortgage Finance Publns, Inc., 2011) 57. Defendant RFC was the sponsor of all 21 Securitizations. In that capacity, RFC

determined the structure of the Securitizations, initiated the Securitizations, purchased the mortgage loans to be securitized, determined distribution of principal and interest, and provided data to the rating agencies to secure investment grade ratings for the Certificates sold to Freddie Mac. RFC also selected RALI, RASC and RAMP as the special-purpose vehicles that would be used to transfer the mortgage loans from RFC to the trusts, and selected RFS or the Non-GMAC Underwriter Defendants for the Securitizations, including Defendant RFS. In its role as sponsor, RFC knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 58. For all 21 Securitizations that it sponsored, RFC also conveyed the mortgage

loans to RALI, RASC and RAMP, as depositor, pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. In these agreements, RFC made certain representations and warranties to RALI, RASC and RAMP regarding the groups of loans collateralizing the Certificates purchased by Freddie Mac. These representations and warranties were assigned by RALI, RASC and RAMP to the trustees for the benefit of the Certificateholders.

Agency mortgage-backed securities are guaranteed by a government agency or government-sponsored enterprise such as Fannie Mae or Freddie Mac, while non-agency mortgage-backed securities are issued by banks and financial companies not associated with a government agency or government-sponsored enterprise.

22

3. 59.

RALI, RASC and RAMP

Defendants RALI, RASC and RAMP have been engaged in the securitization of

mortgage loans as depositors since their incorporation in 1995, 1994, and 1999, respectively. They are special-purpose entities formed solely for the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of their rights and interests in such mortgage loans to the trustee for the benefit of certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 60. RALI was the depositor for six of the 21 Securitizations, RASC was the depositor

for 10 Securitizations, and RAMP was the depositor for five Securitizations. In their capacity as depositors, RALI, RASC and RAMP purchased the mortgage loans from RFC (as sponsor) pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. RALI, RASC and RAMP then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. Together with the other Defendants, RALI, RASC and RAMP were also responsible for preparing and filing the Registration Statements pursuant to which the Certificates purchased by Freddie Mac were offered for sale. The trusts, in turn, held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors, including Freddie Mac. 4. 61. RFS

Defendant RFS was formed in 1990 and is a wholly-owned subsidiary of Ally.

Defendant RFS is an investment bank, solely operating as a registered broker-dealer with respect to the issuance and underwriting of residential and commercial mortgage-backed securities. At all relevant times, RFS was one of the leading underwriters of mortgage and other asset-backed securities in the United States. According to Inside Mortgage Finance in 2004, RFS underwrote over $8.9 billion of non-agency mortgage-backed securities. In 2005, the data shows that RFS

23

underwrote $14.5 billion, and in 2006 and 2007, RFS underwrote $12.4 billion and $10.2 billion in non-agency mortgage-backed securities, respectively. 62. Defendant RFS was the co-lead and selling underwriter for five of the 21

Securitizations and an underwriter for an additional six Securitizations. In that role, it was responsible for underwriting and managing the offer and sale of the Certificates to Freddie Mac and other investors. RFS was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred and underwritten. 5. 63. GMAC-RFC

GMAC-RFC employed its wholly-owned subsidiaries, RFC, RALI, RASC and

RAMP, in the key steps of the securitization process. Unlike typical arms length securitizations, the Securitizations involved various Ally subsidiaries and affiliates at virtually each step in the chain. For all 21 Securitizations, RFC was the sponsor and either RALI, RASC or RAMP was the depositor. 64. GMAC-RFC, as the sole corporate parent of RFC, RALI, RASC and RAMP had

the practical ability, in connection with the Securitizations, and the issuance and sale of the Certificates to Freddie Mac, to direct and control the actions of RFC, RALI, RASC and RAMP, and in fact exercised such direction and control over these activities. 6. 65. Ally, GMACM and ResCap

Defendant ResCap wholly owns GMAC-RFC and Defendant GMACM wholly

owns ResCap. ResCap, as the sole corporate parent of GMAC-RFC, had the practical ability to direct and control the actions of GMAC-RFC, and in fact, exercised such direction and control over the activities of this entity related to the issuance and sale of the Certificates to Freddie

24

Mac. GMACM, as the sole corporate parent of ResCap, had the practical ability to direct and control the actions of ResCap, and in fact, exercised such direction and control over the activities of this entity related to the issuance and sale of the Certificates to Freddie Mac. 66. As detailed, supra, the Securitizations involved all of the GMAC Defendants at

virtually every step in the process, and Ally profited substantially from this vertically integrated approach to mortgage-backed securitization. Furthermore, ResCap shared overlapping management with the other GMAC entities. For example, in 2007, David Applegate served as President of GMACM; the COO of ResCap, GMACMs direct subsidiary; the Chairman and CEO of GMAC-RFC, ResCaps direct subsidiary; and Principal Executive Officer of RALI, GMAC-RFCs direct subsidiary, for which he signed a Shelf Registration and amendment thereto. Similarly, Bruce Paradis served as CEO of GMAC-RFC and then CEO of ResCap, while also serving as the Director, President, and CEO of RALI, RAMP, and RASC -- in which capacity he signed three Shelf Registration Statements and amendments thereto. 7. 67. Non-GMAC Underwriters

The Non-GMAC Underwriters were the nations largest non-agency mortgage-

backed securities underwriters between 2004 through 2007. The Non-GMAC Underwriter Defendants were the co-lead underwriters for twelve Securitizations and underwriters for an additional seven Securitizations. In those roles, the Non-GMAC Defendants were responsible for underwriting and managing the offer and sale of the Certificates to Freddie Mac. The NonGMAC Underwriter Defendants also were obligated to conduct due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred and underwritten.

25

68.

Further, through their positions at GMAC, including Defendants GMACM,

ResCap, GMAC-RFC, RFS, RFC, RAMP, RALI, and RASC, certain persons had the practical ability to direct and control the actions of the GMAC Defendants in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of these entities in connection with the issuance and sale for the Certificates to Freddie Mac. Many people simultaneously held management positions at GMACM, ResCap, GMAC-RFC, RFS, and/or RFC while also holding management positions at RAMP, RALI and RASC. C. 69. Statements in the Prospectus Supplements Plaintiff relies on its claims, in part, upon the Registration Statements in their

entirety. Specific representations and warranties in the Registration Statements that form the basis for the claims herein are set forth for each Securitization in Appendix A hereto. 1. 70. Compliance with Underwriting Guidelines

The Prospectus Supplement for each of the Securitizations contained detailed

descriptions of the underwriting guidelines used to originate the mortgage loans included in the Securitizations. Because payment on, and the value of, the Certificates is based on the cash flows from the underlying mortgage pool, representations concerning compliance with the stated underwriting guidelines were material to reasonable investors. Investors, including Freddie Mac, did not have access to information concerning the collateral pool, and were required to rely on the representations in the Prospectus Supplements concerning that collateral. 71. Among other consequences, the failure to originate mortgage loans in accordance

with stated guidelines diminished the value of the Certificates by increasing the significant risk that an investor will not be paid its principal and interest. Misrepresentations concerning, or failing accurately to disclose, borrower, loan, and property characteristics bearing on the risk of default by the borrower as well as the severity of losses given default can artificially inflate the

26

perceived value of the securities. Without accurate information regarding the collateral pool, reasonable investors, including Freddie Mac, are unable to accurately and independently assess whether the price of an RMBS adequately accounts for the risks they are assuming when they purchase the security. 72. The Prospectus Supplements for each of the Securitizations contained several key

statements with respect to the loan purchasing and underwriting standards of the entities that originated the loans in the Securitizations. For example, with respect to the RAMP 2005-EFC7 Securitization, for which EquiFirst Corporation (EquiFirst) was originator, RFS was a counderwriter, and RASC was the depositor, the Prospectus Supplement states: All of the mortgage loans included in the trust were originated by EquiFirst, generally in accordance with [EquiFirsts] underwriting criteria (emphasis added) and that EquiFirsts underwriting standards are primarily intended to assess the ability and willingness of the borrower to repay the debt, and to evaluate the adequacy of the mortgaged property as collateral for the mortgage loan. 73. With respect to the information evaluated by the originator (in this example,

EquiFirst), the Prospectus Supplement stated that: EquiFirst considers, among other things, a mortgagors credit history, repayment ability and debt service-to-income ratio (Debt Ratio), as well as the value, type and use of the mortgaged property. (emphasis added) The Credit Bureau Risk Score is used along with, but not limited to, mortgage payment history, seasoning on bankruptcy and/or foreclosure, and is not a substitute for the underwriters judgment. EquiFirsts underwriting staff fully reviews each loan to determine whether EquiFirsts guidelines for income, assets, employment and collateral are met. (Emphasis added). 74. states: The Prospectus Supplement for the RAMP 2005-EFC7 Securitization further

27

EquiFirsts guidelines comply with applicable federal and state laws and regulations and generally require an appraisal of the mortgaged property which conforms to Freddie Mac and/or Fannie Mae standards. All loans are subject to EquiFirsts appraisal review process. Appraisals are provided by qualified independent appraisers licensed in their respective states. 75. The Prospectus Supplements for each of the Securitizations made similar

representations with respect to the underwriting guidelines employed by each of the originators in the Securitizations, which included: Aegis Mortgage Corporation, Decision One Mortgage Company, LLC, EFC Holdings Corporation and its subsidiary EquiFirst Corporation, Finance America, LLC, First National Bank of Nevada, Home123 Corporation, Homefield Financial Inc., Mortgage Lenders Network USA, Inc., New Century Mortgage Corporation, Ownit Mortgage Solutions Inc., Peoples Choice Home Loan, Inc., Pinnacle Financial Corporation and SCME Mortgage Bankers, Inc. See Appendix A. 76. Contrary to those representations, however, these originators routinely and

egregiously departed from, or abandoned completely, their stated underwriting guidelines, as discussed in Section I.D.2, infra. As a result, the representations concerning compliance with underwriting guidelines and the inclusion and descriptions of those guidelines in the Prospectus Supplements were false and misleading, and the actual mortgages underlying each Securitization exposed the purchasers, including Freddie Mac, to a materially greater risk to investors than that represented in the Prospectus Supplements. 77. As reflected more fully in Appendix A, for the vast majority of the

Securitizations, the Prospectus Supplements included representations that: (i) the mortgage loans were underwritten in accordance with each originators underwriting guidelines in effect at the time of origination, subject only to limited exceptions; and (ii) the origination and collection

28

practices used by the originator with respect to each mortgage note and mortgage were in all respects legal, proper and customary in the mortgage origination and servicing business. 78. The inclusion of these representations in the Prospectus Supplements had the

purpose and effect of providing assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations. These representations were material to a reasonable investors decisions to purchase the Certificates, and they were material to Freddie Mac. As alleged more fully below, Defendants representations were materially false. 2. 79. Occupancy Status of Borrower

The Prospectus Supplements for each Securitization set forth information about

the occupancy status of the borrowers of the loans underlying the Securitization; that is, whether the property securing a mortgage is (i) the borrowers primary residence; (ii) a second home; or (iii) an investment property. This information was presented in tables, typically titled Occupancy Status of the Mortgage Loans, that assigned all the properties in the collateral group to one of the following categories: (i) Primary, or Owner-Occupied; (ii) Second Home, or Secondary; and (iii) Investor or Non-Owner. For each category, the table stated the number of loans purportedly in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:8

Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner-occupied, investor, and second home. These numbers have been converted to percentages for ease of comparison.

29

Table 4
Transaction RALI 2005-QO4 RALI 2006-QO4 RALI 2006-QO4 RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9 RALI 2007-QH5 RAMP 2005-EFC6 RAMP 2005-EFC7 RAMP 2005-NC1 RAMP 2005-RS9 RAMP 2006-RS1 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 Tranche IA1 IA1 IA2 IA1 IIA IIA AII AII AII AII AII AII AII AII AII AII AII AII AII AII AII AII Supporting Loan Group Group I Group I Group I Group I Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Group II Primary or OwnerOccupied 81.68% 79.14% 79.14% 81.13% 81.78% 80.99% 77.36% 98.15% 100.00% 83.96% 65.80% 78.45% 93.92% 94.42% 89.88% 100.00% 100.00% 99.24% 95.82% 93.65% 95.23% 95.56% Second Home / Secondary 1.71% 5.53% 5.53% 4.10% 3.41% 4.05% 5.74% 0.37% 0.00% 5.56% 1.35% 2.11% 2.29% 0.85% 2.53% 0.00% 0.00% 0.76% 2.81% 1.98% 0.71% 1.27% Investor 16.61% 15.33% 15.33% 14.76% 14.81% 14.97% 16.90% 1.48% 0.00% 10.48% 32.85% 19.44% 3.79% 4.72% 7.59% 0.00% 0.00% 0.00% 1.36% 4.37% 4.05% 3.17%

80.

As Table 4 makes clear, the Prospectus Supplements reported that 17 of the 22

Supporting Loan Groups contained at least 80 percent owner-occupied loans, and 11 of the 22 Supporting Loan Groups contained at least 90 percent owner-occupied loans. 81. Because information about occupancy status is an important factor in determining

the credit risk associated with a mortgage loan -- and, therefore, the securitization that it backs -the statements in the Prospectus Supplements concerning occupancy status were material to a

30

reasonable investors decision to invest in the Certificates, and they were material to Freddie Mac. These statements were material because, among other reasons, borrowers who live in mortgaged properties are substantially less likely to default and more likely to care for their primary residence than borrowers who purchase properties as second homes or investments and live elsewhere. For example, as stated in the Prospectus Supplement for the RALI 2005-QO4 Securitization: [T]he rate of default on mortgage loans or manufactured housing contracts that are secured by investment properties . . . may be higher than on other mortgage loans or manufactured housing contracts. Accordingly, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 82. Other things being equal, the lower the percentage of loans secured by owner-

occupied residences, the greater the risk of loss to Certificateholders. Even modest differences in the percentages of primary/owner-occupied, second home/secondary, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed infra at paragraphs 94 through 98, the Prospectus Supplements for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner-occupied, thereby misrepresenting the degree of risk of the Certificates purchased by Freddie Mac. 3. 83. Loan-to-Value Ratios

The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the

balance of the mortgage loan to the value of the mortgaged property when the loan is made. 84. The denominator in the LTV ratio is the value of the mortgaged property, and is

generally the lower of the purchase price or the appraised value of the property. In a refinancing

31

or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan or homeequity loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risks associated with a given loan. 85. The Prospectus Supplements for the Securitizations contain information about the

LTV ratio for each Supporting Loan Group. Table 5 below reflects two categories of important information reported in the Prospectus Supplements concerning the LTV ratios for each Supporting Loan Group: (i) the percentage of loans with an LTV ratio of 80 percent or less; and (ii) the percentage of loans with an LTV ratio greater than 100 percent. 9 Table 5
Supporting Loan Group Group II Group II Group II Group II Group II Group II Group I Group II Group II Group II Group II Group II Group I Group I % of Loans, by Aggregate Principal Balance, with LTV Less than or Equal to 80% 57.86% 71.74% 47.33% 45.62% 61.19% 57.07% 94.77% 53.93% 53.72% 41.34% 61.60% 45.21% 94.37% 95.44% % of Loans, by Aggregate Principal Balance, with LTV Greater than 100% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Transaction

RAMP 2005-EFC6 RAMP 2005-EFC7 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RAMP 2005-NC1 RALI 2005-QO4 RAMP 2005-RS9 RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RALI 2006-QO4 (IA1 & IA2) RALI 2006-QO5

As used in this Complaint, LTV refers to the loan-to-value ratio for first lien mortgages and for properties with second liens subordinate to the lien included in the securitization (i.e., only the securitized lien is included in the numerator of the LTV calculation). Where the securitized lien is junior to another loan, the more senior lien has been added to the securitized one to determine the numerator in the LTV calculation (this latter calculation is sometimes referred to as the combined-loan-to-value ratio, or CLTV).

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Transaction

Supporting Loan Group Group II Group II Group II Group II Group II Group II Group II

RALI 2006-QO8 RALI 2006-QO9 RAMP 2006-RS1 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 RALI 2007-QH5

% of Loans, by Aggregate Principal Balance, with LTV Less than or Equal to 80% 95.56% 93.89% 44.73% 52.14% 44.68% 43.00% 93.70%

% of Loans, by Aggregate Principal Balance, with LTV Greater than 100% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

86.

The LTV ratio is among the most important measures of the risk of a mortgage

loan for several reasons. First, the LTV ratio is a strong indicator of the likelihood of default because a higher LTV ratio makes it more likely that a decline in the value of a property will completely eliminate a borrowers equity, and will incentivize the borrower to stop making mortgage payments and abandon the property. Second, the LTV ratio is a strong predictor of the severity of loss in the event of a default because the higher the LTV ratio, the smaller the equity cushion, and the greater the likelihood that the proceeds of foreclosure will not cover the unpaid balance of the mortgage loan. 87. Thus, LTV ratios are material to a reasonable investors investment decision with

respect to the Certificates, and they were material to Freddie Mac. Even small differences between the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that collateral groups will generate sufficient funds to pay certificateholders in that securitization. Such differences are important to the decision of a reasonable investor on whether to purchase any such certificate, and they affect the intrinsic value of the certificate. 88. As Table 5 makes clear, the Prospectus Supplements for the majority of the

Securitizations reported that the majority of the mortgage loans in the Supporting Loan Groups

33

had an LTV ratio of 80 percent or less. The Prospectus Supplements also reported that none of the Supporting Loan Groups contained a single loan with an LTV ratio over 100 percent. 89. As discussed infra at paragraphs 99 through 104, the Prospectus Supplements for

the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk to Certificateholders. 4. 90. Credit Ratings

Credit ratings are assigned to the tranches of mortgage-backed securitizations by

the credit rating agencies, including Standard & Poors, Moodys Investor Service, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time Freddie Mac purchased the Certificates, investments with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA or its equivalent through BBB- or its equivalent were generally referred to as investment grade. 91. Rating agencies determine the credit rating for each tranche of a mortgage-backed

securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cash flows based on the quality of the underlying mortgages by using sponsor-provided loan-level data. Credit enhancements, such as subordination, represent the

34

amount of cushion or protection from loss incorporated into a given securitization.10 This cushion is intended to improve the likelihood that holders of highly-rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the composition of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for an AAA or its equivalent rating. 92. For almost a hundred years, investors like pension funds, municipalities,

insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. 93. Each tranche of the Securitizations received a credit rating before issuance, which

purported to describe the riskiness of that tranche. Defendants reported the credit ratings for each tranche in the Prospectus Supplements. For each of the Certificates purchased by Freddie Mac was AAA or its equivalent the credit rating provided. The accuracy of these ratings was material to a reasonable investors decision to purchase the Certificates, and it was material to Freddie Mac. Among other things, the ratings provided additional assurance that investors in the Certificates would receive the expected interest and principal payments. As set forth in Table 8, infra at paragraph 126, the ratings for the majority of the Securitizations were severely downgraded after Freddie Macs purchase of the Certificates. Upon information and belief, the
10

Subordination refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are subordinate to the senior certificates in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate certificates thus provide a degree of protection to the senior certificates from certain losses on the underlying loans.

35

initial ratings were based in substantial part upon the materially inaccurate and incomplete information in the Registration Statements and related information provided to the ratings agencies. D. Falsity of Statements in the Registration Statements and Prospectus Supplements 1. The Statistical Data Provided in the Prospectus Supplements Concerning Owner-Occupancy and Loan-to-Value Ratios was Materially False

94.

A review of loan-level data was conducted to assess whether the statistical

information provided in the Prospectus Supplements was true and accurate. For each Securitization, the review included an analysis either of: (i) a sample of 1,000 loans randomly selected from the Supporting Loan Group; or (ii) all the loans in the Supporting Loan Group if there were fewer than 1,000 such loans. The review of sample data has confirmed, on a statistically-significant basis, that the data provided in the Prospectus Supplements concerning owner-occupancy and LTV ratios was materially false, and that the Prospectus Supplements contained material misrepresentations with respect to the underwriting standards employed by the originators, and certain key characteristics of the mortgage loans across the Securitizations. a. 95. Owner-Occupancy Data was Materially False

The data review has revealed that the owner-occupancy statistics reported in the

Prospectus Supplements were materially false and inflated. Indeed, the Prospectus Supplements overreported the number of underlying properties that were occupied by their owners, and underreported the number of underlying properties held as second homes or investment properties. 96. To determine whether a given borrower actually occupied the property as

claimed, a number of tests were conducted, including, inter alia, whether, months after the loan

36

closed, the borrowers tax bill was being mailed to the property or to a different address, whether the borrower had claimed a tax exemption on the property, and whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests constitutes strong evidence that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, rendering it much more likely that a borrower will not repay the loan. 97. For each Securitization, a significant number of the underlying loans failed two or

more of these tests, demonstrating that the owner-occupancy statistics provided to Freddie Mac were materially false and misleading. For example, the Prospectus Supplement for the RAMP 2005-EFC6 Securitization -- for which RFC was the sponsor and RFS was a co-underwriter -stated that 1.85 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied. But the data review revealed that the true percentage of non-owneroccupied properties was 13.67 percent,11 approximately 700 percent greater than the percentage reported in the Prospectus Supplement because for 12.04 percent of the properties represented as owner-occupied, the owners lived elsewhere. 98. The data review revealed that for each Securitization, the Prospectus Supplement

misrepresented the percentage of non-owner-occupied properties. The true percentage of nonowner-occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization, is reflected in Table 6 below. Table 6

11

The true percentage of non-owner-occupied properties (Table 6 Column C) is calculated by adding the percentage reported in the Prospectus Supplement (Table 6 Column A) to the product of owner-occupied properties reported in the Prospectus Supplement (100 minus Column A) and the percentage of properties reported as owner-occupied but with strong indication of non-owner-occupancy (Table 6 Column B).

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demonstrates that the Prospectus Supplements for each Securitization significantly understated the percentage of non-owner-occupied properties. Table 6
A Reported % of NonOwnerOccupied Properties 1.85% 0.00% 6.08% 5.58% 10.12% 16.04% 18.32% 34.20% 0.00% 0.00% 0.76% 4.18% 20.86% 18.87% 18.22% 19.01% 21.55% 6.35% 4.77% 4.44% 22.64% B Percentage of Properties As OwnerOccupied Misrepresented in the Registration Statements 12.04% 11.88% 9.03% 11.97% 11.41% 10.72% 14.93% 13.42% 12.38% 12.52% 13.20% 9.06% 14.86% 13.14% 13.18% 13.84% 11.66% 9.44% 10.28% 11.10% 15.76% C Actual % of NonOwnerOccupied Properties 13.67% 11.88% 14.56% 16.88% 20.38% 25.04% 30.52% 43.03% 12.38% 12.52% 13.86% 12.86% 32.62% 29.53% 29.00% 30.22% 30.69% 15.19% 14.56% 15.05% 34.83% D Understatement of Non-OwnerOccupied Properties in the Offering Materials 11.82% 11.88% 8.48% 11.30% 10.26% 9.00% 12.19% 8.83% 12.38% 12.52% 13.10% 8.68% 11.76% 10.66% 10.78% 11.21% 9.15% 8.84% 9.79% 10.60% 12.20%

Transaction

Supporting Loan Group

RAMP 2005-EFC6 RAMP 2005-EFC7 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RAMP 2005-NC1 RALI 2005-QO4 RAMP 2005-RS9 RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RALI 2006-QO4 (IA1 & IA2) RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9 RAMP 2006-RS1 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 RALI 2007-QH5

Group II Group II Group II Group II Group II Group II Group I Group II Group II Group II Group II Group II Group I Group I Group II Group II Group II Group II Group II Group II Group II

b. 99.

Loan-to-Value Data was Materially False

The data review has further revealed that the LTV ratios disclosed in the

Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review, and servicing. AVMs rely upon similar

38

data as appraisers -- primarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 100. Applying the AVM to the available data for the properties securing the sampled

loans shows that the retroactive appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of LTV. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. As stated in the Prospectus Supplement for RALI 2005-QO4: The rate of default . . . on mortgage loans or manufactured housing contracts with higher LTV ratios may be higher than for other types of mortgage loans or manufactured housing contracts. 101. For example, for the RALI 2005-QH5 Securitization, for which RFC was the

sponsor and RFS was a co-underwriter, the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 18.26 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 93.70 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 45.89 percent of the loans had LTV ratios at or below 80 percent. 102. The data review revealed that for each Securitization, the Prospectus Supplement

misrepresented the percentage of loans with an LTV ratio above 100 percent, as well the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent,

39

versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance. Table 7
PROSPECTUS DATA REVIEW True % of Loans with LTV Ratio at or Less than 80% 35.31% 38.91% 29.10% 31.29% 44.25% 44.83% 61.17% 36.91% 30.69% 21.70% 44.12% 27.87% 57.25% 53.64% 46.48% 48.39% 29.46% 27.06% 28.40% 27.04% 45.89% PROSPECTUS DATA REVIEW True % of Loans with LTV Ratio Over 100% 16.70% 13.32% 19.47% 17.94% 14.41% 13.01% 8.18% 17.27% 26.94% 33.84% 11.68% 26.92% 8.43% 11.09% 11.62% 13.12% 22.23% 26.46% 28.40% 29.22% 18.26%

Transaction

Supporting Loan Group

% of Loans Reported to have LTV Ratio at or Less than 80% 57.86% 71.74% 47.33% 45.62% 61.19% 57.07% 94.77% 53.93% 53.72% 41.34% 61.60% 45.21% 94.37% 95.44% 95.56% 93.89% 44.73% 52.14% 44.68% 43.00% 93.70%

% of Loans Reported to have LTV Ratio Over 100% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.03% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 2.60% 0.00% 0.00% 0.00% 0.00%

RAMP 2005-EFC6 RAMP 2005-EFC7 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RAMP 2005-NC1 RALI 2005-QO4 RAMP 2005-RS9 RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RALI 2006-QO4 (IA1 & IA2) RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9 RAMP 2006-RS1 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 RALI 2007-QH5

Group II Group II Group II Group II Group II Group II Group I Group II Group II Group II Group II Group II Group I Group I Group II Group II Group II Group II Group II Group II Group II

103.

As Table 7 demonstrates, the Prospectus Supplements for all the Securitizations

falsely reported that only two of the Supporting Loan Groups had mortgage loans with an LTV ratio over 100 percent: the data review revealed that at least eight percent of the mortgage loans for every Securitization had an LTV ratio over 100 percent, and for most Securitizations this figure was much larger. Indeed, for 19 of the 21 Securitizations, the data review revealed that

40

more than 10 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. For 12 Securitizations, the data review revealed that more than 15 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent and for seven Securitizations, the data review revealed that more than 20 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. 104. These misrepresentations with respect to reported LTV ratios also demonstrate

that the representations in the Registration Statements relating to appraisal practices were false, and that the appraisers, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. The Financial Crisis Inquiry Commission (FCIC), created by Congress to investigate the mortgage crisis and attendant financial collapse in 2008, identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. (See FCIC, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (2011) (FCIC Report), at 91.) 2. 105. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines

The Prospectus Supplements each contained material misstatements and

omissions concerning the underwriting guidelines used by the originators of the loans included in the Securitizations, defined herein as the Non-Party Originators. Among other things, the Prospectus Supplements stated that the Non-Party Originators underwrote all loans in

41

compliance with their respective underwriting guidelines. See Appendix A, Sections I-XXI at Subsections B. 106. The Non-Party Originators -- companies such as New Century, Decision One, and

others -- systematically disregarded their respective underwriting guidelines, as confirmed not only by the pervasively false owner-occupancy and LTV figures alleged supra, but also by: (1) government investigations and private actions relating to their underwriting practices, which have revealed widespread abandonment of their reported underwriting guidelines during the period of the Securitizations; (2) the collapse of the credit ratings of Certificates purchased by Freddie Mac; and (3) the surge in delinquencies and defaults in the mortgages in the Securitizations. a. Government and Private Investigations Confirm That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines

107.

An extraordinary volume of publicly-available information, including government

reports and investigations, confirms that the originators whose loans were included by the Defendants in the Securitizations abandoned their loan origination guidelines throughout the period of the Securitizations. 108. For example, in November 2008, the Office of the Comptroller of the Currency

(OCC), an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 2005-2007 originations. Aegis, Decision One, New Century, Ownit, 12 and

12

Ownit, which originated loans for one of the Securitizations, was identified by the OCC as the fifteenth worst subprime lender in the country based on the delinquency rates of the mortgages it originated in the ten metropolitan areas between 2005 and 2007 with the highest

42

Peoples Choice -- the companies that originated loans for eight of the Securitizations at issue here -- were all on that list. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. Several of the Non-Party Originators -- including New Century, HFN and MLN -- have been the target of government investigations or private actions that allege a complete abandonment of their reported underwriting guidelines. i. 109. New Century Violated Its Underwriting Guidelines

New Century and its subsidiary, Home123, originated loans for at least four of the

Securitizations. As stated in the Prospectus Supplement for the RAMP 2005-NC1 Securitization, [f]or the quarter ending September 30, 2005, New Century Financial Corporation originated $40.4 billion in mortgage loans. By the end of 2006, Inside Mortgage Finance reports that New Century was the second largest subprime mortgage loan originator in the United States, with a loan production volume that year of $51.6 billion. Before its collapse in the first half of 2007, New Century was one of the largest subprime lenders in the country. New Century filed for protection from its creditors under Chapter 11 of the federal Bankruptcy Code on April 2, 2007. 110. In 2010, the OCC identified New Century as the worst subprime lender in the

country based on the delinquency rates of the mortgages it originated in the 10 metropolitan areas between 2005 and 2007 with the highest rates of delinquency. See Worst Ten in the Worst Ten: Update, Office of the Comptroller of Currency Press Release, March 22, 2010. Further, in January 2011, the FCIC Report detailed, among other things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. See FCIC Report. The FCIC Report singled out New Century for its role:

rates of delinquency. See Worst Ten in the Worst Ten: Update, Office of the Comptroller of Currency Press Release, March 22, 2010.

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New Centuryonce the nations second-largest subprime lender ignored early warnings that its own loan quality was deteriorating and stripped power from two risk-control departments that had noted the evidence. In a June 2004 presentation, the Quality Assurance staff reported they had found severe underwriting errors, including evidence of predatory lending, federal and state violations, and credit issues, in 25% of the loans they audited in November and December 2003. In 2004, Chief Operating Officer and later CEO Brad Morrice recommended these results be removed from the statistical tools used to track loan performance, and in 2005, the department was dissolved and its personnel terminated. The same year, the Internal Audit department identified numerous deficiencies in loan files; out of nine reviews it conducted in 2005, it gave the companys loan production department unsatisfactory ratings seven times. Patrick Flanagan, president of New Centurys mortgage-originating subsidiary, cut the departments budget, saying in a memo that the group was out of control and tries to dictate business practices instead of audit. 111. On February 29, 2008, after an extensive document review and conducting over

100 interviews, Michael J. Missal, the Bankruptcy Court Examiner for New Century, issued a detailed report on the various deficiencies at New Century, including lax mortgage standards and a failure to follow its own underwriting guidelines. Among his findings, the Examiner reported: New Century had a brazen obsession with increasing loan originations without due regard for the risks associated with that business strategy. . . . Although the primary goal of any mortgage banking company is to make more loans, New Century did so in an aggressive manner that elevated the risks to dangerous and ultimately to fatal levels. New Century also made frequent exceptions to its underwriting guidelines for borrowers who might not otherwise qualify for a particular loan. A Senior Officer of New Century warned in 2004 that the number one issue is exceptions to the guidelines. Moreover, many of the appraisals used to value the homes that secured the mortgages had deficiencies. New Century . . . layered the risks of loan products upon the risks of loose underwriting standards in its loan originations to high risk borrowers.

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Final Report of Michael J. Missal, Bankruptcy Examiner, In re New Century TRS Holdings, Inc., No. 07-10416 (KJC) (Bankr. Del. Feb. 29, 2008). 112. On December 9, 2009, the SEC charged three of New Centurys top officers with

violations of federal securities laws. The SECs complaint details the blatant falsity of New Centurys representations regarding its underwriting guidelines, for example, its representations that it was committed to adher[ing] to high origination standards in order to sell [its] loan products in the secondary market and to only approv[ing] subprime loan applications that evidence a borrowers ability to repay the loan. 113. New Centurys failure to adhere to its underwriting guidelines is further reflected

in allegations in the Assurance of Discontinuance signed by Morgan Stanley and the Attorney General of Massachusetts (the Assurance of Discontinuance), in In re: Morgan Stanley & Co. Inc., Civil Action No. 10-2538 (Suffolk Cnty. Super. Ct. June 24, 2010). The Massachusetts Attorney General alleged: New Century stretch[ed] underwriting guidelines to encompass or approve loans not written in accordance with the guidelines. (Id. 17, 23.) One recurring issue identified by Morgan Stanley was New Centurys origination of loans that violated Massachusetts Division of Banks borrowers best interest standard []. (Id. 18.) During the period 2006-2007, 91 percent of the loans approved for securitization that did not meet New Centurys underwriting guidelines did not have sufficient compensating factors to offset such exceptions. (Id. 27.) In the last three quarters of 2006, Morgan Stanley waived more than half of all material exceptions found by Clayton . . ., and purchased a substantial number of New Century loans found by Clayton to violate guidelines without sufficient compensating factors. (Id. 28.) The loans originated by New Century were unfair loans to Massachusetts borrowers and were in violation of Massachusetts law . . . . (Id. 43-44.)

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114.

As a result, on or about June 24, 2010, Morgan Stanley paid $102 million to settle

the claims asserted by the Attorney General and also agreed to drastic changes in its underwriting practices. 115. Patricia Lindsay, a former Vice President of Corporate Risk at New Century,

testified before the FCIC in April 2010 that, beginning in 2004, underwriting guidelines had been all but abandoned at New Century. Ms. Lindsay further testified that New Century systematically approved loans with 100 percent financing to borrowers with extremely low credit scores and no supporting proof of income. (See Written Testimony of Patricia Lindsay for the FCIC Hearing, April 7, 2010 (Lindsay Testimony), http://fcic-static.law.stanford.edu/cdnmedia/fcic.testimony/2010-0407-Lindsay.pdf, at 3.) 116. Ms. Lindsay also testified that appraisers fear[ed] for their livelihoods, and

therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. (See Written Testimony of Patricia Lindsay to the FCIC, April 7, 2010, at 5.) Indeed, on May 7, 2007, The Washington Post reported that a former New Century appraiser, Maggie Hardiman, recounted how she didnt want to turn away a loan because all hell would break loose and that, when she did reject a loan, her bosses often overruled her and found another appraiser to sign off on it. (David Cho, Pressure at Mortgage Firm Led to Mass Approval of Bad Loans, The Washington Post (May 7, 2007).) ii. 117. HFN Violated Its Underwriting Guidelines

HFN originated loans for 13 of the Securitizations -- as discussed infra, HFN was

the GMAC entity responsible for the origination of all of GMACs residential mortgage loans during the relevant time period.

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118.

MBIA Insurance Corporation, which insured mortgage-backed securities issued

by GMAC, has filed two actions against GMACM and RFC, both parents of HFN, alleging, among other things, that GMACM and RFC made fraudulent representations regarding adherence to GMACs loan origination underwriting guidelines. MBIA alleged that it performed an extensive a review of loan files in advance of making its allegations. Its complaint explains that it performed a review of loan files associated with 4,104 delinquent or charged off loans and that its review revealed that [a]t least 89% of the 4,104 delinquent or charged off loans . . . were not originated in material compliance with GMAC Mortgages Underwriting Guidelines. (Complaint at 6, MBIA Insurance Corp. v. GMAC Mortgage, LLC (f/k/a GMAC Mortgage Corporation), No. 6008737-2010 (N.Y. Sup. Ct.) (filed Compl. Apr. 1, 2010).) MBIAs complaint further alleges that MBIA, or the experts that performed its review, found that a significant number of mortgage loans were made on the basis of stated incomes that were grossly unreasonable or were approved despite [debt-to-income] or CLTV ratios in excess of the limits stated in GMAC Mortgages Underwriting Guidelines, and that, contrary to its Underwriting Guidelines, GMAC Mortgage failed in many cases to verify the borrowers employment when required to do so or to verify prior rental or mortgage payment history, approved mortgage loans with ineligible collateral, approved mortgage loans to borrowers with ineligible credit scores, and approved loans without verifying that the borrower had sufficient funds or reserves. (Id. at 76.) 119. In its complaint against RFC, the direct parent of HFN, MBIA also asserted a

claim for fraud, among other things, alleging that MBIAs review [o]f the 1,847 mortgage loans [revealed that] . . . only 129 mortgage loans -- less than 7% of the mortgage loans reviewed -were originated or acquired in material compliance with RFCs representations and warranties

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. . . with respect to the underwriting of the mortgage loans contributed to the RFC transactions. (Complaint at 46, MBIA Insurance Corp. v. Residential Funding Co., LLC, No. 603552-2008 (N.Y. Sup. Ct.) (filed Compl. Dec. 4, 2008).) 120. Further, on June 29, 2011, the SEC and the DOJ launched investigations of,

among other things, potential fraud related to the origination and/or underwriting of mortgage loans by GMAC. As an originator of residential mortgage loans for the GMAC entities, the scope of the SEC and the DOJs investigation will likely include a review of HFNs compliance with its own loan origination underwriting guidelines. iii. 121. MLN Violated Its Underwriting Guidelines

Mortgage Loan Networks USA, Inc. (MLN), which originated the loans for

four of the Securitizations, filed for bankruptcy on February 5, 2007, and on January 6, 2011, the Liquidating Trustee for MLN filed a motion seeking to destroy certain MLN records and releasing the Trustee from responding to any future requests concerning those records. The United States Attorney objected to the Trustees motion on the basis that federal law enforcement records indicate that [MLNs] loans are the subject of many ongoing investigations. As a result, [MLNs] records, including but not limited to the loan files and loan related information . . . , may be relevant to pending federal criminal investigations into mortgage fraud. (Objection to Debtors Motion for the Destruction for Certain Records, In re Mortgage Lenders Network USA, Inc., No. 07-10146-PJW (Bankr. Del.) (Dkt. 3281).) Accordingly, upon information and belief, government investigations into MLNs origination of loans and compliance with its own underwriting guidelines are ongoing. 122. The originators of the mortgage loans underlying the Securitizations went beyond

the systematic disregard of their own underwriting guidelines. The FCIC found that mortgage loan originators throughout the industry pressured appraisers, during the period of the

48

Securitizations, to issue inflated appraisals that met or exceeded the amounts needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. Upon information and belief, these inflated appraisals resulted in inaccurate LTV ratios. b. The Collapse of the Certificates Credit Ratings Further Shows that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines

123.

The total collapse in the credit ratings of the Certificates invested in by Freddie

Mac, typically from AAA or its equivalent to non-investment speculative grade, is further evidence of the originators systematic disregard of underwriting guidelines, underscoring that these Certificates were impaired from the start. 124. The Certificates purchased by Freddie Mac originally were assigned credit ratings

of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. Those ratings artificially were inflated, however, upon information and belief, in part as a result of the same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 125. Upon information and belief, GMAC provided information at the loan level to the

rating agencies, including LTV ratios, owner-occupancy rates, and other loan characteristics, that the rating agencies used in part to calculate the assigned ratings of the Certificates purchased by Freddie Mac. Upon information and belief, because the information that GMAC provided, which information included among other things the Registration Statements or portions thereof, the ratings were inflated. As a result, the Certificates were offered and purchased at prices suitable for investment grade securities when in fact the Certificates actually carried a severe risk of loss and inadequate credit enhancement.

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126.

Since the issuance of the Certificates, the ratings agencies dramatically have

downgraded their ratings to reflect the revelations regarding the true underwriting practices used to originate the mortgage loans, and the true value and credit quality of the mortgage loans. Table 8 details the extent of the downgrades.13 Table 8
Transaction RAMP 2005-EFC6 RAMP 2005-EFC7 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RAMP 2005-NC1 RALI 2005-QO4 RAMP 2005-RS9 RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RALI 2006-QO4 RALI 2006-QO4 RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9 RAMP 2006-RS1 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 RALI 2007-QH5 Tranche AII AII AII AII AII AII IA1 AII AII AII AII AII IA1 IA2 IA1 IIA IIA AII AII AII AII AII Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/-Rating at July 31, 2011 (Moodys/S&P/Fitch) A1/AAA/-Ca/D/-Aa1/AAA/-Baa3/AAA/-Ba1/AAA/-Ca/D/-Caa3/CCC/C Ca/D/-Ca/CCC/-Caa3/CCC/-Caa1/AA/-Ca/CCC/C Ca/CCC/-Ca/D/-Caa3/AA-/-Ca/D/-Ca/D/-Caa3/CCC/-Ca/D/-Caa3/CCC/CC Caa3/CCC/-Ca/CC/--

c.

The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines

127.

Even though the Certificates were marketed as long-term, stable investments, a

significant percentage of the mortgage loans backing the Certificates have defaulted, have been
13

Applicable ratings are shown in sequential order separated by forward slashes: S&P/Moodys/Fitch. A double-hyphen indicates that the relevant agency did not provide a rating at issuance.

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foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is a direct consequence of the fact that their underlying mortgage loans were not underwritten in accordance with applicable underwriting guidelines as represented in the Prospectus Supplements. 128. Loan groups that were underwritten properly and contained loans with the

characteristics represented in the Prospectus Supplements would have experienced substantially fewer delinquencies and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011. Table 9
Transaction RAMP 2005-EFC6 RAMP 2005-EFC7 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RAMP 2005-NC1 RALI 2005-QO4 RAMP 2005-RS9 RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RALI 2006-QO4 (IA1) RALI 2006-QO4 (IA2) RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9 RAMP 2006-RS1 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 RALI 2007-QH5 Supporting Loan Group Group II Group II Group II Group II Group II Group II Group I Group II Group II Group II Group II Group II Group I Group I Group I Group II Group II Group II Group II Group II Group II Group II Percentage of Delinquent / Defaulted / Foreclosed Loans 33.5% 40.2% 36.6% 30.6% 28.8% 29.0% 42.3% 28.8% 53.0% 61.7% 34.0% 33.3% 39.2% 39.2% 39.9% 40.6% 40.7% 27.5% 43.4% 33.2% 37.9% 43.2%

129.

The confirmed misstatements concerning owner-occupancy and LTV ratios; the

confirmed systematic underwriting failures by the originators responsible for the mortgage loans

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across the Securitizations; and the extraordinary drop in credit rating and rise in delinquencies across those Securitizations all demonstrate that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. E. 130. Freddie Macs Purchases of the Certificates Between September 23, 2005 and May 30, 2007, Freddie Mac purchased from

RFS, JPM, Credit Suisse, RBS, UBS, Bear Stearns, Citi, Barclays, Lehman Brothers and Goldman over $6 billion in RMBS issued in connection with the Securitizations. Table 10 reflects each of Freddie Macs purchases of the Certificates. 14 To date, Freddie Mac has not sold any of the Certificates. Table 10
Settlement Date of Purchase by Freddie Mac 11/22/05 12/28/05 09/23/05 10/28/05 11/29/05 12/28/05 11/30/05 11/29/05 09/28/06 10/27/06 03/29/06 10/27/06 04/27/06 04/27/06 Initial Unpaid Principal Balance 163,581,000.00 199,376,000.00 267,481,000.00 495,741,000.00 547,641,000.00 405,004,000.00 143,428,800.00 494,922,000.00 236,806,000.00 197,896,000.00 232,006,000.00 153,311,000.00 327,356,000.00 81,838,000.00 Purchase Price (% of Par) 100 100 100 100 100 100 100 100 100 100 100 100 100 100

Transaction RAMP 2005-EFC6 RAMP 2005-EFC7 RASC 2005-EMX3 RASC 2005-KS10 RASC 2005-KS11 RAMP 2005-NC1 RALI 2005-QO4 RAMP 2005-RS9 RASC 2006-EMX8 RASC 2006-EMX9 RASC 2006-KS3 RASC 2006-KS9 RALI 2006-QO4 RALI 2006-QO4

Tranche AII AII AII AII AII AII IA1 AII AII AII AII AII IA1 IA2

CUSIP 76112BL32 76112BR85 75405MAE4 75405WAD4 76110W7C4 76112BR36 761118NL8 76112BL99 74924UAE1 74924VAE9 76113ABK6 75406YAE7 75114GAA7 75114GAB5 92911DAA4

Seller to Freddie Mac JPM RFS RFS JPM Credit Suisse Credit Suisse RBS Bear Stearns RFS RFS Citi Barclays RBS RBS

14

Purchases and holdings of securities in Table 10 are stated in terms of unpaid principal balance (UPB) of the relevant Certificates. Purchase prices are stated in terms of percentage of par. To date, Freddie Mac has not sold any of the Certificates it purchased as described in this section.

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Transaction RALI 2006-QO5 RALI 2006-QO8 RALI 2006-QO9 RAMP 2006-RS1 RASC 2007-EMX1 RASC 2007-KS2 RASC 2007-KS3 RALI 2007-QH5

Tranche IA1 IIA IIA AII AII AII AII AII

CUSIP 75114HAA5 75115FAT7 75115HAB2 76112BU24 74924XAE5 74924WAE7 74924YAE3 75116EAD4

Settlement Date of Purchase by Freddie Mac 05/30/06 10/31/06 11/30/06 01/25/06 03/12/07 02/23/07 04/19/07 05/30/07

Initial Unpaid Principal Balance 179,443,000.00 409,198,000.00 284,637,000.00 409,790,000.00 326,812,000.00 164,400,000.00 167,618,000.00 143,007,000.00

Purchase Price (% of Par) 100 100 100 100 100 100 99.96094 100

Seller to Freddie Mac UBS Lehman Brothers Lehman Brothers Credit Suisse RFS JPM JPM Goldman

F. 131.

Freddie Mac was Damaged by Defendants Violations of Sections 11, 12 and 15 of the Securities Act The statements and information in the Registration Statement regarding the credit

quality and characteristics of the mortgage loans underlying the Certificates, and the origination and underwriting practices pursuant to which the mortgage loans purportedly were originated, were material to a reasonable investor. But for the misrepresentations and omissions in the Registration Statement concerning those matters, Freddie Mac would not have purchased the Certificates. 132. Based upon sales of the Certificates or similar certificates in the secondary market

and other indications of value, Freddie Mac has incurred substantial losses on the Certificates due to a decline in value that is directly attributable to Defendants material misrepresentations and omissions. Among other things, the mortgage loans underlying the Certificates experienced defaults and delinquencies at a higher rate than would have been the case had the loans underlying the Certificates actually conformed to the origination guidelines, and had the Certificates merited the credit ratings set forth in the Registration Statement.

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133.

Defendants misstatements and omissions in the Registration Statement were the

direct, proximate and actual cause of Freddie Macs losses resulting from its purchase of the Certificates. The precise extent of Freddie Macs injuries will be proven at trial. 134. At the time it purchased the Certificates, Freddie Mac was unaware of the

Defendants misrepresentations, omissions, and/or untrue statements. Plaintiff was appointed Conservator of Freddie Mac less than one year after the discovery of the untrue statements and omissions contained in the Registration Statement and within three years of the Certificates being offered for sale to the public. Despite the exercise of reasonable diligence, Freddie Mac could not reasonably have discovered the untrue statements and omissions in the Registration Statement more than one year prior to the appointment of the Plaintiff as Conservator. This action is timely pursuant to 12 U.S.C. 4617(b)(12) & (13), which provides for extension or tolling of all statutory time periods applicable to the claims brought herein. II. ADDITIONAL FACTUAL ALLEGATIONS 135. The allegations in paragraphs 160 through 176 below concerning Defendants

knowledge or recklessness concerning the information set forth in or omitted from the Registration Statements and any other materials provided to Freddie Mac are made solely with respect to Plaintiffs common law claims, as are the allegations set forth in paragraphs 177 through 185 concerning Freddie Macs reliance on the material misrepresentations and omissions alleged herein. A. Defendants Were Incentivized to Fund Risky Residential Mortgage Loans and to Securitize and Sell Them to Investors Securitizing large volumes of loans was a highly lucrative and competitive

136.

business for the Defendants. All of the underwriter defendants engaged in this business on a massive scale, each doing multiple billions of dollars worth of securitizations during the period

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when they sold the Certificates to Freddie Mac. Fees, which were a percentage of the balance of the loan pool being purchased, and other transaction revenues associated with the Certificates at issue here, and with the RMBS securitization business more generally, accounted for a substantial portion of the underwriter (and other) Defendants earnings in the relevant time period. The more and the larger the securitizations the Defendants arranged and participated in, the greater their earnings. This financial motive accounts for Defendants willingness, intentionally or recklessly, to make false statements in, or to omit material facts from, the Registration Statements and other offering materials. In furtherance of this motive, the Defendant underwriters took measures and entered into arrangements designed to ensure that a continuous and high volume of mortgage loans would be available for securitization. 137. Thus, among other things, the underwriters provided warehouse funding to

mortgage originators to enable these originators to make, and to continue to make, loans. These subprime mortgage originators used those funds to make large numbers of loans, which they then turned around and sold back to the underwriters whose funds enabled them to make the loans in the first place. The banks then securitized the loans they effectively had funded, and transferred the risk to investors like Freddie Mac through the sale of the RMBS resulting from the securitizations. 138. These arrangements between the underwriters and loan originators undermined

the underwriting process for the Certificates because the underwriters had no incentive to identify and exclude from the securitizations loans that did not conform to the loan originators stated guidelines. To the contrary, the underwriters had the motive to, and did, include loans that upon information and belief, they knew did not conform to those guidelines, and that lacked the characteristics or merited the ratings set forth in the Registration Statement.

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139.

Credit Suisse, Citi, Bear Stearns, Barclays, UBS and Goldman Sachs -- all of

whom were underwriters of the Securitizations -- provided billions of dollars of warehouse lending to New Century. From 2000 to 2010, Citi extended warehouse lines of credit of up to $7 billion to unaffiliated originators, including $950 million to New Century and over $3.5 billion to Ameriquest. (FCIC Report at 113.) Citi and JPM lent their own mortgage origination subsidiaries at least $26.3 billion and $30 billion, respectively, between 2005 and 2007. (See Who is Behind The Financial Meltdown: The Top 25 Subprime Lenders and their Wall Street Backers, The Center for Integrity, available at http://www.publicintegrity.org/investigations/economic_meltdown/the_subprime_25/.) As reported by the FCIC, Barclays provided at least $221 million in warehouse financing to New Century in connection with just a single financing. Upon information and belief, Barclays provided similar financing to originators in connection with several securitizations, leading to the same conflicts of interest. Upon information and belief, RBS also engaged in the same warehouse lending practices. 140. The practice was pervasive among investment banks. Thus, for example, Bear

Stearns kept its pipeline flowing by operating its own mortgage loan originators and loan servicers: EMC Mortgage Corporation (EMC), Bear Stearns Residential Mortgage Corporation, and Encore Credit Corp. As a result of its strategy, Bear Stearns fixed income net revenues were a record $4.0 billion in 2006, up 23 percent from $3.3 billion in 2005. Bear Stearns did not report how it manipulated its wholly-owed originators and servicers to push through non-compliant loans. A former EMC employee, who vetted loans for securitizations, told The Atlantic that Bear traders pushed EMC analysts to get loan analysis done in only one to three days. That way, Bear could sell them off fast to eager investors and didnt have to carry

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the cost of holding these loans on their books. (More Corruption: Bear Stearns Falsified Information as Raters Shrugged, The Atlantic, by Teri Buhl, May 14, 2010.) EMC analysts fabricated data such as FICO scores if lenders did not provide real information quickly enough, and Bear Stearns analysts in New York, rather than EMC employees who had access to loan information, decided how to report and calculate the presence and quality of loan documentation without adequate research. (Id.) 141. GMAC itself was a fully, vertically-integrated RMBS operation that was

dependent on volume. GMACM and HFN originated subprime and Alt A loans; RFC sponsored securitizations of such loans and transferred them to affiliated depositors RALI, RAMP and RASC; and RFS marketed and sold the RMBS to investors. HFN, which originated loans for 13 of the Securitizations here, was under enormous pressure to extend risky loans. A former loan officer at HFN recounted that [t]he main focus was doing Alt A because thats where the money was, and [i]n order to keep your market share, you had to be more aggressive. (See Shaky loans may spur new foreclosure wave, The Portland Tribune (Oct. 30, 2009).) A mortgage broker confirmed such pressure, stating: The V.P.s came down to the office beating the drums about Option ARMs I had Wachovia march through here; I had GMAC. (Id.) 142. Defendants were motivated to churn out and securitize as many mortgages as

possible because they earned so much in revenues on both ends of the securitization process, while transferring the ultimate risk of default to investors, such as Freddie Mac. Indeed, several of the Defendants ranked in the top ten of the nations largest underwriters of RMBS between 2004 and 2007, according to Inside Mortgage Finance. The three underwriters that sold the Certificates to Freddie Mac -- JPM, Credit Suisse and RBS -- were especially prolific. By 2007, RBS ranked fifth with $50.3 billion in transactions, Credit Suisse ranked sixth with $44.1 billion,

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and JPM ranked seventh with $43.5 billion. (2011 Mortgage Market Statistical Annual, Vol. II (Inside Mortgage Finance Publns, Inc., 2011).) B. 143. Defendants Material Misrepresentations and Omissions in the Offering Materials In connection with the sale of the Certificates, the selling underwriters RFS, JPM,

Credit Suisse, RBS, Citi, Barclays, UBS, and Goldman; the depositors RALI, RASC, and RAMP; and the sponsor RFC (together, the Fraud Defendants) each made misrepresentations and omissions of material fact to Freddie Mac in term sheets, Registration Statements, Prospectuses, Prospectus Supplements, and other draft and final written offering documents (the Offering Materials). These Offering Materials describe the credit quality and other characteristics of the underlying mortgage loans and were provided to investors, including Freddie Mac. 144. Accordingly, Freddie Mac required the Fraud Defendants to provide

representations and warranties regarding the origination and quality of the mortgage loans, including that the mortgage loans had been underwritten by the loan originators pursuant to extensive guidelines. 145. Through term sheets or other offering documents, the Fraud Defendants also

furnished Freddie Mac with anticipated credit ratings on the proposed pool of mortgage loans intended for securitization. 146. On information and belief, the Fraud Defendants solicited the anticipated ratings

from credit rating agencies based on misrepresentations by Defendants as to the credit quality of the mortgage loans and the amount of the overcollateralization in the deal. All of the Securitizations had shadow ratings of at least AAA or its equivalent.

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147.

Furthermore, the Fraud Defendants delivered Prospectus Supplements to Freddie

Mac that included more specific information about the loans underlying the Certificates in each Securitization. 148. The materially false and misleading information contained in the initial and final

Prospectus Supplements that the Fraud Defendants provided to Freddie Mac included reproductions of the same schedules that the Fraud Defendants provided to Freddie Mac, containing false data about LTV ratios and owner-occupancy statistics. 149. The Offering Materials, among other things: (1) misrepresented the loans and

loan originators adherence to the stated underwriting guidelines; (2) overstated the number of loans for owner-occupied properties; (3) understated the loan pools average LTV ratios; and (4) failed to disclose that the credit ratings of the Certificates were based on false information. Each misrepresentation and omission created an additional, hidden layer of risk well beyond that known to be associated with non-agency loans or subprime loans. 150. First, the Fraud Defendants statements regarding the mortgage pools

compliance with stated underwriting guidelines were false. The falsity of such representations is evident from disclosures concerning the originators systematic disregard of their stated underwriting guidelines, as well as the Certificates high default rates and plummeting credit ratings. Indeed, of the 15 originators whose loans were sold into the Securitizations, five were cited as among the worst ten in the worst ten metropolitan areas: Aegis, Decision One, New Century, Ownit, and Peoples Choice. Government and private investigations have confirmed that these originators failed to apply any standards at all when making high-risk loans. Moreover, the high default rates and low credit ratings confirm that the loans were not properly underwritten in the first place. As shown in Tables 8 and 9, the average rate of default

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across the Securitizations is 38.03 percent, and although the Certificates invested in by Freddie Mac for all 21 of the Securitizations had been rated AAA (or its equivalent) at the time of purchase, by July 31, 2011, 18 had been downgraded, and most had been downgraded to junk or nearly junk-bond status, with eight downgraded to CCC (or its equivalent), the lowest rating above junk. See supra Section I.D.2.b. 151. These misstatements were material because, as discussed above, the quality of

loans in the pool determined the risk of the Certificates backed by those loans. Because a reasonable underwriting process had not been followed, the entire loan pool was much riskier and more prone to default and market losses than represented. The systemic underwriting failures decreased the reliability of all the information provided to Freddie Mac about the loans, and thus increased the actual risk to investors. As a result of those failures, the value of the Certificates was substantially lower than the price paid by Freddie Mac for those Certificates. 152. Second, as shown in Table 6, the Fraud Defendants materially understated the

non-owner-occupied status for each Securitization by an average of 10.73 percent. This information was material to Freddie Mac because high owner-occupancy rates reported to Freddie Mac should have made the Certificates purchased by Freddie Mac safer investments than certificates backed by second homes or investment properties. 153. Third, the Fraud Defendants understated the loan pools average LTV ratios,

which overstates the borrowers equity cushion in the property. As Table 7 demonstrates, on average, only 38.5 percent of the loans actually had LTV ratios of less than 80 percent, as opposed to 64.2 percent as represented in the Prospectus Supplements. Moreover, while all but two of the Certificates were represented to have no loans with an LTV over 100 percent, in reality, every deal contained at least eight percent loans with greater than 100 percent LTV, with

60

an average of 18.5 percent. In other words, in almost all of the Securitizations, a significant percentage of the mortgage loans either were under-secured or under water from the start. The understatement of LTV ratios was misleading because it misrepresented the risk of a borrower abandoning a property if the value dropped below the unpaid balance of the loan, as well as the risk that proceeds from a foreclosure sale would fail to cover the unpaid balance. 154. Further, the Fraud Defendants failed to disclose that the Certificates credit ratings

were false and misleading because Defendants provided to the ratings agencies the same misinformation contained in the Offering Materials in an attempt to manufacture predetermined ratings. In testimony before the Senate Permanent Subcommittee on Investigations, Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005 to 2008, confirmed that the rating agencies relied upon investment banks to provide accurate information about the loan pools: The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reported to both S&P and investors about those loans . . . . S&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. (SPSI hearing testimony, April 23, 2010) (emphasis added). As a result, the ratings failed to reflect accurately the actual risk underlying the Certificates purchased by Freddie Mac because the ratings agencies were analyzing a mortgage pool that had no relation to the pool that actually backed the Certificates purchased by Freddie Mac. 155. The AAA (or equivalent) anticipated and final credit ratings were material to

Freddie Mac, because the ratings provided additional assurances that Freddie Mac would receive

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the expected interest and principal payments. Freddie Mac would not have purchased the Certificates without the proper ratings. 156. Each of the Fraud Defendants is responsible for the representations made in or

omitted from the Offering Materials. Specific false and misleading statements in the Registration Statements for the Certificates purchased by Freddie Mac are detailed in Sections I.C. and I.D., in paragraphs 69-134 supra and Appendix A, which are incorporated by reference. 157. Because payment on the Certificates ultimately was funded by payments from the

mortgagors, Freddie Mac faced a risk of non-payment if too many borrowers defaulted on their loans and the value of the mortgaged properties was insufficient to cover the unpaid principal balance. Accordingly, any representation bearing on the riskiness of the underlying mortgage loans was material to Freddie Mac. By misrepresenting the true risk profile of the underlying loan pools, the Fraud Defendants defrauded Freddie Mac. 158. As the FCIC found: The Commission concludes that firms securitizing mortgages failed to perform adequate due diligence on the mortgages they purchased and at times knowingly waived compliance with underwriting standards. Potential investors were not fully informed or were misled about the poor quality of the mortgages contained in some mortgage-related securities. These problems appear to have been significant. (FCIC Report at 187 (emphasis added).) C. The Fraud Defendants Knew or were Reckless in not Knowing that Their Representations were False and Misleading The Fraud Defendants knew or were reckless in not knowing that their

159.

representations in the Offering Materials were false, and that the information they omitted from documents rendered them materially misleading. The consistency of the misrepresentations and omissions across all of the 21 Securitizations is strong evidence that the Fraud Defendants did

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not innocently make materially false statements and omissions, but actually knew or were reckless in not knowing that (1) the loan originators systematically disregarded their own underwriting guidelines, (2) the LTV ratios presented in the Registration Statements were materially inaccurate, (3) the owner-occupancy rates presented in the Registration Statements were materially inaccurate, and (4) the credit ratings for the Certificates were based on incomplete and inaccurate information and were not believed by the ratings agencies when provided. 160. The Fraud Defendants financial interests and relationships with mortgage

originators compromised their approach to securitizing RMBS. Thus, for example, six of the Fraud Defendants -- Credit Suisse, Citi, Bear Stearns, Barclays, Goldman Sachs, and UBS -provided warehouse lines of credit to New Century, whose departure from its stated underwriting guidelines has now been extensively investigated and documented. Given all the revelations about New Centurys flagrant conduct and the Fraud Defendants disincentives to perform meaningful due diligence, the Fraud Defendants knew or were reckless in disregarding that New Century loans backing the Certificates were not originated in accordance with the sound underwriting practices. 161. In the case of GMAC, the GMAC entities were so closely integrated and the

abusive lending practices so rampant from the top down that the depositors (RALI, RAMP and RASC), the sponsor (RFC) and the underwriter (RFS), knew -- or were reckless in not knowing - that HFN -- a subsidiary of the sponsor -- systematically was disregarding prudent underwriting standards and that its loans lacked the characteristics represented in the Offering Materials. As detailed above, a sampling of GMACM loans conducted by MBIA has revealed a noncompliance rate of at least 89 percent.

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162.

Further, GMACMs abusive or reckless lending and servicing practices, including

commingling funds from custodial bank accounts and questionable and unlawful foreclosure practices, have also been revealed. (See Moodys downgrades $1.4 billion in GMAC subprime RMBS available at http://www.housingwire.com/2011/03/25/allstates-mbs-exposure-hits-2-78billion.) The GMAC entities also shared substantial overlapping management; for instance, David M. Applegate held simultaneous positions as the President and CEO of GMACM and the Principal Executive Officer of RALI, while Bruce Paradis was the CEO of GMAC-RFC, RALI, RAMP, and RASC. Given the overlapping management and the integrated structure, GMAC knew or was reckless in not knowing of the misrepresentations and omissions concerning HFNs underwriting guidelines. 163. Further, several of the Fraud Defendants knew that the mortgage loans they

securitized were non-compliant because they had been informed of such by third-party experts. Clayton Holdings, Inc. (Clayton) was a due diligence firm that sampled loans for many of the key players in the RMBS market. 15 Clayton was hired to identify, among other things, whether the loans met the originators stated underwriting guidelines and, in some measure, to enable clients to negotiate better prices on pools of loans. (FCIC Report at 166 (footnote omitted).) Yet, upon information and belief, the Fraud Defendants routinely disregarded and manipulated Claytons findings.
15

Clayton was the leading provider of third-party due diligence during the relevant time period. In 2006, Clayton analyzed over $418 billion in loans underlying mortgage-backed securities, which represented 22.8% of the total outstanding U.S. non-agency mortgage-backed securities for that year. (Clayton, Form 10-K.) During 2004, 2005, and 2006, Clayton worked with each of the ten largest non-agency mortgage-backed securities underwriters, as ranked by Inside MBS & ABS, which accounted for 73% to 78% of the total underwriting volume during those years. The belief that GMAC used Clayton for due diligence is based upon the information that GMAC and Clayton shared senior management. (See http://nationalmortgageprofessional.com/news16031/national-groups-expands-its-executiveteam.)

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164.

In January 2008, Clayton disclosed that it had entered into an agreement with the

New York Attorney General (NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. Upon information and belief, the Fraud Defendants were included in that group of investment banks. Thus, these Defendants made a conscious decision not to avail themselves of comprehensive due diligence regarding the loans they were securitizing, which alone renders their misrepresentations concerning those loans knowing or reckless. 165. For the 18 month period ending on June 31, 2007, a significant percentage of the

loans sampled by Clayton at the direction of the Fraud Defendants failed to meet the various loan originators underwriting guidelines. This information was provided to the securities underwriters. Nonetheless, several of the Fraud Defendants overruled Claytons findings and waived in substantial percentages of these loans (approximately 51 percent for JPM, 29 percent for Bear Stearns, 33 percent for Credit Suisse, 53 percent for RBS, 31 percent for Citi, 28 percent for Barclays, 33 percent for UBS, and 29 percent for and Goldman). (See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-thefinancial-crisis-sacramento#documents; FCIC Report, 167.) 166. Upon information and belief, these Defendants waived in these loans, found by

Clayton to be non-compliant with the relevant originators origination guidelines, without taking any adequate steps of their own to verify Claytons findings. These loans then found their way into RMBS that were sold to investors like Freddie Mac. See FCIC Report, 167; see September

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23, 2010 All Clayton Trending Reports, 1st Quarter 2006 -- 2nd Quarter 2007. Consequently, the Fraud Defendants were aware that the mortgage loans making up the pools for the Certificates were not as safe as had been represented, and were priced too high for the level of risk assumed. 167. Similarly, Citis knowledge concerning origination practices went far beyond a

general awareness that originators systematically were disregarding their own underwriting guidelines. Citi knew its representations to Freddie Mac were false. In April 2010, Richard M. Bowen III, an executive of a Citi affiliate testified before the FCIC that during the 2006-2007 time frame -- when Freddie Mac purchased Certificates -- 60 percent to 80 percent of the RMBS Citi sold were defective and in contravention to the representations and warranties made to those investors, including specifically Freddie Mac. (Written Testimony of Richard M. Bowen, III to the FCIC, April 7, 2010, at 1-2, 6.) 168. Freddie Mac: We currently purchase from mortgage companies and sell to third party investors . . . mortgage loans which have not been underwritten by us but which we rep and warrant to the investors (primarily Fannie/Freddie) that these files are complete and have been underwritten to our policy criteria. Our internal Quality Assurance function, which underwrites a small sample of these files post-purchase, has reflected since 2006 . . . that 40-60% of these files are either outside of policy criteria or have documentation missing from the files. QA for recent months indicate 80% of the files fall into this category. (Bowen Testimony, Ex. 1.) Citi retaliated against this whistleblower by decreasing the number of his direct reports from 220 people to two, slashing his bonus, and giving him poor performance reviews. (FCIC Report at 19.) In a November 3, 2007 e-mail, Mr. Bowen recounted Citis misrepresentations to

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169.

Defendant Goldman Sachs malfeasance in the RMBS market has also been

reviewed and reported in detail by the United States Senate. The SPSI Report found that in exchange for lucrative fees, Goldman Sachs helped lenders like Long Beach, Fremont, and New Century, securitize high risk, poor quality loans, obtain favorable credit ratings for the resulting RMBS, and sell the RMBS securities to investors, pushing billions of dollars of risky mortgages into the financial system. (See Sen. Levin, Carl and Sen. Coburn, Tom, U.S. Senate Permanent Subcommittee on Investigations, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (Committee on Homeland Security and Governmental Affairs, April 13, 2011) (SPSI Report), p. 377.) 170. Bear Stearns likewise participated in -- and therefore knew about -- the

origination practices behind the loans it securitized. As reported in The Atlantic, Bear Stearns manipulated its wholly-owned originators to push through non-compliant loans. A former EMC employee revealed that Bear traders pushed EMC analysts to get loan analysis done in only one to three days. That way, Bear could sell them off fast to eager investors and didn't have to carry the cost of holding these loans on their books. (More Corruption: Bear Stearns Falsified Information as Raters Shrugged, The Atlantic, by Teri Buhl, May 14, 2010.) EMC analysts fabricated data such as FICO scores if lenders did not provide real information quickly enough, and Bear Stearns analysts in New York, rather than EMC employees who had access to loan information, decided how to report and calculate the presence and quality of loan documentation without adequate research. (Id.) 171. As active participants in fraudulent origination practices, the Fraud Defendants

knew or were reckless in disregarding the falsity of their statements in the Offering Materials concerning underwriting guidelines.

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172.

The Fraud Defendants also knew or recklessly disregarded that the owner-

occupancy statistics and LTV ratios reported in the Offering Materials were false and misleading. Given their role as underwriters of the securities, the relationships they had with loan originators, and this expertise in underwriting and securitizing RMBS, the Fraud Defendants had the practical ability to gain access to loan files and the ability and resources to test the reported data points, such as owner-occupancy rates and LTV ratios. They intentionally elected not to do so, rendering their representations concerning those data knowingly or recklessly false. 173. Moreover, upon information and belief, underwriters, including certain of the

Fraud Defendants, influenced the appraisals used to determine LTV ratios. Government investigations have uncovered widespread evidence of appraisers being pressured to overvalue properties so more loans could be originated. For instance, several witnesses, ranging from the President of the Appraisal Institute to appraisers and lenders on the ground, confirmed that appraisers felt compelled to come in at value -- i.e., at least the amount needed for the loan to be approved -- or face losing future business or their livelihoods. Given the systemic pressure applied to appraisers, upon information and belief, the appraisers themselves, the originators, and the underwriters did not believe that the appraised values of the properties -- and therefore LTV ratios -- were true and accurate at the time they communicated the information to potential investors, including the GSEs. 174. Further, the Fraud Defendants knew or were reckless in not knowing that the

credit ratings reported for the Certificates failed to reflect the actual risk of the securities, and that the ratings agencies had no basis to believe in the accuracy of those ratings. Not only did these Defendants provide the ratings agencies false, loan-level information, but they also routinely engaged in ratings shopping -- i.e., pressuring the ratings agencies for favorable

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ratings and playing the rating agencies off one another with the threat of withholding future business if the sponsoring bank was not given favorable treatment. As detailed in the SPSI Report: At the same time Moodys and S&P were pressuring their RMBS and CDO analysis to increase market share and revenues, the investment banks responsible for bringing RMBS and CDO business to the firms were pressuring those same analysts to ease rating standards. Former Moodys and S&P analysts and managers interviewed by the Subcommittee described, for example, how investment bankers pressured them to get their deals done quickly, increase the size of the tranches that received AAA ratings, and reduce the credit enhancements protecting the AAA tranches from loss. They also pressed the CRA analysts and managers to ignore a host of factors that could be seen as increasing credit risk. Sometimes described as ratings shopping, the analysts described how some investment bankers threatened to take their business to another credit rating agency if they did not get the favorable treatment they wanted. The evidence collected by the Subcommittee indicates that the pressure exerted by investment banks frequently impacted the ratings process, enabling the banks to obtain more favorable treatment than they otherwise would have received. (SPSI Report, at 278.) 175. As one S&P director put it in an August 8, 2006 e-mail: [Our RMBS friends

have] become so beholden to their top issuers for revenue [that] they have all developed a kind of Stockholm syndrome which they mistakenly tag as Customer Value creation. Ratings analysts who complained about the pressure, or did not do as they were told, were quickly replaced on deals or terminated. 176. Summarizing the intense pressure investment banks put on ratings analysts to

provide favorable ratings, a former Moodys VP and Senior Credit Officer testified before the FCIC that [t]he willingness to decline to rate, or to just say no to proposed transactions, steadily diminished over time. That unwillingness to say no grew in parallel with the companys share price and the proportion of total firm revenues represented by structured finance transactions . . .

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coincident with the steady drive toward commoditization of the instruments we were rating . . . . The threat of losing business . . . even if not realized, absolutely tilted the balance away from independent arbiter of risk towards a captive facilitator of risk transfer . . . . The message from management was . . . Must say yes. (See Written Testimony of Richard Michalek (FCIC Hearing, June 2, 2010), available at http://fcic-static.law.stanford.edu/cdn_media/fcictestimony/2008-0602-Michalek-corrected-oral.pdf; see also Written Statement of Eric Kolchinsky, Managing Director, Moodys Derivatives Group (Managers of rating groups were expected by their supervisors and ultimately the Board of Directors . . . to build, or at least maintain, market shares. It was an unspoken understanding that loss of market share would cause a manager to lose his or her job; [L]owering credit standards . . . was one easy way for a managing director to regain market share.), available at http://hsgac.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=bd65f802-961c4727-b176-72ece145baef.) D. Freddie Mac Justifiably Relied on the Misrepresentations and Omissions in the Offering Materials and was Damaged by Defendants Fraudulent Conduct Freddie Mac is a government-sponsored enterprise chartered by Congress to

177.

provide liquidity, stability, and affordability to the U.S. housing and mortgage markets. In furtherance of this mission, Freddie Mac purchases mortgages and invest in RMBS. 178. Generally when purchasing RMBS, Freddie Mac requires compliance with their

investment requirements, as well as various representations and warranties concerning, among other things, the credit quality of the underlying loans, evaluation of the borrowers ability to pay, the accuracy of loan data provided, and adherence to applicable local, state and federal law. Such representations and warranties were material to Freddie Macs decision to purchase RMBS, including the Certificates.

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179.

The Fraud Defendants intended for investors, including Freddie Mac, to rely on

their representations of material facts about the assets backing the Certificates. These Defendants regularly provided prospective RMBS investors with information concerning the volume of their annual securitization business to assure investors that, by virtue of their expertise in and share of the RMBS market, Freddie Mac should rely upon the representations and warranties in their Offering Materials. See, e.g., Prospectus Supplement for the RALI 2006-QO8 Securitization. 180. The Fraud Defendants knew that Freddie Mac had specific requirements for

investing in non-agency mortgage-backed securities and intended for Freddie Mac to rely on their fraudulent misstatements as shown by their provision of representations, warranties and shadow credit ratings in connection with the Certificates, and their repetition of false loan statistics in term sheets, free writing prospectuses, and Prospectus Supplements, among other materials. 181. In fact, Freddie Mac did rely, to its detriment, on the Fraud Defendants

misrepresentations and material omissions in the Offering Materials. 182. Freddie Macs reliance was justifiable because Freddie Mac necessarily was

required to rely upon the Fraud Defendants to provide accurate information regarding the loans. Freddie Mac lacked access to the actual loan files, and the loan-level data essential to perform the necessary statistical tests with respect to, among other things, owner-occupancy and LTV ratios. 183. Freddie Macs reliance also was justifiable because industry practice was for an

investor to rely upon the representations and warranties of the sponsors and underwriters regarding the quality of the mortgage loans and the standards under which they were originated.

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Information regarding the originators compliance with underwriting guidelines, owneroccupancy rates, LTV ratios, and the information provided to credit ratings agencies, was peculiarly within the knowledge of the Fraud Defendants. 184. Freddie Mac was induced into buying the Certificates based on the false and

misleading Offering Materials. Freddie Mac would not have purchased the Certificates had it known the truth concerning the matters alleged herein. Alternatively, Freddie Mac suffered damages because the price it paid for the Certificates was higher than their actual value. 185. From the day Freddie Mac purchased the Certificates, it suffered injury. As a

result of Defendants misrepresentations, the true value of the Certificates on the date of purchase was far lower than the price paid for them by Freddie Mac. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants RALI, RASC, RAMP, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs) 186. Plaintiff realleges paragraphs 1 through 134 above as if fully set forth herein. For

purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 187. This claim is brought by FHFA pursuant to Section 11 of the Securities Act of

1933 and is asserted on behalf of Freddie Mac, which purchased the Certificates issued pursuant to the Registration Statements for the Securitizations listed in paragraph 43. 188. This claim is for strict liability based on the material misstatements and omissions

in the Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005 for the 21 Securitizations (as specified in Table 1, supra at paragraph 44), and is asserted against RALI, RASC, RAMP, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS, and Goldman Sachs (together, the Section 11 Defendants).

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189.

RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS, and/or Goldman Sachs (the

Underwriter Defendants) acted as underwriter in connection with the sale of the Certificates for each of the 21 Securitizations (as specified in Table 1, supra at paragraph 44), directly and indirectly participated in distributing the Certificates, and directly and indirectly participated in drafting and disseminating the Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. The Underwriter Defendants were underwriters for the Certificates, and are strictly liable for the misstatements and omissions in the Registration Statements under Section 11 of the Securities Act. 190. Depositors RALI, RASC, and RAMP (the Depositor Defendants) filed Shelf

Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005 (as specified in Table 2, supra at paragraph 50) pursuant to which the Securitizations were carried out, and are the issuers of the Certificates issued pursuant to the Registration Statements within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). 191. At the time that they became effective, each of the Registration Statements, as set

forth above, contained material misstatements of fact and omitted information necessary to make the facts stated therein not misleading. The facts misstated or omitted were material to a reasonable investor in the securities sold pursuant to the Registration Statements. 192. The untrue statements of material facts and omissions of material fact in the

Registration Statements are principally those set forth herein in Section IV, and pertain to purported compliance with underwriting guidelines, occupancy status, loan-to-value ratios and credit ratings.

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193.

Freddie Mac purchased or otherwise acquired the Certificates pursuant to the false

and misleading Registration Statements and in the primary market. At the time it purchased the Certificates, Freddie Mac was unaware of the false and misleading statements and omissions alleged herein, and if Freddie Mac had known those facts, it would not have purchased the Certificates. 194. The Section 11 Defendants were obligated to make a reasonable investigation of

the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct, and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. 195. The Section 11 Defendants did not exercise such due diligence and failed to

conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, although the performance of due diligence is not an affirmative defense available to the Depositor Defendants on this strict liability claim, they nonetheless also failed to take reasonable steps to ensure the accuracy of the representations made in the Registration Statements. 196. By virtue of the foregoing, Freddie Mac sustained substantial damages, including

depreciation in the value of the securities, as a result of the misstatements and omissions in the Registration Statements. Plaintiff is entitled to damages, jointly and severally, from each of the Section 11 Defendants. 197. Based on the foregoing, the Section 11 Defendants are jointly and severally liable

for their wrongdoing.

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SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against Defendants RALI, RASC, RAMP, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs) 198. Plaintiff realleges paragraphs 1 through 134 as if fully set forth herein. For

purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 199. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities

Act of 1933 and is asserted on behalf of Freddie Mac, which purchased the Certificates issued pursuant to the Registration Statements in the Securitizations listed in paragraph 43. 200. The Underwriter Defendants are prominently identified as underwriters in each of

the Prospectuses used to sell the Certificates. The Underwriter Defendants offered, promoted, and/or sold the Certificates publicly, including selling to Freddie Mac their Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. The Underwriter Defendants offered, promoted, and/or sold the Certificates to Freddie Mac as specified in Table 2, supra at paragraph 50. 201. The Underwriter Defendants offered, promoted, and/or sold the Certificates to

Freddie Mac by means of the Prospectuses that contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. The Underwriter Defendants successfully solicited Freddie Macs purchases of the Certificates, and generated millions of dollars in commissions in connection with the sale of the Certificates. 202. The Underwriter Defendants offered the Certificates for sale, sold them, and

distributed them by the use of means or instruments of transportation and communication in interstate commerce.

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203.

The Depositor Defendants are prominently identified in the Prospectuses for the

Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell the Certificates for the 21 Securitizations under those Registration Statements. The Depositor Defendants offered the Certificates publicly and actively solicited their sale, including to Freddie Mac. 204. With respect to the Securitizations for which they filed Registration Statements,

the Depositor Defendants offered the Certificates to Freddie Mac by means of Prospectuses that contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, the Depositor Defendants reviewed and participated in drafting the Prospectuses. 205. The Depositor Defendants offered the Certificates for sale by the use of means or

instruments of transportation and communication in interstate commerce. 206. The Underwriter Defendants and Depositor Defendants (together, the Section 12

Defendants) actively participated in the solicitation of Freddie Macs purchase of the Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and/or assisting in marketing and selling the Certificates. 207. Each of the Prospectuses contained material misstatements of fact and omitted

information necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses.

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208.

The untrue statements of material facts and omissions of material fact in the

Registration Statements, which include the Prospectuses, are set forth above in Section IV and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios. 209. The Section 12 Defendants offered and sold the Certificates offered pursuant to

the Registration Statements directly to Freddie Mac, pursuant to the false and misleading Prospectuses. 210. The Section 12 Defendants owed to Freddie Mac a duty to make a reasonable and

diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. The Section 12 Defendants failed to exercise such reasonable care, and in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 211. Freddie Mac did not know of the misstatements and omissions contained in the

Prospectuses at the time they purchased the Certificates. If Freddie Mac had known of those misstatements and omissions, it would not have purchased the Certificates. 212. Prospectuses. 213. Freddie Mac sustained substantial damages in connection with its investments in Freddie Mac acquired the Certificates in the primary market pursuant to the

the Certificates and has the right to rescind and recover the consideration paid for the Certificates, with interest thereon. Plaintiff hereby seeks rescission and makes any necessary tender of its Certificates. In the alternative, Plaintiff seeks damages according to proof.

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THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against RFC, GMAC-RFC, ResCap, GMACM and Ally) 214. Plaintiff realleges paragraphs 1 through 134 above as if fully set forth herein. For

purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 215. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.

77o (Section 15), against RFC, GMAC-RFC, ResCap, GMACM, and Ally for controllingperson liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 216. RFC was the sponsor for all 21 Securitizations carried out pursuant to the

Registration Statements filed by RALI, RAMP, and RASC (as specified in Table 1, supra at paragraph 44), and culpably participated in their violations of Sections 11 and 12(a)(2) by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the Depositors as special-purpose vehicles, and selecting RFS or the Non-GMAC Underwriters as underwriters. In its role as sponsor, RFC knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 217. RFC sold the mortgage loans to the Depositor Defendants (as specified in Table 1,

supra at paragraph 44), and conveyed the mortgage loans to the Depositor Defendants pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. RFC controlled all aspects of the business of the Depositor Defendants, who were special-purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates.

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Upon information and belief, the officers and directors of RFC overlapped with the officers and directors of the Depositor Defendants. In addition, RFC was able to, and did in fact, control the contents of the Registration Statements filed by the Depositors, including the Prospectuses and Prospectus Supplements that contained material misstatements of fact and omitted facts necessary to make the contents therein not misleading. 218. Defendant GMAC-RFC is the corporate parent of, and controlled the business

operations of, RFC and the Depositor Defendants. As the sole corporate parent of RFC and the Depositor Defendants, GMAC-RFC had the practical ability to direct and control the actions of RFC and the Depositor Defendants in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of RFC and the Depositor Defendants. 219. GMAC-RFC culpably participated in the violations of Section 11 and 12(a)(2) set

forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositors and the issuing trusts to serve as conduits for the mortgage loans. 220. Defendant ResCap wholly owns GMAC-RFC and is thus, a parent of RFC and the

Depositor Defendants. ResCap culpably participated in the violations of Section 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositor Defendants and the issuing trusts to serve as conduits for the mortgage loans. 221. Defendant GMACM wholly owns ResCap, and is thus, a parent of GMAC-RFC,

RFC, and the Depositor Defendants. GMAC-RFC culpably participated in the violations of

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Section 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositor Defendants and the issuing trusts to serve as conduits for the mortgage loans. 222. Defendant Ally wholly owns GMACM and RFS and is the ultimate parent of

GMAC-MG, ResCap, GMAC-RFC, RFC, and the Depositor Defendants. As the sole corporate parent of RFS, Ally had the practical ability to direct and control the actions of RFS in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of RFS in connection with the issuance and sale of the Certificates. Ally culpably participated in the violations of Section 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositor Defendants and the issuing trusts to serve as conduits for the mortgage loans. 223. Ally, GMACM, ResCap, and GMAC-RFC are controlling persons within the

meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of RFC, RFS, and the Depositor Defendants at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 224. Freddie Mac purchased the Certificates in the primary market, which were issued

pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, in the primary market which at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements.

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225.

Freddie Mac did not know of the misstatements and omissions in the Registration

Statements; had Freddie Mac known of those misstatements and omissions, it would not have purchased the Certificates. 226. Freddie Mac has sustained damages as a result of the misstatements and

omissions in the Registration Statements, for which it is entitled to compensation. FOURTH CAUSE OF ACTION Primary Violations of the Virginia Securities Act (Against RALI, RASC, RAMP, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs) 227. Plaintiff realleges paragraphs 1 through 134 above as if fully set forth herein. For

purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 228. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the

Virginia Code and is asserted on behalf of Freddie Mac with respect to those Certificates identified in Table 10 above that were purchased by Freddie Mac and issued pursuant to the Registration Statements. 229. The Depositor Defendants (as specified in Table 1, supra) made false and

materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each Securitization. The Underwriter Defendants (as specified in Table 1, supra) made false and materially misleading statements in the Prospectuses for the Securitizations effected under the Shelf Registration Statements. 230. The Underwriter Defendants are prominently identified in the Prospectuses, the

primary documents that they used to sell the Certificates. The Underwriter Defendants offered

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the Certificates publicly, including selling to Freddie Mac the Certificates, as set forth in the Method of Distribution or equivalent underwriting section of each Prospectus. 231. The Underwriter Defendants offered and sold the Certificates to Freddie Mac by

means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. The Underwriter Defendants reviewed and participated in drafting the Prospectuses. 232. The Underwriter Defendants successfully solicited Freddie Macs purchases of

the Certificates. The Underwriter Defendants were paid a substantial commission based on the amount it received from the sale of the Certificates to the public. 233. The Underwriter Defendants offered the Certificates for sale, sold them, and

distributed them to Freddie Mac in the State of Virginia. 234. The Depositor Defendants are prominently identified in the Prospectuses for the

Securitizations carried out under the Registration Statements. These Prospectuses were the primary documents used to sell Certificates for the Securitizations pursuant to the Registration Statements. The Depositor Defendants offered the Certificates publicly and actively solicited their sale, including to Freddie Mac. The Depositor Defendants were paid a percentage of the total dollar amount of the offering upon completion of the Securitizations effected pursuant to the Shelf Registration Statements. 235. With respect to the Securitizations for which it filed the Shelf Registration

Statements, including the related Prospectus Supplements, the Depositor Defendants offered the Certificates to Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of

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the circumstances under which they were made, not misleading. The Depositor Defendants reviewed and participated in drafting the Prospectuses. 236. Each of the Underwriter Defendants and the Depositor Defendants actively

participated in the solicitation of the Freddie Macs purchase of the Certificates, and did so in order to benefit itself. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the Certificates. 237. Each of the Prospectuses contained material misstatements of fact and omitted

facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and specifically to Freddie Mac. 238. The untrue statements of material facts and omissions of material facts in the

Registration Statements, which include the Prospectuses, are set forth above, and include compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 239. The Underwriter Defendants and the Depositor Defendants offered and sold the

Certificates directly to Freddie Mac pursuant to the materially false, misleading, and incomplete Prospectuses. 240. The Underwriter Defendants owed to Freddie Mac, as well as to other investors in

these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. The Depositor Defendants owed the same duty with respect to the Prospectuses for the Securitizations effected under the Shelf Registration Statements.

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241.

The Underwriter Defendants and the Depositor Defendants failed to exercise such

reasonable care. These Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 242. In contrast, Freddie Mac did not know, and in the exercise of reasonable diligence

could not have known, of the untruths and omissions contained in the Prospectuses at the time it purchased the Certificates. If Freddie Mac had known of those untruths and omissions, it would not have purchased the Certificates. 243. Freddie Mac sustained substantial damages in connection with its investments in

the Certificates and has the right to rescind and recover the consideration paid for the Certificates, with interest thereon. Plaintiff hereby seeks rescission and makes any necessary tender of its Certificates. In the alternative, Plaintiff seeks damages according to proof. FIFTH CAUSE OF ACTION Controlling Person Liability Under the Virginia Securities Act (Against RFC, GMAC-RFC, ResCap, GMACM and Ally) 244. Plaintiff realleges paragraphs 1 through 134 above as if fully set forth herein. For

purposes of this cause of action, Plaintiff hereby expressly excludes any allegation that could be construed as sounding in fraud. 245. This claim is brought under Section 13.1-522(C) of the Virginia Code and is

asserted on behalf of Freddie Mac, which purchased the Certificates (identified in Table 10, supra) that were issued pursuant to the Registration Statements. This claim is brought against RFC, GMAC-RFC, ResCap, GMACM, and Ally (the Control Persons) for controlling-person liability with regard to the claim brought by Plaintiff pursuant to Section 13.1-522(A)(ii).

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246.

RFC was the sponsor for all 21 Securitizations carried out pursuant to the

Registration Statements filed by the Depositor Defendants (as specified in Table 1, supra), and culpably participated in their violations of Section 13.1-522(A)(ii) by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting the Depositors as special-purpose vehicles, and selecting RFS or the Non-GMAC Underwriters as underwriters. In its role as sponsor, RFC knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the mortgages would be issued by the relevant trusts. 247. RFC sold the mortgage loans to the Depositor Defendants (as specified in Table 1

supra), and conveyed the mortgage loans to the Depositor Defendants pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. RFC controlled all aspects of the business of the Depositor Defendants, who were special-purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of RFC overlapped with the officers and directors of the Depositor Defendants. In addition, RFC was able to, and did in fact, control the contents of the Registration Statements filed by the Depositors, including the Prospectuses and Prospectus Supplements that contained material misstatements of fact and omitted facts necessary to make the contents therein not misleading. 248. Defendant GMAC-RFC is the corporate parent of, and controlled the business

operations of, RFC and the Depositor Defendants. As the sole corporate parent of RFC and the Depositor Defendants, GMAC-RFC had the practical ability to direct and control the actions of

85

RFC and the Depositor Defendants in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of RFC and the Depositor Defendants. 249. GMAC-RFC culpably participated in the violations of Section 13.1-522(A)(ii) set

forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositor Defendants and the issuing trusts to serve as conduits for the mortgage loans. 250. Defendant ResCap wholly owns GMAC-RFC and is thus, a parent of RFC and the

Depositor Defendants. ResCap culpably participated in the violations of Section 13.1-522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositor Defendants and the issuing trusts to serve as conduits for the mortgage loans. 251. Defendant GMACM wholly owns ResCap, and is thus, a parent of GMAC-RFC,

RFC, and the Depositor Defendants. GMAC-RFC culpably participated in the violations of Section 13.1-522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositor Defendants and the issuing trusts to serve as conduits for the mortgage loans. 252. Defendant Ally wholly owns GMACM and RFS and is the ultimate parent of

GMAC-MG, ResCap, GMAC-RFC, RFC, and the Depositor Defendants. As the sole corporate parent of RFS, Ally had the practical ability to direct and control the actions of RFS in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of

86

RFS in connection with the issuance and sale of the Certificates. Ally culpably participated in the violations of Section 13.1-522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as the Depositor Defendants and the issuing trusts to serve as conduits for the mortgage loans. 253. Ally, GMACM, ResCap, and GMAC-RFC are controlling persons within the

meaning of Section 13.1-522(C) of the Virginia Code by virtue of their actual power over, control of, ownership of, and/or directorship of RFC, RFS, and the Depositor Defendants at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 254. Freddie Mac purchased the Certificates, which were issued pursuant to the

Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and specifically to Freddie Mac. 255. Freddie Mac did not know, and in the exercise of reasonable diligence could not

have known, of the misstatements and omissions in the Registration Statements; had Freddie Mac known of those misstatements and omissions, it would not have purchased the Certificates. 256. Freddie Mac has sustained substantial damages as a result of the misstatements

and omissions in the Registration Statements, for which it is entitled to compensation, and for which the Control Persons are jointly and severally liable.

87

SIXTH CAUSE OF ACTION (Common Law Fraud Against RALI, RAMP, RASC, RFC, RFS JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs) 257. 258. Plaintiff realleges paragraphs 1 through 185 as if fully set forth herein. Freddie Mac was fraudulently induced to purchase the Certificates by the Fraud

Defendants misrepresentations and omissions of material facts. 259. The material representations set forth above and in Appendix A were fraudulent,

and the Fraud Defendants representations falsely and misleadingly misrepresented and omitted material statements of fact. The representations at issue are identified in Sections I.C. and I.D. and in Appendix A. 260. The Fraud Defendants knew their representations and omissions were false and/or

misleading at the time they were made, or made such representations and omissions recklessly without knowledge of their truth or falsity. 261. Each of the Fraud Defendants made the misleading statements with the intent and

for the purpose of inducing Freddie Mac to purchase the Certificates. 262. Freddie Mac justifiably relied on the Fraud Defendants false representations and

misleading omissions. 263. But for the Fraud Defendants fraudulent misrepresentations and omissions

regarding the Fraud Defendants underwriting practice and quality of the loans making up the securitizations, Freddie Mac would not have purchased the Certificates. 264. As a result of the foregoing, Freddie Mac has suffered damages in an amount to

be proven at trial. Plaintiff hereby demands rescission and makes any necessary tender of the Certificates.

88

265.

Because the Fraud Defendants defrauded Freddie Mac willfully and wantonly,

and because, by their acts, the Fraud Defendants knowingly affected the general public, including but not limited to all persons with interest in the Certificates, Plaintiff is entitled to recover punitive damages. SEVENTH CAUSE OF ACTION (Aiding and Abetting Fraud Against Ally, GMACM, GMAC-MG, ResCap, GMAC-RFC, RFC, RALI, RASC and RAMP) 266. 267. Plaintiff realleges paragraphs 1 through 185 as if fully set forth herein. This is a claim for aiding and abetting fraud, in the alternative, should it be found

that the Underwriting Defendants alone are liable for fraud. This claim is brought against Ally, GMACM, GMAC-MG, ResCap, GMAC-RFC, RFC, the Depositor Defendants, arising from the intentional and substantial assistance each rendered to the Underwriter Defendants to advance the fraud on Freddie Mac. 268. Through overlapping personnel, strategies, and intertwined business operations,

and the fluid transfer of information among the Defendants, each of Ally, GMACM, GMACMG, ResCap, GMAC-RFC, RFC, the Depositor Defendants knew of the Fraud Defendants and fraudulent scheme to offload the credit risks of non-agency loans to investors, including Freddie Mac. Each of these Defendants acted in concert to defraud Freddie Mac. 269. Ally, GMACM, GMAC-MG, ResCap, GMAC-RFC, RFC, the Depositor

Defendants, through their employees and representatives, substantially assisted in, among other things: (a) the extension of warehouse loans to originators; (b) acquiring the underlying mortgage loans from the originators; (c) packaging up those loans into pools which were deposited into the Trust; (d) waiving into the collateral pools of the Trusts loans previously rejected by Clayton or otherwise non-compliant loans, despite the lack of compensating factors;

89

(e) creating and structuring the Trusts whose Certificates would be sold to investors including Freddie Mac; and (f) preparing the Registration Statements which would be used to market the Certificates. 270. The Underwriter Defendants would not have been able to implement their fraud

against Freddie Mac without such substantial assistance. 271. Through overlapping personnel, strategies, and intertwined business operations,

and the fluid transfer of information among the Defendants, each of the Defendants knew of the fraud perpetrated on Freddie Mac. 272. The Underwriter Defendants could not have perpetrated their fraud without the

substantial assistance of each other defendant, and they all provided financial, strategic, and marketing assistance for their scheme. Defendants are highly intertwined and interdependent businesses and each benefitted from the success of the scheme. Through the fraudulent sale of the Certificates to the Freddie Mac, the Selling Underwriters were able to materially improve their financial condition by reducing their exposure to declining subprime-related assets and garnering millions of dollars in fees from the structuring and sale of the Certificates. 273. As a direct, proximate, and foreseeable result of the conduct of Ally, GMACM,

GMAC-MG, ResCap, GMAC-RFC, RFC, and the Depositor Defendants, Freddie Mac has suffered and will continue to suffer damages in an amount to be proven at trial. Plaintiff hereby demands rescission and makes any necessary tender of the Certificates. 274. Because the Fraud Defendants defrauded Freddie Mac willfully and wantonly,

and because, by their acts, the Fraud Defendants knowingly affected the general public, including but not limited to all persons with interest in the Certificates, Plaintiff is entitled to recover punitive damages.

90

EIGHTH CAUSE OF ACTION (Negligent Misrepresentation Against RALI, RASC, RAMP, RFC, RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS and Goldman Sachs) 275. 276. Plaintiff realleges paragraphs 1 through 185 as if fully set forth herein. Between September 23, 2005 and May 30, 2007, RALI, RASC, RAMP, RFC,

RFS, JPM, Credit Suisse, RBS, Citi, Barclays, UBS, Goldman Sachs (the Negligent Misrepresentation Defendants) sold the Certificates Freddie Mac as described above. Because the Depositor Defendants owned and then conveyed the underlying mortgage loans to the issuing trusts, the Depositor Defendants had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through their possession of the loan files and other documentation. 277. Likewise, as underwriters of the Securitizations, the Underwriter Defendants had

the access to and ability to review loan file information and were obligated to perform adequate due diligence to ensure the accuracy of the Offering Materials. Accordingly, the Underwriter Defendants had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 278. The Negligent Misrepresentation Defendants also had unique, exclusive, and

special knowledge of the work of third-party due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. Freddie Mac lacked access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the Certificates, Freddie Mac could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. Freddie Mac therefore reasonably relied on the knowledge and

91

representations of the Negligent Misrepresentation Defendants regarding the underlying mortgage loans. 279. The Negligent Misrepresentation Defendants were aware that Freddie Mac

reasonably relied on these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by Freddie Mac prior to the closing of the Securitizations. Freddie Mac reasonably relied upon these Defendants misrepresentations and omissions in the Offering Materials. 280. The Negligent Misrepresentation Defendants breached their duty of disclosure by

making false or misleading statements of material facts to Freddie Mac when they knew or should have known of the falsity of their statements. The misrepresentations are set forth in Sections I.C. and I.D. above and Appendix A.; 281. In addition, having false or misleading representations about the underlying

collateral in the Securitizations and the facts bearing on the riskiness of the Certificates, the Negligent Misrepresentation Defendants had a duty to correct the misimpressions left by their statements, including with respect to any half truths. The Negligent Misrepresentation Defendants failed to correct in a timely manner any of their misstatements or half truths. 282. Freddie Mac reasonably relied on the information provided by the Selling

Negligent Misrepresentation Defendants, and as a result, Freddie Mac suffered damages in an amount to be determined at trial.

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PRAYER FOR RELIEF WHEREFORE Plaintiff respectfully requests that judgment be entered: An award in favor of Plaintiff against all Defendants, jointly and severally, for: a. Rescission and recovery of the consideration paid for the Certificates, with interest thereon (in connection with this request for rescission, the Certificates are hereby tendered to the Defendants); b. Freddie Macs monetary losses, including any diminution in value of the Certificates, as well as lost principal and lost interest payments thereon; c. Punitive damages; d. Attorneys fees and costs; e. Prejudgment interest at the maximum legal rate; and f. Such other and further relief as the Court may deem just and proper. DATED: New York, New York September 2, 2011 KASOWITZ, BENSON, TORRES & FRIEDMAN LLP

By: /s/ Marc E. Kasowitz Marc E. Kasowitz (mkasowitz@kasowitz.com) Hector Torres (htorres@kasowitz.com) Michael S. Shuster (mshuster@kasowitz.com) Christopher P. Johnson (cjohnson@kasowitz.com) Michael Hanin (mhanin@kasowitz.com) Kanchana W. Leung (kleung@kasowitz.com) 1633 Broadway New York, New York 10019 (212) 506-1700 Attorneys for Plaintiff Federal Housing Finance Agency

93

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstBANK OF AMERICA CORPORATION; BANK OF AMERICA, NATIONAL ASSOCIATION; MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. (f/k/a BANC OF AMERICA SECURITIES LLC); ASSET BACKED FUNDING CORPORATION; BANC OF AMERICA MORTGAGE SECURITIES, INC.; BANC OF AMERICA FUNDING CORPORATION; GEORGE C. CARP; ROBERT CARUSO; GEORGE E. ELLISON; ADAM D. GLASSNER; DANIEL B. GOODWIN; JULIANA JOHNSON; AASHISH KAMAT; MICHAEL J. KULA; JAMES H. LUTHER; WILLIAM L. MAXWELL; MARK I. RYAN; AND ANTOINE SCHETRITT, Defendants.

___ CIV. ___ (___)

COMPLAINT JURY TRIAL DEMANDED

TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................6 The Plaintiff and the GSEs...................................................................................................6 The Defendants ....................................................................................................................7 The Non-Party Originators ................................................................................................10 JURISDICTION AND VENUE ....................................................................................................11 FACTUAL ALLEGATIONS ........................................................................................................12 I. THE SECURITIZATIONS................................................................................................12 A. B. C. Residential Mortgage-Backed Securitizations In General .....................................12 The Securitizations At Issue In This Case .............................................................13 The Securitization Process .....................................................................................15 1. 2. II. BOA National Groups Mortgage Loans in Special Purpose Trusts ..........15 The Trusts Issue Securities Backed by the Loans ......................................16

THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................20 A. The Role of Each of the Defendants ......................................................................20 1. 2. 3. 4. 5. 6. 7. BOA National ............................................................................................20 ABF Corp. ..................................................................................................22 BOA Mortgage...........................................................................................22 BOA Funding .............................................................................................23 MLPF&S, As Successor-in-Interest to BOA Securities ............................24 BOA Corporation .......................................................................................24 The Individual Defendants .........................................................................25

B. III.

The Defendants Failure To Conduct Proper Due Diligence.................................27

THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS................................................................................................................29 A. B. C. D. Compliance With Underwriting Guidelines ..........................................................29 Statements Regarding Occupancy Status of Borrower ..........................................31 Statements Regarding Loan-to-Value Ratios.........................................................33 Statements Regarding Credit Ratings ....................................................................36

IV.

THE FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS ............................................................................38 A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................38 1. 2. B. Owner Occupancy Data Was Materially False ..........................................39 Loan-to-Value Data Was Materially False ................................................41

The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................45 1. Government Investigations and Private Litigants Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines .........45 The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines .................................................................51 The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................53

2.

3.

V.

FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES .................................................54

FIRST CAUSE OF ACTION ........................................................................................................57 SECOND CAUSE OF ACTION ...................................................................................................61 THIRD CAUSE OF ACTION .......................................................................................................65 FOURTH CAUSE OF ACTION ...................................................................................................68

ii

FIFTH CAUSE OF ACTION ........................................................................................................72 SIXTH CAUSE OF ACTION .......................................................................................................75 SEVENTH CAUSE OF ACTION .................................................................................................79 EIGHTH CAUSE OF ACTION ....................................................................................................83 PRAYER FOR RELIEF ................................................................................................................87 JURY TRIAL DEMANDED .........................................................................................................88

iii

Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against Bank of America Corporation (BOA Corp.); Bank of America, National Association (BOA National); Merrill Lynch, Pierce, Fenner & Smith, Inc. (MLPF&S), as successor-in-interest to Banc of America Securities, LLP (BOA Securities); Asset Backed Funding Corporation (ABF Corp.); Banc of America Mortgage Securities, Inc. (BOA Mortgage); Banc of America Funding Corporation (BOA Funding) (collectively, BOA); George C. Carp; Robert Caruso; George E. Ellison; Adam D. Glassner; Daniel B. Goodwin; Juliana Johnson; Aashish Kamat; Michael J. Kula; William L. Maxwell; Mark I. Ryan; James H. Luther; and Antoine Schetritt (the Individual Defendants) (together with BOA, the Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the

offer and sale of certain residential mortgage-backed securities to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or GSEs). These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 311

5606.05(c) of the District of Columbia Code, and constitutes common law negligent misrepresentation. 2. Between September 30, 2005 and November 5, 2007, Fannie Mae and Freddie

Mac purchased over $6 billion in residential mortgage-backed securities (the GSE Certificates) issued in connection with 23 BOA-sponsored and/or BOA-underwritten securitizations.1 The GSE Certificates purchased by Freddie Mac, along with date and amount of the purchases, are listed below in Table 10. The GSE Certificates purchased by Fannie Mae, along with the date and amount of the purchases, are listed below in Table 11. The 23 securitizations at issue are: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii.
1

ABFC Trust, Series 2005-WMC1 (ABFC 2005-WMC1); ABFC Trust, Series 2006-HE1 (ABFC 2006-HE1); ABFC Trust, Series 2006-OPT1 (ABFC 2006-OPT1); ABFC Trust, Series 2006-OPT2 (ABFC 2006-OPT2); ABFC Trust, Series 2006-OPT3 (ABFC 2006-OPT3); ABFC Trust, Series 2007-WMC1 (ABFC 2007-WMC1); Banc of America Funding Trust, Series 2006-G (BAFC 2006-G); Banc of America Funding Trust, Series 2006-H (BAFC 2006-H); Banc of America Funding Trust, Series 2007-A (BAFC 2007-A); Banc of America Funding Trust, Series 2007-C (BAFC 2007-C); Banc of America Alternative Loan Trust, Series 2005-10 (BOAA 2005-10); Banc of America Alternative Loan Trust, Series 2005-11 (BOAA 2005-11); Banc of America Alternative Loan Trust, Series 2005-12 (BOAA 2005-12);

For purposes of this Complaint, the securities issued under the Registration Statements (as defined in note 2 below) are referred to as Certificates, while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the GSE Certificates. Holders of Certificates are referred to as Certificateholders. 2

xiv. xv. xvi. xvii.

Banc of America Alternative Loan Trust, Series 2006-1 (BOAA 2006-1); Banc of America Alternative Loan Trust, Series 2006-2 (BOAA 2006-2); Banc of America Alternative Loan Trust, Series 2006-3 (BOAA 2006-3); NationStar Home Equity Loan Asset-Backed Certificates, Series 2007-C (NSTR 2007-C); Option One Mortgage Loan Trust Asset-Backed Certificates, Series 2005-5 (OOMLT 2005-5); Option One Mortgage Loan Asset-Backed Certificates, Series 2007-2 (OOMLT 2007-2); Option One Mortgage Loan Trust Asset-Backed Certificates, Series 2007-6 (OOMLT 2007-6); Option One Mortgage Loan Trust Asset-Backed Certificates, Series 2007-FXD1 (OOMLT 2007-FXD1); Option One Mortgage Loan Trust Asset-Backed Certificates, Series 2007-HL1 (OOMLT 2007-HL1); SunTrust Alternative Loan Trust, Series 2005-1F (STALT 2005-1F);

xviii.

xix.

xx.

xxi.

xxii.

xxiii.

(collectively, the Securitizations). 3. The Certificates were offered for sale pursuant to one of nine shelf registration

statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC). Defendants ABF Corp., BOA Mortgage, and BOA Funding filed six Shelf Registration Statements that pertained to seventeen of the Securitizations in this action. These six Shelf Registration Statements, and the amendments thereto, were signed by or on behalf of the Individual Defendants. With respect to all of the Securitizations, BOA Securities was the lead underwriter and the underwriter who sold the Certificates to the GSEs.

4.

For each Securitization, a prospectus (Prospectus) and prospectus supplement

(Prospectus Supplement) were filed with the SEC as part of the Registration Statement2 for that Securitization. The GSE Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the corresponding Prospectuses and Prospectus Supplements. 5. The Registration Statements contained statements about the characteristics and

credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers of those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investors decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices and had materially poorer credit quality than what was represented in the Registration Statements. 6. The Registration Statements also contained statistical summaries of the groups of

mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was also material to reasonable investors. However, a loan level analysis of a sample of loans for each Securitization a review that encompassed thousands of mortgages across all of the Securitizations has revealed that these statistics were also false and omitted material facts.

The term Registration Statement as used herein incorporates the Shelf Registration Statement, the Prospectus and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated. 4

7.

For example, the percentage of owner-occupied properties is a material risk factor

to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans. 8. Defendant BOA Securities (an underwriter) is directly responsible for the

misstatements and omissions of material fact contained in the Registration Statements because it prepared these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. Defendants ABF Corp. (a depositor), BOA Mortgage (a depositor), BOA Funding (a depositor), and the Individual Defendants are also directly responsible for the misstatements and omissions of material fact contained in the Registration Statements filed by ABF Corp., BOA Mortgage, and BOA Funding because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. 9. Defendants BOA National, BOA Corp., and the Individual Defendants are also

responsible for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over BOA Securities and Defendants ABF Corp., BOA Mortgage, and BOA Funding. BOA Corp. directly participated in and exercised dominion and control over the business operations of BOA Securities and Defendants ABF Corp., BOA Mortgage, and BOA Funding. BOA National (the sponsor) and the Individual

Defendants directly participated in and exercised dominion and control over the business operations of Defendants ABF Corp., BOA Mortgage, and BOA Funding. 10. Fannie Mae and Freddie Mac purchased over $6 billion of the Certificates

pursuant to the Registration Statements filed with the SEC. These documents contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 11. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against

the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for common law negligent misrepresentation. PARTIES The Plaintiff and the GSEs 12. The Federal Housing Finance Agency is a federal agency located at 1700 G

Street, NW in Washington, D.C. FHFA was created on July 30, 2008 pursuant to the Housing and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. 4617), to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of the GSEs, including but not limited to, the authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12 U.S.C. 4617(b)(2). 6

13.

Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by

Congress with a mission to provide liquidity, stability, and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. The Defendants 14. Defendant BOA Corp. purports to be one of the worlds largest financial

institutions and delivers banking and financial services throughout the world. BOA Corp. is a Delaware corporation principally located in Charlotte, North Carolina. It maintains offices and conducts substantial business operations at the Bank of America Tower at One Bryant Park, New York, New York. BOA Corp. is the sole parent corporation of each of the other BOA Defendants: BOA National, BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding. 15. Defendant BOA National is one of the nations largest banks and a wholly-owned

subsidiary of BOA Corp. BOA National is a Delaware corporation principally located in Charlotte, North Carolina, with offices and substantial business operations at the Bank of America Tower at One Bryant Park, New York, New York. BOA National was the sponsor of sixteen of the Securitizations. 16. Defendant MLPF&S is a Delaware corporation and an SEC-registered broker-

dealer. It principally located at 4 World Financial Center, 250 Vesey Street, New York, New York and is a wholly-owned subsidiary of BOA Corp. MLPF&S is liable as successor-ininterest to BOA Securities, which was the lead underwriter for each of the Securitizations and intimately involved in the offerings. Fannie Mae and Freddie Mac also purchased all of the GSE Certificates from BOA Securities in its capacity as underwriter of the Securitizations. On November 1, 2010, BOA Securities at the time a Delaware Corporation and wholly-owned 7

subsidiary of BOA Corp. was merged with and into MLPF&S. This merger followed BOA Corp.s acquisition in January 2009 of MLPF&S as part of its acquisition of Merrill Lynch & Co. Defendant MLPF&S is liable as a matter of law as successor to BOA Securities by virtue of its status as the surviving entity in its merger with BOA Securities. 17. Defendant ABF Corp. is a Delaware corporation with its principal place of

business in Charlotte, North Carolina. ABF Corp. is a direct subsidiary of BOA National and an indirect wholly-owned subsidiary of BOA Corp. BOA Funding was the depositor for six of the Securitizations. BOA Funding, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 18. Defendant BOA Mortgage is a Delaware corporation with its principal place of

business in Charlotte, North Carolina and offices at the Bank of America Tower at One Bryant Park, New York, New York. BOA Mortgage is a direct subsidiary of BOA National and an indirect wholly-owned subsidiary of BOA Corp. BOA Mortgage was the depositor for six of the Securitizations. BOA Mortgage, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 19. Defendant BOA Funding is a Delaware corporation with its principal place of

business in Charlotte, North Carolina and offices at the Bank of America Tower at One Bryant Park, New York, New York. BOA Funding is a direct subsidiary of BOA National and an indirect wholly-owned subsidiary of BOA Corp. BOA Funding was the depositor for five of the Securitizations. BOA Funding, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 20. Defendant George C. Carp is an individual residing in Charlotte, North Carolina.

Mr. Carp was Treasurer, Chief Accounting Officer, and Chief Financial Officer of ABF Corp.

and BOA Funding. Mr. Carp was also a Managing Director and Capital Markets Finance Executive of BOA Corp. Mr. Carp signed four of the Shelf Registration Statements and any amendment thereto. 21. Defendant Robert Caruso is an individual residing in New York, New York. Mr.

Caruso was a Director of BOA Mortgage. Mr. Caruso was also a Senior Vice President at BOA National. Mr. Caruso signed two of the Shelf Registration Statements and any amendment thereto. 22. Defendant George E. Ellison is an individual residing in Charlotte, North

Carolina. Mr. Ellison was a Director of ABF Corp. and BOA Funding. Mr. Ellison was also Managing Director of the Global Structured Finance Division at BOA Securities. Mr. Ellison signed four of the Shelf Registration Statements and any amendment thereto. 23. Defendant Adam D. Glassner is an individual residing in Charlotte, North

Carolina. Mr. Glassner was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage. Mr. Glassner was also a Managing Director at BOA Securities. Mr. Glassner signed the amendment to one of the Shelf Registration Statements. 24. Defendant Daniel B. Goodwin is an individual residing in New Jersey. Defendant

Daniel B. Goodwin was President and Chief Executive Officer of ABF Corp. Mr. Goodwin was also a Managing Director at BOA Securities. Mr. Goodwin signed two of the Shelf Registration Statements and any amendment thereto. 25. Defendant Juliana Johnson is an individual residing in Charlotte, North Carolina.

Ms. Johnson was a Director of BOA Mortgage. Ms. Johnson signed two of the Shelf Registration Statements and any amendment thereto.

26.

Defendant Aashish R. Kamat is an individual residing in New York, New York.

Mr. Kamat was a Director of BOA Mortgage. Mr. Kamat signed one of the Shelf Registration Statements and any amendment thereto. 27. Defendant Michael J. Kula was a Director of BOA Mortgage. Mr. Kula was also

a Senior Vice President at BOA National. Mr. Kula signed one of the Shelf Registration Statements and any amendment thereto. 28. Defendant James H. Luther was a Director of ABF Corp. and BOA Funding.

Mr. Luther signed three of the Shelf Registration Statements and any amendment thereto. 29. Defendant William L. Maxwell was a Director of ABF Corp. Mr. Maxwell

signed two Shelf Registration Statements that were not subsequently amended. 30. Defendant Mark I. Ryan is an individual residing in Charlotte, North Carolina.

Mr. Ryan was President and Chief Executive Officer of BOA Funding. Mr. Ryan signed two of the Shelf Registration Statements and any amendment thereto. 31. Defendant Antoine Schetritt is an individual residing in New York, New York.

Mr. Schetritt was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage. Mr. Schetritt was also a Managing Director and the Head of Residential Finance at BOA Securities. Mr. Schetritt signed one Shelf Registration Statement. The Non-Party Originators 32. In eight Securitizations sponsored either by BOA National or non-party Option

One Mortgage Corporation (Option One), 100 percent of the mortgage loans were originated

10

by Option One. As to six Securitizations in which it acted as sponsor, BOA National itself originated or acquired 100 percent of the mortgage loans underlying the Securitizations.3 JURISDICTION AND VENUE 33. Jurisdiction of this Court is founded upon 28 U.S.C. 1345, which gives federal

courts original jurisdiction over claims brought by FHFA in its capacity as conservator of Fannie Mae and Freddie Mac. 34. Jurisdiction of this Court is also founded upon 28 U.S.C. 1331 because the

Securities Act claims asserted herein arise under Sections 11, 12(a)(2), and 15 of the Securities Act, 15 U.S.C. 77k, 77l(a)(2), 77o. This Court further has jurisdiction over the Securities Act claims pursuant to Section 22 of the Securities Act, 15 U.S.C. 77v. 35. This Court has jurisdiction over the statutory claims of violations of Sections

13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). This Court also has jurisdiction over the common law claim of negligent misrepresentation pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 36. Venue is proper in this district pursuant to Section 22 of the Securities Act of

1933, 15 U.S.C. 77v and 28 U.S.C. 1391(b). The BOA Defendants conduct business in this district, BOA Securities is principally located in this district, at least two of the Individual Defendants reside in this district, and many of the acts and transactions alleged herein, including

The remaining nine Securitizations were sponsored by BOA National (seven), NationStar Mortgage LLC (one) and SunTrust Asset Funding LLC (one). In those Securitizations, the underlying mortgage loans were originated or acquired by a mix of originators including but not limited to BOA National, non-party Option One, and other nonparty originators. 11

the preparation and dissemination of the Registration Statements, and offer and sale of the Certificates, occurred in substantial part within this district. Defendants are also subject to personal jurisdiction in this district. FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 37. Residential Mortgage-Backed Securitizations In General Asset-backed securitization distributes risk by pooling cash-producing financial

assets and issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 38. The most common form of securitization of mortgage loans involves a sponsor

the entity that acquires or originates the mortgage loans and initiates the securitization and the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is established pursuant to a Pooling and Servicing Agreement entered into by, among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 39. Residential mortgage-backed securities are backed by the underlying mortgage

loans. Some residential mortgage-backed securitizations are created from more than one cohort of loans called collateral groups, in which case the trust issues securities backed by different groups. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group.

12

Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the cash-flows from the designated mortgage group, such as homeowners payments of principal and interest on the mortgage loans held by the related trust. 40. Residential mortgage-backed securities are issued pursuant to registration

statements filed with the SEC. These registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage groups underlying the certificates. Certificates are issued by the trust pursuant to the registration statement, the prospectus, and the prospectus supplement. Underwriters sell the certificates to investors. 41. A mortgage servicer is necessary to manage the collection of proceeds from the

mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 42. The Securitizations At Issue In This Case This case involves the 23 Securitizations listed in paragraph 2 above, sixteen of

which were sponsored by BOA National, and all of which were underwritten by BOA Securities. For each of the 23 Securitizations, Table 1 identifies: (1) the sponsor; (2) the depositor; (3) the

13

lead underwriter; (4) the principal amount issued for the tranches4 purchased by the GSEs; (5) the date of issuance; and (6) the loan group or groups backing the GSE Certificate for that Securitization (referred to as the Supporting Loan Groups). Table 1
Transaction Tranche Sponsor Depositor Lead Underwriter
BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities (colead) BOA Securities (colead)

Principal Amount Issued ($)


235,900,000 305,011,000 166,946,000 167,027,000 232,465,000 232,459,000 114,343,000 114,273,000 631,248,000 396,306,000 431,225,000 94,441,000 68,349,000 92,219,000 86,674,000 128,037,000 71,582,000 94,235,000 51,314,000 75,638,000 49,085,000 224,590,000 227,921,000

Date of Issuance
9/30/2005 12/14/2006 8/10/2006 8/10/2006 10/12/2006 10/12/2006 11/14/2006 11/14/2006 11/5/2007 7/31/2006 10/2/2006 1/31/2007 4/30/2007 10/27/2005 11/29/2005 12/29/2005 1/30/2006 1/30/2006 3/1/2006 3/1/2006 3/30/2006 6/7/2007 11/10/2005

Supporting Loan Group(s)


Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 1 Group 1 Group 5 Group 1 Group 6 Group 2 Group 2 Group 2 Group 1 Group 3 Group 1 Group 3 Group 5 Group 1 Group I

ABFC 2005WMC1 ABFC 2006-HE1 ABFC 2006OPT1 ABFC 2006OPT2 ABFC 2006OPT3 ABFC 2007WMC1 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2005-10 BOAA 2005-11 BOAA 2005-12 BOAA 2006-1

A1 A1 A2 A1 A2 A1 A2 A1 A1A 1A1 5A1 1A1 6A1 2CB1 2CB1 2CB1 1CB1 3CB1 1CB1

BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National BOA National NationStar Mortgage LLC Option One

ABF Corp. ABF Corp. ABF Corp. ABF Corp. ABF Corp. ABF Corp. ABF Corp. ABF Corp. ABF Corp. BOA Funding BOA Funding BOA Funding BOA Funding BOA Mortgage BOA Mortgage BOA Mortgage BOA Mortgage BOA Mortgage BOA Mortgage BOA Mortgage BOA Mortgage NationStar Funding LLC Option One Mortgage Acceptance Corporation

BOAA 2006-2 3CB1 BOAA 2006-3 NSTR 2007-C 5CB1 1AV1 A1 OOMLT 2005-5

A tranche is one of a series of certificates or interests created and issued as part of the same transaction. 14

Transaction

Tranche

Sponsor

Depositor

Lead Underwriter
BOA Securities (colead)

Principal Amount Issued ($)


190,306,000

Date of Issuance
3/9/2007

Supporting Loan Group(s)


Group I

IA1

Option One

OOMLT 2007-2

IIA1

Option One

IA1 OOMLT 2007-6 IIA1 OOMLT 2007FXD1

Option One

Option One

IA1

Option One

IA1 OOMLT 2007HL1 STALT 2005-1F 4A1

Option One

SunTrust Asset Funding, LLC

Option One Mortgage Acceptance Corporation Option One Mortgage Acceptance Corporation Option One Mortgage Acceptance Corporation Option One Mortgage Acceptance Corporation Option One Mortgage Acceptance Corporation Option One Mortgage Acceptance Corporation BOA Funding

BOA Securities (colead)

190,288,000

3/12/2007

Group II

BOA Securities (colead)

435,470,000

5/30/2007

Group I

BOA Securities (colead)

272,242,000

1/30/2007

Group II

BOA Securities (colead)

273,043,000

1/30/2007

Group I

BOA Securities (colead)

304,935,000

4/26/2007

Group I

BOA Securities

117,447,000

1/5/2006

Group 4

C.

The Securitization Process 1. BOA National Groups Mortgage Loans in Special Purpose Trusts

43.

With respect to the sixteen of the 23 Securitizations for which it was the sponsor,

BOA National either originated the mortgage loans underlying the Certificates or purchased the loans after they were originated, either directly from the originators or through affiliates of the originators.5 44. BOA National then sold the mortgage loans for the sixteen Securitizations that it

sponsored to one of three depositors, all of which are BOA-affiliated entities: ABF Corp., BOA Mortgage, and BOA Funding (collectively, the Depositor Defendants). With respect to one of the remaining seven Securitizations, non-party SunTrust Asset Funding, LLC, as sponsor, sold

Non-party sponsors SunTrust Asset Funding LLC, Option One, and NationStar Mortgage LLC each sponsored one or more of the remaining six Securitizations. The sponsor for each Securitization is specified in Table 1, at paragraph 42 above. 15

the mortgage loans to Defendant BOA Funding, as depositor. With respect to six of the remaining Securitizations, non-party sponsors Option One and NationStar Mortgage LLC sold the mortgage loans to non-party depositors Option One Mortgage Acceptance Corporation and NationStar Funding LLC (formerly known as CHEC Funding LLC), respectively, as reflected in Table 1, above at paragraph 42. Defendant BOA Securities was the lead or co-lead underwriter, as well as the selling underwriter, for all 23 Securitizations. 45. ABF Corp., BOA Mortgage, and BOA Funding were wholly-owned, limited-

purpose financial subsidiaries of BOA National. The sole purpose of ABF Corp., BOA Funding, and BOA Mortgage as depositors was to act as a conduit through which loans acquired by the sponsor could be securitized and sold to investors. 46. As depositors for seventeen of the Securitizations, ABF Corp., BOA Mortgage,

and BOA Funding transferred the relevant mortgage loans to the trusts. As part of each of the Securitizations, the trustee, on behalf of the Certificateholders, executed a Pooling and Servicing Agreement (PSA) with the relevant depositor and the parties responsible for monitoring and servicing the mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued Certificates, including the GSE Certificates, backed by such loans. The GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans. 2. 47. The Trusts Issue Securities Backed by the Loans

Once the mortgage loans were transferred to the trusts in accordance with the

PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cashflows from the underlying mortgages in the Supporting Loan 16

Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages. 48. The Certificates were issued pursuant to one of nine Shelf Registration Statements

filed with the SEC on a Form S-3. The Shelf Registration Statements were amended by one or more Forms S-3/A filed with the SEC (the Amendments). Six of the Shelf Registration Statements and the Amendments were filed by ABF Corp., BOA Mortgage, and BOA Funding. Each Individual Defendant signed one or more of the six Shelf Registration Statements, including any amendments thereto, that were filed by ABF Corp., BOA Mortgage, and BOA Funding. The SEC filing number, registrants, signatories and filing dates for the nine Shelf Registration Statements with Amendments, as well as the Certificates covered by each Shelf Registration Statement, are reflected in Table 2 below. Table 2
SEC File No. Date Registration Statement Filed
9/7/2004

Date(s) Amended Registration Statement Filed


9/29/2004

Registrants

Covered Certificates

Signatories of Registration Statement


Sal Mirran, Aashish Kamat, Juliana Johnson, Robert Caruso Mark I. Ryan, George C. Carp, George E. Ellison, William L. Maxwell, James H. Luther Robert E. Dubrish, Steven L. Nadon, William L. ONeill Daniel B. Goodwin, George C. Carp, George E. Ellison, William L. Maxwell

Signatories of Amendments

333118843

BOA Mortgage

333121559

12/22/2004

Not applicable

BOA Funding

BOAA 2005-11; BOAA 2005-12; BOAA 2006-1; BOAA 2006-2; BOAA 2005-10; STALT 2005-1F

Sal Mirran, Aashish Kamat, Juliana Johnson, Robert Caruso Not applicable

333126920

7/27/2005

Not applicable

Option One Mortgage Acceptance Corporation ABF Corp.

OOMLT 2005-5

Not applicable

333127970

8/30/2005

Not applicable

ABFC 2005-WMC1

Not applicable

17

SEC File No.

Date Registration Statement Filed


12/20/2005

Date(s) Amended Registration Statement Filed


3/15/2006 3/31/2006

Registrants

Covered Certificates

Signatories of Registration Statement


Daniel B. Goodwin, George C. Carp, George E. Ellison, James H. Luther Mark I. Ryan, George C. Carp, George E. Ellison, James H. Luther Anthony H. Barone, Jesse K. Bray, Gerard A. Berrens, Leldon E. Echols Antoine Schetritt, Michael J. Kula, Juliana C. Johnson, Robert Caruso Robert E. Dubrish, Steven L. Nadon, William L. ONeill

Signatories of Amendments

333130524

ABF Corp.

ABFC 2006-OPT1; ABFC 2006-OPT2; ABFC 2006-OPT3; ABFC 2007-WMC1; ABFC 2006-HE1 BAFC 2006-H; BAFC 2007-A; BAFC 2007-C; BAFC 2006-G NSTR 2007-C

Daniel B. Goodwin, George C. Carp, George E. Ellison, James H. Luther Mark I. Ryan, George C. Carp, George E. Ellison, James H. Luther Anthony H. Barone, Jesse K. Bray, Gerard A. Berrens, Leldon E. Echols, Adam J. DeYoung Adam D. Glassner, Michael J. Kula, Juliana C. Johnson, Robert Caruso Robert E. Dubrish, Steven L. Nadon, William L. ONeill

333130536

12/20/2005

3/15/2006 3/21/2006

BOA Funding

333130642

12/22/2005

3/3/2006 4/3/2006 4/19/2006 4/28/2006

Chec Funding, LLC

333132249

3/7/2006

5/12/2006

BOA Mortgage

BOAA 2006-3

333130870

1/5/2006

3/31/2006 3/30/2006 3/17/2006 3/02/2006 2/10/2006

Option One Mortgage Acceptance Corporation

OOMLT 2007-2; OOMLT 2007-6; OOMLT 2007FXD1; OOMLT 2007-HL1

49.

The Prospectus Supplement for each Securitization describes the underwriting

guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debtto-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes; information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property; and information concerning whether the loans were delinquent.

18

50.

The Prospectus Supplements associated with each Securitization were filed with

the SEC as part of the Registration Statements. The Form 8-Ks attaching the PSAs for each Securitization were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below. Table 3
Transaction Date Prospectus Supplement Filed
9/30/2005 12/15/2006 8/10/2006 10/16/2006 11/15/2006 11/7/2007 7/31/2006 10/2/2006 1/31/2007 5/1/2007 10/27/2005 11/29/2005 12/29/2005 1/30/2006 3/1/2006 3/30/2006 6/11/2007 11/8/2005 3/9/2007 5/25/2007 1/30/2007 4/26/2007 1/5/2006

Date Form 8-K Attaching PSA

Filing No. of Related Registration Statement


333-127970 333-130524 333-130524 333-130524 333-130524 333-130524 333-130536 333-130536 333-130536 333-130536 333-118843 333-118843 333-118843 333-118843 333-118843 333-132249 333-130642 333-126920 333-130870 333-130870 333-130870 333-130870 333-121559

ABFC 2005-WMC1 ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 ABFC 2007-WMC1 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2005-10 BOAA 2005-11 BOAA 2005-12 BOAA 2006-1 BOAA 2006-2 BOAA 2006-3 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 OOMLT 2007-6 OOMLT 2007FXD1 OOMLT 2007-HL1 STALT 2005-1F

10/17/2005 12/29/2006 8/25/2006 10/27/2006 11/29/2006 11/20/2007 8/15/2006 10/16/2006 2/15/2007 5/15/2007 11/10/2005 12/14/2005 1/6/2006 2/14/2006 3/14/2006 4/13/2006 6/22/2007 11/23/2005 3/27/2007 6/18/2007 3/15/2007 6/1/2007 1/12/2006

51.

The Certificates were issued pursuant to the PSAs, and Defendant BOA Securities

offered and sold the GSE Certificates to Fannie Mae and Freddie Mac pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements.

19

II.

THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS A. 52. The Role of Each of the Defendants Each of the Defendants, including the Individual Defendants, had a role in the

securitization process and the marketing for most or all of the Certificates, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 53. With respect to each Securitization, the Depositor Defendants, MLPF&S (as

successor-in-interest to BOA Securities), and the Individual Defendants who signed the Registration Statement, as well as the BOA Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statement, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 54. BOA National

BOA National is one of the nations largest banks and a leading sponsor of

mortgage-backed securities. BOA National is also the direct parent corporation of ABF Corp., BOA Mortgage, and BOA Funding. As stated in the Prospectus Supplement for the ABFC 2006-OPT3 Securitization, [BOA National] and its affiliates have been active in the securitization market since inception. The volume of loans originated and aggregated by BOA National made it possible for BOA Corp. to consistently securitize tens of billions of dollars worth of mortgage loans during the time period relevant here. In 2005, BOA Corp. securitized a

20

total of $95.1 billion of mortgages. See Bank of America Corp., 2006 Annual Report, at 119. In 2006, BOA Corp. securitized a total of $65.5 billion of mortgages. Id. In 2007, BOA Corp. securitized a total of $84.5 billion of mortgages. See Bank of America Corp., 2007 Annual Report, at 135. In 2007, BOA was ranked the 14th largest sponsor of non-agency mortgagebacked securities.6 See Financial Crisis Inquiry Commission, Preliminary Staff Report: Securitization and the Mortgage Crisis, April 7, 2010, at 13. 55. Defendant BOA National was the sponsor of sixteen of the 23 Securitizations. In

that capacity, BOA National determined the structure of the Securitizations, initiated the Securitizations, purchased the mortgage loans to be securitized, determined distribution of principal and interest, and provided data to the credit rating agencies to secure investment grade ratings for the Certificates. BOA National also selected the Depositor Defendants ABF Corp., BOA Mortgage, or BOA Funding as the special purpose vehicles that would be used to transfer the mortgage loans from BOA National to the trusts, and selected BOA Securities as the underwriter for the Securitizations. In its role as sponsor, BOA National knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 56. For the sixteen Securitizations that it sponsored, BOA National also conveyed the

mortgage loans to ABF Corp., BOA Mortgage, or BOA Funding as depositor, pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. In these agreements, BOA National made certain representations and warranties to ABF Corp., BOA Mortgage, and BOA Funding regarding the groups of loans collateralizing the Certificates. Agency mortgage-backed securities are guaranteed by a government agency or government-sponsored enterprise such as Fannie Mae or Freddie Mac, while non-agency mortgage-backed securities are issued by banks and financial companies not associated with a government agency or government sponsored enterprise. 21
6

These representations and warranties were assigned by ABF Corp., BOA Mortgage, and BOA Funding to the trustees for the benefit of the Certificateholders. 2. 57. ABF Corp.

Defendant ABF Corp. is a wholly-owned direct subsidiary of BOA National and a

wholly-owned indirect subsidiary of BOA Corp. ABF Corp. is a special purpose entity formed solely for the 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. 58. ABF Corp. was the depositor for six of the 23 Securitizations. In its capacity as

depositor, ABF Corp. purchased the mortgage loans from the sponsor (which was BOA National for all six Securitizations) pursuant to the Assignment and Recognition Agreements or Mortgage Loan Purchase Agreements, as applicable. ABF Corp. then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. ABF Corp., together with the other Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the sole benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 59. BOA Mortgage

Defendant BOA Mortgage is a wholly-owned direct subsidiary of BOA National

and a wholly-owned indirect subsidiary of BOA Corp. BOA Mortgage is a special purpose entity formed solely for the purpose of purchasing mortgage loans, filing registration statements with the SEC, forming issuing trusts, assigning mortgage loans and all of its rights and interests

22

in such mortgage loans to the trustee for the benefit of the certificateholders, and depositing the underlying mortgage loans into the issuing trusts. 60. BOA Mortgage was the depositor for six of the 23 Securitizations. In its capacity

as depositor, BOA Mortgage purchased the mortgage loans from the sponsor (which was BOA National for all six Securitizations) pursuant to the Assignment and Recognition Agreements or Mortgage Loan Purchase Agreements, as applicable. BOA Mortgage then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. BOA Mortgage, together with the other Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 4. 61. BOA Funding

Defendant BOA Funding is a wholly-owned direct subsidiary of BOA National

and a wholly-owned indirect subsidiary of BOA Corp. BOA Funding is a special purpose entity formed solely for the 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 62. BOA Funding was the depositor for five of the 23 Securitizations. In its capacity

as depositor, BOA Funding purchased the mortgage loans from the sponsor (which, for all but one of the five Securitizations, was BOA National) pursuant to the Assignment and Recognition Agreements or Mortgage Loan Purchase Agreements, as applicable. BOA Funding then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. BOA Funding, together with the other Defendants, was also responsible for preparing and filing the 23

Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the sole benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 5. 63. MLPF&S, As Successor-in-Interest to BOA Securities

BOA Securities was an investment bank, and was, at all relevant times, a

registered broker/dealer and one of the leading underwriters of mortgage and other asset-backed securities in the United States. 64. BOA Securities was one of the nations largest underwriters of asset-backed

securities. For the period 2005 through 2007, BOA Securities was the tenth largest underwriter of subprime mortgage-backed securities and had a 4.5 percent market share. During the same period, BOA Securities underwrote over $24 billion of subprime mortgage-backed securities: approximately $10 billion, $3.9 billion and $10.1 billion in 2005, 2006, and 2007, respectively. See Compass Point Research & Trading LLC, Mortgage Finance, August 17, 2010. 65. BOA Securities was the lead underwriter for the Securitizations. In that role, it

was responsible for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors. BOA Securities was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 66. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to

BOA Securities by virtue of its status as the surviving entity in its merger with BOA Securities. 6. 67. BOA Corporation

BOA Corp. employed its wholly-owned subsidiaries, BOA National, BOA

Securities, ABF Corp., BOA Mortgage, and BOA Funding, in the key steps of the securitization 24

process. Unlike typical arms length securitizations, sixteen of the 23 Securitizations here involved various BOA subsidiaries and affiliates at virtually each step in the chain. With respect to all but seven of the Securitizations, the sponsor was BOA National, the depositor was ABF Funding, BOA Mortgage, or BOA Funding, and the lead underwriter was BOA Securities. As to the remaining Securitizations, non-parties served as sponsor and depositor (except in one instance in which BOA Funding acted as depositor), and BOA Securities was the lead and selling underwriter. 68. As the sole corporate parent of BOA Securities, ABF Funding, BOA Mortgage,

BOA Funding, and BOA National, BOA Corp. had the practical ability to direct and control the actions of BOA Securities, ABF Funding, BOA Mortgage, and BOA Funding related to the Securitizations, and in fact exercised such direction and control over the activities of these entities related to the issuance and sale of the Certificates. 69. As detailed above, the Securitizations here involved BOA entities, including the

aforementioned subsidiaries of the BOA Corp., at virtually each step in the process. BOA Corp. profited substantially from this vertically integrated approach to mortgage-backed securitization. 7. 70. The Individual Defendants

Defendant George C. Carp was Treasurer, Chief Accounting Officer, and Chief

Financial Officer of ABF Corp. and BOA Funding. Mr. Carp signed four of the Shelf Registration Statements and any amendment thereto. 71. Defendant Robert Caruso was a Director of BOA Mortgage. Mr. Caruso signed

two of the Shelf Registration Statements and any amendment thereto. 72. Defendant George E. Ellison was a Director of BOA Funding and ABF Corp.

Mr. Ellison signed four of the Shelf Registration Statements and any amendment thereto.

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73.

Defendant Adam D. Glassner was President, Chief Executive Officer, and

Chairman of the Board of BOA Mortgage. Mr. Glassner signed the amendment to one of the Shelf Registration Statements. 74. Defendant Daniel B. Goodwin was President and Chief Executive Officer of ABF

Corp. Mr. Goodwin was also a Managing Director at BOA Securities. Mr. Goodwin signed two of the Shelf Registration Statements and any amendment thereto. 75. Defendant Juliana Johnson was a Director of BOA Mortgage. Ms. Johnson

signed two of the Shelf Registration Statements and any amendment thereto. 76. Defendant Aashish Kamat was a Director of BOA Mortgage. Mr. Kamat signed

one of the Shelf Registration Statements and any amendment thereto. 77. Defendant Michael J. Kula was a Director of BOA Mortgage. Mr. Kula signed

one of the Shelf Registration Statements and any amendment thereto. 78. Defendant James H. Luther was a Director of BOA Funding and ABF Corp.

Mr. Luther signed three of the Shelf Registration Statements and any amendment thereto. 79. Defendant William L. Maxwell was a director of ABF Corp. Mr. Maxwell signed

two of the Shelf Registration Statements that were not subsequently amended. 80. Defendant Mark I. Ryan was President and Chief Executive Officer of BOA

Funding. Mr. Ryan signed two of the Shelf Registration Statements and any amendment thereto. 81. Defendant Antoine Schetritt was President, Chief Executive Officer, and

Chairman of the Board of BOA Mortgage. Mr. Schetritt signed one Shelf Registration Statement.

26

B. 82.

The Defendants Failure To Conduct Proper Due Diligence Defendants failed to conduct adequate and sufficient due diligence to ensure that

the mortgage loans underlying the Securitizations complied with the representations in the Registration Statements. 83. As discussed above at paragraphs 54 and 64, from approximately 2005 through

2007, BOAs involvement in the mortgage-backed securitization industry was substantial. Defendants indeed had enormous financial incentives to complete as many offerings as quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, ABF Corp., BOA Mortgage, and BOA Funding, as the depositors, were paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations, and BOA Securities, as the underwriter, was paid a commission based on the amount it received from the sale of the Certificates to the public. 84. The push to securitize large volumes of mortgage loans contributed to the absence

of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or to otherwise ensure the accuracy of the statements in the Registration Statements pertaining to the Securitizations. 85. For instance, BOA retained third-parties, including Clayton Holdings, Inc.

(Clayton), to analyze the loans it was considering placing in its securitizations, but waived a significant number of loans into the Securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it 27

had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. 86. BOA was negligent in allowing into the Securitizations a substantial number of

mortgage loans that, as reported to BOA by third-party due diligence firms, did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon learning from the third-party due diligence firms that there were high percentages of defective or at least questionable loans in the sample of loans reviewed by the third-party due diligence firms, BOA failed to take any additional steps to verify that the population of loans in the Securitizations did not include a similar percentage of defective and/or questionable loans. 87. Claytons trending reports revealed that in the period from the first quarter of

2006 to the second quarter of 2007, 30 percent of the mortgage loans BOA submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 27 percent of the loans were subsequently waived in by BOA without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested here. See Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-the-financial-crisissacramento#documents.

28

88.

In May 2011, the NYAG opened an investigation into the mortgage securitization

practices of Bank of America. The New York Times reported on May 16, 2011, that the Attorney General had subpoenaed information covering many aspects of BOAs pooling operations in connection with the bundling of home loans into securities. Upon information and belief, that investigation is ongoing. III. THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS A. 89. Compliance With Underwriting Guidelines The Prospectus Supplements for each Securitization describe the mortgage loan

underwriting guidelines pursuant to which the mortgage loans underlying the related Securitizations were to have been originated. These guidelines were intended to assess the creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 90. The statements made in the Prospectus Supplements, which, as discussed, formed

part of the Registration Statement for each Securitization, were material to a reasonable investors decision to purchase and invest in the Certificates because the failure to originate a mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency and default by the borrower, as well as a risk that losses upon liquidation will be higher, thus resulting in a greater economic risk to an investor. 91. The Prospectus Supplements for the Securitizations contained several key

statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. For example, the Prospectus Supplement for the ABFC 2006-OPT3 Securitization, for which Option One was the originator, BOA National was the sponsor, BOA Securities was the underwriter, and ABF Corp. was the depositor, stated that: All of the

29

mortgage loans were originally originated or acquired by Option One Mortgage Corporation in accordance with the underwriting guidelines described under Underwriting Standards in this prospectus supplement and that the Option One Underwriting Guidelines are primarily intended to assess the value of the mortgaged property, to evaluate the adequacy of such property as collateral for the mortgage loan and to assess the applicants ability to repay the mortgage loan. 92. The ABFC 2006-OPT3 Prospectus Supplement further stated that exceptions to

the Option One Underwriting Guidelines (including a debt-to-income ratio exception, a pricing exception, a loan-to-value exception, a credit score exception or an exception from certain requirements of a particular risk category) are made on a case-by-case basis, but only where compensating factors exist. 93. With respect to the information evaluated by the originator, the Prospectus

Supplement stated that: Each mortgage loan applicant completes an application that includes information with respect to the applicants liabilities, income, credit history, employment history and personal information. The Option One Underwriting Guidelines require a credit report and, if available, a credit score on each applicant from a credit-reporting agency. The credit report typically contains information relating to such matters as credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions or judgments. 94. The ABFC 2006-OPT3 Prospectus Supplement further stated that: The Option

One Underwriting Guidelines require that mortgage loans be underwritten in a standardized procedure which complies with applicable federal and state laws and regulations and require

30

Option Ones underwriters to be satisfied that the value of the property being financed, as indicated by an appraisal supports the loan balance. 95. The Prospectus and Prospectus Supplements for each of the Securitizations had

similar representations to those quoted above. The relevant representations in the Prospectus and Prospectus Supplement pertaining to originating entity underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed below in Section IV, in fact, the originators of the mortgage loans in the Supporting Loan Group for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectus and Prospectus Supplements false and misleading. B. 96. Statements Regarding Occupancy Status of Borrower The Prospectus Supplements contained collateral group-level information about

the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplements for each of the Securitizations presented this information in tabular form, usually in a table entitled Occupancy Status of the Mortgage Loans. This table divided all the loans in the collateral group by occupancy status, e.g., into the following categories: (i) Primary, or Owner Occupied; (ii) Second Home, or Secondary; and (iii) Investment or Non-Owner. For each category, the table stated the number of loans in that category.

31

97.

In the case of six of the 23 Securitizations,7 the Prospectus Supplement stated that

all or nearly all of the mortgage loans in the Supporting Loan Group were Investment or NonOwner properties. The Prospectus Supplements for the remaining seventeen Securitizations, however, reported that an overwhelming majority of the mortgage loans in the Supporting Loan Groups were owner-occupied, while a small percentage were reported to be non-owner occupied (i.e. a second home or investor home). The occupancy statistics for the Supporting Loan Groups for the seventeen Securitizations were reported in the Prospectus Supplements as follows:8 Table 4
Primary or Owner Occupied (%) 90.50 95.55 91.41 88.19 92.97 91.41 91.44 91.41 90.87 79.90 83.95 58.38 82.89 88.47 97.19 86.47 91.56 84.95 82.50 95.07 92.17 Second Home/Secondary (%) 5.08 0.60 0.90 1.26 0.95 0.42 2.02 0.94 3.96 9.00 4.69 13.35 8.72 11.53 0.87 1.70 0.74 1.79 1.69 0.70 0.91

Transaction ABFC 2005WMC1 ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 ABFC 2007WMC1 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2006-3 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 OOMLT 2007-6 OOMLT 2007FXD1
7

Supporting Loan Group Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 1 Group 5 Group 1 Group 6 Group 5 Group 1 Group I Group I Group II Group I Group I Group II

Investor (%) 4.42 3.85 7.70 10.55 6.08 8.17 6.54 7.66 5.17 11.09 11.36 28.27 8.39 0.00 1.94 11.82 7.70 13.26 15.81 4.22 6.92

These six Securitizations are BOAA 2005-10, BOAA 2005-11, BOAA 2005-12, BOAA 2006-1, BOAA 2006-2, and STALT 2005-1F. Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, investor, and second home. These numbers have been converted to percentages. 32
8

Transaction OOMLT 2007-HL1

Supporting Loan Group Group I

Primary or Owner Occupied (%) 92.84

Second Home/Secondary (%) 0.92

Investor (%) 6.25

98.

The statements about occupancy status were material to a reasonable investors

decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to default than borrowers who purchase homes as second homes or investments and live elsewhere, and are more likely to care for their primary residence, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 99. Other things being equal, the higher the percentage of loans not secured by

owner-occupied residences, the greater the risk of loss to the certificateholders. Even small differences in the percentages of primary/owner-occupied, second home/secondary, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed below at paragraphs 111 through 115, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner-occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 100. Statements Regarding Loan-to-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the

balance of the mortgage loan to the value of the mortgaged property when the loan is made.

33

101.

The denominator in the LTV ratio is the value of the mortgaged property, and is

generally the lower of the purchase price or the appraised value of the property. In a refinancing or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan. 102. The Prospectus Supplements for each Securitization also contained group-level

information about the LTV ratio for the underlying group of loans as a whole. The percentage of loans with an LTV ratio at or less than 80 percent and the percentage of loans with an LTV ratio greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups are reflected in Table 5 below.9 Table 5
Transaction Supporting Loan Group Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80% 60.68 56.39 49.60 52.53 70.79 67.04 0.00 0.00 52.49 84.93 Percentage of loans, by aggregate principal balance, with LTV greater than 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

ABFC 2005-WMC1 ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 ABFC 2007-WMC1 BAFC 2006-G
9

Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 1

As used in this Complaint, LTV refers to the original loan-to-value ratio for first lien mortgages and for properties with second liens that are subordinate to the lien that was included in the securitization (i.e., only the securitized lien is included in the numerator of the LTV calculation). However, for second lien mortgages, where the securitized lien is junior to another loan, the more senior lien has been added to the securitized one to determine the numerator in the LTV calculation (this latter calculation is sometimes referred to as the combined-loan-to-value ratio, or CLTV). 34

Transaction

Supporting Loan Group

BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2005-10 BOAA 2005-11 BOAA 2005-12 BOAA 2006-1 BOAA 2006-2 BOAA 2006-3 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 OOMLT 2007-6 OOMLT 2007FXD1 OOMLT 2007-HL1 STALT 2005-1F

Group 5 Group 1 Group 6 Group 2 Group 2 Group 2 Group 1 Group 3 Group 1 Group 3 Group 5 Group 1 Group I Group I Group II Group I Group I Group II Group I Group 4

Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80% 93.53 84.18 97.31 87.60 90.29 91.35 95.76 89.40 94.87 90.92 84.94 25.94 39.86 64.26 63.15 51.49 65.81 62.64 0.00 94.73

Percentage of loans, by aggregate principal balance, with LTV greater than 100% 0.08 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.14 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

103.

As Table 5 makes clear, the Prospectus Supplement for nearly all of the

Securitizations reported that many or most of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80 percent or less,10 and the Prospectus Supplement for nearly all of the Securitizations reported that zero mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent. 104. The LTV ratio is among the most important measures of the risk of a mortgage

loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the

The lone exceptions are the ABFC 2006-OPT3 and OOMLT 2007-HL1 Securitizations, for which the majority of mortgages were reported as having an LTV ratio greater than 80 percent and below 100 percent. 35

10

property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV ratio, the greater the equity cushion, so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 105. Thus, LTV ratio is a material consideration to a reasonable investor in deciding

whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed below at paragraphs 116 through 121, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates.11 D. 106. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of mortgage-backed securitizations by

the credit rating agencies, including Moodys Investors Service, Standard & Poors, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for

The lone exceptions are the ABFC 2006-OPT3 and OOMLT 2007-HL1 Securitizations, for which the Registration Statements solely understated the percentage of loans with an LTV ratio above 100 percent by more than 40 percent. 36

11

recovery. At the time the GSEs purchased the GSE Certificates, investments with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA or its equivalent through BBB- or its equivalent were generally referred to as investment grade. 107. Rating agencies determine the credit rating for each tranche of a mortgage-backed

securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cashflows based on the quality of the underlying mortgages by using sponsor-provided loan level data. Credit enhancements, such as subordination, represent the amount of cushion or protection from loss incorporated into a given securitization.12 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for an AAA or its equivalent rating. 108. Credit ratings have been an important tool to gauge risk when making investment

decisions. For almost a hundred years, investors like pension funds, municipalities, insurance

Subordination refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are subordinate to the senior certificates in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate certificates thus provide a degree of protection to the senior certificates from losses on the underlying loans. 37

12

companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Maes and Freddie Macs respective internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 109. Each tranche of the Securitizations received a credit rating upon issuance, which

purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was investment grade, almost always AAA or its equivalent. The accuracy of these ratings was material to a reasonable investors decision to purchase the GSE Certificates. As set forth in Table 8, below at paragraph 142, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates as AAA (or its equivalent) when, in fact, they were not. IV. THE FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 110. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the

statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically-significant basis, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage

38

loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading. 1. 111. Owner Occupancy Data Was Materially False

The data review has revealed that the owner occupancy statistics reported in the

Prospectus Supplements were materially false and inflated. In fact, for the seventeen Securitizations whose Prospectus Supplement represented the Supporting Loan Groups to be overwhelmingly owner-occupied, far fewer underlying properties were occupied by their owners than disclosed in the Prospectus Supplement and more correspondingly were held as second homes or investment properties. 112. To determine whether a given borrower actually occupied the property as

claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much more likely that a borrower will not repay the loan. 113. A significant number of the loans in the Supporting Loan Groups backing the

seventeen Securitizations for which the majority of mortgage loans were purportedly for owneroccupied properties failed two or more of these tests, indicating that the owner occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. For example, for the ABFC 2006-HE1 Securitization, for which BOA National was the sponsor, BOA Securities was the underwriter, and ABF Corp. was the depositor, the Prospectus Supplement stated that 4.45 percent of the underlying properties by loan count in the Supporting 39

Loan Group were not owner-occupied. But the data review revealed that, for 11.32 percent of the properties represented as owner-occupied, the owners lived elsewhere, indicating that the true percentage of non-owner occupied properties was 15.27 percent, more than triple the percentage reported in the Prospectus Supplement.13 114. The data review revealed that for each of the seventeen Securitizations, the

Prospectus Supplement misrepresented the percentage of non-owner occupied properties. The true percentage of non-owner occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization, is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for the majority of the Securitizations understated the percentage of non-owner occupied properties by at least 6.53 percent, and for several Securitizations by 10 percent or more. 115. In the case of six of the 23 Securitizations,14 the Prospectus Supplement stated

that all or nearly all of the mortgage loans in the Supporting Loan Group were Investment or Non-Owner properties. The Prospectus Supplements for the remaining seventeen Securitizations, however, reported that an overwhelming majority of the mortgage loans in the Supporting Loan Groups were owner-occupied, while a small percentage were reported to be non-owner occupied (i.e. a second home or investor home). The occupancy statistics for the Supporting Loan Groups for the seventeen Securitizations were reported in the Prospectus Supplements as follows.

This conclusion is arrived at by summing (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 4.45 percent), and (b) the product of (i) the stated owner-occupied percentage (here, 96.13 percent) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 11.32 percent). These six Securitizations are BOAA 2005-10, BOAA 2005-11, BOAA 2005-12, BOAA 2006-1, BOAA 2006-2, and STALT 2005-1F. 40
14

13

Table 6
Transaction Supporting Loan Group Reported Percentage of Non-Owner Occupied Properties Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-Owner Occupancy15 9.89 11.32 10.06 10.77 8.20 11.56 8.24 11.57 11.80 16.19 11.01 22.39 16.97 13.85 11.27 10.52 10.36 10.78 8.76 9.40 11.05 10.08 Actual Percentage of Non-Owner Occupied Properties Prospectus Percentage Understatement of Non-Owner Occupied Properties

ABFC 2005-WMC1 ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 ABFC 2007-WMC1 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2006-3 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 OOMLT 2007-6 OOMLT 2007-FXD1 OOMLT 2007-HL1

Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 1 Group 5 Group 1 Group 6 Group 5 Group 1 Group I Group II Group I Group I Group II Group I Group I

9.50 4.45 8.59 11.81 7.03 8.59 8.56 8.59 9.13 20.10 16.05 41.62 17.11 11.53 2.81 13.53 15.05 8.44 17.50 7.83 4.93 7.16

18.45 15.27 17.79 21.31 14.65 19.16 16.10 19.17 19.85 33.03 25.30 54.69 31.18 23.78 13.76 22.62 23.85 18.32 24.72 16.49 15.43 16.52

8.95 10.82 9.19 9.50 7.63 10.57 7.54 10.57 10.72 12.93 9.25 13.07 14.07 12.26 10.95 9.10 8.80 9.87 7.22 8.67 10.50 9.36

2. 116.

Loan-to-Value Data Was Materially False

The data review has further revealed that the LTV ratios disclosed in the

Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties

As described more fully in paragraph 112, failing two or more tests of owneroccupancy is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property. 41

15

during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisersprimarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 117. Applying the AVM to the available data for the properties securing the sampled

loans shows that the appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of the LTV ratio. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan as well as the risk of greater losses in the event of a default. 118. For example, for the BAFC 2006-G Securitization, which was sponsored by BOA

National and underwritten by BOA Securities, and for which BOA Funding was the depositor, the Prospectus Supplement stated that zero LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 11.13 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 84.93 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 48.08 percent of the loans had LTV ratios at or below 80 percent. 119. The data review revealed that for all but two of the 23 Securitizations (ABFC

2006-OPT3 and OOMLT 2007-HL1),16 the Prospectus Supplement misrepresented the percentage of loans with an LTV ratio that were above 100 percent, as well the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of Even in the case of those two exceptions, the percentage of mortgage loans with an LTV ratio at or under 80 percent was understated and thus misrepresented. 42
16

mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance. Table 7
PROSPECTUS Transaction Supporting Loan Group Percentage of Loans Reported to Have LTV Ratio At Or Under 80% 60.68 56.39 49.60 52.53 70.79 67.04 0.00 0.00 52.49 84.93 93.53 84.18 97.31 87.60 90.29 91.35 95.76 89.40 94.87 90.92 84.94 25.94 39.86 64.26 63.15 51.49 65.81 62.64 0 94.73 DATA REVIEW True Percentage of Loans With LTV Ratio At Or Under 80% 38.88 38.67 35.42 37.82 48.98 49.05 3.38 2.17 29.48 48.08 51.32 58.30 62.94 74.27 75.33 78.31 81.22 68.65 84.87 75.31 65.77 22.32 30.73 42.77 40.37 31.85 49.53 48.04 2.64 65.06 PROSPECTUS Percentage of Loans Reported to Have LTV Ratio Over 100% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.08 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.14 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 DATA REVIEW True Percentage of Loans With LTV Ratio Over 100% 15.56 18.78 20.48 17.62 14.56 12.81 40.68 43.89 23.38 11.13 8.23 8.85 6.17 4.21 4.47 3.65 2.54 5.69 2.59 6.34 6.46 27.02 17.38 16.94 16.03 22.48 14.45 12.98 46.52 8.62

ABFC 2005-WMC1 ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 ABFC 2007-WMC1 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2005-10 BOAA 2005-11 BOAA 2005-12 BOAA 2006-1 BOAA 2006-2 BOAA 2006-3 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 OOMLT 2007-6 OOMLT 2007FXD1 OOMLT 2007-HL1 STALT 2005-1F

Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 1 Group 5 Group 1 Group 6 Group 2 Group 2 Group 2 Group 1 Group 3 Group 1 Group 3 Group 5 Group 1 Group I Group I Group II Group I Group I Group II Group I Group 4

43

120.

As Table 7 demonstrates, the Prospectus Supplements for all of the

Securitizations reported that virtually none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent.17 In contrast, the data review revealed that at least 2.54 percent of the mortgage loans for each Securitization had an LTV ratio over 100 percent, and for most Securitizations this figure was much larger. Indeed, for thirteen of the Securitizations, the data review revealed that more than ten percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. For six Securitizations, the data review revealed that more than 20 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. 121. These inaccuracies with respect to reported LTV ratios also indicate that the

representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission (the FCIC), which identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See FCIC, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (January 2011). In the BAFC 2006-H and BOAA 2006-3 Securitizations, the percentage of mortgage loans with a reported LTV ratio over 100 percent was .08 and .14 percent, respectively. 44
17

B. 122.

The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statements contained material misstatements and omissions

regarding compliance with underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage lending businesses. This is confirmed by the systematically misreported owner occupancy and LTV statistics, discussed above, and by (1) investigations into originators underwriting practices by government officials and private litigants, which have revealed widespread abandonment of originators reported underwriting guidelines during the relevant period; (2) the collapse of the Certificates credit ratings; and (3) the surge in delinquency and default in the mortgages in the Securitizations. 1. Government Investigations and Private Litigants Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines

123.

The abandonment of underwriting guidelines is further demonstrated by

government reports and investigations that have described rampant underwriting failures throughout the period of the Securitizations, and, more specifically, have described underwriting failures by the very originator whose loans were included by the Defendants in the majority of the Securitizations. 124. As described above at paragraph 32, Option One Originated 100 percent of the

mortgage loans underlying eight Securitizations, and BOA National originated 100 percent of the mortgage loans underlying six Securitizations. Each additionally originated smaller portions of the loans underlying one or more additional Securitizations. These fourteen Securitizations

45

comprise approximately 59 percent of Fannie Maes and Freddie Macs $6 billion worth of purchases of the 23 Securitizations. 125. In November 2008, the Office of the Comptroller of the Currency (the OCC),

an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 20052007 originations. Option One, which originated many of the loans for the Securitizations at issue here, was on that list. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. 126. Option One has been identified through multiple reports and investigations for its

faulty underwriting. On June 3, 2008, for instance, the Attorney General for the Commonwealth of Massachusetts filed an action against Option One (the Option One Complaint), and its past and present parent companies, for their unfair and deceptive origination and servicing of mortgage loans. See Complaint, Commonwealth v. H&R Block, Inc., CV NO. 08-2474-BLS (Mass. Super. Ct. June. 3, 2008). According to the Massachusetts Attorney General, since 2004, Option One had increasingly disregarded underwriting standards . . . and originated thousands of loans that [Option One] knew or should have known the borrowers would be unable to pay, all in an effort to increase loan origination volume so as to profit from the practice of packaging and selling the vast majority of [Option Ones] residential subprime loans to the secondary market. See Option One Complaint. 127. The Massachusetts Attorney General alleged that Option Ones agents and

brokers frequently overstated an applicants income and/or ability to pay, and inflated the appraised value of the applicants home, and that Option One avoided implementing

46

reasonable measures that would have prevented or limited these fraudulent practices. Option Ones origination policies employed from 2004 through 2007 have resulted in an explosion of foreclosures. Id. at 1. 128. On November 24, 2008, the Superior Court of Massachusetts granted a

preliminary injunction that prevented Option One from foreclosing on thousands of its loans issued to Massachusetts residents. Commonwealth v. H&R Block, Inc., No. 08-2474-BLS1, 2008 WL 5970550 (Mass. Super. Ct. Nov. 24, 2008). On October 29, 2009, the Appeals Court of Massachusetts affirmed the preliminary injunction. See Commonwealth v. Option One Mortgage Co., No. 09-P-134, 2009 WL 3460373 (Mass. App. Ct. Oct. 29, 2009). 129. On August 9, 2011, the Massachusetts Attorney General announced that H&R

Block, Inc., Option Ones parent company, had agreed to settle the suit for approximately $125 million. See Massachusetts Attorney General Press Release, H&R Block Mortgage Company Will Provide $125 Million in Loan Modifications and Restitutions, Aug. 9, 2011. Media reports noted that the suit was being settled amidst ongoing discussions among multiple states attorneys general, federal authorities, and five major mortgage servicers, aimed at resolving investigations of the lenders foreclosure and mortgage-servicing practices. The Massachusetts Attorney General released a statement saying that no settlement should include a release for conduct relating to the lenders packaging of mortgages into securitizations. See, e.g., Bloomberg.com, H&R Block, Massachusetts Reach $125 Million Accord in State Mortgage Suit, Aug. 9, 2011. 130. BOA also departed from its own underwriting standards as a consequence of

striving to increase the volume of subprime mortgage loans it originated between 2004 and 2007. In 2004, Bank of America announced its commitment to invest $750 billion over 10 years in

47

low- and moderate-income (LMI) communities through consumer loans and other programs. FCIC Report at 97; see also BOA Press Release, Bank of America Community Development Lending Exceeds $85 Billion, May 22, 2006. Pursuant to this initiative, in 2005 alone, BOA provided more than $33.2 billion in mortgage loans to LMI borrowers and made more than $40 million in loans and investments every business hour. Id. As disclosed to the FCIC in June 2010, almost 17 percent of the LMI loans originated by Bank of America between 2004 and 2007 were delinquent at some point for 90 days or more. See 6/16/10 BOA letter to FCIC, Schedule 2.5. Bank of America retained only about 50 percent of those LMI loans on its balance sheet and either sold or securitized the rest. Id. 131. The FCIC reports that, in 2005, examiners from the Federal Reserve and other

agencies conducted a confidential peer group study of mortgage practices at six companies, including BOA. According to Sabeth Siddique, then head of credit risk at the Federal Reserve Boards Division of Banking Supervision and Regulation, the study showed a very rapid increase in the volume of these irresponsible loans, very risky loans. The study also showed that [a] large percentage of their loans issued were subprime and Alt-A mortgages, and the underwriting standards for these products had deteriorated. FCIC Report at 172. 132. BOA was one of the most aggressive competitors in the mortgage origination

market. Even the top executives of Countrywide Financial Corp., the notorious mortgage lender singled out by the FCIC for having originated high-risk loans destined to bring financial and reputational catastrophe, FCIC Report at xxii, complained to each other at the time that BOAs appetite for risky products was greater than that of Countywide. In a June 13, 2005 e-mail Countrywide CEO Angelo Mozilo wrote to President and COO David Sambol: This is the third deal in the last 10 days that BoA has offered that is impossible to beat. In fact the other two

48

were substantially worse than this one. It appears to me that BofA is making an aggressive move into mortgages once again. (Emphasis added). 133. BOA also participated in warehouse lending extending a line of credit to a

third-party loan originator to fund mortgage loans to ensure that it had access to a steady stream of mortgage loans to securitize and sell to investors. In 2001, BOA sold EquiCredit, the division of BOA that, at the time, was primarily responsible for making subprime loans. In order to guarantee that it could obtain sufficient mortgages to pool into its residential mortgage-backed securities securitizations, BOA began to directly fund originating banks, including Countrywide and New Century Mortgage Corporation. According to Inside Mortgage Funding, BOA was the leading participant in the warehouse lending channel, with nearly 26 percent market share by 2009. See BOA press release, Bank of America Exits First Mortgage Wholesale Channel, October 5, 2010. 134. In addition, BOA sought to expand its share of the mortgage securities market by

aggressively pursuing subprime mortgage originators, including Option One, offering to pay more for their mortgages than competing Wall Street banks and offering to perform less due diligence than its competitors. 135. Plaintiffs with access to files compiled by BOA in originating loans have

confirmed that Bank of America routinely originated loans that failed to comply with its guidelines. In its recently filed action alleging that BOA National and BOA Securities, among others, engaged in common law fraud and violated the Securities Act of 1933, the insurer American International Group, Inc. (AIG), has described that after managing to obtain the loan files relating to a 2007 securitization of mortgage-backed securities (OOMLT 2007-FXD2), AIG arranged for a third-party consultant to review a sample of the files to assess whether the loans

49

met stated underwriting guidelines. See Complaint, Am. Intl Group, Inc. v. Bank of Am. Corp., et al., CV No. 652199/2011 (NY Sup. August 8, 2011) at 128-29. 136. The results of that review confirmed what the publicly available data already

showed: that BOAs mortgage pools contain loans rife with violations of BOAs representations and its underwriting guidelines. AIGs review of 100 loan files from OOMLT 2007-FXD2 revealed violations of underwriting guidelines in 82 percent of the loans, including violations of guidelines relating to income, employment, and owner-occupancy. Id. 137. The originators of the mortgage loans underlying the Securitizations went beyond

the systematic disregard of their own underwriting guidelines. Indeed, as the FCIC has confirmed, mortgage loan originators throughout the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, discussed above, which in turn made the loans appear to the investors less risky than they were. 138. As described by Patricia Lindsay, a former wholesale lender who testified before

the FCIC in April 2010, appraisers fear[ed] for their livelihoods, and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See Written Testimony of Patricia Lindsay to the FCIC, April 7, 2010, at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that [i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again . [T]oo often state licensed and certified appraisers are forced into making a

50

Hobsons Choice. See Testimony of Jim Amorin to the FCIC, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRANAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgage-backed securitizations. 2. The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines

139.

The total collapse in the credit ratings of the GSE Certificates, typically from

AAA or its equivalent to non-investment speculative grade, is further evidence of the originators systematic disregard of underwriting guidelines, amplifying that the GSE Certificates were impaired from the start. 140. The GSE Certificates that Fannie Mae and Freddie Mac purchased were originally

assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements 141. BOA provided or caused to be provided loan-level information to the rating

agencies that they relied upon in order to calculate the Certificates assigned ratings, including the borrowers LTV ratio, debt-to-income ratio, owner occupancy status, and other loan-level information described in aggregation reports in the Prospectus Supplements. Because the information that BOA provided or caused to be provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its 51

equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and carried inadequate credit enhancement. 142. Since the issuance of the Certificates, the ratings agencies have dramatically

downgraded their ratings to reflect the revelations regarding the true underwriting practices used to originate the mortgage loans, and the true value and credit quality of the mortgage loans. Table 8 details the extent of the downgrades.18 Table 8
Transaction ABFC 2005-WMC1 ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 ABFC 2007-WMC1 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2005-10 BOAA 2005-11 BOAA 2005-12 BOAA 2006-1 BOAA 2006-2 BOAA 2006-3 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 Tranche A1 A1 A2 A1 A2 A1 A2 A1 A1A 1A1 5A1 1A1 6A1 2CB1 2CB1 2CB1 1CB1 3CB1 1CB1 3CB1 5CB1 1AV1 A1 IIA1 Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/--/AAA Aaa/--/AAA --/AAA/AAA Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/--/AAA Aaa/--/AAA Aaa/--/AAA Aaa/--/AAA Aaa/--/AAA Aaa/--/AAA Aaa/--/AAA Aaa/--/AAA Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/-Rating at July 31, 2011 (Moodys/S&P/Fitch) Aaa/AAA/AAA Caa3/CCC/C Caa1/A/CCC Caa1/A/CCC Caa2/BB-/CC Caa3/B+/CC Caa2/-/C Caa2/--/C --/CCC/C Caa2/BB/-Caa3/CCC/-Caa3/CCC/C Caa1/BB/CCC Caa2/--/C Caa2/--/C Caa2/--/C Caa1/--/CC Caa2/--/C Caa1/--/CC Caa3/--/C Caa3/--/C Caa3/CCC/-Aa3/AAA/BBB Caa3/CCC/--

Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch. The hyphens between forward slashes indicate that the relevant agency did not provide a rating at issuance. 52

18

Transaction

Tranche IA1 IA1 IIA1 IA1 IA1 4A1

OOMLT 2007-6 OOMLT 2007FXD1 OOMLT 2007-HL1 STALT 2005-1F

Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/-Aaa/AAA/-Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/-Aaa/AAA/--

Rating at July 31, 2011 (Moodys/S&P/Fitch) Caa3/CCC/-Caa3/CCC/-Ca/CC/WD Ca/CC/WD Ca/CCC/-Ca/D/--

3.

The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines

143.

Even though the Certificates purchased by Fannie Mae and Freddie Mac were

supposed to represent long-term, stable investments, a significant percentage of the mortgage loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with applicable underwriting guidelines as represented in the Registration Statements. 144. Loan groups that were properly underwritten and contained loans with the

characteristics represented in the Registration Statements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011. Table 9
Transaction Tranche Percentage of Delinquent/Defaulted/Foreclosed Loans 32.7 50.9 61.5 61.6 48.6 53.6

ABFC 2005-WMC1 ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2

A1 A1 A2 A1 A2 A1

53

ABFC 2006-OPT3 ABFC 2007-WMC1 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2005-10 BOAA 2005-11 BOAA 2005-12 BOAA 2006-1 BOAA 2006-2 BOAA 2006-3 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 OOMLT 2007-6 OOMLT 2007-FXD1 OOMLT 2007-HL1 STALT 2005-1F

A2 A1 A1A 1A1 5A1 1A1 6A1 2CB1 2CB1 2CB1 1CB1 3CB1 1CB1 3CB1 5CB1 1AV1 A1 IIA1 IA1 IA1 IIA1 IA1 IA1 4A1

43.8 44.7 50.8 22.2 34.1 45.1 26.2 17.2 19.7 13.0 10.7 21.9 7.6 18.1 28.9 31.4 41.3 42.1 42.7 38.5 32.8 34.2 48.0 29.3

145.

The confirmed misstatements concerning owner occupancy and LTV ratios, the

confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations, and the extraordinary drop in credit rating and rise in delinquencies across those Securitizations, all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. V. FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 146. In total, between September 30, 2005 and November 5, 2007, Fannie Mae and

Freddie Mac purchased over $6 billion in residential mortgage-backed securities issued in

54

connection with the Securitizations. Table 10 reflects each of Freddie Macs purchases of the Certificates.19 Table 10
Settlement Date of Purchase by Freddie Mac
9/30/2005 8/10/2006 10/12/2006 11/14/2006 11/5/2007 6/7/2007 11/10/2005 3/12/2007 5/30/2007 1/30/2007 4/26/2007

Transaction

Tranche

CUSIP

Initial Unpaid Principal Balance


235,900,000 166,946,000 232,465,000 114,343,000 631,248,000 224,590,000 227,921,000 190,288,000 435,470,000 272,242,000 304,935,000

Purchase Price (% of Par)


100 100 100 100 100 100 100 100 100 99.99 100

Seller to Freddie Mac

ABFC 2005-WMC1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 ABFC 2007-WMC1 NSTR 2007-C OOMLT 2005-5 OOMLT 2007-2 OOMLT 2007-6 OOMLT 2007-FXD1 OOMLT 2007-HL1

A1 A2 A2 A2 A1A 1AV1 A1 IIA1 IA1 IIA1 IA1

04542BNX6 00075QAR3 00075XAB3 00075VAB7 04545EAA1 63860KAA0 68389FKK9 68401TAB4 68403KAQ8 68402VAB8 68402SAA7

BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities

147.

Table 11 reflects each of Fannie Maes purchases of the Certificates:

Table 11
Settlement Date of Purchase by Fannie Mae
12/14/2006 8/10/2006 10/12/2006 11/14/2006 7/31/2006 9/29/2006 1/31/2007 4/30/2007 10/31/2005 11/30/2005 12/30/2005 2/28/2006 2/28/2006 3/31/2006 3/31/2006

Transaction

Tranche

CUSIP

Initial Unpaid Principal Balance


304,800,000 167,027,000 232,459,000 114,273,000 396,306,000 431,225,000 94,441,000 68,349,000 92,219,000 86,674,000 128,037,000 71,491,241 93,494,428 50,937,925 75,289,333

Purchase Price (% of Par)


100 100 100 100 100 100 100 99.99 101.11 99.78 99.91 100.67 102.16 100.16 101.70

Seller to Fannie Mae

ABFC 2006-HE1 ABFC 2006-OPT1 ABFC 2006-OPT2 ABFC 2006-OPT3 BAFC 2006-G BAFC 2006-H BAFC 2007-A BAFC 2007-C BOAA 2005-10 BOAA 2005-11 BOAA 2005-12 BOAA 2006-1 BOAA 2006-2

A1 A1 A1 A1 1A1 5A1 1A1 6A1 2CB1 2CB1 2CB1 1CB1 3CB1 1CB1 3CB1

00075WAA7 00075QAQ5 00075XAA5 00075VAA9 05950MAA8 05950PAS2 05952DAA6 059522AA0 05948KR84 05948KV55 05948KY52 05948K2G3 05948K2K4 05948K2V0 05948K3A5

BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities BOA Securities

Purchases of securities in Tables 10 and 11 are stated in terms of unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par. 55

19

Transaction

Tranche

CUSIP

Settlement Date of Purchase by Fannie Mae


8/24/2007 3/12/2007 1/30/2007 12/30/2005

Initial Unpaid Principal Balance


37,470,787 190,306,000 273,043,000 87,447,000

Purchase Price (% of Par)


99.03 100 99.99 101.75

Seller to Fannie Mae

BOAA 2006-3 OOMLT 2007-2 OOMLT 2007-FXD1 STALT 2005-1F

5CB1 IA1 IA1 4A1

05948K4Q9 68401TAA6 68402VAA0 86789MAV9

BOA Securities BOA Securities BOA Securities BOA Securities

148.

The statements and assurances in the Registration Statements regarding the credit

quality and characteristics of the mortgage loans underlying the GSE Certificates, and the origination and underwriting practices pursuant to which the mortgage loans were originated, which were summarized in such documents, were material to a reasonable investors decision to purchase the GSE Certificates. 149. The false statements of material facts and omissions of material facts in the

Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer hundreds of millions of dollars in damages, including without limitation depreciation in the value of the Certificates. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements. 150. Fannie Maes and Freddie Macs losses have been much greater than they would

have been if the mortgage loans had the credit quality represented in the Registration Statements. 151. BOAs misstatements and omissions in the Registration Statements regarding the

true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchases of the GSE Certificates. Based upon sales of the Certificates or

56

similar certificates in the secondary market, BOA proximately caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants MLPF&S, ABF Corp., BOA Mortgage, BOA Funding, George C. Carp, Robert Caruso, George E. Ellison, Adam D. Glassner, Daniel B. Goodwin, Juliana Johnson, Aashish Kamat, Michael J. Kula, Mark I. Ryan, James H. Luther, and Antoine Schetritt) 152. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 153. This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of

1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against Defendant MLPF&S (as successor-in-interest to BOA Securities) with respect to each of the Registration Statements. This claim is also brought against (i) Defendants ABF Corp., BOA Mortgage, and BOA Funding, and (ii) Defendants George C. Carp, Robert Caruso, George E. Ellison, Adam D. Glassner, Daniel B. Goodwin, Juliana Johnson, Aashish Kamat, Michael J. Kula, Mark I. Ryan, James H. Luther, and Antoine Schetritt (collectively, the Section 11 Individual Defendants), each with respect to the Registration Statements filed by ABF Corp., BOA Mortgage, or BOA Funding that registered securities that were bona fide offered to the public on or after September 6, 2005. 154. This claim is predicated upon the strict liability of Defendant MLPF&S (as

successor-in-interest to BOA Securities) for making false and materially misleading statements in each of the Registration Statements for the Securitizations, and for omitting facts necessary to make the facts stated therein not misleading. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. 57

Depositor Defendants ABF Corp., BOA Mortgage, BOA Funding, and the Section 11 Individual Defendants are strictly liable for making false and materially misleading statements in the Registration Statements filed by the Depositor Defendants that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to ten of the 23 securitizations (as specified in Table 2, above at paragraph 48), and for omitting facts necessary to make the facts stated therein not misleading. 155. BOA Securities served as underwriter of each of the Securitizations, and as such,

is liable for the misstatements and omissions in the Registration Statements under Section 11 of the Securities Act. As discussed above at paragraph 16, MLPF&S is liable as successor-ininterest to BOA Securities, which was merged into it in November 2010. 156. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding filed six of

the Registration Statements, under which seventeen of the 23 securitizations were carried out. As depositors, ABF Corp., BOA Mortgage, and BOA Funding are issuers of the GSE Certificates issued pursuant to the Registration Statements they filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, they are liable under Section 11 of the Securities Act for the misstatements and omissions in those three Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 157. At the time Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding

filed six Registration Statements applicable to seventeen of the Securitizations, the Section 11 Individual Defendants were officers and/or directors of ABF Corp., BOA Mortgage, and/or BOA Funding. In addition, the Section 11 Individual Defendants signed those Registration Statements and either signed or authorized another to sign on their behalf the amendments to those

58

Registration Statements. As such, the Section 11 Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in those three Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 158. At the time that they became effective, each of the Registration Statements

contained material misstatements of fact and omitted information necessary to make the facts stated therein not misleading, as set forth above. The facts misstated or omitted were material to a reasonable investor reviewing the Registration Statements. 159. The untrue statements of material facts and omissions of material fact in the

Registration Statements are set forth above in Section IV and pertain to compliance with underwriting guidelines, occupancy status and loan-to-value ratios. 160. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE

Certificates pursuant to the false and misleading Registration Statements. Fannie Mae and Freddie Mac made these purchases in the primary market. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and misleading statements and omissions alleged herein, and if the GSEs would have known those facts, they would not have purchased the GSE Certificates. 161. BOA Securities owed to Fannie Mae, Freddie Mac, and other investors a duty to

make a reasonable and diligent investigation of the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Section 11 Individual Defendants owed the same duty with respect to the three Registration Statements that they signed that registered

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securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to ten of the Securitizations. 162. BOA Securities and the Section 11 Individual Defendants did not exercise such

due diligence and failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding, though subject to strict liability without regard to whether they performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. 163. Fannie Mae and Freddie Mac sustained substantial damages as a result of the

misstatements and omissions in the Registration Statements. 164. The time period from July 13, 2009 through August 30, 2011 is tolled for statute

of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). 165. By reason of the conduct herein alleged, BOA Securities, ABF Corp., BOA

Mortgage, BOA Funding, and the Section 11 Individual Defendants are jointly and severally liable for their wrongdoing.

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SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against MLPF&S, ABF Corp., BOA Mortgage, and BOA Funding) 166. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 167. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities

Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements in the Securitizations listed in paragraph 2. 168. This claim is predicated upon BOA Securities negligence for making false and

materially misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for the Securitizations listed in paragraph 2. As discussed above at paragraph 16, MLPF&S is liable as successor-ininterest to BOA Securities, which was merged into it in November 2010. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding acted negligently in making false and materially misleading statements in the Prospectuses for the Securitizations carried out under the six Registration Statements they filed, which are applicable to seventeen of the Securitizations. 169. BOA Securities is prominently identified in the Prospectuses, the primary

documents that it used to sell the GSE Certificates. BOA Securities offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac their GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 170. BOA Securities offered and sold the GSE Certificates to Fannie Mae and Freddie

Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances

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under which they were made, not misleading. BOA Securities reviewed and participated in drafting the Prospectuses. 171. BOA Securities successfully solicited Fannie Maes and Freddie Macs purchases

of the GSE Certificates. As underwriter, BOA Securities obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 172. BOA Securities offered the GSE Certificates for sale, sold them, and distributed

them by the use of means or instruments of transportation and communication in interstate commerce. 173. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding are

prominently identified in the Prospectuses for the Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates for the seventeen Securitizations under those Registration Statements. ABF Corp., BOA Mortgage, and BOA Funding offered the Certificates publicly and actively solicited their sale, including to Fannie Mae and Freddie Mac. 174. With respect to the seventeen Securitizations for which they filed Registration

Statements, ABF Corp., BOA Mortgage, and BOA Funding offered the GSE Certificates to Fannie Mae and Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, ABF Corp., BOA Mortgage, and BOA Funding reviewed and participated in drafting the Prospectuses.

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175.

Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding offered the

GSE Certificates for sale by the use of means or instruments of transportation and communication in interstate commerce. 176. Each of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding actively

participated in the solicitation of the GSEs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 177. Each of the Prospectuses contained material misstatements of fact and omitted

information necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses. 178. The untrue statements of material facts and omissions of material fact in the

Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios. 179. BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding offered and sold

the GSE Certificates directly to Fannie Mae and Freddie Mac, pursuant to the false and misleading Prospectuses. 180. BOA Securities owed to Fannie Mae and Freddie Mac, as well as to other

investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding owed the same duty with respect to

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the Prospectuses for the Securitizations carried out under the six Registration Statements filed by them. 181. BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding failed to exercise

such reasonable care. These Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. 182. In contrast, Fannie Mae and Freddie Mac did not know of the untruths and

omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If the GSEs would have known of those untruths and omissions, they would not have purchased the GSE Certificates. 183. Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market

pursuant to the Prospectuses. 184. Fannie Mae and Freddie Mac sustained substantial damages in connection with

their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 185. The time period from July 13, 2009 through August 30, 2011 is tolled for statute

of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12).

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THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against BOA Corp., BOA National, and the Individual Defendants) 186. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 187. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.

77o (Section 15), against BOA Corp., BOA National, and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 188. The Individual Defendants at all relevant times participated in the operation and

management of ABF Corp., BOA Mortgage, and/or BOA Funding and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of ABF Corp.s, BOA Mortgages, and/or BOA Fundings business affairs. Defendant George C. Carp was Treasurer, Chief Accounting Officer, and Chief Financial Officer of ABF Corp. and BOA Funding. Defendant Robert Caruso was a Director of BOA Mortgage. Defendant George E. Ellison was a Director of ABF Corp. and BOA Funding. Defendant Daniel B. Goodwin was President and Chief Executive Officer of ABF Corp. Defendant Juliana Johnson was a Director of BOA Mortgage. Defendant Adam D. Glassner was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage. Defendant Aashish Kamat was a Director of BOA Mortgage. Defendant Michael J. Kula was a Director of BOA Mortgage. Defendant James H. Luther was a Director of ABF Corp. and BOA Funding. Defendant William L. Maxwell was a director of ABF Corp. Defendant Mark I. Ryan was President and Chief Executive Officer of BOA Funding. Defendant Antoine Schetritt was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage.

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189.

Defendant BOA National was the sponsor for sixteen of the Securitizations

carried out under five of the Registration Statements filed by ABF Corp., BOA Mortgage, and BOA Funding, and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting ABF Corp., BOA Mortgage, and BOA Funding as the special purpose vehicles, and selecting BOA Securities as underwriter for the Securitizations. In its role as sponsor, BOA National knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 190. Defendant BOA National also acted as the seller of the mortgage loans for the

sixteen Securitizations carried out under five of the Registration Statements filed by Defendants ABF Corp., BOA Mortgage, and BOA Funding, in that it conveyed such mortgage loans to ABF Corp., BOA Mortgage, and BOA Funding pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. 191. Defendant BOA National also controlled all aspects of the business of Depositor

Defendants ABF Corp., BOA Mortgage, and BOA Funding, as those Defendants were merely special purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates. ABF Corp., BOA Mortgage, and BOA Funding were direct, wholly-owned subsidiaries of BOA National, and the officers and directors of BOA National overlapped with the officers and directors of ABF Corp., BOA Mortgage, and BOA Funding. In addition, because of its position as sponsor, BOA National was able to, and did in fact, control the contents of the five Registration Statements filed by ABF Corp., BOA Mortgage, and BOA

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Funding, including the Prospectuses and Prospectus Supplements, which pertained to the sixteen Securitizations sponsored by BOA National and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 192. Defendant BOA Corp. controlled the business operations of BOA Securities

Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding. As the sole corporate parent of BOA Securities and ABF Corp., BOA Mortgage, and BOA Funding, BOA Corp. had the practical ability to direct and control the actions of ABF Corp., BOA Mortgage, BOA Funding, and BOA Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding in connection with the issuance and sale of the Certificates. 193. BOA Corp.s push to securitize large volumes of mortgage loans contributed to

the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 194. BOA Corp. culpably participated in the violations of Section 11 and 12(a)(2) set

forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as ABF Corp., BOA Mortgage, BOA Funding, and the issuing trusts to serve as conduits for the mortgage loans. 195. BOA Corp., BOA National, and the Individual Defendants are controlling persons

within the meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements.

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196.

Fannie Mae and Freddie Mac purchased in the primary market Certificates issued

pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 197. Fannie Mae and Freddie Mac did not know of the misstatements and omissions in

the Registration Statements; had the GSEs known of those misstatements and omissions, they would not have purchased the GSE Certificates. 198. Fannie Mae and Freddie Mac have sustained damages as a result of the

misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 199. The time period from July 13, 2009 through August 30, 2011 is tolled for statute

of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). FOURTH CAUSE OF ACTION Violation of Section 13.1-522(A)(ii) of the Virginia Code (Against MLPF&S, ABF Corp., BOA Mortgage, and BOA Funding) 200. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 201. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the

Virginia Code and is asserted on behalf of Freddie Mac. The allegations set forth below in this

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cause of action pertain to only those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. 202. This claim is predicated upon BOA Securities negligence for making false and

materially misleading statements in the Prospectuses for the Securitizations listed in paragraph 2. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding acted negligently in making false and materially misleading statements in the Prospectuses for the Securitizations carried out under the six Registration Statements they filed. 203. BOA Securities is prominently identified in the Prospectuses, the primary

documents that it used to sell the GSE Certificates. BOA Securities offered the Certificates publicly, including selling to Freddie Mac its GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 204. BOA Securities offered and sold the GSE Certificates to Freddie Mac by means

of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. BOA Securities reviewed and participated in drafting the Prospectuses. 205. BOA Securities successfully solicited Freddie Macs purchases of the GSE

Certificates. As underwriter, BOA Securities obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 206. BOA Securities offered the GSE Certificates for sale, sold them, and distributed

them to Freddie Mac in the State of Virginia.

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207.

Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding are

prominently identified in the Prospectuses for the Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates for those Securitizations. ABF Corp., BOA Mortgage, and BOA Funding offered the Certificates publicly and actively solicited their sale, including to Freddie Mac. 208. With respect to the Securitizations for which they filed Registration Statements,

ABF Corp., BOA Mortgage, and BOA Funding offered the GSE Certificates to Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, ABF Corp., BOA Mortgage, and BOA Funding reviewed and participated in drafting the Prospectuses. 209. Each of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding actively

participated in the solicitation of Freddie Macs purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 210. Each of the Prospectuses contained material misstatements of fact and omitted

information necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses. 211. The untrue statements of material facts and omissions of material fact in the

Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios.

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212.

BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding offered and sold

the GSE Certificates directly to Freddie Mac, pursuant to the false and misleading Prospectuses. 213. BOA Securities owed to Freddie Mac, as well as to other investors in these trusts,

a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding owed the same duty with respect to the Prospectuses for the Securitizations carried out under the six Registration Statements filed by them. 214. BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding failed to exercise

such reasonable care. These Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. 215. In contrast, Freddie Mac did not know of the untruths and omissions contained in

the Prospectuses at the time they purchased the GSE Certificates. If Freddie Mac would have known of those untruths and omissions, they would not have purchased the GSE Certificates. 216. Freddie Mac sustained substantial damages in connection with its investments in

the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon.

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217.

This action is brought within three years of the date that the FHFA was appointed

as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). FIFTH CAUSE OF ACTION Violation of Section 13.1-522(C) of the Virginia Code (Against BOA Corp., BOA National, and the Individual Defendants) 218. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 219. This claim is brought by Plaintiff under Section 13.1-522(C) of the Virginia Code

and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. This claim is brought against BOA Corp., BOA National, and the Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 220. The Individual Defendants at all relevant times participated in the operation and

management of ABF Corp., BOA Mortgage, and/or BOA Funding and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of ABF Corp.s, BOA Mortgages, and/or BOA Fundings business affairs. Defendant George C. Carp was Treasurer, Chief Accounting Officer, and Chief Financial Officer of ABF Corp. and BOA Funding. Defendant Robert Caruso was a Director of BOA Mortgage. Defendant George E. Ellison was a Director of ABF Corp. and BOA Funding. Defendant Daniel B. Goodwin was President and Chief Executive Officer of ABF Corp. Defendant Juliana Johnson was a Director of BOA Mortgage. Defendant Adam D. Glassner was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage. Defendant Aashish Kamat was a Director of BOA Mortgage.

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Defendant Michael J. Kula was a Director of BOA Mortgage. Defendant James H. Luther was a Director of ABF Corp. and BOA Funding. Defendant William L. Maxwell was a director of ABF Corp. Defendant Mark I. Ryan was President and Chief Executive Officer of BOA Funding. Defendant Antoine Schetritt was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage. 221. Defendant BOA National was the sponsor for Securitizations carried out under

five of the Registration Statements filed by ABF Corp., BOA Mortgage, and BOA Funding, and culpably participated in the violations of Section 13.1-522(A)(ii) set forth above with respect to the offering of the GSE Certificates to Freddie Mac by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting ABF Corp., BOA Mortgage, and BOA Funding as the special purpose vehicles, and selecting BOA Securities as underwriter for the Securitizations. In its role as sponsor, BOA National knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 222. Defendant BOA National also acted as the seller of the mortgage loans for

Securitizations carried out under five of the Registration Statements filed by Defendants ABF Corp., BOA Mortgage, and BOA Funding, in that it conveyed such mortgage loans to ABF Corp., BOA Mortgage, and BOA Funding pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. 223. Defendant BOA National also controlled all aspects of the business of Depositor

Defendants ABF Corp., BOA Mortgage, and BOA Funding, as those Defendants were merely special purpose entities created for the purpose of acting as a pass-through for the issuance of the

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Certificates. ABF Corp., BOA Mortgage, and BOA Funding were direct, wholly-owned subsidiaries of BOA National, and the officers and directors of BOA National overlapped with the officers and directors of ABF Corp., BOA Mortgage, and BOA Funding. In addition, because of its position as sponsor, BOA National was able to, and did in fact, control the contents of five of the Registration Statements filed by ABF Corp., BOA Mortgage, and BOA Funding, including the Prospectuses and Prospectus Supplements, which pertained to Securitizations sponsored by BOA National and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 224. Defendant BOA Corp. controlled the business operations of BOA Securities

Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding. As the sole corporate parent of BOA Securities and ABF Corp., BOA Mortgage, and BOA Funding, BOA Corp. had the practical ability to direct and control the actions of ABF Corp., BOA Mortgage, BOA Funding, and BOA Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding in connection with the issuance and sale of the Certificates. 225. BOA Corp.s push to securitize large volumes of mortgage loans contributed to

the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 226. BOA Corp. culpably participated in the violations of Section 13.1-522(A)(ii) set

forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as ABF Corp., BOA Mortgage, BOA Funding, and the issuing trusts to serve as conduits for the mortgage loans.

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227.

BOA Corp., BOA National, and the Individual Defendants are controlling persons

within the meaning of Section 13.1-522(C) by virtue of their actual power over, control of, ownership of, and/or directorship of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 228. Freddie Mac purchased Certificates issued pursuant to the Registration

Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 229. Freddie Mac did not know of the misstatements and omissions in the Registration

Statements; had Freddie Mac known of those misstatements and omissions, it would not have purchased the GSE Certificates. 230. Freddie Mac has sustained damages as a result of the misstatements and

omissions in the Registration Statements, for which they are entitled to compensation. 231. This action is brought within three years of the date that the FHFA was appointed

as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). SIXTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against MLPF&S, ABF Corp., BOA Mortgage, and BOA Funding) 232. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud.

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233.

This claim is brought by Plaintiff pursuant to 31-5606.05(a)(1)(B) of the District

of Columbia Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above, which were purchased by Fannie Mae. 234. This claim is predicated upon BOA Securities negligence for making false and

materially misleading statements in the Prospectuses for the Securitizations listed in paragraph 2. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding acted negligently in making false and materially misleading statements in the Prospectuses for the Securitizations carried out under the six Registration Statements they filed. 235. BOA Securities is prominently identified in the Prospectuses, the primary

documents that it used to sell the GSE Certificates. BOA Securities offered the Certificates publicly, including selling to Fannie Mae its GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 236. BOA Securities offered and sold the GSE Certificates to Fannie Mae by means of

the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. BOA Securities reviewed and participated in drafting the Prospectuses. 237. BOA Securities successfully solicited Fannie Maes purchases of the GSE

Certificates. As underwriter, BOA Securities obtained substantial commissions based upon the amount received from the sale of the Certificates to the public.

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238.

BOA Securities offered the GSE Certificates for sale, sold them, and distributed

them to Fannie Mae in the District of Columbia. 239. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding are

prominently identified in the Prospectuses for the Securitizations carried out under the Registration Statements that they filed. These Prospectuses were the primary documents each used to sell Certificates for those Securitizations. ABF Corp., BOA Mortgage, and BOA Funding offered the Certificates publicly and actively solicited their sale, including to Fannie Mae. 240. With respect to the Securitizations for which they filed Registration Statements,

ABF Corp., BOA Mortgage, and BOA Funding offered the GSE Certificates to Fannie Mae by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, ABF Corp., BOA Mortgage, and BOA Funding reviewed and participated in drafting the Prospectuses. 241. Each of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding actively

participated in the solicitation of Fannie Maes purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 242. Each of the Prospectuses contained material misstatements of fact and omitted

information necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses.

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243.

The untrue statements of material facts and omissions of material fact in the

Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, and loan-to-value ratios. 244. BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding offered and sold

the GSE Certificates directly to Fannie Mae, pursuant to the false and misleading Prospectuses. 245. BOA Securities owed to Fannie Mae, as well as to other investors in these trusts,

a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding owed the same duty with respect to the Prospectuses for the Securitizations carried out under the six Registration Statements filed by them. 246. BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding failed to exercise

such reasonable care. These Defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. 247. In contrast, Fannie Mae did not know of the untruths and omissions contained in

the Prospectuses at the time they purchased the GSE Certificates. If Fannie Mae would have known of those untruths and omissions, they would not have purchased the GSE Certificates.

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248.

Fannie Mae sustained substantial damages in connection with its investments in

the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 249. The time period from July 13, 2009 through August 30, 2011 is tolled for statute

of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against BOA Corp., BOA National, and the Individual Defendants) 250. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 251. This claim is brought under Section 31-5606.05(c) of the District of Columbia

Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above, which were purchased by Fannie Mae. This claim is brought against BOA Corp., BOA National, and the Individual Defendants for controlling-person liability with regard to the Sixth Cause of Action set forth above. 252. The Individual Defendants at all relevant times participated in the operation and

management of ABF Corp., BOA Mortgage, and/or BOA Funding and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of ABF Corp.s, BOA Mortgages, and/or BOA Fundings business affairs. Defendant George C. Carp was Treasurer, Chief Accounting Officer, and Chief Financial Officer of ABF Corp. and BOA Funding.

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Defendant Robert Caruso was a Director of BOA Mortgage. Defendant George E. Ellison was a Director of ABF Corp. and BOA Funding. Defendant Daniel B. Goodwin was President and Chief Executive Officer of ABF Corp. Defendant Juliana Johnson was a Director of BOA Mortgage. Defendant Adam D. Glassner was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage. Defendant Aashish Kamat was a Director of BOA Mortgage. Defendant Michael J. Kula was a Director of BOA Mortgage. Defendant James H. Luther was a Director of ABF Corp. and BOA Funding. Defendant William L. Maxwell was a director of ABF Corp. Defendant Mark I. Ryan was President and Chief Executive Officer of BOA Funding. Defendant Antoine Schetritt was President, Chief Executive Officer, and Chairman of the Board of BOA Mortgage. 253. Defendant BOA National was the sponsor for Securitizations carried out under

five of the Registration Statements filed by ABF Corp., BOA Mortgage, and BOA Funding, and culpably participated in the violations of Section 31-5606.05(a)(1)(B) set forth above with respect to the offering of the GSE Certificates to Fannie Mae by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting ABF Corp., BOA Mortgage, and BOA Funding as the special purpose vehicles, and selecting BOA Securities as underwriter for the Securitizations. In its role as sponsor, BOA National knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cashflows would be issued by the relevant trusts. 254. Defendant BOA National also acted as the seller of the mortgage loans

Securitizations carried out under five of the Registration Statements filed by Defendants ABF Corp., BOA Mortgage, and BOA Funding, in that it conveyed such mortgage loans to ABF

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Corp., BOA Mortgage, and BOA Funding pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. 255. Defendant BOA National also controlled all aspects of the business of Depositor

Defendants ABF Corp., BOA Mortgage, and BOA Funding, as those Defendants were merely special purpose entities created for the purpose of acting as a pass-through for the issuance of the Certificates. ABF Corp., BOA Mortgage, and BOA Funding were direct, wholly-owned subsidiaries of BOA National, and the officers and directors of BOA National overlapped with the officers and directors of ABF Corp., BOA Mortgage, and BOA Funding. In addition, because of its position as sponsor, BOA National was able to, and did in fact, control the contents of five Registration Statements filed by ABF Corp., BOA Mortgage, and BOA Funding, including the Prospectuses and Prospectus Supplements, which pertained to the Securitizations sponsored by BOA National and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 256. Defendant BOA Corp. controlled the business operations of BOA Securities

Depositor Defendants ABF Corp., BOA Mortgage, and BOA Funding. As the sole corporate parent of BOA Securities and ABF Corp., BOA Mortgage, and BOA Funding, BOA Corp. had the practical ability to direct and control the actions of ABF Corp., BOA Mortgage, BOA Funding, and BOA Securities in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding in connection with the issuance and sale of the Certificates. 257. BOA Corp.s push to securitize large volumes of mortgage loans contributed to

the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements.

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258.

BOA Corp. culpably participated in the violations of Section 31-5606.05(a)(1)(B)

set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and establish special-purpose financial entities such as ABF Corp., BOA Mortgage, BOA Funding, and the issuing trusts to serve as conduits for the mortgage loans. 259. BOA Corp., BOA National, and the Individual Defendants are controlling persons

within the meaning of Section 31-5606.05(c) by virtue of their actual power over, control of, ownership of, and/or directorship of BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 260. Fannie Mae purchased Certificates issued pursuant to the Registration Statements,

including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements. 261. Fannie Mae did not know of the misstatements and omissions in the Registration

Statements; had Fannie Mae known of those misstatements and omissions, it would not have purchased the GSE Certificates. 262. Fannie Mae has sustained damages as a result of the misstatements and omissions

in the Registration Statements, for which they are entitled to compensation. 263. The time period from July 13, 2009 through August 30, 2011 is tolled for statute

of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. In addition, this

82

action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against MLPF&S, ABF Corp., BOA Mortgage, and BOA Funding) 264. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 265. This is a claim for common law negligent misrepresentation against Defendants

MLPF&S (as successor-in-interest to BOA Securities), ABF Corp., BOA Mortgage, and BOA Funding. 266. Between September 30, 2005 and November 5, 2007, BOA Securities, ABF

Corp., BOA Mortgage, and BOA Funding sold the GSE Certificates to the GSEs as described above. Because ABF Corp., BOA Mortgage, and BOA Funding owned and then conveyed the underlying mortgage loans that collateralized the Securitizations for which they served as depositors, ABF Corp., BOA Mortgage, and BOA Funding had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through its possession of the loan files and other documentation. 267. Likewise, as underwriter for the Securitizations, BOA Securities was obligated

and had the opportunity to perform sufficient due diligence to ensure that the Registration Statements for those Securitizations, including without limitation the corresponding Prospectus Supplements, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriter which gave it access to loan file information and obligated it to perform adequate due diligence to ensure the accuracy of the Registration

83

Statements BOA Securities had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. As discussed above at paragraph 16, MLPF&S is liable as successor-in-interest to BOA Securities, which was merged into it in November 2010. 268. BOA Securities also had unique, exclusive, and special knowledge of the work of

third-party due diligence providers, such as Clayton, which identified significant failures by originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on BOA Securities knowledge and their express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 269. BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding were aware that

the GSEs reasonably relied on BOA Securities, ABF Corp.s, BOA Mortgages, and BOA Fundings reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The degree to which the underlying mortgage loans were actually originated in compliance with the underwriting guidelines was known to these Defendants and was not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. 270. Based upon their unique, exclusive, and special knowledge and expertise about

the loans held by the trusts in the Securitizations, BOA Securities, ABF Corp., BOA Mortgage,

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and BOA Funding had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding negligently breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. 271. In addition, having made actual representations about the underlying collateral in

the Securitizations and the facts bearing on the riskiness of the Certificates, BOA Securities, ABF Corp., BOA Mortgage, and BOA Funding had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon BOA Securities, ABF Corp.s, BOA Mortgages, and BOA Fundings representations about the Securitizations, and these Defendants failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 272. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the

representations by BOA as the sponsor, depositor, and lead and selling underwriter in all sixteen of the BOA-sponsored Securitizations. The GSEs received term sheets containing critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner occupancy statistics, which term sheets were delivered, upon information and belief, by

85

BOA Securities. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 273. The GSEs relied upon the accuracy of the data transmitted to them and

subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by ABF Corp., BOA Mortgage, BOA Funding, and BOA Securities relating to the collateral quality of the underlying loans and the structure of the Securitization. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were AAA quality (or its equivalent) meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 274. Detailed information about the underlying collateral and structure of each

Securitization was provided to the credit rating agencies by, upon information and belief, BOA National. The credit rating agencies based their ratings on the information provided to them by BOA, and the agencies anticipated ratings of the Certificates were dependent on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the accuracy of BOAs representations in the term sheets and Prospectus Supplements. 275. In addition, the GSEs relied on the fact that the originators of the mortgage loans

in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with underwriting guidelines was a precondition to the GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards.

86

276.

In purchasing the GSE Certificates, the GSEs justifiably relied on BOAs false

representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 277. But for the above misrepresentations and omissions, the GSEs would not have

purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above. 278. The GSEs were damaged in an amount to be determined at trial as a direct,

proximate, and foreseeable result of the Depositor Defendants and BOA Securities misrepresentations, including any half truths. 279. The time period from July 13, 2009 through August 30, 2011 is tolled for statute

of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae, BOA Corp., BOA Securities, BOA Mortgage, BOA National, and BOA Funding. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 280. An award in favor of Plaintiff against all Defendants, jointly and severally, for all

damages sustained as a result of Defendants wrongdoing, in an amount to be proven at trial, but including: a. Rescission and recovery of the consideration paid for the GSE

Certificates, with interest thereon; b. Each GSEs monetary losses, including any diminution in value of the

GSE Certificates, as well as lost principal and lost interest payments thereon; 87

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstBARCLAYS BANK PLC; BARCLAYS CAPITAL INC.; SECURITIZED ASSET BACKED RECEIVABLES LLC; MICHAEL WADE; JOHN CARROLL; and PAUL MENEFEE, Defendants.

___ CIV. ___ (___)

COMPLAINT JURY TRIAL DEMANDED

TABLE OF CONTENTS NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................5 The Plaintiff and the GSEs ..................................................................................................5 The Defendants ....................................................................................................................6 JURISDICTION AND VENUE ......................................................................................................7 FACTUAL ALLEGATIONS ..........................................................................................................8 I. THE SECURITIZATIONS..................................................................................................8 A. B. C. Residential Mortgage-Backed Securitizations In General .......................................8 The Securitizations At Issue In This Case .............................................................10 The Securitization Process .....................................................................................11 1. 2. II. Mortgage Loans Are Grouped in Special Purpose Trusts .........................11 The Trusts Issue Securities Backed by the Loans ......................................12

THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................14 A. The Role of Each of the Defendants ......................................................................14 1. 2. 3. 4. B. SABR .........................................................................................................15 Barclays Capital .........................................................................................16 Barclays Bank ............................................................................................16 The Individual Defendants .........................................................................17

Defendants Failure To Conduct Proper Due Diligence ........................................17

III.

THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS................................................................................................................18 A. B. C. Compliance With Underwriting Guidelines ..........................................................18 Statements Regarding Occupancy Status of Borrower ..........................................21 Statements Regarding Loan-to-Value Ratios.........................................................23

D. IV.

Statements Regarding Credit Ratings ....................................................................25

FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS......................................................................................27 A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................27 1. 2. B. Owner Occupancy Data Was Materially False ..........................................28 Loan-to-Value Data Was Materially False ................................................30

The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................32 1. Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines ..............................................................33 The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines. ................................................................37 The Surge in Mortgage Delinquency and Default Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines .................................................................38

2.

3.

V.

FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES .................................................40

FIRST CAUSE OF ACTION ........................................................................................................41 SECOND CAUSE OF ACTION ...................................................................................................45 THIRD CAUSE OF ACTION .......................................................................................................48 FOURTH CAUSE OF ACTION ...................................................................................................51 FIFTH CAUSE OF ACTION ........................................................................................................54 SIXTH CAUSE OF ACTION .......................................................................................................57 SEVENTH CAUSE OF ACTION .................................................................................................60 EIGHTH CAUSE OF ACTION ....................................................................................................62 PRAYER FOR RELIEF ................................................................................................................66 JURY TRIAL DEMANDED .........................................................................................................67

ii

Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against Barclays Bank PLC (Barclays Bank), Barclays Capital Inc. (Barclays Capital), and Securitized Asset Backed Receivables LLC (SABR) (collectively, Barclays), Michael Wade, John Carroll, and Paul Menefee (collectively, the Individual Defendants, and together with Barclays, the Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the

offer and sale of certain residential mortgage-backed securities (RMBS) to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or the GSEs). These

securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely stated that the underlying

mortgage loans and properties complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and

their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 315606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and constitutes negligent misrepresentation. 2. Between October 28, 2005 and February 28, 2007, Fannie Mae and Freddie Mac

purchased approximately $4.9 billion in residential mortgage-backed securities (the GSE

Certificates) issued in connection with eight Barclays-underwritten securitizations.1

The GSE

Certificates purchased by Freddie Mac, along with date and amount of the purchases, are listed infra in Table 10. The GSE Certificates purchased by Fannie Mae, along with date and amount The following eight securitizations are at issue in

of the purchases, are listed infra in Table 11. this action: i.

Argent Securities Inc., Asset-Backed Pass-Through Certificates, Series 2005-W3 (ARSI 2005-W3); Fremont Home Loan Trust, Mortgage-Backed Certificates, Series 2005-D (FHLT 2005-D); Ameriquest Mortgages Securities Inc., Asset-Backed Pass-Through Certificates, Series 2005-R10 (AMSI 2005-R10); Argent Securities Inc., Asset-Backed Pass-Through Certificates, Series 2006-W5 (ARSI 2006-W5); Securitized Asset Backed Receivables LLC Trust, C-Bass Mortgage Loan AssetBacked Certificates, Series 2006-CB1 (CBASS 2006-CB1); Argent Securities Inc., Asset-Backed Pass-Through Certificates, Series 2006-W2 (ARSI 2006-W2) Fremont Home Loan Trust, Mortgage-Backed Certificates, Series 2006-C (FHLT 2006-C); Securitized Asset Backed Receivables LLC Trust, C-Bass Mortgage Loan AssetBacked Certificates, Series 2007-CB2 (CBASS 2007-CB2);

ii.

iii.

iv.

v.

vi.

vii.

viii.

(collectively, the Securitizations). 3. Each Certificate was offered for sale pursuant to one of seven shelf registration

statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC).
1

Defendant SABR filed two of the Shelf Registration Statements (the

For purposes of this Complaint, the securities issued under the Registration Statements (as defined in paragraph 4 below) are referred to as Certificates, while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the GSE Certificates. Holders of Certificates are referred to as Certificateholders.

SABR Shelf Registration Statements) that pertained to two of the Securitizations CBASS 2006-CB1 and CBASS 2007-CB2 (the SABR Securitizations). The Individual Defendants

signed one or more of the SABR Shelf Registration Statements and the amendments thereto. Argent Securities Inc., Fremont Mortgage Securities, and Ameriquest Mortgage Securities Inc. filed the remaining five Shelf Registration Statements. Barclays Capital was the lead or co-lead

underwriter and the underwriter who sold the GSE Certificates to Fannie Mae and Freddie Mac with respect to all the Securitizations. 4. For each Securitization, a prospectus (Prospectus) and prospectus supplement

(Prospectus Supplement) were filed with the SEC as part of the Registration Statement2 for that Securitization. The GSE Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the corresponding Prospectuses and Prospectus Supplements. 5. The Registration Statements contained statements about the characteristics and

credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers of those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investors Unbeknownst

decision to invest in mortgage-backed securities by purchasing the Certificates.

to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices and had materially poorer credit quality than what was represented in the Registration Statements.

The term Registration Statement as used herein incorporates the Shelf Registration Statement, the Prospectus, and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated.

6.

The Registration Statements also contained statistical summaries of the groups of

mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was also material to reasonable

investors. However, a loan-level analysis of a sample of loans for each Securitizationa review that encompassed thousands of mortgages across all of the Securitizationshas revealed that these statistics were false and omitted material facts due to inflated property values and misstatements of other key characteristics of the mortgage loans. 7. For example, the percentage of owner-occupied properties is a material risk factor

to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. Likewise, the Prospectus Supplements misrepresented

other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans. 8. Defendants Barclays Capital (which lead underwrote and then sold the GSE

Certificates to the GSEs), SABR (which acted as depositor in the SABR Securitizations), and the Individual Defendants (who signed the SABR Shelf Registration Statements) are directly responsible for the misstatements and omissions of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. 9. Defendant Barclays Bank is likewise responsible for the misstatements and

omissions of material fact contained in the Registration Statements by virtue of its direction and control over the business operations of Defendants Barclays Capital and SABR. Barclays Bank

directly participated in and exercised dominion and control over the business operations of Defendants Barclays Capital and SABR. 10. Fannie Mae and Freddie Mac purchased approximately $4.9 billion of the These documents

Certificates pursuant to the Registration Statements filed with the SEC.

contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae

and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 11. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against

the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for negligent misrepresentation. PARTIES The Plaintiff and the GSEs 12. The Federal Housing Finance Agency is a federal agency located at 1700 G FHFA was created on July 30, 2008 pursuant to the Housing

Street, N.W. in Washington, D.C.

and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. 4617) to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and

Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of the GSEs, including but not limited to, the

authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. U.S.C. 4617(b)(2). 13.

12

Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by

Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested

in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. McLean, Virginia. The Defendants 14. Defendant Barclays Bank is a public limited company registered in England and Freddie Mac is located at 8200 Jones Branch Drive in

Wales, with its registered head office at Churchill Place, London E14 5HP. Barclays Bank maintains a New York Branch that is located at 200 Park Avenue, New York, New York 10166. Together with its subsidiary companies, it is an international financial services group engaged primarily in banking, investment banking, and asset management. 15. Defendant Barclays Capital is an SEC-registered broker-dealer. Barclays

Capital is a Connecticut corporation that is principally located at 200 Park Avenue, New York, New York 10166. Barclays Capital is a wholly-owned subsidiary of Barclays Bank.

Defendant Barclays Capital was the lead or co-lead underwriter for each Securitization, and was intimately involved in the offerings. Fannie Mae and Freddie Mac purchased all of the GSE

Certificates from Barclays Capital in its capacity as underwriter of the Securitizations. 16. Defendant SABR is a Delaware corporation, and is principally located at 200 Park

Avenue, New York, New York 10166. SABR is a wholly owned subsidiary of Barclays Bank. SABR was the depositor for the SABR Securitizations. SABR, as depositor, was also

responsible for preparing and filing reports required under the Securities Exchange Act of 1934.

17.

Defendant Michael Wade was President and Chief Executive Officer at SABR.

Mr. Wade signed the SABR Shelf Registration Statements and the amendments thereto, and did so in New York. 18. Defendant John Carroll was Vice President and Chief Financial Officer at SABR.

Mr. Carroll signed the SABR Shelf Registration Statements and the amendments thereto, and did so in New York. 19. SABR. Defendant Paul Menefee was Vice President and Chief Accounting Officer at

Mr. Menefee signed the SABR Shelf Registration Statements and the amendments

thereto, and did so in New York. The Non-Party Originators 20. The loans underlying the Certificates were acquired by the sponsor for each The originators principally responsible

Securitization from non-party mortgage originators.3

for the loans underlying the Certificates were Argent Mortgage Company, L.L.C. (Argent), Fremont Investment & Loan (Fremont), Ameriquest Mortgage Company (Ameriquest), HSBC Consumer Lending (USA) Inc. (HSBC), and Lime Financial Inc. (Lime). JURISDICTION AND VENUE 21. Jurisdiction of this Court is founded upon 28 U.S.C. 1345, which gives federal

courts original jurisdiction over claims brought by FHFA in its capacity as conservator of Fannie Mae and Freddie Mac. 22. Jurisdiction of this Court is also founded upon 28 U.S.C. 1331 because the

Securities Act claims asserted herein arise under Sections 11, 12(a)(2), and 15 of the Securities

The Securitizations were all sponsored by non-parties. In particular, Ameriquest, Fremont, and Credit-Based Asset Servicing and Securitization (C-BASS) each sponsored one or more of the eight Securitizations.

Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o. This Court further has jurisdiction over the Securities Act claims pursuant to Section 22 of the Securities Act of 1933, 15 U.S.C. 77v. 23. This Court has jurisdiction over the statutory claims of violations of Sections

13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). This Court also has jurisdiction over the common law claim of

negligent misrepresentation pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 24. Venue is proper in this district pursuant to Section 22 of the Securities Act of

1933, 15 U.S.C. 77v, and 28 U.S.C. 1391(b). Barclays Capital and SABR are principally located in this district. Barclays Bank maintains a branch in this district. Many of the acts and transactions alleged herein, including the preparation and dissemination of the Registration Statements, occurred in substantial part within this district. The Individual Defendants signed the Registration Statements in this district. in this District. FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 25. Residential Mortgage-Backed Securitizations In General Asset-backed securitization distributes risk by pooling cash-producing financial Defendants are also subject to personal jurisdiction

assets and issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 26. The most common form of securitization of mortgage loans involves a sponsor

the entity that acquires or originates the mortgage loans and initiates the securitization and the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage

loans.

The trust is established pursuant to a Pooling and Servicing Agreement entered into by,

among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 27. loans. Residential mortgage-backed securities are backed by the underlying mortgage

Some residential mortgage-backed securitizations are created from more than one cohort

of loans called collateral groups, in which case the trust issues securities backed by different groups. For example, a securitization may involve two groups of mortgages, with some

securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the

cash-flows from the designated mortgage group, such as homeowners payments of principal and interest on the mortgage loans held by the related trust. 28. Residential mortgage-backed securities are issued pursuant to registration These registration statements include prospectuses, which

statements filed with the SEC.

explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage groups underlying the certificates. Certificates are issued by the trust pursuant to the registration statement, the prospectus, and the prospectus supplement. Underwriters sell the certificates to investors.

29.

A mortgage servicer is necessary to manage the collection of proceeds from the The servicer is responsible for collecting homeowners mortgage loan The

mortgage loans.

payments, which the servicer remits to the trustee after deducting a monthly servicing fee. servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee.

The trustee (or trust

administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 30. The Securitizations At Issue In This Case This case involves the eight Securitizations listed in Table 1 below. Barclays

Capital served as the lead or co-lead underwriter and sold the GSE Certificates to the GSEs for all eight of the Securitizations. For each of the eight Securitizations, Table 1 identifies: (1)

the sponsor; (2) the depositor; (3) the lead underwriter; (4) the principal amount issued for the tranches4 purchased by the GSEs; (5) the date of issuance; and (6) the loan group backing the GSE Certificates for that Securitization (referred to as the Supporting Loan Groups). Table 1
Transaction Tranche Sponsor Ameriquest Mortgage Company Depositor Argent Securities Inc. Fremont Mortgage Securities Corporation Ameriquest Mortgage Securities, Inc. Argent Securities Inc. Lead Underwriter(s) Barclays Capital Inc. and Morgan Stanley & Co. Incorporated Barclays Capital Inc. Barclays Capital Inc. and J.P. Morgan Securities Inc. Barclays Capital Inc. Principal Amount Issued $736,186,000 Date of Issuance 10/28/2005 Supporting Loan Group Group I

ARSI 2005-W3

A1

FHLT 2005-D

1A1

Fremont Investment & Loan

$343,936,000

11/18/2005

Group I

AMSI 2005-R10

A1

Ameriquest Mortgage Company Ameriquest Mortgage Company

$1,230,491,000

11/23/2005

Group I

ARSI 2005-W5

A1

$881,201,000

12/28/2005

Group I

A tranche is one of a series of certificates or interests created and issued as part of the same transaction.

10

Transaction

Tranche

Sponsor Credit-Based Asset Servicing and Securitization LLC Ameriquest Mortgage Company Fremont Investment & Loan Credit-Based Asset Servicing and Securitization LLC

Depositor Securitized Asset Backed Receivables LLC Argent Securities Inc. Fremont Mortgage Securities Corporation Securitized Asset Backed Receivables LLC

Lead Underwriter(s) Barclays Capital Inc. Barclays Capital Inc. and Deutsche Bank Securities Inc. Barclays Capital Inc.

Principal Amount Issued $287,298,000

Date of Issuance 1/26/2006

Supporting Loan Group Group I

CBASS 2006-CB1

AV1

ARSI 2006-W2

A1

$725,306,000

2/27/2006

Group I

FHLT 2006-C

1A1

$459,746,000

8/30/2006

Group 1

CBASS 2007-CB2

A1

Barclays Capital Inc.

$220,801,000

2/28/2007

Group I

C.

The Securitization Process 1. Mortgage Loans Are Grouped in Special Purpose Trusts

31.

Non-party sponsors Ameriquest, Fremont, and C-BASS purchased the mortgage

loans underlying the Certificates for one or more of the Securitizations after the loans were originated, either directly from the originators or through affiliates of the originators. 32. The sponsors then sold the mortgage loans for the Securitizations that they

sponsored to depositors. C-BASS sold the mortgage loans for two of the Securitizations to Defendant SABR, as depositor. With respect to the remaining six Securitizations, non-party

sponsors Ameriquest and Fremont sold the mortgage loans to non-party depositors, as reflected in Table 1, supra at paragraph 30. Defendant Barclays Capital was the lead or co-lead and the selling underwriter for all eight Securitizations. 33. Capital. SABR was a wholly-owned, limited-purpose financial subsidiary of Barclays

The sole purpose of SABR as depositor was to act as a conduit through which loans

acquired by the sponsor could be securitized and sold to investors. 34. As depositor for the SABR Securitizations, SABR transferred the relevant

mortgage loans to the trusts.

11

35.

As part of each of the Securitizations, the trustee, on behalf of the

Certificateholders, executed a Pooling and Servicing Agreement (PSA) with the relevant depositor and the parties responsible for monitoring and servicing the mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage loans pursuant to the The

related PSA and issued Certificates, including the GSE Certificates, backed by such loans.

GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans. 2. 36. The Trusts Issue Securities Backed by the Loans

Once the mortgage loans were transferred to the trusts in accordance with the The Certificates

PSAs, each trust issued Certificates backed by the underlying mortgage loans.

were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cash-flows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of

the related transaction and the credit quality of the underlying mortgages. 37. The Certificates were issued pursuant to one of seven Shelf Registration The Shelf Registration Statements were Each Individual Defendant signed

Statements filed with the SEC on a Form S-3.

amended by one or more Forms S-3/A filed with the SEC.

one or more of the SABR Shelf Registration Statements, including any amendments thereto. The SEC filing number, registrants, signatories and filing dates for the seven Shelf Registration Statements and amendments thereto, as well as the Certificates covered by each Shelf Registration Statement, are reflected in Table 2 below.

12

Table 2
SEC File No.
333 112237

Date Registration Statement Filed


1/27/2004

Date(s) Amended Registration Statement Filed


Notapplicable

Registrants

Covered Certificates

Signatories of Registration Statement


AdamJ.Bass; JohnP.Grazer; AndrewL.Stidd MurrayL.Zoota; LouisJ.Rampino; WayneR.Bailey; ThomasW.Hayes; PatrickLamb AdamJ.Bass; JohnP.Grazer; AndrewL.Stidd AdamJ.Bass; JohnP.Grazer; AndrewL.Stidd MichaelWade; JohnCarroll; PaulMenefee

Signatories of Amendments

ArgentSecurities Inc. Fremont Mortgage Securities Corporation Ameriquest Mortgage SecuritiesInc. ArgentSecurities Inc. SecuritizedAsset Backed ReceivablesLLC

ARSI2005W3

Notapplicable

333 125587

6/7/2005

Notapplicable

FHLT2005D

Notapplicable

333 121781 333 121782 333 123990

12/30/2004

Notapplicable

AMSI2005R10 ARSI2005W5; ARSI2006W2 CBASS2006CB1

Notapplicable AdamJ.Bass; JohnP.Grazer; AndrewL.Stidd MichaelWade JohnCarroll; PaulMenefee 5/16Am. MurrayL.Zoota; LouisJ.Rampino; WayneR.Bailey; ThomasW.Hayes; DonaldPuglisi; PatrickE.Lamb; AlanFaigin; 6/23Am. KyleW.Walker; LouisJ.Rampino; MurrayL.Zoota; WayneR.Bailey; ThomasW.Hayes; DonaldPuglisi; RonaldS.Nicolas; AlanFaigin JohnCarroll; MichaelWade; PaulMenefee

12/30/2004

1/12/2006

4/11/2005

12/7/2005

333 132540

3/17/2006

5/16/2006, 6/23/2006

Fremont Mortgage Securities Corporation

FHLT2006C

MurrayL.Zoota; LouisJ.Rampino; WayneR.Bailey; ThomasW.Hayes; DonaldPuglisi; KyleR.Walker; RonaldNicolas,Jr.

333 130543

12/20/2005

2/9/2006

SecuritizedAsset Backed ReceivablesLLC

CBASS2007CB2

MichaelWade; JohnCarroll; PaulMenefee

38.

The Prospectus Supplement for each Securitization describes the underwriting

guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics

regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debt-

13

to-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes; information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property; and information concerning whether the loans were delinquent. 39. The Prospectus Supplements associated with each Securitization were filed with

the SEC as part of the Registration Statements. The Form 8-Ks attaching the PSAs for each Securitization were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below. Table 3
Transaction
ARSI 2005-W3 FHLT 2005-D AMSI 2005-R10 ARSI 2005-W5 CBASS 2006-CB1 ARSI 2006-W2 FHLT 2006-C CBASS 2007-CB2

Date Prospectus Supplement Filed


10/28/2005 11/16/2005 11/23/2005 12/27/2005 1/26/2006 2/27/2006 8/31/2006 3/2/2007

Filing Date of Form 8-K Attaching PSA


11/11/2005 12/5/2005 12/08/2005 1/12/2006 2/10/2006 3/14/2006 9/20/2006 3/15/2007

Filing No. of Related Registration Statement


333-112237 333-125587 333-121781 333-121782 333-123990 333-121782 333-132540 333-130543

40.

The Certificates were issued pursuant to the PSAs, and Defendant Barclays

Capital offered and sold the GSE Certificates to Fannie Mae and Freddie Mac pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements. II. THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS A. 41. The Role of Each of the Defendants Each of the Defendants, including the Individual Defendants, had a role in the

securitization process and the marketing for most or all of the Certificates, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the

14

mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 42. With respect to each Securitization, the depositor, underwriters, and Individual

Defendants who signed the Registration Statement, as well as the Defendants who exercised control over the activities, are liable, jointly and severally, as participants in the registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statements, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 43. SABR

Defendant SABR is a wholly owned subsidiary of Barclays Bank. It is a special

purpose entity formed solely for the 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. 44. SABR was the depositor for two of the eight Securitizations. In its capacity as

depositor, SABR purchased the mortgage loans from the sponsor (which was C-BASS in the SABR Securitizations) pursuant to a mortgage loan purchase and warranties agreement. SABR

then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. SABR, together with the other Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in

turn held the mortgage loans for the sole benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac.

15

2. 45.

Barclays Capital

Defendant Barclays Capital was formed in 1997 and is the investment banking Defendant Barclays Capital was, at all relevant times, a registered

division of Barclays Bank.

broker/dealer and one of the leading underwriters of mortgage and other asset-backed securities in the United States. 46. Barclays Capital was the lead or co-lead underwriter in each of the In that role, it was responsible for underwriting and managing the offer and Barclays Capital

Securitizations.

sale of the Certificates to Fannie Mae and Freddie Mac and other investors.

was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, underwritten, and transferred. 3. 47. Barclays Bank

Barclays Bank employed its wholly-owned subsidiaries, Barclays Capital and With respect to the SABR Securitizations,

SABR, in the key steps of the securitization process. the depositor was SABR.

SABR does not have any significant assets and was created for the

sole purpose of acquiring and pooling residential loans, offering securities or other mortgage- or asset-related securities, and related activities. Barclays Capital, the investment banking division of Barclays Bank, was the lead and selling underwriter with respect to all of the Securitizations. 48. As the sole corporate parent of Barclays Capital and SABR, Barclays Bank had

the practical ability to direct and control the actions of Barclays Capital and SABR related to the Securitizations, and in fact exercised such direction and control over the activities of these entities related to the issuance and sale of the Certificates. Furthermore, Barclays Bank, upon information and belief, shared overlapping management with the other Defendant entities. instance, Defendant John Carroll was Vice President and Chief Financial Officer at SABR. For Mr.

16

Carroll was also Managing Director at Barclays Bank. Mr. Carroll signed the SABR Shelf Registration Statements as an employee of both Barclays Bank and SABR. 4. 49. The Individual Defendants

Defendant Michael Wade was President and Chief Executive Officer at SABR.

Mr. Wade signed the SABR Shelf Registration Statements and the amendments thereto. 50. Defendant John Carroll was Vice President and Chief Financial Officer at SABR. Mr. Carroll signed the SABR Shelf

Mr. Carroll was also Managing Director at Barclays Bank. Registration Statements and the amendments thereto. 51. SABR. thereto. B. 52.

Defendant Paul Menefee was Vice President and Chief Accounting Officer at

Mr. Menefee signed the SABR Shelf Registration Statements and the amendments

Defendants Failure To Conduct Proper Due Diligence The Defendants failed to conduct adequate and sufficient due diligence to ensure

that the mortgage loans underlying the Securitizations complied with the representations in the Registration Statements. 53. During the time period in which the Certificates were issuedapproximately

2005 through 2007Barclays was extensively involved in the subprime mortgage market. In 2005, Barclays Capital securitized $27.1 billion in mortgage-backed securities, putting it in the top ten banks in this category. In June 2006, Barclays Bank acquired mortgage servicer In April 2007, Barclays Bank

HomeEq Servicing Corporation from Wachovia Corporation.

acquired EquiFirst Corporation (EquiFirst), the non-prime mortgage origination business of Regions Financial Corporation for $76 million. EquiFirst made $24.4 billion of high interest loans between 2005 and 2007. Barclays Bank stated that EquiFirst was to be combined with

Barclays Capitals active U.S. wholesale mortgage business, mortgage servicing, and capital

17

markets capabilities to create a vertically integrated franchise for the purchase and securitization of non-prime mortgages. 54. Defendants had enormous financial incentives to complete as many offerings as

quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, Barclays

Capital, as the underwriter, was paid a commission based on the amount it received from the sale of the Certificates to the public. 55. The push to securitize large volumes of mortgage loans contributed to the absence

of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or otherwise to ensure the accuracy of the statements in the Registrations Statements pertaining to the Securitizations. III. THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS A. 56. Compliance With Underwriting Guidelines The Prospectus Supplements for each Securitization describe the mortgage loan

underwriting guidelines pursuant to which the mortgage loans underlying the related Securitizations were to have been originated. These guidelines were intended to assess the

creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 57. The statements made in the Prospectus Supplements, which, as discussed, formed

part of the Registration Statement for each Securitization, were material to a reasonable investors decision to purchase and invest in the Certificates because the failure to originate a mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency

18

and default by the borrower, as well as a risk that losses upon liquidation will be higher, thus resulting in a greater economic risk to an investor. 58. The Prospectus Supplements for the Securitizations contained several key

statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. For example, the Prospectus Supplement for the AMSI 2005-R10

Securitization, for which Ameriquest was the originator, Barclays Capital was the underwriter and Ameriquest Mortgage Securities, Inc. was the depositor, stated that: All mortgage loans to

be included in a trust fund will have been subject to underwriting standards acceptable to the depositor and applied as described in the following paragraph. Each mortgage loan seller, or another party on its behalf, will represent and warrant that mortgage loans purchased by or on behalf of the depositor from it have been originated by the related originators in accordance with these guidelines. It also stated that the Underwriting Guidelines are primarily intended to

evaluate: (1) the applicants credit standing and repayment ability and (2) the value and adequacy of the mortgaged property as collateral. 59. The AMSI 2005-R10 Prospectus Supplement stated that the originator may

determine that a loan applicant, not strictly qualifying under an enumerated risk factor warrants an exception to the requirements set forth in the Underwriting Guidelines, but emphasized that the exceptions were made on a case-by-case basis. 60. With respect to the information evaluated by the originator, the Prospectus

Supplement stated that: Each loan application package has an application completed by the applicant that includes information with respect to the applicants liabilities, income, credit history and employment history, as well as certain other personal information. The Originator

also obtains (or the broker submits) a credit report on each applicant from a credit reporting

19

company.

If applicable, the loan application package must also generally include a letter from

the applicant explaining all late payments on mortgage debt and, generally, consumer (i.e. nonmortgage) debt. 61. The Prospectus and Prospectus Supplement for each of the Securitizations had The relevant representations in the Prospectus

similar representations to those quoted above.

and Prospectus Supplement pertaining to originating entity underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed infra at paragraphs 91 through 109, in fact, the originators of the mortgage loans in the Supporting Loan Group for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 62. Further, for the vast majority of the Securitizations, the Prospectuses and

Prospectus Supplements described or referenced additional representations and warranties in the PSA or the Mortgage Loan Purchase Agreement by the originator/sponsor concerning the mortgage loans underlying the Securitizations. These representations and warranties, which are described more fully for each Securitization in Appendix A, included (i) each mortgage loan was made in material compliance with all applicable local, state and federal laws and regulations; (ii) no mortgage loan is delinquent; (iii) origination and collection practices used by the originator with respect to each mortgage note and mortgage have been in all respects legal, proper, prudent and customary in the mortgage origination and servicing business; and (iv) the mortgage note and the mortgage were not subject to any right of rescission, set-off, counterclaim or defense (including the defense of usury) as to render such mortgage note or mortgage unenforceable.

20

63.

The inclusion of these representations in the Prospectuses and Prospectus

Supplements had the purpose and effect of providing additional assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations and the compliance of that collateral with the underwriting guidelines described in the Prospectuses and Prospectus Supplements. These representations were material to a reasonable investors decision to

purchase the Certificates. B. 64. Statements Regarding Occupancy Status of Borrower The Prospectus Supplements contained collateral group-level information about

the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplements for each of

the Securitizations presented this information in tabular form, usually in a table entitled Occupancy Status of the Mortgage Loans. This table divided all the loans in the collateral

group by occupancy status, e.g., into the following categories: (i) Primary, or OwnerOccupied; (ii) Secondary or Second Home; and (iii) Investor or Non-Owner. each category, the table stated the number of loans in that category. For

Occupancy statistics for

the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:5 Table 4
Transaction
ARSI 2005-W3 FHLT 2005-D

Supporting Loan Group


Group I Group I

Primary/ OwnerOccupied (%)


85.64 89.98

Secondary/Second Home (%)


1.01 1.29

Investor/Non-Owner (%)
13.35 8.73

Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: primary or owner-occupied, secondary or second home, and investor or non-owner. These numbers have been converted to percentages.

21

Transaction
AMSI 2005-R10 ARSI 2005-W5 CBASS 2006-CB1 ARSI 2006-W2 FHLT 2006-C CBASS 2007-CB2

Supporting Loan Group


Group I Group I Group I Group I Group 1 Group I

Primary/ OwnerOccupied (%)


95.93 84.32 91.81 83.66 94.29 89.82

Secondary/Second Home (%)


0.92 1.01 1.41 0.98 0.66 2.12

Investor/Non-Owner (%)
3.15 14.67 6.78 15.36 5.05 8.06

65.

As Table 4 makes clear, the Prospectus Supplements for each Securitization

reported that an overwhelming majority of the mortgage loans in the Supporting Loan Groups were owner-occupied, while a small percentage were reported to be non-owner-occupied (i.e. a second home or investor/non-owner property). 66. The statements about occupancy status were material to a reasonable investors Information about occupancy status is an important factor

decision to invest in the Certificates.

in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to

default than borrowers who purchase homes as second homes or investments and live elsewhere, and are more likely to care for their primary residence, the percentage of loans in the collateral group of a securitization that are secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. 67. Other things being equal, the higher the percentage of loans not secured by Even small

owner-occupied residences, the greater the risk of loss to the certificateholders.

differences in the percentages of primary/owner-occupied, second home/secondary, and investor/non-owner properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed at paragraphs 80 through 84 below, the Registration Statement for each Securitization materially

22

overstated the percentage of loans in the Supporting Loan Groups that were owner-occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 68. Statements Regarding Loan-to-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the

balance of the mortgage loan to the value of the mortgaged property when the loan is made. 69. The denominator in the LTV ratio is the value of the mortgaged property, and is In a

generally the lower of the purchase price or the appraised value of the property.

refinancing or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular,

an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan. 70. The Prospectus Supplements for each Securitization also contained group-level The percentage

information about the LTV ratio for the underlying group of loans as a whole.

of loans with an LTV ratio at or less than 80 percent and the percentage of loans with an LTV ratio greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups are reflected in Table 5 below.6

As used in this Complaint, LTV refers to the original loan-to-value ratio for first lien mortgages and for properties with second liens that are subordinate to the lien that was included in the securitization (i.e., only the securitized lien is included in the numerator of the LTV calculation). However, for second lien mortgages, where the securitized lien is junior to another loan, the more senior lien has been added to the securitized one to determine the numerator in the LTV calculation (this latter calculation is sometimes referred to as the combined-loan-to-value ratio, or CLTV).

23

Table 5
Supporting Loan Group
Group I Group I Group I Group I Group I Group I Group 1 Group I

Transaction
ARSI 2005-W3 FHLT 2005-D AMSI 2005-R10 ARSI 2005-W5 CBASS 2006-CB1 ARSI 2006-W2 FHLT 2006-C CBASS 2007-CB2

Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80%
53.18 69.19 54.09 56.08 69.72 48.87 60.13 56.66

Percentage of loans, by aggregate principal balance, with LTV greater than 100%
0.00 0.00 0.00 0.00 0.01 0.00 0.00 0.00

71.

As Table 5 makes clear, the Prospectus Supplement for each Securitization

reported that many or most of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80% or less, and that virtually no mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent. 72. The LTV ratio is among the most important measures of the risk of a mortgage

loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the

property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV, the greater the equity cushion, so the greater the

likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 73. Thus, LTV ratio is a material consideration to a reasonable investor in deciding

whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay

24

Certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed infra at paragraphs 85 through 90, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates. D. 74. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of mortgage-backed securitizations by

the credit rating agencies, including Moodys Investors Service, Standard & Poors, Fitch Ratings, and DBRS. Each credit rating agency uses its own scale with letter designations to In general, AAA or its equivalent ratings are at the top of the C and D ratings are at

describe various levels of risk.

credit rating scale and are intended to designate the safest investments.

the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time the GSEs purchased the GSE Certificates, investments

with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA or its equivalent through

BBB- or its equivalent were generally referred to as investment grade. 75. Rating agencies determine the credit rating for each tranche of a mortgage-backed

securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood

of repayment by estimating cash-flows based on the quality of the underlying mortgages by using sponsor-provided loan-level data. Credit enhancements, such as subordination, represent

25

the amount of cushion or protection from loss incorporated into a given securitization.7

This

cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit

enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 76. Credit ratings have been an important tool to gauge risk when making investment

decisions. In testimony before the Senate Permanent Subcommittee on Investigations, Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005 to 2008, confirmed that the rating agencies relied upon investment banks to provide accurate information about the loan pools: The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reported to both S&P and investors about those loans . . . . S&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. (SPSI hearing testimony, April 23, 2010). 77. For almost a hundred years, investors like pension funds, municipalities,

insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Mae and Freddie Macs

Subordination refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are subordinate to the senior notes in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate certificates thus provide a degree of protection to the senior certificates from losses on the underlying loans.

26

respective internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 78. Each tranche of the Securitizations received a credit rating upon issuance, which

purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was investment grade, AAA or its equivalent. The accuracy of these ratings was

material to a reasonable investors decision to purchase the Certificates. As set forth in Table 8, infra at paragraph 105, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates as AAA (or its equivalent) in fact, they were not. IV. FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 79. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the

statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically-significant basis, material

misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner

occupancy and LTV ratios was materially false and misleading.

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1. 80.

Owner Occupancy Data Was Materially False

The data review has revealed that the owner occupancy statistics reported in the

Prospectus Supplements were materially false and inflated. In fact, far fewer underlying properties were occupied by their owners than disclosed in the Prospectus Supplements, and more correspondingly were held as second homes or investment properties. 81. To determine whether a given borrower actually occupied the property as

claimed, a number of tests were conducted, including, inter alia, whether months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much more likely that a borrower will not repay the loan. 82. A significant number of the loans failed two or more of these tests, indicating that

the owner occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. 83. For example, for the AMSI 2005-R10 Securitization, the Prospectus Supplement

stated that 4.07 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied. But the data review revealed that, for 9.65 percent of the properties

represented as owner-occupied, the owners lived elsewhere, indicating that the true percentage of

28

non-owner-occupied properties was 13.33 percent, more than double the percentage reported in the Prospectus Supplement.8 84. The data review revealed that for each Securitization, the Prospectus Supplement

misrepresented the percentage of non-owner-occupied properties. The true percentage of nonowner-occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization, is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization understated the percentage of non-owner-occupied properties by at least 7.49 percent, and for all but one of the Securitizations by nine percent or more. Table 6
Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-Owner Occupancy9
11.60 13.36 9.65 11.44 8.16 11.34 12.87 12.40

Transaction

Supporting Loan Group

Reported Percentage of Non-OwnerOccupied Properties

Actual Percentage of Non-OwnerOccupied Properties

Prospectus Understatement of Non-OwnerOccupied Properties


9.94 12.02 9.26 9.65 7.49 9.49 12.14 11.14

ARSI 2005-W3 FHLT 2005-D AMSI 2005-R10 ARSI 2005-W5 CBASS 2006-CB1 ARSI 2006-W2 FHLT 2006-C CBASS 2007-CB2

Group I Group I Group I Group I Group I Group I Group 1 Group I

14.36 10.02 4.07 15.68 8.19 16.34 5.71 10.18

24.30 22.05 13.33 25.33 15.68 25.83 17.85 21.32

This conclusion is arrived at by summing (a) the stated non-owned-occupied percentage in the Prospectus Supplement (here, 4.07 percent), and (b) the product of (i) the stated owner-occupied percentage (here, 95.93 percent) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 9.65 percent). As described more fully in paragraph 81, failing two or more tests of owneroccupancy is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property.
9

29

2. 85.

Loan-to-Value Data Was Materially False

The data review has further revealed that the LTV ratios disclosed in the

Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model

(AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties AVMs rely upon similar

during prequalification, origination, portfolio review and servicing.

data as appraisersprimarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 86. Applying the AVM to the available data for the properties securing the sampled

loans shows that the appraised value given to such properties was significantly higher than the actual value of such properties. understatement of LTV. The result of this overstatement of property values is a material

That is, if a propertys true value is significantly less than the value

used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the

risk of greater losses in the event of a default. 87. For example, for the CBASS 2007-CB2 Securitization, which was sponsored by

C-BASS and underwritten by Barclays Capital, the Prospectus Supplement stated that no LTV ratio for the Supporting Loan Group was above 100 percent. In fact, 29.27 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the

Prospectus Supplement stated that 60.68 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 31.87 percent of the loans had LTV ratios at or

below 80 percent.

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88.

The data review revealed that for each Securitization, the Prospectus Supplement

misrepresented the percentage of loans with an LTV ratio above 100 percent, as well the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true

percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage reported in the Prospectus Supplement. calculated by aggregated principal balance. Table 7
PROSPECTUS Percentage of Loans Reported to Have LTV Ratio At Or Less Than 80%
53.18 69.19 54.09 56.08 69.72 48.87 60.13 56.66

The percentages listed in Table 7 were

Transaction

Supporting Loan Group


Group I Group I Group I Group I Group I Group I Group 1 Group I

DATA REVIEW True Percentage of Loans With LTV Ratio At Or Less Than 80%
36.47 46.05 41.14 37.59 45.34 32.95 37.06 31.87

PROSPECTUS Percentage of Loans Reported to Have LTV Ratio Over 100%


0.00 0.00 0.00 0.00 0.01 0.00 0.00 0.00

DATA REVIEW True Percentage of Loans With LTV Ratio Over 100%
17.07 13.33 12.93 14.26 12.82 20.93 22.07 29.27

ARSI 2005-W3 FHLT 2005-D AMSI 2005-R10 ARSI 2005-W5 CBASS 2006-CB1 ARSI 2006-W2 FHLT 2006-C CBASS 2007-CB2

89.

As Table 7 demonstrates, the Prospectus Supplements for all of the

Securitizations reported that virtually none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent. In contrast, the data review revealed that at least 12.25 percent of the mortgage loans for each Securitization had an LTV ratio over 100 percent, and for almost half of the Securitizations this figure was much larger. Indeed, for three of the Securitizations, the data review revealed that more than 20 percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent.

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90.

These inaccuracies with respect to reported LTV ratios also indicate that the

representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission (the FCIC), which identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See FCIC, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (January 2011). B. 91. The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statements contained material misstatements and omissions Indeed, the originators for the loans

regarding compliance with underwriting guidelines.

underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage lending businesses. This is confirmed by the systematically misreported owner occupancy and LTV statistics, discussed above, and by (1) government investigations into originators underwriting practices, which have revealed widespread abandonment of originators reported underwriting guidelines during the relevant period; (2) the collapse of the Certificates credit ratings; and (3) the surge in delinquency and default in the mortgages in the Securitizations.

32

1.

Government Investigations Have Confirmed That the Originators of the Loans in the Securitizations Systematically Failed to Adhere to Their Underwriting Guidelines

92.

The abandonment of underwriting guidelines is confirmed by several government

reports and investigations that have described rampant underwriting failures throughout the period of the Securitizations, and, more specifically, have described underwriting failures by the very originators whose loans were included by the Defendants in the Securitizations. 93. For instance, in November 2008, the Office of the Comptroller of the Currency,

an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst

originators were defined as those with the largest number of non-prime mortgage foreclosures for 2005-2007 originations. Argent, Ameriquest, and Fremont, which originated many of the

loans for the Securitizations at issue here, were all on that list. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. 94. The originators of the mortgage loans underlying the Securitizations went beyond

the systemic disregard of their own underwriting guidelines. Indeed, as the FCIC has confirmed, mortgage loan originators throughout the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, discussed supra, which in turn made the loans appear to the investors less risky that they were. 95. As described by Patricia Lindsay, a former wholesale lender who testified before

the FCIC in April 2010, appraisers fear[ed] for their livelihoods, and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come

33

up with the most accurate value. See Written Testimony of Patricia Lindsay to the FCIC, April 7, 2010, at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in

his testimony that [i]in many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again [T]oo often state licensed and certified appraisers are forced into making a Hobsons Choice. See Testimony of Jim Amorin to the FCIC, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRANAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers

systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgage-backed securitizations. 96. On October 4, 2007, the Commonwealth of Massachusetts, through its Attorney

General, brought an enforcement action against Fremont, which originated loans for two of the Securitizations, for an array of unfair and deceptive business conduct, on a broad scale. See Complaint, Commonwealth v. Fremont Investment & Loan and Fremont General Corp., No. 07-4373 (Mass. Super. Ct.) (Fremont Complaint). According to the complaint, Fremont (i)

approve[ed] borrowers without considering or verifying the relevant documentation related to the borrowers credit qualifications, including the borrowers income; (ii) approv[ed] borrowers for loans with inadequate debt-to-income analyses that do not properly consider the borrowers ability to meet their overall level of indebtedness and common housing expenses; (iii) failed to meaningfully account for [ARM] payment adjustments in approving and selling loans; (iv) approved borrowers for these ARM loans based only on the initial fixed teaser rate, without regard for borrowers ability to pay after the initial two year period; (v) consistently failed to monitor or supervise brokers practices or to independently verify the

34

information provided to Fremont by brokers; and (vi) ma[de] loans based on information that Fremont knew or should have known was inaccurate or false, including, but not limited to, borrowers income, property appraisals, and credit scores. See Fremont Complaint. 97. On December 9, 2008, the Supreme Judicial Court of Massachusetts affirmed a

preliminary injunction that prevented Fremont from foreclosing on thousands of its loans issued to Massachusetts residents. As a basis for its unanimous ruling, the Supreme Judicial Court

found that the record supported the lower courts conclusions that Fremont made no effort to determine whether borrowers could make the scheduled payments under the terms of the loan, and that Fremont knew or should have known that [its lending practices and loan terms] would operate in concert essentially to guarantee that the borrower would be unable to pay and default would follow. Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 556 (Mass. 2008). The terms of the preliminary injunction were made permanent by a settlement reached on June 9, 2009. 98. Argent originated loans for three of the Securitizations. According to a

December 7, 2008 article in the Miami Herald, employees of Argent Mortgage had a practice of actively assisting brokers to falsify information on loan applications. tutor[]mortgage brokers in the art of fraud. They would

Employees taught [brokers] how to doctor

credit reports, coached them to inflate [borrower] income on loan applications, and helped them invent phantom jobs for borrowers so that loans could be approved. Borrowers Betrayed, Part 4, Miami Herald, Dec. 7, 2008. 99. Orson Benn, a former Argent Vice President who went to prison for his role in

facilitating mortgage fraud, has stated that at Argent the accuracy of loan applications was not a priority. Borrowers Betrayed, Part 4, Miami Herald, Dec. 7, 2008. Mr. Benn was the head

35

of a crime ring that fabricated loan applications in order to pocket the loan fees; Mr. Benn himself pocketed a $3,000 kickback for each loan he helped secure. FCIC Report at 164. Of

the 18 defendants charged in the Argent ring, 16 have been convicted or pled guilty, FCIC Report at 164, including Mr. Benn, who was sentenced to 18 years in prison, Ex-Argent Mortgage VP Sentenced For Fraud, North Country Gazette, Sept. 5, 2008. 100. Other jurisdictions have also investigated Argent for its mortgage origination

practices. On June 22, 2011, a grand jury in Cuyahoga County, Cleveland, indicted nine employees of Argent for their suspected roles in approving fraudulent home loans. The case,

investigated by the Cuyahoga County Mortgage Fraud Task Force, alleges that the employees helped coach mortgage brokers about how to falsify loan documents to misstate the source or existence of down payments, as well as a borrowers income and assets. Argent was Clevelands number one lender in 2004, and originated over 10,000 loans during the time span 2002 through 2005. This was the first time in Ohio, and one of few instances nationwide, that a

mortgage fraud investigation has led to criminal charges against employees of a subprime lender. Mark Gillespie, Former employees of subprime mortgage lender indicted by Cuyahoga County grand jury, The Plain Dealer, June 23, 2011. 101. Indeed, Jacquelyn Fishwick, who worked for more than two years at an Argent

loan processing center near Chicago as an underwriter and account manager, noted that some Argent employees played fast and loose with the rules. She personally saw some stuff [she]

didnt agree with, such as [Argent] account managers remove documents from files and create documents by cutting and pasting them. The Subprime House of Cards, Cleveland Plain Dealer, May 11, 2008.

36

102.

Similarly, Argent was also not diligent about confirming accurate appraisals for Steve Jernigan, a fraud investigator at The

the properties for which it was issuing mortgages.

Argent, said that he once went to check on a subdivision for which Argent had made loans. address on the loans turned out to be in the middle of a cornfield; the appraisals had all been fabricated. The same fake picture had been included in each file. Michael W. Hudson,

Silencing the Whistle-blowers, The Investigative Fund, May 10, 2010. 2. The Collapse of the Certificates Credit Ratings Further Indicates that the Mortgage Loans were not Originated in Adherence to the Stated Underwriting Guidelines.

103.

The total collapse in the credit ratings of the GSE Certificates, typically from

AAA or its equivalent to non-investment speculative grade, is further evidence of the originators systematic disregard of underwriting guidelines, amplifying that the GSE Certificates were impaired from the start. 104. The GSE Certificates that Fannie Mae and Freddie Mac purchased were originally

assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements 105. Barclays provided or caused to be provided loan-level information to the rating

agencies that they relied upon in order to calculate the Certificates assigned ratings, including the borrowers LTV ratio, debt-to-income ratio, owner-occupancy status, and other loan-level information described in aggregation reports in the Prospectus Supplements. Because the

information that Barclays provided or caused to be provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those

37

ratings signified.

As a result, the GSEs paid Defendants inflated prices for purported AAA (or

its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and carried inadequate credit enhancement. 106. Since the issuance of the Certificates, the ratings agencies have dramatically

downgraded their ratings to reflect the revelations regarding the true underwriting practices used to originate the mortgage loans, and the true value and credit quality of the mortgage loans. Table 8 details the extent of the downgrades.10 Table 8
Transaction
ARSI 2005-W3 FHLT 2005-D AMSI 2005-R10 ARSI 2005-W5 CBASS 2006-CB1 ARSI 2006-W2 FHLT 2006-C CBASS 2007-CB2

Tranche
A1 1A1 A1 A1 AV1 A1 1A1 A1

Rating at Issuance (Moodys/S&P/Fitch/DBRS)


Aaa/AAA/AAA/Aaa/AAA/-/AAA Aaa/AAA/AAA/Aaa/AAA/AAA/Aaa/AAA/AAA/AAA Aaa/AAA/AAA/Aaa/AAA/AAA/AAA Aaa/AAA/AAA/AAA

Rating at July 31, 2011 (Moodys/S&P/Fitch/DBRS)


Ba2/BBB/B/Baa3/AAA/A1/AAA/A/B2/B+/CC/B1/BB/CC/C Caa1/CCC/C/Ca/CCC/CC/C Ca/B-/C/C

3.

The Surge in Mortgage Delinquency and Default Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines

107.

Even though the Certificates purchased by Fannie Mae and Freddie Mac were

supposed to represent long-term, stable investments, a significant percentage of the mortgage loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the

Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch/DBRS. A hyphen between forward slashes indicates that the relevant agency did not provide a rating at issuance.

10

38

mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with applicable underwriting guidelines as represented in the Registration Statements. 108. Loan groups that were properly underwritten and contained loans with the

characteristics represented in the Registration Statements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 reflects the percentage of loans in the Supporting

Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011. Table 9
Transaction
ARSI 2005-W3 FHLT 2005-D AMSI 2005-R10 ARSI 2005-W5 CBASS 2006-CB1 ARSI 2006-W2 FHLT 2006-C CBASS 2007-CB2

Supporting Loan Group


Group I Group I Group I Group I Group I Group I Group I Group I

Percentage of Delinquent/Defaulted/Foreclosed Loans


40.00 55.40 33.70 36.10 44.50 42.10 53.20 44.50

109.

The confirmed misstatements concerning owner occupancy and LTV ratios, the

confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations, and the extraordinary drop in credit rating and rise in delinquencies across those Securitizations, all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines.

39

V.

FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 110. In total, between October 28, 2005 and February 28, 2007, Fannie Mae and

Freddie Mac purchased approximately $4.9 billion in residential mortgage-backed securities issued in connection with the Securitizations. purchases of the Certificates.11 Table 10
Settlement Date of Purchase by Freddie Mac
10/28/2005 11/18/2005 11/23/2005 12/28/2005 1/26/2006 2/27/2006 2/28/2007

Table 10 reflects each of Freddie Macs

Transaction
ARSI 2005-W3 FHLT 2005-D AMSI 2005R10 ARSI 2005-W5 CBASS 2006CB1 ARSI 2006-W2 CBASS 2007CB2

Tranche
A1 1A1 A1 A1 AV1 A1 A1

CUSIP
040104NX5 35729PMA5 03072SS22 040104QK0 81375WHF6 040104SG7 1248MBAF2

Initial Unpaid Principal Balance


736,186,000 343,936,000 1,230,491,000 881,201,000 287,298,000 725,306,000 220,801,000

Purchase Price (% of Par)


100 100 100 100 100 100 100

Seller to Freddie Mac


Barclays Capital Barclays Capital Barclays Capital Barclays Capital Barclays Capital Barclays Capital Barclays Capital

111.

Table 11 reflects Fannie Maes purchase of the Certificates: Table 11


Settlement Date of Purchase by Fannie Mae
9/7/2006

Transaction
FHLT 2006-C

Tranche
1A1

CUSIP
35729TAA0

Initial Unpaid Principal Balance


459,746,000

Purchase Price (% of Par)


100

Seller to Fannie Mae


Barclays Capital

112.

The statements and assurances in the Registration Statements regarding the credit

quality and characteristics of the mortgage loans underlying the GSE Certificates, and the origination and underwriting practices pursuant to which the mortgage loans were originated, which were summarized in such documents, were material to a reasonable investors decision to purchase the GSE Certificates. Purchased securities in Tables 10 and 11 are stated in terms of unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par.
11

40

113.

The false statements of material facts and omissions of material facts in the

Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer hundreds of millions of dollars in damages, including without limitation depreciation in the value of the securities. The mortgage loans underlying

the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements. 114. Fannie Maes and Freddie Macs losses have been much greater than they would

have been if the mortgage loans had the credit quality represented in the Registration Statements. 115. Barclays misstatements and omissions in the Registration Statements regarding

the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchase of the GSE Certificates. 116. Barclays misstatements and omissions in the Registration Statements regarding

the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchases of the GSE Certificates. Based upon sales of the Certificates

or similar certificates in the secondary market, Barclays proximately caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants Barclays Capital, SABR, and the Individual Defendants) 117. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud.

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118.

This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of

1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against This claim is

Defendant Barclays Capital with respect to each of the Registration Statements.

also brought against (i) Defendant SABR and (ii) the Individual Defendants, each with respect to the SABR Shelf Registration Statements filed by SABR in connection with the SABR Securitizations. 119. This claim is predicated upon Defendants Barclays Capitals strict liability for

making false and materially misleading statements in each of the Registration Statements for the Securitizations and for omitting facts necessary to make the facts stated therein not misleading. Defendant SABR and the Individual Defendants are strictly liable for making false and materially misleading statements in the SABR Shelf Registration Statements which are applicable to the SABR Securitizations (as specified in Table 1, supra at paragraph 30), and for omitting facts necessary to make the facts stated therein not misleading. 120. Securitization. Defendant Barclays Capital served as the lead or co-lead underwriter in each As the underwriter in each Securitization, Barclays Capital is strictly liable

under Section 11 of the Securities Act for the misstatements and omissions in each Registration Statement. 121. Defendant SABR filed the SABR Shelf Registration Statements under which two

of the eight Securitizations were carried out. As depositor, Defendant SABR is an issuer of the GSE Certificates issued pursuant to the Registration Statements it filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77(b)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, it is liable under Section 11 of the Securities Act for the

42

misstatements and omissions in the SABR Shelf Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005 in connection with the SABR Securitizations. 122. At the time SABR filed the SABR Shelf Registration Statements applicable to the

SABR Securitizations, the Individual Defendants were officers and/or directors of SABR. In addition, the Individual Defendants signed the SABR Shelf Registration Statements and either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the Individual Defendants are liable under Section 11 of the Securities

Act for the misstatements and omissions in the SABR Shelf Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005 in connection with the SABR Securitizations. 123. At the time that they became effective, each Registration Statement contained

material misstatements of fact and omitted information necessary to make the facts stated therein not misleading, as set forth above. The facts misstated or omitted were material to a reasonable investor reviewing the Registration Statements, including to Fannie Mae and Freddie Mac. 124. The untrue statements of material facts and omissions of material fact in the

Registration Statements are set forth above in Section IV and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 125. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE Fannie Mae and

Certificates pursuant to the false and misleading Registration Statements. Freddie Mac made these purchases in the primary market.

At the time they purchased the GSE

Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and

43

misleading statements and omissions alleged herein, and if the GSEs had known those facts, they would not have purchased the GSE Certificates. 126. Barclays Capital owed to Fannie Mae, Freddie Mac, and other investors a duty to

make a reasonable and diligent investigation of the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct and that there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Individual Defendants owed the same duty with respect to the SABR Shelf Registration Statements they signed, which are applicable to the SABR Securitizations. 127. Barclays Capital and the Individual Defendants did not exercise such due

diligence and failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, SABR, though subject to strict liability without regard to whether it performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations in the SABR Shelf Registration Statements. 128. Fannie Mae and Freddie Mac sustained substantial damages as a result of the

misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 129. The time period since July 29, 2011 is tolled for statute of limitations purposes by

virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, Barclays Bank, Barclays Capital, and SABR. This action is brought within

44

three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). 130. By reason of the conduct herein alleged, Barclays Capital, SABR, and the

Individual Defendants are jointly and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against Barclays Capital and SABR) 131. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 132. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities

Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. 133. Defendant Barclays Capital negligently made false and materially misleading

statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each Securitization. Defendant SABR negligently made false and materially misleading statements in the Prospectuses for the SABR Securitizations effected under the SABR Shelf Registration Statements it filed in connection with the SABR Securitizations. 134. Barclays Capital is prominently identified in the Prospectuses, the primary Barclays Capital offered the Certificates

documents that it used to sell the GSE Certificates.

publicly, including selling to Fannie Mae and Freddie Mac the GSE Certificates, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 135. Barclays Capital offered and sold the GSE Certificates to Fannie Mae and Freddie

Mac by means of the Prospectuses, which contained untrue statements of material facts and

45

omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Barclays Capital reviewed and participated in drafting the Prospectuses. 136. Barclays Capital successfully solicited Fannie Maes and Freddie Macs

purchases of the GSE Certificates. As underwriter, Barclays Capital obtained substantial commissions based upon the amount received from the sale of the Certificates to the public. 137. Barclays Capital offered the GSE Certificates for sale, sold them, and distributed

them by the use of means or instruments of transportation and communication in interstate commerce, including communications between its representatives in New York and representatives of Fannie Mae in the District of Columbia and Freddie Mac in McLean, Virginia. 138. SABR is prominently identified in the Prospectuses for the SABR Securitizations These Prospectuses were the

carried out under the SABR Shelf Registration Statements it filed.

primary documents SABR used to sell Certificates for the SABR Securitizations under the SABR Shelf Registration Statements. SABR offered the Certificates publicly, and actively SABR was paid a

solicited their sale, including selling to Fannie Mae and Freddie Mac.

percentage of the total dollar amount of the offering upon completion of the SABR Securitizations effected pursuant to the SABR Shelf Registration Statements. 139. With respect to the SABR Securitizations for which it filed the SABR Shelf

Registration Statements, SABR offered and sold the GSE Certificates to Fannie Mae and Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Prospectuses. SABR reviewed and participated in drafting the

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140.

SABR offered the GSE Certificates for sale by the use of means or instruments of

transportation and communication in interstate commerce. 141. Barclays and SABR actively participated in the solicitation of the GSEs purchase Such solicitation included

of the GSE Certificates, and did so in order to benefit themselves.

assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates. 142. Each of the Prospectuses contained material misstatements of fact and omitted

information necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and were specifically material to Fannie Mae and Freddie Mac. 143. The untrue statements of material facts and omissions of material fact in the

Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 144. SABR and Barclays Capital offered and sold the GSE Certificates offered

pursuant to the Registration Statements directly to Fannie Mae and Freddie Mac, pursuant to the false and misleading Prospectuses. 145. Barclays Capital owed to Fannie Mae and Freddie Mac, as well as to other

investors in these trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. SABR owed the same duty with respect to the Prospectuses for the SABR Securitizations carried out under the SABR Shelf Registration Statements it filed.

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146.

Barclays Capital and SABR failed to exercise such reasonable care.

These

defendants in the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 147. In contrast, Fannie Mae and Freddie Mac did not know, and in the exercise of

reasonable diligence could not have known, of the untruths and omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If the GSEs had known of those

untruths and omissions, they would not have purchased the GSE Certificates. 148. Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market

pursuant to the Prospectuses. 149. Fannie Mae and Freddie Mac sustained substantial damages in connection with

their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 150. The time period since July 29, 2011 is tolled for statute of limitations purposes by

virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, Barclays Bank, Barclays Capital, and SABR. This action is brought within

three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against Barclays Bank and the Individual Defendants) 151. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud.

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152.

This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.

77o, against Barclays Bank and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 153. The Individual Defendants at all relevant times participated in the operation and

management of SABR, and conducted and participated, directly and indirectly, in the conduct of SABRs business affairs. Defendant Michael Wade was President and Chief Executive Officer of SABR. Defendant John Carroll was Vice President and Chief Financial Officer of SABR.

Defendant Paul Menefee was Vice President and Chief Accounting Officer at SABR. 154. Because of their positions of authority and control as senior officers and directors

of SABR, the Individual Defendants were able to, and in fact did, control the contents of the SABR Shelf Registration Statements, including the related Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 155. Defendant Barclays Bank controlled all aspects of the business of SABR, as

SABR was merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of For example, Defendant

Barclays Bank overlapped with the officers and directors of SABR.

John Carroll was both Vice President and Chief Executive Officer at SABR, and Managing Director at Barclays Bank. 156. Capital. Defendant Barclays Bank also controlled the business operations of Barclays As the sole

Barclays Bank is the corporate parent of Barclays Capital and SABR.

corporate parent of Barclays Capital and SABR, Barclays Bank, upon information and belief, held the voting power and therefore the practical ability to direct and control the actions of

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Barclays Capital and SABR in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Barclays Capital and SABR in connection with the issuance and sale of the Certificates. Barclays Bank expanded its share of the residential mortgage-backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 157. Defendant Barclays Bank wholly owns Barclays Capital and SABR. Barclays

Bank culpably participated in the violations of Section 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as SABR and the issuing trusts to serve as conduits for the mortgage loans. 158. Barclays Bank and the Individual Defendants are controlling persons within the

meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of Barclays Capital and SABR at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 159. Fannie Mae and Freddie Mac purchased in the primary market the GSE

Certificates issued pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and were specifically material to Fannie Mae and Freddie Mac.

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160.

Fannie Mae and Freddie Mac did not know of the misstatements and omissions in Had the GSEs known of those misstatements and omissions, they

the Registration Statements.

would not have purchased the GSE Certificates. 161. Fannie Mae and Freddie Mac have sustained substantial damages as a result of the

misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 162. The time period since July 29, 2011 is tolled for statute of limitations purposes by

virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, Barclays Bank, Barclays Capital, and SABR. This action is brought within

three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). FOURTH CAUSE OF ACTION Violation of Section 13.1-522(A)(ii) of the Virginia Code (Against Barclays Capital and SABR) 163. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 164. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the The allegations set forth below in this

Virginia Code and is asserted on behalf of Freddie Mac.

cause of action pertain only to the GSE Certificates issued in connection with the CBASS 2007CB2 Securitization (the CBASS 2007-CB2 Certificates). 165. This claim is predicated upon Barclays Capitals and SABRs negligence in

making materially false and misleading statements in the Prospectus (as supplemented by the Prospectus Supplement, hereinafter referred to in this Section as Prospectus) for the CBASS

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2007-CB2 Securitization, effected under the Registration Statement filed December 20, 2005 by SABR. 166. Barclays Capital and SABR are prominently identified in the Prospectus for the

CBASS 2007-CB2 Securitization, the primary document used to sell the CBASS 2007-CB2 Certificates. Barclays Capital and SABR offered the Certificates issued in connection with the

CBASS 2007-CB2 Securitization publicly, including selling the CBASS 2007-CB2 Certificates to Freddie Mac, as set forth in the Underwriting section of the Prospectus. 167. Barclays Capital and SABR offered and sold the CBASS 2007-CB2 Certificates

to Freddie Mac by means of a Prospectus, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Barclays Capital and SABR reviewed and participated in drafting the Prospectus. 168. Barclays Capital and SABR successfully solicited Freddie Macs purchase of the

CBASS 2007-CB2 Certificates. As underwriter, Barclays Capital obtained a substantial commission based upon the amount received from the sale of the Certificates issued in connection with the CBASS 2007-CB2 Securitization to the public. SABR was paid a

percentage of the total dollar amount of the offering upon completion of the CBASS 2007-CB2 Securitization. 169. Barclays Capital and SABR offered the GSE Certificates for sale, sold them, and

distributed them to Freddie Mac in the State of Virginia. 170. Barclays Capital and SABR actively participated in the solicitation of Freddie

Macs purchase of the CBASS 2007-CB2 Certificates, and did so in order to benefit themselves.

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Such solicitation included assisting in preparing a Registration Statement, filing the Registration Statement, and assisting in marketing the CBASS 2007-CB2 Certificates. 171. The Prospectus contained material misstatements of fact and omitted information

necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectus, and were specifically material to Freddie Mac. 172. The untrue statements of material facts and omissions of material fact in the

Registration Statement, which include the Prospectus, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 173. Barclays Capital and SABR offered and sold the CBASS 2007-CB2 Certificates

offered pursuant to the Registration Statement directly to Freddie Mac, pursuant to the false and misleading Prospectus. 174. Barclays Capital owed to Freddie Mac, as well as to other investors, a duty to

make a reasonable and diligent investigation of the statements contained in the Prospectus, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. SABR owed the same duty with respect to the Prospectus for the CBASS 2007-CB2 Securitization, effected under the Registration Statement filed December 20, 2005. 175. Barclays Capital and SABR failed to exercise such reasonable care. These

defendants in the exercise of reasonable care should have known that the Prospectus contained untrue statements of material facts and omissions of material facts at the time of the CBASS 2007-CB2 Securitization as set forth above.

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176.

In contrast, Freddie Mac did not know, and in the exercise of reasonable diligence

could not have known, of the untruths and omissions contained in the Prospectus at the time it purchased the CBASS 2007-CB2 Certificates. If Freddie Mac had known of those untruths and

omissions, it would not have purchased the CBASS 2007-CB2 Certificates. 177. Freddie Mac sustained substantial damages in connection with its investment in

the CBASS 2007-CB2 Certificates and has the right to rescind and recover the consideration paid for the CBASS 2007-CB2 Certificates, with interest thereon. 178. The time period since July 29, 2011 is tolled for statute of limitations purposes by

virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, Barclays Bank, Barclays Capital, and SABR. This action is brought within

three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). FIFTH CAUSE OF ACTION Violation of Section 13.1-522(C) of the Virginia Code (Against Barclays Bank and the Individual Defendants) 179. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 180. This claim is brought by Plaintiff under Section 13.1-522(C) of the Virginia Code The allegations set forth below in this cause of action

and is asserted on behalf of Freddie Mac.

pertain only to the CBASS 2007-CB2 Certificates. This claim is brought against Barclays Bank and the Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 181. The Individual Defendants at all relevant times participated in the operation and

management of SABR, and conducted and participated, directly and indirectly, in the conduct of

54

SABRs business affairs. Defendant Michael Wade was President and Chief Executive Officer of SABR. Defendant John Carroll was Vice President and Chief Financial Officer of SABR.

Defendant Paul Menefee was Vice President and Chief Accounting Officer at SABR. 182. Because of their positions of authority and control as senior officers and directors

of SABR, the Individual Defendants were able to, and in fact did, control the contents of the Registration Statement filed in connection with the CBASS 2007-CB2 Securitization, including the related Prospectus Supplement, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 183. Defendant Barclays Bank controlled all aspects of the business of SABR, as

SABR was merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of For example, Defendant

Barclays Bank overlapped with the officers and directors of SABR.

John Carroll was both Vice President and Chief Executive Officer at SABR, and Managing Director at Barclays Bank. 184. Capital. Defendant Barclays Bank also controlled the business operations of Barclays As the sole

Barclays Bank is the corporate parent of Barclays Capital and SABR.

corporate parent of Barclays Capital and SABR, Barclays Bank, upon information and belief, held the voting power and therefore the practical ability to direct and control the actions of Barclays Capital and SABR in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Barclays Capital and SABR in connection with the issuance and sale of the CBASS 2007-BC2 Certificates. Barclays Bank expanded its share of

the residential mortgage-backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue

55

statements of material facts and omissions of material facts in the Registration Statement filed in connection with the CBASS 2007-CB2 Securitization. 185. Defendant Barclays Bank wholly owns Barclays Capital and SABR. Barclays

Bank culpably participated in the violation of Section 13.1-522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statement filed in connection with the CBASS 2007-CB2 Securitization and established special-purpose financial entities such as SABR and the issuing trust to serve as conduits for the mortgage loans. 186. Barclays Bank and the Individual Defendants are controlling persons within the

meaning of Section 13.1-522(C) by virtue of their actual power over, control of, ownership of, and/or directorship of Barclays Capital and SABR at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statement filed in connection with the CBASS 2007-CB2 Securitization. 187. Freddie Mac purchased the CBASS 2007-CB2 Certificates issued pursuant to the

Registration Statement filed December 20, 2005 by SABR, including the corresponding Prospectus and Prospectus Supplement, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing

the Registration Statements, and were specifically material to Freddie Mac. 188. Freddie Mac did not know of the misstatements and omissions in the Registration

Statement filed in connection with the CBASS 2007-CB2 Securitization. Had Freddie Mac known of those misstatements and omissions, it would not have purchased the CBASS 2007CB2 Certificates.

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189.

Freddie Mac has sustained substantial damages as a result of the misstatements

and omissions in the Registration Statement filed in connection with the CBASS 2007-CB2 Securitization, for which it is entitled to compensation. 190. The time period since July 29, 2011 is tolled for statute of limitations purposes by

virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, Barclays Bank, Barclays Capital, and SABR. This action is brought within

three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). SIXTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against Barclays Capital) 191. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 192. This claim is brought by Plaintiff pursuant to Section 31-5606.05(a)(1)(B) of the The allegations set forth

District of Columbia Code and is asserted on behalf of Fannie Mae.

below in this cause of action pertain only to the GSE Certificates issued in connection with the FHLT 2006-C Securitization (the FHLT 2006-C Certificates). 193. This claim is predicated upon Barclays Capitals negligence in making materially

false and misleading statements in the Prospectus (as supplemented by the Prospectus Supplement, hereinafter referred to in this Section as Prospectus) for the FHLT 2006-C Securitization that Barclays Capital sold. 194. Barclays Capital is prominently identified in the Prospectus for the FHLT 2006-C Barclays

Securitization, the primary document used to sell the FHLT 2006-C Certificates.

Capital offered the Certificates issued in connection with the FHLT 2006-C Securitization

57

publicly, including selling the FHLT 2006-C Certificates to Fannie Mae, as set forth in the Method of Distribution section of the Prospectus. 195. Barclays Capital offered and sold the FHLT 2006-C Certificates to Fannie Mae by

means of a Prospectus, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Prospectus. 196. C Certificates. Barclays Capital successfully solicited Fannie Maes purchase of the FHLT 2006As underwriter, Barclays Capital obtained a substantial commission based upon Barclays Capital reviewed and participated in drafting the

the amount received from the sale of the Certificates issued in connection with the FHLT 2006-C Securitization to the public. 197. Barclays Capital offered the FHLT 2006-C Securitization Certificates for sale,

sold them, and distributed them to Fannie Mae in the District of Columbia. 198. Barclays Capital actively participated in the solicitation of Fannie Maes purchase Such solicitation

of the FHLT 2006-C Certificates, and did so in order to benefit itself.

included assisting in preparing a Registration Statement, filing the Registration Statement, and assisting in marketing the FHLT 2006-C Certificates. 199. The Prospectus contained material misstatements of fact and omitted information

necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectus, and were specifically material to Fannie Mae. 200. The untrue statements of material facts and omissions of material fact in the

Registration Statement, which include the Prospectus, are set forth above in Section IV, and

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pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 201. Barclays Capital offered and sold the FHLT 2006-C Certificates pursuant to the

Registration Statement dated March 17, 2006 directly to Fannie Mae, pursuant to the materially false, misleading, and incomplete Prospectus. 202. Barclays Capital owed to Fannie Mae, as well as to other investors, a duty to

make a reasonable and diligent investigation of the statements contained in the Prospectus, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. 203. Barclays Capital failed to exercise such reasonable care. Barclays Capital in the

exercise of reasonable care should have known that the Prospectus contained untrue statements of material facts and omissions of material facts at the time of the Securitization as set forth above. 204. In contrast, Fannie Mae did not know, and in the exercise of reasonable diligence

could not have known, of the untruths and omissions contained in the Prospectus at the time it purchased the FHLT 2006-C Certificates. If Fannie Mae had known of those untruths and

omissions, it would not have purchased the FHLT 2006-C Certificates. 205. Fannie Mae sustained substantial damages in connection with its investment in

the FHLT 2006-C Certificates and has the right to rescind and recover the consideration paid for the FHLT 2006-C Certificates, with interest thereon. 206. The time period since July 29, 2011 is tolled for statute of limitations purposes by

virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, Barclays Bank, Barclays Capital, and SABR. This action is brought within

59

three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against Barclays Bank) 207. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 208. This claim is brought under Section 31-5606.05(c) of the District of Columbia

Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to the FHLT 2006-C Certificates. This claim is brought against Barclays

Bank for controlling-person liability with regard to the Sixth Cause of Action set forth above. 209. Defendant Barclays Bank controlled the business operations of Barclays Capital. As the sole corporate parent of

Barclays Bank is the corporate parent of Barclays Capital.

Barclays Capital, Barclays Bank, upon information and belief, held the voting power and therefore the practical ability to direct and control the actions of Barclays Capital in issuing and selling the Certificates, and in fact exercised such direction and control over the activities of Barclays Capital in connection with the issuance and sale of the FHLT 2006-C Certificates. Barclays Bank expanded its share of the residential mortgage-backed securitization market in order to increase revenue and profits. The push to securitize large volumes of mortgage loans

contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statement filed in connection with the FHLT 2006-C Securitization. 210. Defendant Barclays Bank wholly owns Barclays Capital and SABR. Barclays It

Bank culpably participated in the violation of Section 31-5606.05(a)(1)(B) set forth above. oversaw the actions of its subsidiary Barclays Capital and allowed it to misrepresent the

60

mortgage loans characteristics in the Registration Statement filed in connection with the FHLT 2006-C Securitization. 211. Barclays Bank is a controlling person within the meaning of Section 31-

5606.05(c) by virtue of its actual power over, control of, ownership of, and/or directorship of Barclays Capital at the time of the wrongs alleged herein and as set forth herein, including its control over the content of the Registration Statement filed in connection with the FHLT 2006-C Securitization. 212. Fannie Mae purchased the FHLT 2006-C Certificates issued pursuant to the

Registration Statement, including the Prospectus and Prospectus Supplement, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and were specifically material to Fannie Mae. 213. Fannie Mae did not know of the misstatements and omissions in the Registration Had Fannie Mae known

Statement filed in connection with the FHLT 2006-C Securitization.

of those misstatements and omissions, it would not have purchased the FHLT 2006-C Certificates. 214. Fannie Mae has sustained substantial damages as a result of the misstatements and

omissions in the Registration Statement filed in connection with the FHLT 2006-C Securitization, for which it is entitled to compensation. 215. The time period since July 29, 2011 is tolled for statute of limitations purposes by

virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, Barclays Bank, Barclays Capital, and SABR. This action is brought within

61

three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against SABR and Barclays Capital) 216. 217. Plaintiff realleges each allegation above as if fully set forth herein. This is a claim for common law negligent misrepresentation against Defendants

SABR and Barclays Capital. 218. Between October 28, 2005 and February 28, 2007, Barclays Capital and SABR Because SABR owned and then

sold the GSE Certificates to the GSEs as described above.

conveyed the underlying mortgage loans that collateralized the Securitizations for which it served as depositor, SABR had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through its possession of the loan files and other documentation. 219. Likewise, as underwriter for the Securitizations, Barclays Capital was obligated

toand had the opportunity toperform sufficient due diligence to ensure that the Registration Statements for those Securitizations, including without limitation the corresponding Prospectus Supplements, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriterwhich gave it access to loan file information and obligated it to perform adequate due diligence to ensure the accuracy of the Registration StatementsBarclays Capital had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 220. The GSEs, like other investors, had no access to borrower loan files prior to the Accordingly, when

closing of the Securitizations and their purchase of the Certificates.

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determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on SABRs and Barclays Capitals

knowledge and their express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 221. SABR and Barclays Capital were aware that the GSEs reasonably relied on

SABRs and Barclays Capitals reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually

originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing of the Securitizations. In purchasing the GSE Certificates from SABR and Barclays Capital, the GSEs relied on their special relationship with those Defendants, and the purchases were made, in part, in reliance on that relationship. 222. Based upon their unique, exclusive, and special knowledge and expertise about

the loans held by the trusts in the Securitizations, SABR and Barclays Capital had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. SABR and Barclays Capital breached their duty to provide such

information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include

misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy

63

statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the term sheets and Prospectus Supplements. 223. In addition, having made actual representations about the underlying collateral in

the Securitizations and the facts bearing on the riskiness of the Certificates, SABR and Barclays Capital had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon SABRs and Barclays Capitals

representations about the Securitizations, and these defendants failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 224. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the

representations by SABR as the depositor in the SABR Securitizations and Barclays Capital as lead and selling underwriter in all of the Securitizations. The GSEs received term sheets

containing critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner occupancy statistics, which term sheets were delivered, upon information and belief, by Barclays Capital. This data was subsequently incorporated into

Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 225. The GSEs relied upon the accuracy of the data transmitted to them and In particular, the GSEs relied upon the

subsequently reflected in the Prospectus Supplements.

credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by Barclays Capital relating to the collateral quality of the underlying loans and the structure of the Securitization. These credit ratings represented a

determination by the credit rating agencies that the GSE Certificates were AAA quality (or its

64

equivalent)meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 226. Detailed information about the underlying collateral and structure of each

Securitization was provided or caused to be provided to the credit rating agencies by Barclays Capital and/or the sponsor. The credit rating agencies based their ratings on the information provided to them, and the agencies anticipated ratings of the Certificates were dependent on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit ratings

and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the accuracy of the representations in the term sheets and Prospectus Supplements. 227. In addition, the GSEs relied on the fact that the originators of the mortgage loans

in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with underwriting guidelines was a

precondition to the GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 228. In purchasing the GSE Certificates, the GSEs justifiably relied on SABRs and

Barclays Capitals false representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 229. But for the above misrepresentations and omissions, the GSEs would not have

purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above.

65

230.

The GSEs were damaged in an amount to be determined at trial as a direct,

proximate, and foreseeable result of SABRs and Barclays Capitals misrepresentations, including any half truths. 231. The time period since July 29, 2011 is tolled for statute of limitations purposes by

virtue of a tolling agreement entered into among the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, Barclays Bank, Barclays Capital, and SABR. This action is brought within

three years of the date that FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 232. An award in favor of Plaintiff against all Defendants, jointly and severally, for all

damages sustained as a result of Defendants wrongdoing, in an amount to be proven at trial, but including: a. Rescission and recovery of the consideration paid for the GSE

Certificates, with interest thereon; b. Each GSEs monetary losses, including any diminution in value of the

GSE Certificates, as well as lost principal and lost interest payments thereon; c. d. e. Attorneys fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper.

66

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, JURY TRIAL DEMANDED -againstCITIGROUP, INC.; CITIGROUP MORTGAGE LOAN TRUST, INC.; CITIGROUP GLOBAL MARKETS, INC.; CITIGROUP GLOBAL MARKETS REALTY CORP.; SUSAN MILLS; RANDALL COSTA; SCOTT FREIDENRICH; RICHARD A. ISENBERG; MARK I. TSESARSKY; PETER PATRICOLA; JEFFREY PERLOWITZ; and EVELYN ECHEVARRIA, Defendants.

___ CIV. ___ (___)

COMPLAINT

TABLE OF CONTENTS Page

NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................6 JURISDICTION AND VENUE ......................................................................................................9 FACTUAL ALLEGATIONS ........................................................................................................10 I. THE SECURITIZATIONS................................................................................................10 A. B. C. Residential Mortgage-Backed Securitizations In General .....................................10 The Securitizations At Issue In This Case .............................................................12 The Securitization Process .....................................................................................12 1. 2. II. CGMR Pools Mortgage Loans In Special Purpose Trusts.........................12 The Trusts Issue Securities Backed By The Loans ....................................13

THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................16 A. The Role Of Each Of The Defendants ...................................................................16 1. 2. 3. 4. 5. B. CGMR ........................................................................................................17 CGMLT......................................................................................................18 CGMI .........................................................................................................18 Citi..............................................................................................................19 The Individual Defendants .........................................................................20

Defendants Failure To Conduct Proper Due Diligence ........................................25

III.

THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS ..........30

A. B. C. D. IV.

Compliance With Underwriting Guidelines ..........................................................30 Statements Regarding Occupancy Status Of Borrower .........................................33 Statements Regarding Loan-To-Value Ratios .......................................................35 Statements Regarding Credit Ratings ....................................................................37

FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS......................................................................................39 A. The Statistical Data Provided In The Prospectus Supplements Concerning Owner Occupancy And LTV Ratios Was Materially False...................................39 1. 2. B. Owner Occupancy Data Was Materially False ..........................................40 Loan-To-Value Data Was Materially False ...............................................42

The Originators Of The Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines .........................................................45 1. Government Investigations Have Confirmed That The Originators Of The Loans In The Securitizations Systematically Failed To Adhere To Their Underwriting Guidelines ................................................45 i. ii. iii. iv. v. vi. 2. Wells Fargo ....................................................................................46 Countrywide...................................................................................49 American Home .............................................................................50 Argent ............................................................................................52 WMC..............................................................................................54 Inflated Appraisals .........................................................................55

The Collapse Of The Certificates Credit Ratings Further Indicates That The Mortgage Loans Were Not Originated In Adherence To The Stated Underwriting Guidelines .........................................................56

ii

3.

The Surge In Mortgage Delinquencies And Defaults Further Indicates That The Mortgage Loans Were Not Originated In Adherence To The Stated Underwriting Guidelines ..................................58

V.

FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES .................................................59

FIRST CAUSE OF ACTION ........................................................................................................61 SECOND CAUSE OF ACTION ...................................................................................................64 THIRD CAUSE OF ACTION .......................................................................................................68 FOURTH CAUSE OF ACTION ...................................................................................................72 FIFTH CAUSE OF ACTION ........................................................................................................75 SIXTH CAUSE OF ACTION .......................................................................................................78 SEVENTH CAUSE OF ACTION .................................................................................................82 EIGHTH CAUSE OF ACTION ....................................................................................................85 PRAYER FOR RELIEF ................................................................................................................89 JURY TRIAL DEMANDED .........................................................................................................90

iii

Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against Citigroup, Inc. (Citi), Citigroup Mortgage Loan Trust, Inc. (CGMLT), Citigroup Global Markets, Inc. (CGMI), Citigroup Global Markets Realty Corp. (CGMR) (collectively, the Citi Defendants), Susan Mills, Randall Costa, Richard A. Isenberg, Scott Freidenrich, Mark I. Tsesarsky, Peter Patricola, Jeffrey Perlowitz, and Evelyn Echevarria (the Individual Defendants) (together with the Citi Defendants, the Defendants) alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the

offer and sale of certain residential mortgage-backed securities to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or GSEs). These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, and constitutes common law negligent misrepresentation.

2.

Between September 13, 2005 and May 31, 2007, Fannie Mae and Freddie Mac

purchased over $3.5 billion in residential mortgage-backed securities (the GSE Certificates) issued in connection with ten securitizations sponsored or underwritten by the Citi Defendants.1 The GSE Certificates purchased by Freddie Mac, along with date and amount of the purchases, are listed infra in Table 10. The GSE Certificates purchased by Fannie Mae, along with date and amount of the purchases, are listed infra in Table 11. The following ten securitizations are at issue in this case: i. Argent Securities Inc., Asset-Backed Pass-Through Certificates, Series 2005-W2 (ARSI 2005-W2); ii. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2005-7 (CMLTI 2005-7); iii. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 200510 (CMLTI 2005-10); iv. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2005HE3 (CMLTI 2005-HE3); v. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2005HE4 (CMLTI 2005-HE4); vi. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2006AR2 (CMLTI 2006-AR2); vii. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2006-

For purposes of this Complaint, the securities issued under the Registration Statements (as defined in note 2 below) are referred to as Certificates, while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the GSE Certificates. Holders of Certificates are referred to as Certificateholders.

AR5 (CMLTI 2006-AR5); viii. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2006WF1 (CMLTI 2006-WF1); ix. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2006WF2 (CMLTI 2006-WF2); x. CitiGroup Mortgage Loan Trust Mortgage Pass-Through Certificates, Series 2007AR7 (CMLTI 2007-AR7); and (collectively, the Securitizations). 3. The Certificates were offered for sale pursuant to one of five shelf registration

statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC). Defendant CGMLT filed four Shelf Registration Statements that pertained to nine of the Securitizations at issue in this action. The Individual Defendants signed one or more of the Shelf Registration Statements and the amendments thereto. With respect to all of the Securitizations, CGMI was the lead underwriter, and with respect to all but one of the Securitizations, CGMI was also the underwriter who sold the Certificates to the GSEs. 4. For each Securitization, a prospectus (Prospectus) and prospectus supplement

(Prospectus Supplement) were filed with the SEC as part of the Shelf Registration Statement for that Securitization.2 The GSE Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the corresponding Prospectuses and Prospectus Supplements. 5.
2

The Registration Statements contained statements about the characteristics and

The term Registration Statement, as used herein, incorporates the Shelf Registration statement, the Prospectus and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated.

credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers of those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investors decision to purchase the Certificates. Unbeknownst to Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the stated underwriting standards and origination practices and had materially poorer credit quality than what was represented in the Registration Statements. 6. The Registration Statements contained statistical summaries of the groups of

mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was also material to reasonable investors. However, a loan level analysis for each Securitizationan analysis that encompassed a statistically significant sample of thousands of mortgages across all of the Securitizationshas revealed that these statistics were also false and omitted material facts due to inflated property values and misstatements of other key characteristics of the mortgage loans. 7. For example, the percentage of owner-occupied properties is a material risk factor

to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties

relative to the amount of the underlying loans. 8. Defendants CGMLT (the depositor for nine of the Securitizations), CGMI (the

lead underwriter for all of the Securitizations and selling underwriter for nine of the Securitizations), and the Individual Defendants (the signatories to the Registration Statements with respect to nine of the Securitizations) are directly responsible for the misstatements and omissions of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the GSE Certificates to Fannie Mae and Freddie Mac, and/or directed and controlled such activities. 9. Defendants CGMR (the sponsor of nine of the Securitizations) and Citi are also

responsible for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over Defendants CGMLT and CGMI. Citi also directly participated in and exercised dominion and control over the business operations of Defendants CGMLT, CGMR, and CGMI. 10. Fannie Mae and Freddie Mac purchased over $3.5 billion of the Certificates

pursuant to the Registration Statements filed with the SEC. These documents contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 11. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against

the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for

common law negligent misrepresentation. PARTIES The Plaintiff and the GSEs 12. The Federal Housing Finance Agency is a federal agency located at 1700 G

Street, NW in Washington, D.C. FHFA was created on July 30, 2008 pursuant to the Housing and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. 4617), to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of the GSEs, including but not limited to, the authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12 U.S.C. 4617(b)(2). 13. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by

Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. The Defendants 14. Defendant CitiGroup, Inc. is a diversified global financial services holding

company, incorporated under the laws of the State of Delaware, and headquartered at 399 Park Avenue, New York, New York. Citi offers a broad range of financial services to consumer and corporate customers, with more than 200 million customer accounts and operations in more than 100 countries. All of the Citi Defendants are direct or indirect subsidiaries of Citi.

15.

Defendant CitiGroup Global Markets, Inc., formerly known as Salomon Smith

Barney or Smith Barney, is a New York corporation with its principal place of business at 388 Greenwich St. in New York, New York. CGMI is a registered broker-dealer with the SEC, and is a wholly owned subsidiary of Citi. CGMI was the lead underwriter for each Securitization and was intimately involved in the offerings of the Certificates. With one exception, Fannie Mae and Freddie Mac purchased all of the GSE Certificates from CGMI in its capacity as underwriter of the Securitizations. 16. Defendant CitiGroup Mortgage Loan Trust, Inc. is a Delaware corporation with

its principal place of business located at 390 Greenwich Street, 6th Floor, New York, New York 10013. It is a wholly owned subsidiary of Citi. It was the depositor for nine of the ten Securitizations, the registrant for certain Registration Statements filed with the SEC, and an issuer of certain Certificates purchased by the GSEs. 17. Defendant Citigroup Global Markets Realty Corp. is a New York corporation

with its principal place of business at 390 Greenwich St. in New York, New York. It is an affiliate of CGMI, a wholly owned subsidiary of Citi. CGMR was the sponsor of nine of the ten Securitizations.3 18. Defendant Susan Mills is an individual residing in Rockville Centre, New York.

Ms. Mills was Vice President and Managing Director of Defendant CGMLT. Ms. Mills was also the head of CGMIs Mortgage Finance Group since 1999. Ms. Mills signed the Shelf Registration Statements and the amendments thereto, and did so in New York. 19. Defendant Richard A. Isenberg is an individual residing in New York, New York.

The remaining securitization was sponsored by non-party Ameriquest Mortgage Company.

Mr. Isenberg was a Director and President (Principal Executive Officer) of Defendant CGMLT. Mr. Isenberg signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 20. Defendant Randall Costa is an individual residing in Evanston, Illinois. Mr.

Costa was a Director and President (Principal Executive Director) of Defendant CGMLT. Mr. Costa signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 21. Defendant Scott Freidenrich is an individual residing in Westfield, New Jersey.

Mr. Freidenrich was a Treasurer (Principal Financial Officer) of Defendant CGMLT. Mr. Freidenrich signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 22. Defendant Mark I. Tsesarsky is an individual residing in New York, New York.

Mr. Tsesarsky was a Director of Defendant CGMLT. Mr. Tsesarsky signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 23. Defendant Peter Patricola is an individual residing in Holmdel, New Jersey. Mr.

Patricola was a Controller of Defendant CGMLT. Mr. Patricola signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 24. Defendant Jeffrey Perlowitz is an individual residing in Short Hills, New Jersey.

Mr. Perlowitz was a Director of Defendant CGMLT. Mr. Perlowitz signed certain Shelf Registration Statements and the amendments thereto, and did so in New York. 25. Defendant Evelyn Echevarria is an individual residing in Charlotte, North

Carolina. Ms. Echevarria was a Director of Defendant CGMLT. Ms. Echevarria signed certain Registration Statements and the amendments thereto, and did so in New York.

The Non-Party Originators: 26. CitiMortgage, Inc. (CitiMortgage) is a Florida corporation with its principal

place of business at 1000 Technology Drive, Mailstop 730, OFallon, Missouri. It was engaged in the business of, among other things, originating and acquiring residential mortgage loans and selling those loans through securitizations. It originated and serviced many of the residential mortgage loans at issue here. 27. In addition, many of the loans underlying the Certificates were acquired by the

sponsor for each Securitization from other non-party mortgage originators. The originators responsible for the loans underlying the Certificates include Countrywide Home Loans, Inc. (Countrywide), Greenpoint Mortgage Funding, Inc., Quicken Loans, Inc., MortgageIT, Inc., Wells Fargo Bank, N.A. (Wells Fargo), WMC Mortgage Corp. (WMC), American Home Mortgage Corp. (American Home), and Argent Mortgage Company (Argent), among others. JURISDICTION AND VENUE 28. Jurisdiction of this Court is founded upon 28 U.S.C. 1345, which gives federal

courts original jurisdiction over claims brought by FHFA in its capacity as conservator of Fannie Mae and Freddie Mac. 29. Jurisdiction of this Court is also founded upon 28 U.S.C. 1331 because the

Securities Act claims asserted herein arise under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o. This Court further has jurisdiction over the Securities Act claims pursuant to Section 22 of the Securities Act of 1933, 15 U.S.C. 77v. 30. This Court has jurisdiction over the statutory claims of violations of Sections

13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code pursuant to this Courts supplemental jurisdiction

under 28 U.S.C. 1367(a). This Court also has jurisdiction over the common law claim of negligent misrepresentation pursuant to this Courts supplemental jurisdiction under 28 U.S.C. 1367(a). 31. Venue is proper in this district pursuant to Section 22 of the Securities Act of

1933, 15 U.S.C. 77v, and 28 U.S.C. 1391(b). Several of the Citi Defendants are principally located in this district, several of the Individual Defendants reside in this district, and many of the acts and transactions alleged herein, including the preparation and dissemination of the Registration Statements occurred in substantial part in the State of New York. Additionally, the GSE Certificates were actively marketed and sold from this State and several of the Defendants can be found and transact business in this District. Defendants are also subject to personal jurisdiction in this District. FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 32. Residential Mortgage-Backed Securitizations In General Asset-backed securitization distributes risk by pooling cash-producing financial

assets and issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 33. The most common form of securitization of mortgage loans involves a sponsor or

sellerthe entity that acquires or originates the mortgage loans and initiates the securitization and the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is established pursuant to a Pooling and Servicing Agreement entered into by, among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to

10

an intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 34. Residential mortgage-backed securities (RMBS) are backed by the underlying

mortgage loans. Some RMBS are created from more than one cohort of loans called collateral groups, in which case the trust issues securities backed by different loan groups. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. The purchasers of the securities receive the cash-flows from the designated mortgage groups, such as homeowners payments of principal and interest on the mortgage loans held by the related trust. 35. RMBS are issued pursuant to registration statements filed with the SEC. These

registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage group underlying the certificates. Certificates are issued by the trust pursuant to the registration statement and the prospectus and prospectus supplement. Underwriters sell the certificates to investors. 36. A mortgage servicer is necessary to manage the collection of proceeds from the

mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The

11

servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 37. The Securitizations At Issue In This Case This case involves the ten Securitizations listed in Table 1 below, nine of which

were sponsored and structured by CGMR, and all of which were underwritten by CGMI. For each of the ten Securitizations, Table 1 identifies the (1) sponsor; (2) depositor; (3) lead underwriter; (4) principal amount issued for the tranches purchased by the GSEs; (5) date of issuance; and (6) the loan group or groups backing the GSE Certificate for that Securitization (referred to as the Supporting Loan Groups). Table 1
Securitization Tranche
4

Sponsor

Depositor

Lead Underwriter

Principal Amount Issued per Tranche ($)


1,351,319,000 151,768,000 132,099,000 380,972,000 344,773,000 161,220,000 36,920,000 425,206,000 484,445,000 117,893,000

Date of Issuance

Supporting Loan Groups


Group I Group I-3 Group 1-2 Group I Group I Group I-1 Group 1-2 Group I Group I Group 2

ARSI 2005-W2 CMLTI 2005-10 CMLTI 2005-7 CMLTI 2005-HE3 CMLTI 2005-HE4 CMLTI 2006-AR2 CMLTI 2006-AR5 CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7

A1 IA3A IA2 A1 A1 IA1 1A2A A1 A1 A2A

Ameriquest Mortgage Company CGMR CGMR CGMR CGMR CGMR CGMR CGMR CGMR CGMR

Argent Securities Inc. CGMLT CGMLT CGMLT CGMLT CGMLT CGMLT CGMLT CGMLT CGMLT

CGMI CGMI CGMI CGMI CGMI CGMI CGMI CGMI CGMI CGMI

9/27/2005 12/ 30/2005 9/30/2005 9/13/2005 11/30/2005 3/30/2006 6/30/2006 3/30/2006 5/31/2006 5/31/2007

C.

The Securitization Process 1. CGMR Pools Mortgage Loans In Special Purpose Trusts

38.

As the sponsor for nine of the ten Securitizations, Defendant CGMR purchased

the mortgage loans underlying the Certificates for those nine Securitizations after the loans were

A tranche is one of a series of certificates or interests created and issued as part of the same transaction.

12

originated, either directly from the originators or through affiliates of the originators, including CitiMortgage.5 39. CGMR then sold the mortgage loans for the nine Securitizations that it sponsored

to the depositor, Defendant CGMLT, a Citi-affiliated entity. With respect to the remaining securitization, a non-party sponsor sold the mortgage loans to a non-party depositor, as reflected in Table 1, supra at paragraph 37. Defendant CGMI was the lead or co-lead underwriter, and the selling underwriter, for that securitization. 40. CGMLT was a wholly-owned, limited-purpose financial subsidiary of Defendant

Citi. The sole purpose of CGMLT as depositor was to act as a conduit through which loans acquired by the sponsor could be securitized and sold to investors. 41. As depositor for nine of the Securitizations, Defendant CGMLT transferred the

relevant mortgage loans to the trusts. As part of each of the Securitizations, the trustee, on behalf of the Certificateholders, executed a Pooling and Servicing Agreement (PSA) with the relevant depositor and the parties responsible for monitoring and servicing the mortgage loans in that Securitization. The securitization trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued Certificates, including the GSE Certificates, backed by such loans. 2. 42. The Trusts Issue Securities Backed By The Loans

Once the mortgage loans were transferred to the trusts in accordance with the

PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an Non-party sponsor Ameriquest Mortgage Company was a sponsor of the one non-Citi sponsored Securitizations. The sponsor for each Securitization is included in Table 1, supra at paragraph 37.
5

13

ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cash-flows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages. 43. The Certificates were issued pursuant to one of the five Shelf Registration

Statements, filed with the SEC on Form S-3. Certain Shelf Registration Statements were amended by one or more Forms S-3/A filed with the SEC. Each Individual Defendant signed one or more of the four Shelf Registration Statements, including any amendments thereto, which were filed by CGMLT. The SEC filing number, registrants, signatories, and filing dates for each Shelf Registration Statement and amendments thereto, as well as the Certificates covered by each Shelf Registration Statement, are reflected in Table 2 below. Table 2
SEC File No.
333124036

Date Registration Statement Filed


4/13/2005

Date(s) Amended Registration Statement Filed


N/A

Registrant

Covered Certificates

Signatories of Registration Statements


Susan Mills Richard A. Isenberg Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria Susan Mills Richard A. Isenberg Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria

Signatories of Amendments

CGMLT

CMLTI 2005HE3

N/A

333127834

8/25/2005

9/7/2005

CGMLT

333131136

1/19/2006

2/28/2006; 3/30/2006; 4/5/2006

CGMLT

CMLTI 2005-7; CMLTI 200510; CMLTI 2005HE4; CMLTI 2006WF1; CMLTI 2006AR2 CMLTI 2006AR5; CMLTI 2006WF2

Susan Mills Richard A. Isenberg Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria

333-

10/25/2006

11/17/2006;

CGMLT

CMLTI 2007-

Susan Mills Randall Costa Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria Susan Mills

Susan Mills Randall Costa Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria Susan Mills

14

SEC File No.


138237

Date Registration Statement Filed

Date(s) Amended Registration Statement Filed


12/4/2006; 12/12/2006

Registrant

Covered Certificates

Signatories of Registration Statements


Randall Costa Scott Freidenrich Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria Adam J. Bass John P. Grazer Andrew L. Stidd

Signatories of Amendments

AR7

Randall Costa Scott Freidenrich6 Peter Patricola Mark I. Tsesarsky Jeffrey Perlowitz Evelyn Echevarria N/A

333112237

1/27/2004

N/A

Argent Securities Inc.

ARSI 2005-W2

44.

The Prospectus Supplement for each Securitization describes the underwriting

guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide detailed and accurate information regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loanto-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debt-to-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes; information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property; and information concerning whether the loans were delinquent. 45. The Prospectus Supplements associated with each Securitization were filed with

the SEC as part of the Registration Statements. The Forms 8-K attaching the PSAs for each Securitization were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K was filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 3 below.
6

Scott Freidenrich did not sign the 11/17/2006 amendment to the Shelf Registration Statement.

15

Table 3
Transaction
ARSI 2005-W2 CMLTI 2005-10 CMLTI 2005-7 CMLTI 2005-HE3 CMLTI 2005-HE4 CMLTI 2006-AR2 CMLTI 2006-AR5 CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7

Date Prospectus Supplement Filed


9/28/05 12/30/2005 10/3/2005 9/13/2005 11/29/2005 3/30/2006 6/30/2006 3/27/2006 5/25/2006 6/1/2007

Date of Filing Form 8-K Attaching PSA Filed


10/12/2005 3/22/2006 10/19/2005 9/28/2005 12/15/2005 5/1/2006 7/31/2006 4/18/2006 6/20/2006 10/2/2007

Filing No. of Related Registration Statement


333-112237 333-127834 333-127834 333-124036 333-127834 333-127834 333-131136 333-127834 333-131136 333-138237

46.

The Certificates were issued pursuant to the PSAs, and Defendant CGMI offered

and sold the Certificates to Fannie Mae and Freddie Mac pursuant to the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements. II. THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS A. 47. The Role Of Each Of The Defendants Each of the Defendants, including the Individual Defendants, had a role in the

securitization process and the marketing for most or all of the Certificates, which included purchasing the mortgage loans from the originators, structuring and arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 48. With respect to each Securitization, the depositor, underwriters, and the

Individual Defendants who signed the Registration Statements, as well as the Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statements, and omitting material facts

16

required to be stated therein or necessary to make the statements contained therein not misleading. 1. 49. CGMR

Defendant CGMR was organized in 1979 and has been securitizing residential

mortgage loans since 1987. CGMR is an affiliate of CGMI, and acted as the sponsor of nine of the Securitizations. CGMR is a leading sponsor of mortgage-backed securities. As stated in the Prospectus Supplement for the CMLTI 2007-AR7 Securitization, during the 2003, 2004, 2005, and 2006 fiscal years, CGMR securitized approximately $2.9 billion, $7.1 billion, $18.4 billion, and $21 billion of mortgage loans, respectively. 50. CGMR was the sponsor of nine of the ten Securitizations. In that capacity,

CGMR determined the structure of the Securitizations, initiated the Securitizations, purchased the mortgage loans to be securitized, determined the distribution of principal and interest, and provided data to the credit rating agencies to secure investment grade ratings for the GSE Certificates. For nine of the Securitizations, Defendant CGMR also selected CGMLT as the special purpose vehicle that would be used to transfer the mortgage loans from CGMR to the trusts, and selected CGMI as the underwriter for the Securitizations. In its role as sponsor, CGMR knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts. 51. For the nine Securitizations that it sponsored, CGMR also conveyed the mortgage

loans to CGMLT pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. In these agreements, CGMR made certain representations and warranties to CGMLT regarding the groups of loans collateralizing the Certificates. These representations

17

and warranties were assigned by CGMLT to the trustees for the benefit of the Certificateholders. 2. 52. CGMLT

Defendant CGMLT is engaged in the securitization of mortgage loans as a

depositor. It is 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. 53. Defendant CGMLT was the depositor for nine of the ten Securitizations. In its

capacity as depositor, CGMLT purchased the mortgage loans from CGMR (as sponsor) pursuant to the Assignment and Recognition Agreements or Mortgage Loan Purchase Agreements, as applicable. CGMLT then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trusts. CGMLT, together with the other Defendants, was also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 54. CGMI

Defendant CGMI, formerly known as Salomon Smith Barney, was founded in

1910 and acquired by Travelers Group in 1998, which subsequently merged with Citi that year. Defendant CGMI is an investment bank, and was, at all relevant times, a registered broker/dealer and one of the leading underwriters of mortgage- and other asset-backed securities in the United States. CGMI was Citis private label securities arm, specializing in nonconforming and alternative pools of loans. Mortgage Banking Magazine, CitiMortgage on the Move, December

18

2006. 55. Defendant CGMI was the lead underwriter for the Securitizations. In that role, it

was responsible for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors, with the exception of the CMLTI 2006-AR2 Securitization, which was sold to the GSEs by non-party UBS Securities, LLC. CGMI was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred and underwritten. 4. 56. Citi

Defendant Citi wholly owns its subsidiaries CGMLT, CGMI, CGMR, and

CitiMortgage. Unlike typical arms-length securitizations, the Securitizations here involved various Citi subsidiaries and affiliates at virtually each step in the chain. With respect to over two-thirds of the Securitizations, the sponsor was CGMR, the depositor was CGMLT, the master servicer was CitiMortgage, and the lead underwriter was CGMI. As for the remaining deals, with the exception of CMLTI 2006-AR2, CGMI was the lead and selling underwriter. 57. As the sole corporate parent of CGMI, CGMLT, and CGMR, Citi had the

practical ability to direct and control the actions of CGMI, CGMLT, and CGMR related to the Securitizations, and in fact exercised such direction and control over the activities of CGMR, CGMLT, CitiMortgage, and CGMI related to the issuance and sale of the Certificates. 58. Citi, through its subsidiaries CGMI, CGMLT, CGMR, and CitiMortgage, was

deeply involved in the RMBS market. Citi expanded its share of the residential mortgagebacked securitization market to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and

19

omissions of material facts in the Registration Statements. 59. From 2002 to 2005, Citi experienced intense growth in its residential mortgage

business, doubling its origination business from $73 billion in 2002 to nearly $140 billion in 2005. Mortgage Banking Magazine, CitiMortgage on the Move, December 2006. The growth was even more striking at the subprime level. From 2005 to 2007, Citi issued at least $26.3 billion in subprime loans. Center for Public Integrity, The Subprime 25. Such massive quantities of loans were the result of rapid and uncontrolled growth. In 2006, Citis subprime lending increased by 85%, to a total of $38 billion. Mortgage Banking Magazine, Inside the Market Correction, May 2007. 60. As detailed above, the Securitizations here involved Citi entities, including the

aforementioned subsidiaries, at virtually each step in the process. Citi profited substantially from this vertically integrated approach to mortgage backed securitization. Furthermore, Citi shares, and, on information and belief, shared, overlapping management with the other Citi Defendant entities. For instance, Defendant Susan Mills was Vice President and Managing Director of Defendant CGMLT, and signed four Shelf Registration Statements on behalf of CGMLT; she is also the head of CGMIs Mortgage Finance Group. 5. 61. The Individual Defendants

Defendant Susan Mills was the Vice President and then Managing Director of

Defendant CGMLT. Under one of these two capacities, she signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005;

20

Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005; Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006. 62. Defendant Richard A. Isenberg was a Director and President (Principal Executive

Officer) of Defendant CGMLT. In that capacity, he signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005; and Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005. 63. Defendant Randall Costa was a Director and President (Principal Executive

Officer) of Defendant CGMLT. In that capacity, he signed the following Registration Statements: Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and

21

Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006.

64.

Defendant Scott Freidenrich was a Treasurer (Principal Financial Officer) of

Defendant CGMLT. In that capacity, he signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005; Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005; Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006. 65. Defendant Mark I. Tsesarsky was a Director of Defendant CGMLT. In that

capacity, he signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005; Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005;

22

Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006. 66. Defendant Peter Patricola was a Controller of Defendant CGMLT. In that

capacity, he signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005; Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005; Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006. 67. Defendant Jeffrey Perlowitz was a Director of Defendant CGMLT. In that

capacity, he signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005;

23

Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005; Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006. 68. Defendant Evelyn Echevarria was a Director of Defendant CGMLT. In that

capacity, she signed the following Registration Statements: Registration Statement under file number 333-124036, filed with the SEC on April 13, 2005. Registration Statement under file number 333-127834, filed with the SEC on August 25, 2005, and the related amendments on form S-3/A on or about September 7, 2005; Registration Statement under file number 333-131136, filed with the SEC on January 19, 2006, and the related amendments on form S-3/A on or about February 28, 2006, March 30, 2006, and April 5, 2006; and Registration Statement under file number 333-138237, filed with the SEC on October 25, 2006, and the related amendments on form S-3/A on or about November 17, 2006, December 4, 2006, and December 12, 2006.

24

B. 69.

Defendants Failure To Conduct Proper Due Diligence The Defendants failed to conduct adequate and sufficient due diligence to ensure

that the mortgage loans underlying the Securitizations complied with the representations in the Registration Statements. 70. During the time period in which the Certificates were issuedapproximately

2005 through 2007Citis involvement in the mortgage-backed securitization market was rapidly expanding. In an effort to increase revenue and profits, Citi vastly expanded the volume of mortgage-backed securities it issued as compared to prior years. From 2003 to 2004, the volume of mortgage loans that CGMR securitized more than doubled to $7.1 billion. In 2005, the volume again more than doubled from $7.1 billion to $18.4 billion. In 2006, CGMR securitized its largest volume of mortgage loans $21.5 billion. CGMRs growth in subprime loans was particularly astronomical. CGMR issued $300 million in subprime loans in 2003. By 2004, that number increased eight-fold to $2.4 billion, and then nearly quadrupled again in 2005 to $8.2 billion. By 2006, CGMR had securitized its largest volume of subprime loans, over $10.3 billion. See CMLTI 2007-AR7 Prospectus Supplement, filed May 30, 2007. 71. The Defendants had enormous financial incentives to complete as many offerings

as quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements or conducting adequate and reasonable due diligence of the underlying mortgage loans. For example, CGMLT, as the depositor, was paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations, and CGMI, as the underwriter, was paid a commission based on the amount it received from the sale of the Certificates to the public. Thus, the greater the number of offerings, the greater the profit to CGMLT and CGMI.

25

72.

The push to securitize large volumes of mortgage loans contributed to the absence

of controls needed to prevent the inclusion of untrue statements and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or otherwise to ensure the accuracy of the statements in the Registrations Statements pertaining to the Securitizations. 73. For instance, Citi retained third-parties, including Clayton Holdings, Inc.

(Clayton), to analyze the loans it was considering for inclusion in its securitizations, but waived a significant number of loans into its securitizations that these third-parties had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with the applicable guidelines or had compensating factors that excused the failure of the loans to comply with underwriting guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. 74. Citi was negligent in allowing into the Securitizations a substantial number of

mortgage loans that, as reported to Citi by third-party due diligence firms, did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon learning from its third-party due diligence firms that there were high percentages of defective or at least questionable loans in the sample of loans reviewed

26

by the third-party due diligence firms, Citi failed to take any additional steps to verify that the population of loans in the Securitizations did not include a similar percentage of defective and/or questionable loans. 75. Claytons trending reports revealed that in the period from the first quarter of

2006 to the second quarter of 2007, 42 percent of the mortgage loans Citi submitted to Clayton to review in RMBS loan pools were rejected by Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that Clayton found defective, 31 percent of the loans were subsequently waived in by Citi without proper consideration and analysis of compensating factors and included in securitizations such as the ones in which Fannie Mae and Freddie Mac invested. See FCIC Report at 167. 76. Likewise, in 2006, Richard Bowen, the Business Chief Underwriter for

Correspondent Lending in the Consumer Lending Group within Citi, began raising serious concerns to Citis senior management about the poor quality of the loans Citi was acquiring from third-party originators and then securitizing. The Consumer Lending Group housed Citis consumer-lending activities, including prime and subprime mortgages, as well as Citis purchase of loans from originators other than Citis origination arm, CitiMortgage. As chief underwriter, Mr. Bowen was charged with the underwriting responsibility for over $90 billion annually of residential mortgage production; in other words, his responsibility was to ensure that these mortgages met the credit standards required by Citi credit policy. Written Testimony of Richard M. Bowen, III to the FCIC, April 7, 2010 (Bowen Testimony) at 1. 77. Mr. Bowen discovered serious issues with the loans Citi purchased, both prime

and subprime loans. On the prime side, Citi had represented and warranted that the mortgages were underwritten to Citis credit guidelines. However, in 2006, Mr. Bowen discovered that

27

some 60% of these mortgages were defective, with that figure rising to 80% in 2007. On the subprime side, vast pools of subprime loans, totaling over $300 million, were purchased even though they failed to meet Citis credit policy criteria. Bowen Testimony at 1-2. 78. Citis due diligence process was woefully inadequate. For example, an

underwriting department called Quality Assurance was supposed to review the prime loans that Citi purchased, as Citi would subsequently represent and warrant to investors that these loans met Citis underwriting criteria. According to Citis policy, at least 95% of the prime loans the Quality Assurance department reviewed were required to have an agree designation, meaning Citis underwriters agreed with the originators underwriting decision. The Quality Assurance Department would then report these results to the Third Party Originators Committee (TPO Committee), which had overall responsibility for managing the selling mortgage company relationships. Bowen Testimony at 4-5. 79. However, Mr. Bowen soon discovered that the reports to the TPO Committee

were, at the least, highly misleading. In fact, many of the agree decisions were actually agree contingent, meaning that the agree decision was contingent upon receiving documents that were missing from the loan file. Quality Assurance was reporting both types of designations together, even though the agree contingent decisions were missing documents required by Citis policies. In reality, only 40% of the loans Quality Assurance reviewed properly received an agree designation, with 55% receiving the misleading agree contingent label. Bowen Testimony at 5-6. A follow-up study found even more staggering results, with a 70% defect rate in the agree designations. Bowen Testimony at 7. 80. The same themes of underwriting breaches ran through the subprime origination

channel as well. According to Citis policy, Citi underwriters were required to underwrite a

28

statistically significant sample of a prospective pool of subprime loans, approving only those loans that met Citi policy guidelines. However, in the third quarter of 2006, Citis Wall Street Chief Risk Officer started changing many of the underwriting decisions from turn down to approve in order to artificially increase[] the approval rate on the sample. This higher approval rate was then used as justification to purchase these pools. Bowen Testimony 8-9. 81. These flawed due diligence practices were especially troubling, because, in the

words of Defendant Susan Mills, the Managing Director of Defendant CGMLT, these due diligence reviews served as the primary . . . means by which we evaluated the loans that we purchased and securitized. Written Testimony of Susan Mills to the FCIC, April 7, 2010 (Mills Testimony) at 4. 82. Defendant Mills personally witnessed a near tripling of early payment default

rates in the loans her group was purchasing during the period from 2005 to 2007. By the same token, Bowen repeatedly expressed concerns to his direct supervisor and company executives about the quality and underwriting of mortgages that CitiMortgage purchased and then sold to the GSEs. FCIC Report at 168. Yet Citi failed to take any corrective action or improve its due diligence practices. 83. To the contrary, despite these serious flaws in Citis due diligence practices,

securitization of these faulty loans became a factory line, in the words of former Citi CEO Charles Prince. As more and more of these subprime mortgages were created as raw material for the securitization process, not surprisingly in hindsight, more and more of it was of lower and lower quality. And at the end of that process, the raw material going into it was actually bad quality, it was toxic quality, and that is what ended up coming out the other end of the pipeline. FCIC Report at 102-03.

29

III.

THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 84. Compliance With Underwriting Guidelines The Prospectus Supplements for each Securitization describe the mortgage loan

underwriting guidelines pursuant to which the mortgage loans underlying the related Securitizations were to have been originated. These guidelines were intended to assess the creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 85. The statements made in the Prospectus Supplements, which, as discussed, formed

part of the Registration Statement for each Securitization, were material to a reasonable investors decisions to purchase and invest in the Certificates because the failure to originate a mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency and default by the borrower, as well as a risk that losses upon liquidation will be higher, thus resulting in a greater economic risk to an investor. 86. The Prospectus Supplements for the Securitizations contained several key

statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. For example, the Prospectus Supplement for the CMLTI 2006-WF2 Securitization, for which Wells Fargo was the originator, CGMR was the sponsor, CGMLT was the depositor, and CGMI was the underwriter, stated that All of the mortgage loans were originated by Wells Fargo Bank or acquired by Wells Fargo Bank from correspondent lenders after re-underwriting such acquired mortgage loans generally in accordance with its underwriting guidelines then in effect. 87. The CMLTI 2006-WF2 Prospectus Supplement stated that the originator may

make the determination that the prospective borrower warrants loan parameters beyond those

30

shown above, but emphasized that such decisions are made [o]n a case-by-case basis and only upon the presence of acceptable compensating factors. 88. With respect to the information evaluated by the originator, the CMLTI 2006-

WF2 Prospectus Supplement stated that: The underwriting standards that guide the determination represent a balancing of several factors that may affect the ultimate recovery of the loan amount, including, among others, the amount of the loan, the ratio of the loan amount to the property value (i.e., the lower of the appraised value of the mortgaged property and the purchase price), the borrowers means of support and the borrowers credit history. 89. The Prospectus Supplement further stated that: Verifications of employment,

income, assets or mortgages may be used to supplement the loan application and the credit report in reaching a determination as to the applicants ability to meet his or her monthly obligations on the proposed mortgage loan, as well as his or her other mortgage payments (if any), living expenses and financial obligations. A mortgage verification involves obtaining information regarding the borrowers payment history with respect to any existing mortgage the applicant may have. This verification is accomplished by either having the present lender complete a verification of mortgage form, evaluating the information on the credit report concerning the applicants payment history for the existing mortgage, communicating, either verbally or in writing, with the applicants present lender or analyzing cancelled checks provided by the applicant. Verifications of income, assets or mortgages may be waived under certain programs offered by [the originator], but [the originators] underwriting guidelines require, in most instances, a verbal or written verification of employment to be obtained. In some cases, employment histories may be obtained through one of various employment verification sources, including the borrowers employer, employer-sponsored web sites, or third-party services

31

specializing in employment verifications. 90. The Prospectuses and Prospectus Supplements for each of the Securitizations had

similar representations to those quoted above. The relevant representations in the Prospectuses and Prospectus Supplement pertaining to originating bank underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed at paragraphs 120 through 149 below, in fact, the originators of the mortgage loans in the Supporting Loan Group for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 91. Further, for the vast majority of the Securitizations, the Prospectuses and

Prospectus Supplements described additional representations and warranties concerning the mortgage loans backing the Securitizations that were made by the originator to the sponsor in the PSA. Such representations and warranties, which are described more fully for each Securitization in Appendix A, included: (i) the mortgage loans were underwritten in accordance with the originators underwriting guidelines in effect at the time of origination, subject to only limited exceptions; (ii) the mortgage loan was made in compliance with, and is enforceable under, all applicable local, state and federal laws and regulations; (iii) each mortgage loan was current as to all required payments; (iv) the mortgage loan seller had good title to each mortgage loan and each loan was subject to no offsets, defenses, counterclaims, or rights of rescission; and (v) the origination and collection practices used by the originator with respect to each mortgage note and mortgage have been in all respects legal, proper, prudent and customary in the mortgage origination and servicing business. 92. The inclusion of these representations in the Prospectuses and Prospectus

32

Supplements had the purpose and effect of providing additional assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations and its compliance with the underwriting guidelines described in the Prospectuses and Prospectus Supplements. These representations were material to a reasonable investors decision to purchase the Certificates. B. 93. Statements Regarding Occupancy Status Of Borrower The Prospectus Supplements contained collateral group-level information about

the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplements for each of the Securitizations presented this information in tabular form, usually in a table entitled Occupancy Status of the Mortgage Loans. This table divided all the loans in the collateral group by occupancy status, e.g., into the categories: (i) Primary, or Owner Occupied; (ii) Second Home, or Secondary; and (iii) Investment or Non-Owner. For each category, the table stated the number of loans in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:7 Table 4
Transaction
ARSI 2005-W2 CMLTI 2005-10 CMLTI 2005-7 CMLTI 2005-HE3 CMLTI 2005-HE4

Supporting Loan Group


Group I Group I-3 Group 1-2 Group I Group I

Primary or Owner Occupied


86.10% 72.35% 85.05% 92.08% 85.35%

Second Home/Secondary
1.10% 4.84% 2.93% 3.84% 1.76%

Investor
12.80% 22.81% 12.02% 4.08% 12.89%

Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, investor, and second home. These numbers have been converted to percentages.

33

Transaction
CMLTI 2006-AR2 CMLTI 2006-AR5 CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7

Supporting Loan Group


Group I-1 Group 1-2 Group I Group I Group 2

Primary or Owner Occupied


88.75% 89.26% 58.08% 60.10% 36.23%

Second Home/Secondary
4.20% 9.40% 4.79% 3.55% 8.83%

Investor
7.05% 1.34% 37.14% 36.36% 54.94%

94.

As Table 4 makes clear, the Prospectus Supplements for all but one Securitization

reported that a majority, and usually an overwhelming majority, of the mortgage loans in the Supporting Loan Groups were owner occupied, while a much smaller percentage were reported to be non-owner occupied (i.e. a second home or investor property). 95. The statements about occupancy status were material to a reasonable investors

decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to default and more likely to care for their primary residence than borrowers who purchase homes as second homes or investments and live elsewhere, the percentage of loans in the collateral group of a securitization that are not secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization. As stated in the Prospectus Supplement for the CMLTI 2005-HE4 Securitization and other Securitizations: With respect to each mortgaged property, unless otherwise provided in the related prospectus supplement, the borrower will have represented that the dwelling is either an owner-occupied primary residence or a vacation or second home that is not part of a mandatory rental pool and is suitable for year-round occupancy. 96. Other things being equal, the higher the percentage of loans not secured by

owner-occupied residences, the greater the risk of loss to the certificateholders. Even small

34

differences in the percentages of primary/owner-occupied, second home/secondary, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed at paragraphs 108 through 118 below, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 97. Statements Regarding Loan-To-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV, is the ratio of the balance of

the mortgage loan to the value of the mortgaged property when the loan is made. 98. The denominator in the LTV ratio is the value of the mortgaged property, and is

generally the lower of the purchase price or the appraised value of the property. In a refinancing or home equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan. 99. The Prospectus Supplements for each Securitization also contained group-level

information about the LTV ratio for the underlying group of loans as a whole. The percentage of loans with an LTV ratio at or less than 80 percent and the percentage of loans with an LTV ratio greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups are reflected in Table 5 below.8

As used in this Complaint, LTV refers to the original loan-to-value ratio for first lien mortgages and for properties with second liens that are subordinate to the lien that was included

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Table 5
Transaction Supporting Loan Group
Group I Group I-3 Group 1-2 Group I Group I Group I-1 Group 1-2 Group I Group I Group 2

Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80%
62.07% 87.38% 94.00% 72.59% 57.93% 96.28% 94.44% 46.05% 43.46% 88.12%

Percentage of loans, by aggregate principal balance, with LTV greater than 100%
0% 0% 0% 0.03% 0% 0% 0% 0% 0% 0%

ARSI 2005-W2 CMLTI 2005-10 CMLTI 2005-7 CMLTI 2005-HE3 CMLTI 2005-HE4 CMLTI 2006-AR2 CMLTI 2006-AR5 CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7

100.

As Table 5 makes clear, the Prospectus Supplement for eight of the ten

Securitizations reported that the majority of the mortgage loans in the Supporting Loan Groups had an LTV ratio of 80 percent or less, and the Prospectus Supplements for all but one of the Securitizations reported that no mortgage loans in the Supporting Loan Group had an LTV ratio over 100 percent. 101. The LTV ratio is among the most important measures of the risk of a mortgage

loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV, the greater the equity cushion, so the greater the

in the securitization (i.e., only the securitized lien is included in the numerator of the LTV calculation). Where the securitized lien is junior to another loan, the more senior lien has been added to the securitized one to determine the numerator in the LTV calculation (this latter calculation is sometimes referred to as the combined-loan-to-value ratio, or CLTV).

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likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 102. Thus, LTV ratio is a material consideration to a reasonable investor in deciding

whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed at paragraphs 113 through 118 below, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates. D. 103. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of securities in mortgage-backed

securitizations by the credit rating agencies, including Moodys Investors Service, Standard & Poors, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time the GSEs purchased their GSE Certificates in the Securitizations, investments with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, RMBS securities with credit ratings between AAA or its equivalent through BBB or its equivalent were generally referred to as

37

investment grade. 104. Rating agencies determine the credit rating for each tranche of securities in a

mortgage-backed securitization by comparing the likelihood of contractual principal and interest payments to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cash-flows based on the quality of the underlying mortgages by using sponsor provided loan level data. Credit enhancements, such as subordination, represent the amount of cushion or protection from loss incorporated into a given securitization.9 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the credit characteristics of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating. 105. Credit ratings have been an important tool to gauge risk when making investment

decisions. In testimony before the Senate Permanent Subcommittee on Investigations, Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005 to 2008, confirmed that the rating agencies relied upon investment banks to provide accurate information about the loan pools:

Subordination refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are subordinate to the senior certificates in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate certificates thus provide a degree of protection to the senior certificates from losses on the underlying loans.

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The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reported to both S&P and investors about those loans . . . . S&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. (SPSI hearing testimony, April 23, 2010). 106. For almost a hundred years, investors like pension funds, municipalities,

insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Mae and Freddie Macs respective internal policies limited their purchases of private label RMBS to those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their equivalent). 107. Each tranche in the Securitizations received a credit rating upon issuance, which

purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Statements. The credit rating provided for each of the GSE Certificates was always AAA or its equivalent. The accuracy of these ratings was material to a reasonable investors decision to purchase the Certificates. As set forth in Table 8, infra at paragraph 153, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates as AAA (or its equivalent) when, in fact, they were not. IV. FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 108. The Statistical Data Provided In The Prospectus Supplements Concerning Owner Occupancy And LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the

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statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all of the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, at a statistically-significant level, material misrepresentations of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy percentages and LTV ratios was false and misleading. 1. 109. Owner Occupancy Data Was Materially False

The data review has revealed that the owner occupancy statistics reported in the

Prospectus Supplements were materially false and inflated. In fact, far fewer underlying properties were occupied by their owners than disclosed in the Prospectus Supplements, and more correspondingly were held as second homes or investment properties. 110. To determine whether a given borrower actually occupied the property as

claimed, a number of tests were conducted, including, inter alia, (i) whether, months after the loan closed, the borrowers tax bill was being mailed to the property securing the mortgage or to a different address; (ii) whether the borrower had claimed a tax exemption on the property; and (iii) whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it more likely that a borrower will not repay the loan. 111. A significant number of the loans failed two or more of these tests, indicating that

the owner occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. For example, for the CMLTI 2005-HE3 Securitization, for which CGMR was

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the sponsor, CGMLT was the depositor, and CGMI was the underwriter, the Prospectus Supplement stated that only 7.92 percent of the underlying properties by loan count in the Supporting Loan Group were not owner-occupied. But the data review revealed that, for 14.39 percent of the properties represented as owner-occupied, the owners in fact lived elsewhere, indicating that the true percentage of non-owner occupied properties was 21.17 percent, nearly triple the percentage reported in the Prospectus Supplement.10 112. The data review revealed that for each Securitization, the Prospectus Supplement

misrepresented the percentage of non-owner occupied properties. The true percentage of nonowner occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization is reflected in Table 6 below. Table 6 demonstrates that the Prospectus Supplements for each Securitization understated the percentage of non-owner occupied properties by at least 5 percent, and for many Securitizations by ten percent or more. Table 6
Transaction Supporting Loan Group Reported Percentage of Non-Owner Occupied Properties
13.90% 27.65%

Percentage of Properties Reported as Owner-Occupied With Strong Indication of NonOwner Occupancy11


11.81% 16.22%

Actual Percentage of Non-OwnerOccupied Properties


24.07% 39.98%

Prospectus Understatement of Non-Owner Occupied Properties


10.17% 11.73%

ARSI 2005-W2 CMLTI 2005-10

Group I Group I-3

This conclusion is arrived at by summing (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 7.92 percent), and (b) the product of (i) the stated owner-occupied percentage (here, 92.08 percent) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 14.39 percent). As described more fully in paragraph 110, failing two or more tests of owneroccupancy is a strong indication that the borrower did not live at the mortgage property and instead used it as a second home or an investment property.
11

10

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Transaction

Supporting Loan Group

Reported Percentage of Non-Owner Occupied Properties


14.95% 7.92% 14.65% 11.25% 10.74% 41.92% 39.90% 63.77%

Percentage of Properties Reported as Owner-Occupied With Strong Indication of NonOwner Occupancy11


18.07% 14.39% 15.57% 15.78% 18.70% 10.76% 12.56% 13.89%

Actual Percentage of Non-OwnerOccupied Properties


30.32% 21.17% 27.94% 25.25% 27.43% 48.17% 47.45% 68.80%

Prospectus Understatement of Non-Owner Occupied Properties


15.37% 13.25% 13.29% 14.01% 16.69% 6.25% 7.55% 5.03%

CMLTI 2005-7 CMLTI 2005-HE3 CMLTI 2005-HE4 CMLTI 2006-AR2 CMLTI 2006-AR5 CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7

Group 1-2 Group I Group I Group I-1 Group 1-2 Group I Group I Group 2

2. 113.

Loan-To-Value Data Was Materially False

The data review has further revealed that the LTV ratios disclosed in the

Prospectus Supplements were materially false and understated, as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisersprimarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data. 114. Applying the AVM to the available data for the properties securing the sampled

loans shows that the appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of LTV. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan and the risk of greater losses in the event of a default. As stated in the Prospectus Supplement for CMLTI 2005-10, mortgage loans with high loan-to-value ratios leave the related borrower with

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little or no equity in the related mortgaged property which may result in losses with respect to these mortgage loans. 115. For example, for the CMLTI 2006-WF1 Securitization, which was sponsored by

CGMR, deposited by CGMLT, and underwritten by CGMI, the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 17.24 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 46.05 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 36.35 percent of the loans had LTV ratios at or below 80 percent. 116. The data review revealed that for each Securitization, the Prospectus Supplement

misrepresented the percentage of loans with an LTV ratio above 100 percent, as well as the percentage of loans that had an LTV ratio at or below 80 percent. Table 7 reflects (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the percentage as reported in the Prospectus Supplement. The percentages listed in Table 7 were calculated by aggregated principal balance. Table 7
PROSPECTUS Supporting Loan Group Percentage of Loans Reported to Have LTV Ratio At Or Under 80%
62.07% 87.38% 94.00% 72.59% 57.93% 96.28% 94.44%

Transaction

DATA REVIEW True Percentage of Loans With LTV Ratio At Or Under 80%
45.67% 50.17% 49.18% 43.66% 44.45% 55.61% 62.25%

PROSPECTUS Percentage of Loans Reported to Have LTV Ratio Over 100%


0% 0% 0% 0.03% 0% 0% 0%

DATA REVIEW True Percentage of Loans With LTV Ratio Over 100%
12.38% 7.73% 7.71% 10.84% 14.50% 4.77% 5.16%

ARSI 2005-W2 CMLTI 2005-10 CMLTI 2005-7 CMLTI 2005-HE3 CMLTI 2005-HE4 CMLTI 2006-AR2 CMLTI 2006-AR5

Group I Group I-3 Group 1-2 Group I Group I Group I-1 Group 1-2

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CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7

Group I Group I Group 2

46.05% 43.46% 88.12%

36.35% 36.40% 49.76%

0% 0% 0%

17.24% 14.60% 16.71%

117.

As Table 7 demonstrates, the Prospectus Supplements for the Securitizations

reported that for all but one of the Securitizations none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent. With respect to that one exception, the percentage of mortgage loans with a reported LTV ratio over 100 percent was very smallless than 1 percent. In contrast, the data review revealed that at least 4.77 percent of the mortgage loans for each Securitization had an LTV ratio over 100 percent, and for most Securitizations this figure was much higher. Indeed, for six of the Securitizations the data review revealed that ten percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent. 118. These inaccuracies with respect to reported LTV ratios also indicate that the

representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the FCIC, which identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See FCIC Report at 91-92.

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B. 119.

The Originators Of The Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines The Registration Statements contained material misstatements and omissions

regarding compliance with underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage lending businesses. This is confirmed by the systematically misreported owner occupancy and LTV statistics, discussed above, and by (1) government investigations into originators underwriting practices, which have revealed widespread abandonment of the originators reported underwriting guidelines during the relevant period; (2) the collapse of the Certificates credit ratings; and (3) the surge in delinquency and default in the mortgages in the Securitizations. 1. Government Investigations Have Confirmed That The Originators Of The Loans In The Securitizations Systematically Failed To Adhere To Their Underwriting Guidelines

120.

For nine of the ten Securitizations the Citi Defendants sold to the GSEs, CGMR

would purchase loans originated by other entities, including CitiMortgage, as listed supra in paragraphs 26-27. The prospectus supplements for the Securitizations represented that the underlying mortgages were originated according to the originators guidelines. For example, the CMLTI 2006-WF2 Securitization stated that [a]ll of the mortgage loans were originated by Wells Fargo Bank or acquired by Wells Fargo Bank from correspondent lenders after reunderwriting such acquired mortgage loans generally in accordance with its underwriting guidelines then in effect. However, in reality, these originators systematically failed to adhere to their underwriting guidelines. 121. Several government reports and investigations have focused on the abandonment

of underwriting guidelines, describing rampant underwriting failures throughout the period of the

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Securitizations, and, more specifically, describing underwriting failures by the very originators whose loans were included by the Citi Defendants in the Securitizations. 122. For instance, in November 2008, the Office of the Comptroller of the Currency,

an office within the United States Department of the Treasury, issued a report identifying the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 20052007 originations. Numerous originators who originated loans that the Citi Defendants eventually sold to the GSEs are on that list, including Wells Fargo, Countrywide, American Home, Argent, and WMC. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. 123. The Citi Defendants had the opportunity to review loan files from such originators

as part of their due diligence and their obligations in the securitization process. Such a review would have revealed that the actual underwriting practices of the originators, including originators such as Wells Fargo, Countrywide, American Home, Argent, and WMC were vastly inconsistent with the statements in the Offering Materials regarding the high standards of the originators and the Citi Defendants. That the originators had serious origination underwriting breakdowns is also confirmed by the testimony of Mr. Bowen, who gave detailed statistics about the reject rates for loans bought by Citigroup from third party originators like Wells Fargo, Countrywide, and American Home. i. 124. Wells Fargo

Wells Fargo Bank, N.A. originated all of the mortgage loans for the CMLTI

2006-WF1 and CMLTI 2006-WF2 offerings. Wells Fargo Bank, N.A. also originated approximately 78.90 percent of the Group I-1 Mortgage Loans in the CMLTI 2006-AR2

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offering. 125. In March 2009, residential mortgage-backed securities investors filed suit against

Wells Fargo, alleging that it had misrepresented its underwriting guidelines and loan quality. See In re Wells Fargo Mortgage-Backed Certificates Litig., No. 09-CV-01376 (N.D. Cal. 2009). In denying in part a motion to dismiss, the court found that plaintiffs had adequately pled that variance from the stated [underwriting] standards was essentially [Wells Fargos] norm and that this conduct infected the entire underwriting process. In re Wells Fargo Mortgage-Backed Certificates Litig., 712 F. Supp. 2d 958, 972 (N.D. Cal. 2010). Wells Fargo agreed to settle the investors claims. 126. Further, a number of government actors have announced investigations of Wells

Fargos lending practices. In July 2009, the Attorney General of Illinois filed a lawsuit, People v. Wells Fargo & Co., No. 09-CH-26434 (Ill. Cir. Ct. 2009), alleging that Wells Fargo engaged in deceptive practices by misleading Illinois borrowers about their mortgage terms. The complaint details how borrowers were placed into loans that were unaffordable and unsuitable, and how Wells Fargo failed to maintain proper controls. 127. In April 2010, the City of Memphis filed its First Amended Complaint in

Memphis v. Wells Fargo Bank, No. 09-CV-02857 (W.D. Tenn. 2009), alleging that Wells Fargo failed to underwrite African-American borrowers properly. A similar lawsuit was filed by the City of Baltimore, Mayor and City Council of Baltimore v. Wells Fargo Bank, N.A., No. 08-CV00062 (D. Md. 2008). The City of Memphis and City of Baltimore complaints include sworn declarations from many former Wells Fargo employees, which provide evidence of predatory lending and abandonment of underwriting guidelines. For instance, Camille Thomas, a loan processor at Wells Fargo from January 2004 to January 2008, stated under oath that loans were

47

granted based on inflated appraisals, which allowed borrowers to get larger loans than they could afford due to the impact on the LTV calculation and some loans were even granted based on falsified income documents. Similarly, another affidavit by Doris Dancy, a credit manager at Wells Fargo from July 2007 to January 2008, stated that managers put pressure on employees to convince people to apply for loans, even if the person could not afford the loan or did not qualify for it. She was also aware that loan applications contained false data, used to get customers to qualify for loans. 128. The FCIC interviewed Darcy Parmer, a former employee of Wells Fargo, who

worked as an underwriter and a quality assurance analyst from 2001 until 2007. Ms. Parmer confirmed that, during her tenure, Wells Fargos underwriting standards were loosening, adding that they were being applied on the fly and that [p]eople were making it up as they went. She also told the FCIC that 99 percent of the loans she would review in a day would get approved, and that, even though she later became a fraud analyst, she never received any training in detecting fraud. The FCICs January 2011 Report described how hundreds and hundreds and hundreds of fraud cases that Ms. Palmer knew were identified within Wells Fargos home equity loan division were not reported to FinCEN.12 In addition, according to Ms. Palmer, at least half the loans she flagged for fraud were nevertheless funded, over her objections. 129. In July 2011, the Federal Reserve Board issued a consent cease and desist order

and assessed an $85 million civil money penalty against Wells Fargo & Co. and Wells Fargo Financial, Inc. According to the Federal Reserves press release, the order addressed in part

FinCEN is the Financial Crimes Enforcement Network, a bureau within the Treasury Department that collects and analyzes information regarding financial fraud.

12

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allegations that Wells Fargo Financial sales personnel falsified information about borrowers incomes to make it appear that the borrowers qualified for loans when they would not have qualified based on their actual incomes. The Federal Reserve Board also found that the poor practices of Wells Fargo were fostered by Wells Fargo Financials incentive compensation and sales quota programs, and the lack of adequate controls to manage the risks resulting from these programs. ii. 130. Countrywide

Countrywide was similarly derelict in its underwriting obligations. Countrywide

originated approximately 43.26 percent of the Group I mortgage loans in the CMLTI 2006-AR5 offering. 131. In January 2011, the FCIC issued its final report, which detailed, among other

things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. The FCIC Report singled out Countrywide for its role: Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities. As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in catastrophic consequences. Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in financial and reputational catastrophe for the firm. But they did not stop. See FCIC Report, at xxii. 132. Countrywide has also been the subject of several investigations and actions

concerning its lax and deficient underwriting practices. In June 2009, for instance, the SEC initiated a civil action against Countrywide executives Angelo Mozilo (founder and Chief Executive Officer), David Sambol (Chief Operating Officer), and Eric Sieracki (Chief Financial Officer) for securities fraud and insider trading. In a September 16, 2010 opinion denying these

49

defendants motions for summary judgment, the United States District Court for the Central District of California found that the SEC raised genuine issues of fact as to, among other things, whether the defendants had misrepresented the quality of Countrywides underwriting processes. The court noted that the SEC presented evidence that Countrywide routinely ignored its official underwriting to such an extent that Countrywide would underwrite any loan it could sell into the secondary mortgage market, and that a significant portion (typically in excess of 20%) of Countrywides loans were issued as exceptions to its official underwriting guidelines . . . . The court concluded that a reasonable jury could conclude that Countrywide all but abandoned managing credit risk through its underwriting guidelines . . . . S.E.C. v. Mozilo, No. CV 093994, 2010 WL 3656068, at *10 (C.D. Cal. Sept. 16, 2010). Mozilo, Sambol, and Sieracki subsequently settled with the SEC. 133. The testimony and documents only recently made available to the GSEs by way

of the SECs investigation confirm that Countrywide was systematically abusing exceptions and low-documentation processes in order to circumvent its own underwriting standards. For example, in an April 13, 2006 e-mail, Mozilo wrote to Sieracki and others that he was concerned that certain subprime loans had been originated with serious disregard for process [and] compliance with guidelines, resulting in the delivery of loans with deficient documentation. Mozilo further stated that I have personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan[s]. iii. 134. American Home

Likewise, American Home failed to follow its origination guidelines. American

Home originated 83.30 percent of the mortgage loans in Loan Group I for the CMLTI 2007-AR7

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offering. 135. An internal American Home Credit Update presentation from October 2005,

which was made public in June 2008, made clear that American Homes underwriting guidelines were to be either relaxed substantially or essentially rendered meaningless, in order to allow American Home to make loans to high-risk borrowers. Specifically, the Credit Update sets forth a new interpretation of guidelines that included: 136. Not requiring verification of income sources on stated income loans; Reducing the time that needs to have passed since the borrower was in bankruptcy or credit counseling; Reducing the required documentation for self-employed borrowers; and Broadening the acceptable use of second and third loans to cover the full property value. An internal American Home e-mail sent on November 2, 2006, made public in

June 2008, from Steve Somerman, an American Home Senior Vice President of Product and Sales Support in California and co-creator of the American Homes Choice Point Loans program, to loan officers nationwide, stated that American Home would make a loan to virtually any borrower, regardless of the borrowers ability to verify income, assets or even employment. The e-mail specifically encouraged loan officers to make a variety of loans that were inherently risky and extremely susceptible to delinquencies and default, including (1) stated income loans, where both the income and assets of the borrower were taken as stated on the credit application without verification; (2) NINA or No Income, No Asset loans, which allowed for loans to be made without any disclosure of the borrowers income or assets; and (3) No Doc loans, which allowed loans to be made to borrowers who did not disclose their income, assets or employment history. See Complaint, In re American Home Mortgage Securities Litigation, No. 07-MD-1898 (TCP) (E.D.N.Y. June 3, 2008).

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137.

American Home is involved in several criminal probes and investigations, and

federal prosecutors have convicted one American Home sales executive, Kourash Partow, of mortgage fraud. See Judgment in a Criminal Case, U.S. v. Partow, Case No. 3:06-CR-00070-08HRH, Aug. 31, 2007; see also U.S. v. Partow, 283 Fed. Appx. 476 (9th Cir. 2008). After his conviction, Partow, who worked for Countrywide before joining American Home, sought a lighter sentence on the grounds that his former employers (Countrywide and American Home) both had knowledge of the loan document inaccuracies and in fact encouraged manipulation by intentionally misrepresenting the performance of loans and the adequacy of how the loans were underwritten. Partow admitted that he would falsify clients income or assets in order to get loans approved, and that American Home did not require documentary verification of such figures. Loan Data Focus of Probe, Countrywide Files May Have Included Dubious Information, The Wall Street Journal, March 22, 2008; MSNBC.com, Inside the fiasco that led to the mortgage mess and Countrywides collapse, updated March 22, 2009. iv. 138. Argent

Argent also failed to follow its underwriting guidelines. Argent originated

86.32% percent of the mortgage loans in Loan Group I for the CMLTI 2005-HE4 offering; it also originated the loans in the ARSI 2005-W2 offering. 139. According to a December 7, 2008 article in the Miami Herald, employees of

Argent Mortgage had a practice of actively assisting brokers to falsify information on loan applications. They would tutor[] . . . mortgage brokers in the art of fraud. Employees taught [brokers] how to doctor credit reports, coached them to inflate [borrower] income on loan applications, and helped them invent phantom jobs for borrowers so that loans could be approved. Borrowers Betrayed, Part 4, Miami Herald, Dec. 7, 2008.

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140.

Orson Benn, a former Argent Vice President who went to prison for his role in

facilitating mortgage fraud, has stated that at Argent the accuracy of loan applications was not a priority. Borrowers Betrayed, Part 4, Miami Herald, Dec. 7, 2008. Mr. Benn was the head of a crime ring that fabricated loan applications in order to pocket the loan fees; Mr. Benn himself pocketed a $3,000 kickback for each loan he helped secure. FCIC Report at 164. Of the 18 defendants charged in the Argent ring, 16 have been convicted or pled guilty, FCIC Report at 164, including Mr. Benn, who was sentenced to 18 years in prison, Ex-Argent Mortgage VP Sentenced For Fraud, North Country Gazette, Sept. 5, 2008. 141. Other jurisdictions have also investigated Argent for its mortgage origination

practices. On June 22, 2011, a grand jury in Cuyahoga County, Cleveland, indicted nine employees of Argent for their suspected roles in approving fraudulent home loans. The case, investigated by the Cuyahoga County Mortgage Fraud Task Force, alleges that the employees helped coach mortgage brokers about how to falsify loan documents to misstate the source or existence of down payments, as well as a borrowers income and assets. Argent was Clevelands number one lender in 2004, and originated over 10,000 loans during the time span 2002 through 2005. This was the first time in Ohio, and one of few instances nationwide, that a mortgage fraud investigation has led to criminal charges against employees of a subprime lender. Mark Gillespie, Former employees of subprime mortgage lender indicted by Cuyahoga County grand jury, The Plain Dealer, June 23, 2011. 142. Indeed, Jacquelyn Fishwick, who worked for more than two years at an Argent

loan processing center near Chicago as an underwriter and account manager, noted that some Argent employees played fast and loose with the rules. She personally saw some stuff [she] didnt agree with, such as [Argent] account managers remove documents from files and create

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documents by cutting and pasting them. The Subprime House of Cards, Cleveland Plain Dealer, May 11, 2008. 143. Similarly, Argent was also not diligent about confirming accurate appraisals for

the properties for which it was issuing mortgages. Steve Jernigan, a fraud investigator at Argent, said that he once went to check on a subdivision for which Argent had made loans. The address on the loans turned out to be in the middle of a cornfield; the appraisals had all been fabricated. The same fake picture had been included in each file. Michael W. Hudson, Silencing the Whistle-blowers, The Investigative Fund, May 10, 2010. 144. In 2007, Citigroup acquired Argent from its parent ACC Capital Holdings Corp.

This acquisition is notable because Mr. Bowen, who was described above was a Chief Underwriter within Citigroups Consumer Lending Group was given the opportunity to review Argent before Citigroup acquired it. He reported that large numbers of Argents loans were not underwritten according to the representations that were there. FCIC Hearing Transcript, Apr. 7, 2010, p. 239. Despite Mr. Bowens warnings, however, Citigroup proceeded with the acquisition and in fact touted it, stating that [t]hrough this acquisition, we gain important operational and pricing efficiencies . . . from point of origination through securitization and servicing. Citigroup Press Release, Aug. 31, 2007. v. 145. WMC

WMC also failed to follow its underwriting guidelines. WMC originated 82.97

percent of the mortgage loans in Loan Group I for the CMLTI 2005-HE3 offering. 146. WMC employed reckless underwriting standards and practices, as described more

fully below, that resulted in a huge amount of foreclosures, ranking WMC fourth in the report presented to the FCIC in April 2010 identifying the Worst Ten mortgage originators in the

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Worst Ten metropolitan areas. See Worst Ten in the Worst Ten, Office of the Comptroller of the Currency Press Release, November 13, 2008. General Electric, which had purchased WMC in 2004, closed down operations at WMC in late 2007 and took a $1.4 billion charge in the third quarter of that year. See, e.g., Diane Brady, Adventures of a Subprime Survivor, Bloomberg Businessweek, Oct. 29, 2007 (available at http://www.businessweek.com /magazine/content/07_44/b4056074.htm). 147. WMCs reckless loan originating practices were noticed by regulatory authorities.

In June 2008, the Washington State Department of Financial Institutions, Division of Consumer Services filed a Statement of Charges and Notice of Intention to Enter an Order to Revoke License, Prohibit From Industry, Impose Fine, Order Restitution and Collect Investigation Fees (the Statement of Charges) against WMC Mortgage and its principal owners individually. See Statement of Charges, No. C-07-557-08-SC01, Jun. 4, 2008. The Statement of Charges described a review of 86 loan files, which revealed that at least 76 of those loans were defective or otherwise in violation of Washington state law. Id. Among other things, the investigation uncovered that WMC had originated loans with unlicensed or unregistered mortgage brokers, understated amounts of finance charges on loans, understated amounts of payments made to escrow companies, understated annual percentage rates to borrowers and committed many other violations of Washington State deceptive and unfair practices laws. Id. vi. 148. Inflated Appraisals

The originators of the mortgage loans underlying the Securitizations went beyond

the systematic disregard of their own underwriting guidelines. Indeed, as the FCIC has confirmed, mortgage loan originators throughout the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed

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for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators aimed at putting the mortgages into a package of mortgages that would be sold for securitization. This resulted in lower LTV ratios, discussed above, which in turn made the loans appear less risky to the investors than they were. 149. As described by Patricia Lindsay, a former wholesale lender who testified before

the FCIC in April 2010, appraisers fear[ed] for their livelihoods, and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See Written Testimony of Patricia Lindsay to the FCIC, April 7, 2010, at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that [i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again . . . . [T]oo often state licensed and certified appraisers are forced into making a Hobsons Choice. See Testimony of Jim Amorin to the FCIC, April 23, 2009, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRANAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgage-backed securitizations 2. The Collapse Of The Certificates Credit Ratings Further Indicates That The Mortgage Loans Were Not Originated In Adherence To The Stated Underwriting Guidelines

150.

The total collapse in the credit ratings of the GSE Certificates, typically from

AAA or its equivalent to non-investment speculative grade, is further evidence of the originators systematic disregard of underwriting guidelines, amplifying that the GSE Certificates were impaired from the start. 151. The GSE Certificates that Fannie Mae and Freddie Mac purchased were originally

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assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 152. The Citi Defendants provided or caused to be provided loan level information to

the rating agencies that they relied upon to calculate the Certificates assigned ratings, including the borrowers LTV ratio, debt-to-income ratio, owner occupancy status, and other loan level information described in the aggregation reports Prospectus Supplements. Because the information that the Citi Defendants provided or caused to be was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of AAA (or its equivalent) certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and inadequate credit enhancement. 153. Since the issuance of the Certificates, the ratings agencies have dramatically

downgraded their ratings to reflect the revelations regarding the true underwriting practices used to originate the mortgage loans, and the true value and credit quality of the mortgage loans. Table 8 details the extent of the downgrades.13

Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch. A hyphen between forward slashes indicates that the relevant agency did not provide a rating at issuance.

13

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Table 8
Transaction
ARSI 2005-W2 CMLTI 2005-10 CMLTI 2005-7 CMLTI 2005-HE3 CMLTI 2005-HE4 CMLTI 2006-AR2 CMLTI 2006-AR5 CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7

Tranche
A1 IA3A 1A2 A1 A1 IA1 1A2A A1 A1 A2A

Rating at Issuance (Moodys/S&P/Fitch)


Aaa/AAA/AAA Aaa/AAA/-Aaa/Not Rated/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/--/AAA - -/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/--/AAA

Rating at July 31, 2011 (Moodys/S&P/Fitch)


Baa1/AA/B Caa3/CCC/-Caa3/--/D Aa1/AAA/AAA A3/AAA/BB Caa3/--/C - -/CCC/C Caa3/CCC/C Caa3/CCC/C Ca/--/D

3.

The Surge In Mortgage Delinquencies And Defaults Further Indicates That The Mortgage Loans Were Not Originated In Adherence To The Stated Underwriting Guidelines

154.

Even though the Certificates purchased by Fannie Mae and Freddie Mac were

supposed to represent long-term, stable investments, a significant percentage of the mortgage loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with the applicable underwriting guidelines as represented in the Registration Statements. 155. Loan groups that were properly underwritten and contained loans with the

characteristics represented in the Registration Statements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 9 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011.

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Table 9
Percentage of Delinquent/Defaulted/Foreclosed Loans
34.8% 28.1% 28.2% 70.7% 34.3% 14.3% 17.5% 32.9% 37.0% 53.8%

Transaction
ARSI 2005-W2 CMLTI 2005-10 CMLTI 2005-7 CMLTI 2005-HE3 CMLTI 2005-HE4 CMLTI 2006-AR2 CMLTI 2006-AR5 CMLTI 2006-WF1 CMLTI 2006-WF2 CMLTI 2007-AR7

Supporting Loan Group


Group I Group I-3 Group 1-2 Group I Group I Group I-1 Group 1-2 Group I Group I Group 2

156.

The confirmed misstatements concerning owner occupancy and LTV ratios, the

confirmed systematic underwriting failures by the originators responsible for the mortgage loans across the Securitizations, and the extraordinary drop in credit rating and rise in delinquencies across the Securitizations, all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. V. FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 157. In total, between September 13, 2005 and May 31, 2007, Fannie Mae and Freddie

Mac purchased over $3.5 billion in residential mortgage-backed securities issued in connection with the Securitizations. 158. Table 10 reflects Freddie Macs purchases of the Certificates.14

Purchased securities in Tables 10 and 11 are stated in terms of unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par. The Settlement Date, refers to the date by which a buyer must pay for the securities delivered by the seller.

14

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Table 10
Transaction Tranche CUSIP Settlement Date of Purchase by Freddie Mac
9/27/2005 9/13/2005 11/30/2005 5/31/2007

Initial Unpaid Principal Balance ($)


1,351,319,000 380,972,000 340,420,000 117,893,000

Purchase Price (% of Par)


100 100 100 101.9063

Seller to Freddie Mac


CGMI CGMI CGMI CGMI

ARSI 2005-W2 CMLTI 2005HE3 CMLTI 2005HE4 CMLTI 2007AR7

A1 A1 A1 A2A

040104NW7 17307GXJ2 17307GQ84 17312YAB8

159.

Table 11 reflects Fannie Maes purchases of the Certificates:

Table 11
Transaction Tranche CUSIP Settlement Date of Purchase by Fannie Mae
2/3/2006 10/17/2005 6/30/2006

Initial Unpaid Principal Balance ($)


148,577,697 130,480,732 115,073,166

Purchase Price (% of Par)


100.6719 100.2539 99.5703

Seller to Fannie Mae


CGMI CGMI UBS Securities LLC CGMI CGMI CGMI

CMLTI 200510 CMLTI 2005-7 CMLTI 2006AR2 CMLTI 2006AR5 CMLTI 2006WF1 CMLTI 2006WF2

IA3A 1A2 IA1

17307GT73 17307GA57 17307G6K9

1A2A A1 A1

17309FAD0 17307G4E5 17309BAL1

6/30/2006 3/30/2006 5/31/2006

36,920,000 425,206,000 484,445,000

99.8034 101.3047 101.1875

160.

The statements and assurances in the Registration Statements regarding the credit

quality and characteristics of the mortgage loans underlying the GSE Certificates, and the origination and underwriting practices used to make these loans, were material to a reasonable investors decision to purchase the GSE Certificates. 161. The false statements of material facts and omissions of material facts in the

Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused Fannie Mae and Freddie Mac to suffer hundreds of millions of dollars in damages, including without limitation depreciation in the value of the securities. The mortgage loans underlying the GSE Certificates experienced defaults and delinquencies at a much higher rate than they would

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have had the loan originators adhered to the underwriting guidelines set forth in the Registration Statements, and the payments to the Trusts were therefore much lower than they would have been had the loans been underwritten as described in the Registration Statements. 162. Fannie Maes and Freddie Macs losses have been much greater than they would

have been if the mortgage loans had the credit quality represented in the Registration Statements. 163. Defendants misstatements and omissions in the Registration Statements

regarding the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchase of the GSE Certificates. 164. Defendants misstatements and omissions in the Registration Statements

regarding the true characteristics of the loans were the proximate cause of Fannie Maes and Freddie Macs losses relating to their purchases of the GSE Certificates. Based upon sales of the Certificates or similar certificates in the secondary market, Defendants proximately caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac in an amount to be determined at trial. FIRST CAUSE OF ACTION Violation of Section 11 of the Securities Act of 1933 (Against Defendants CGMI, CGMLT, and the Individual Defendants) 165. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 166. This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of

1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements. This claim is brought against Defendant CGMI with respect to each of the Registration Statements, and is brought against Defendants CGMLT and the Individual Defendants with respect to the Registration Statements

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filed by CGMLT that registered securities that were bona fide offered to the public on or after September 6, 2005. 167. This claim is predicated upon Defendant CGMIs strict liability for making false

and materially misleading statements in each of the Registration Statements for the Securitizations and for omitting facts necessary to make the facts stated therein not misleading. CGMLT and the Individual Defendants are strictly liable for making false and materially misleading statements in the Registration Statements filed by CGMLT that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to eight of the ten Securitizations (as specified in Tables 1 and 2 above), including the related Prospectus Supplements, and for omitting facts necessary to make the facts stated therein not misleading. 168. Defendant CGMI served as the underwriter of each of the Securitizations, and as

such, is liable for the misstatements and omissions in the Registration Statements under Section 11 of the Securities Act. 169. Defendant CGMLT filed the four Registration Statements under which nine of the

ten Securitizations were carried out. As a depositor, Defendant CGMLT is an issuer of the GSE Certificates issued pursuant to the Registration Statements it filed within the meaning of Section 2(a)(4) of the Securities Act, 15 U.S.C. 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. 77k(a). As such, it is liable under Section 11 of the Securities Act for the misstatements and omissions in those Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 170. At the time Defendant CGMLT filed four Registration Statements applicable to

nine of the Securitizations, the Individual Defendants were officers and/or directors of CGMLT.

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In addition, the Individual Defendants signed those Registration Statements and either signed or authorized another to sign on their behalf the amendments to those Registration Statements. As such, the Individual Defendants are liable under Section 11 of the Securities Act for the misstatements and omissions in those Registration Statements that registered securities that were bona fide offered to the public on or after September 6, 2005. 171. At the time that they became effective, each of the Registration Statements

contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading, as set forth above. The facts misstated or omitted were material to a reasonable investor reviewing the Registration Statement, including to Fannie Mae and Freddie Mac. 172. The untrue statements of material facts and omissions of material facts in the

Registration Statements are set forth above in Section IV and pertain to, among other things, compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 173. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE

Certificates pursuant to the false and misleading Registration Statements. Fannie Mae and Freddie Mac made these purchases in the primary market and shortly after issuance. At the time they purchased the GSE Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and misleading statements and omissions alleged herein, and if they had known those facts, they would not have purchased the GSE Certificates. 174. CGMI owed to Fannie Mae, Freddie Mac, and other investors a duty to make a

reasonable and diligent investigation of the statements contained in the Registration Statements at the time they became effective to ensure that such statements were true and correct and that

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there were no omissions of material facts required to be stated in order to make the statements contained therein not misleading. The Individual Defendants owed the same duty with respect to the Registration Statements they signed that registered securities that were bona fide offered to the public on or after September 6, 2005, which are applicable to eight of the Securitizations. 175. CGMI and the Individual Defendants did not exercise such due diligence and

failed to conduct a reasonable investigation. In the exercise of reasonable care, these Defendants should have known of the false statements and omissions contained in or omitted from the Registration Statements filed in connection with the Securitizations, as set forth herein. In addition, CGMLT, though subject to strict liability without regard to whether it performed diligence, also failed to take reasonable steps to ensure the accuracy of the representations. 176. Fannie Mae and Freddie Mac sustained substantial damages as a result of the

misstatements and omissions in the Registration Statements. 177. The time period from June 2, 2009 through August 29, 2011 has been tolled for

statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). 178. By reason of the conduct herein alleged, CGMI, CGMLT, and the Individual

Defendants are jointly and severally liable for their wrongdoing. SECOND CAUSE OF ACTION Violation of Section 12(a)(2) of the Securities Act of 1933 (Against Defendants CGMLT and CGMI) 179. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud.

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180.

This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities

Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE Certificates issued pursuant to the Registration Statements for the Securitizations listed in paragraph 2, with the exception of CMLTI 2006-AR2. 181. This claim is predicated upon CGMIs negligence in making materially false and

misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for each of the Securitizations listed in paragraph 2 that CGMI sold. Defendant CGMLT acted negligently in making false and materially misleading statements in the Prospectuses for the Securitizations carried out under the Registration Statements, which are applicable to nine of the Securitizations. 182. CGMI is prominently identified in the Prospectuses, the primary documents that it

used to sell the GSE Certificates, except for CMLTI 2006-AR2. CGMI offered the Certificates publicly, including selling to Fannie Mae and Freddie Mac its GSE Certificates, except for CMLTI 2006-AR2, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 183. CGMI offered and sold the GSE Certificates, except for CMLTI 2006-AR2, to

Fannie Mae and Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances which they were made, not misleading. CGMI reviewed and participated in drafting the Prospectuses. 184. CGMI successfully solicited Fannie Maes and Freddie Macs purchases of the

GSE Certificates, except for CMLTI 2006-AR2. As underwriter, CGMI obtained substantial commissions based upon the amount it received from the sale of the Certificates to the public.

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185.

CGMI offered the GSE Certificates, except for CMLTI 2006-AR2, for sale, sold

them, and distributed them by the use of means or instruments of transportation and communication in interstate commerce. 186. CGMLT is prominently identified in the Prospectuses for the Securitizations

carried out under the Registration Statements it filed. These Prospectuses were the primary documents CGMLT used to sell Certificates for the nine Securitizations under those Registration Statements. CGMLT offered the Certificates publicly and actively solicited their sale, except for CMLTI 2006-AR2, including to Fannie Mae and Freddie Mac. 187. With respect to the nine Securitizations for which it filed Registration Statements,

CGMLT offered GSE Certificates, except for CMLTI 2006-AR2, to Fannie Mae and Freddie Mac by means of Prospectuses that contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. Upon information and belief, CGMLT reviewed and participated in drafting the Prospectuses. 188. CGMLT offered the GSE Certificates, except for CMLTI 2006-AR2, for sale by

the use of means or instruments of transportation and communication in interstate commerce. 189. Each of CGMI and CGMLT actively participated in the solicitation of the GSEs

purchase of the GSE Certificates, except for CMLTI 2006-AR2, and did so in order to benefit themselves. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates, except for CMLTI 2006-AR2. 190. Each of the Prospectuses contained material misstatements of fact and omitted

facts necessary to make the facts stated therein not misleading. The facts misstated and omitted

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were material to a reasonable investor reviewing the Prospectuses, and were specifically material to Fannie Mae and Freddie Mac. 191. The untrue statements of material facts and omissions of material fact in the

Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 192. CGMLT and CGMI offered and sold the GSE Certificates, except for CMLTI

2006-AR2, offered pursuant to the Registration Statements directly to Fannie Mae and Freddie Mac, pursuant to the false and misleading Prospectuses. 193. CGMI owed to Fannie Mae and Freddie Mac, as well as to other investors in these

trusts, a duty to make a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. CGMLT owed the same duty with respect to the Prospectuses for the Securitizations carried out under the four Registration Statements filed by it. 194. CGMLT and CGMI failed to exercise such reasonable care. These defendants in

the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations as set forth above. 195. In contrast, Fannie Mae and Freddie Mac did not know, and in the exercise of

reasonable diligence could not have known, of the untruths and omissions contained in the Prospectuses at the time they purchased the GSE Certificates. If they had known of those untruths and omissions, they would not have purchased the GSE Certificates.

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196.

Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market

and shortly after issuance pursuant to the Prospectuses. 197. Fannie Mae and Freddie Mac sustained substantial damages in connection with

their investments in the GSE Certificates and have the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 198. The time period from June 2, 2009 through August 29, 2011 has been tolled for

statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac, and is thus timely under 12 U.S.C. 4617(b)(12). THIRD CAUSE OF ACTION Violation of Section 15 of the Securities Act of 1933 (Against Defendants CGMR, Citi, and the Individual Defendants) 199. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 200. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.

77o (Section 15), against CGMR, Citi, and the Individual Defendants for controlling-person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth above. 201. The Individual Defendants at all relevant times participated in the operation and

management of CGMLT and their related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of CGMLTs business affairs. Defendant Susan Mills was the Vice President and the Managing Director of CGMLT. Defendant Randall Costa was a President and Director of CGMLT. Defendant Richard A. Isenberg was a President and Director of CGMLT. Defendant Scott Freidenrich was a Treasurer and Principal Financial Officer of

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CGMLT. Defendant Peter Patricola was a Controller of CGMLT. Defendant Mark I. Tsesarsky was a Director of CGMLT. Defendant Jeffrey Perlowitz was a Director of CGMLT. Defendant Evelyn Echevarria was a Director of CGMLT. 202. Defendant CGMR was the sponsor for the nine Securitizations carried out under

the four Registration Statements filed by CGMLT, and culpably participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting CGMLT as the special purpose vehicle, and selecting CGMI as underwriter. In its role as sponsor, CGMR knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cash-flows from the mortgages would be issued by the relevant trusts. 203. Defendant CGMR also acted as the seller of the mortgage loans for the

Securitizations carried out under the four Registration Statements filed by CGMLT, in that it conveyed such mortgage loans to CGMLT pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. 204. Defendant CGMR also controlled all aspects of the business of CGMLT, as

CGMLT was merely a special purpose entity created for the purpose of acting as a pass-through for the issuance of the Certificates. Upon information and belief, the officers and directors of CGMR overlapped with the officers and directors of CGMLT, such as Susan Mills, who was the Vice President and Managing Director of CGMLT, as well as head of CGMIs Mortgage Finance Group. In addition, because of its position as sponsor, CMGR was able to, and did in fact, control the contents of the four Registration Statements filed by CGMLT, including the

69

Prospectuses and Prospectus Supplements, which pertained to nine Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 205. Defendant Citi controlled the business operations of CGMLT and CGMI.

Defendant Citi is the corporate parent of CGMLT and CGMI. As the sole corporate parent of CGMI and CGMLT, Citi had the practical ability to direct and control the actions of CGMI and CGMLT in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of CGMLT and CGMI in connection with the issuance and sale of the Certificates. 206. Citi expanded its share of the residential mortgage-backed securitization market in

order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 207. Citi culpably participated in the violations of Section 11 and 12(a)(2) set forth

above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as CGMLT and the issuing trusts to serve as conduits for the mortgage loans. 208. Defendant Citi wholly owns CGMR, CGMI and CGMLT. Citi culpably

participated in the violations of Section 11 and 12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as CGMLT and the issuing trusts to serve as conduits for the mortgage loans. 209. Citi, CGMR, and the Individual Defendants are controlling persons within the

70

meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or directorship of CGMI and CGMLT at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 210. Fannie Mae and Freddie Mac purchased in the primary market and shortly after

issuance the GSE Certificates issued pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements, which, at the time they became effective, contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and were specifically material to Fannie Mae and Freddie Mac. 211. Fannie Mae and Freddie Mac did not know, and in the exercise of reasonable

diligence could not have known, of the misstatements and omissions in the Registration Statements. Had the GSEs known of those misstatements and omissions, they would not have purchased the GSE Certificates. 212. Fannie Mae and Freddie Mac have sustained damages as a result of the

misstatements and omissions in the Registration Statements, for which they are entitled to compensation. 213. The time period from June 2, 2009 through August 29, 2011 has been tolled for

statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12).

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FOURTH CAUSE OF ACTION Violation of Section 13.1-522(A)(ii) of the Virginia Code (Against CGMI and CGMLT) 214. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 215. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the

Virginia Code and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain to only those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. 216. This claim is predicated upon CGMIs negligence in making materially false and

misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for the Securitizations listed in paragraph 2 that CGMI sold. Defendant CGMLT acted negligently in making materially false and misleading statements in the Prospectuses for the Securitizations effected under the four Shelf Registration Statements CGMLT filed, which are applicable to nine of the Securitizations. 217. CGMI is prominently identified in the Prospectuses, the primary documents it

used to sell the Certificates, except for CMLTI 2006-AR2. CGMI offered the Certificates publicly, including selling to Freddie Mac its GSE Certificates as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 218. CGMI offered and sold the GSE Certificates, except for CMLTI 2006-AR2, to

Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. CGMI reviewed and participated in drafting the Prospectuses.

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219.

CGMI successfully solicited Freddie Macs purchases of the GSE Certificates,

except for CMLTI 2006-AR2. As underwriter, CGMI obtained substantial commissions based on the amount it received from the sale of the Certificates to the public. 220. CGMI offered the GSE Certificates for sale, sold them, and distributed them,

except for CMLTI 2006-AR2, to Freddie Mac in the State of Virginia. 221. CGMLT is prominently identified in the Prospectuses for the Securitizations

carried out under the Registration Statements it filed. These Prospectuses were the primary documents CGMLT used to sell Certificates for the Securitizations under those Registration Statements. CGMLT offered the Certificates publicly and actively solicited their sale, except for CMLTI 2006-AR2, including to Freddie Mac. 222. With respect to the nine Securitizations for which it filed Registration Statements,

including the related Prospectus Supplements, CGMLT offered the GSE Certificates, except for CMLTI 2006-AR2, to Freddie Mac by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, CGMLT reviewed and participated in drafting the Prospectuses. 223. Each of CGMI and CGMLT actively participated in the solicitation of Freddie

Macs purchase of the GSE Certificates, except for CMLTI 2006-AR2, and did so in order to benefit itself. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates, except for CMLTI 2006-AR2. 224. Each of the Prospectuses contained material misstatements of fact and omitted

facts necessary to make the facts stated therein not misleading. The facts misstated and omitted

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were material to a reasonable investor reviewing the Prospectuses, and specifically to Freddie Mac. 225. The untrue statements of material facts and omissions of material facts in the

Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 226. CGMI and CGMLT offered and sold the GSE Certificates, except for CMLTI

2006-AR2, pursuant to the Registration Statements directly to Freddie Mac, pursuant to the materially false, misleading, and incomplete Prospectuses. 227. CGMI owed to Freddie Mac, as well as to other investors, a duty to make a

reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. CGMLT owed the same duty with respect to the Prospectuses for the Securitizations effected under the four Registration Statements filed by it. 228. CGMI and CGMLT failed to exercise such reasonable care. These defendants in

the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 229. In contrast, Freddie Mac did not know, and in the exercise of reasonable diligence

could not have known, of the untruths and omissions contained in the Prospectuses at the time it purchased the GSE Certificates. If Freddie Mac had known of those untruths and omissions, it would not have purchased the GSE Certificates.

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230.

Freddie Mac sustained substantial damages in connection with their investments

in the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 231. This action is brought within three years of the date that the FHFA was appointed

as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). FIFTH CAUSE OF ACTION Violation of Section 13.1-522(C) of the Virginia Code (Against CGMR, Citi, and the Individual Defendants) 232. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 233. This claim is brought by Plaintiff under Section 13.1-522(C) of the Virginia Code

and is asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 10 above that were purchased by Freddie Mac on or after September 6, 2006. This claim is brought against CGMR, Citi, and the Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action set forth above. 234. The Individual Defendants at all relevant times participated in the operation and

management of CGMLT and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of CGMLTs business affairs. Defendant Susan Mills was the Vice President and Managing Director of Defendant CGMLT, and was also the head of CGMIs Mortgage Finance Group. Defendant Richard A. Isenberg was a Director and President of Defendant CGMLT. Defendant Randall Costa was a Director and President of Defendant CGMLT. Defendant Scott Freidenrich was a Treasurer of Defendant CGMLT. Defendant Mark

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I. Tsesarsky was a Director of Defendant CGMLT. Defendant Peter Patricola was a Controller of Defendant CGMLT. Defendant Jeffrey Perlowitz was a Director of Defendant CGMLT. Defendant Evelyn Echevarria was a Director of Defendant CGMLT. 235. Defendant CGMR was the sponsor for the nine Securitizations carried out under

the four Registration Statements filed by CGMLT, and culpably participated in the violation of Section 13.1-522(A)(ii) set forth above with respect to the offering of GSE Certificates by initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting CGMLT as the special purpose vehicle, and selecting CGMI as the lead underwriter. In its role as sponsor, CGMR knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cash-flows would be issued by the relevant trusts. 236. Defendant CGMR also acted as the seller of the mortgage loans for the

Securitizations carried out under the four Registration Statements filed by CGMLT, in that it conveyed such mortgage loans to the CGMLT pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. 237. Defendant CGMR also controlled all aspects of the business of CGMLT, as

CGMLT was merely a special purpose vehicle created to for the purpose of acting as a passthrough for the issuance of the Certificates. Upon information and belief, the officers and directors of CGMR overlapped with the officers and directors of CGMLT, such as Susan Mills, who was the Vice President and Managing Director of CGMLT, as well as head of CGMIs Mortgage Finance Group. In addition, because of its position as sponsor, CGMR was able to, and did in fact, control the contents of the Registration Statements filed by CGMLT, including

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the Prospectuses and Prospectus Supplements, which pertained to nine Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 238. Defendant Citi controlled the business operations of CGMLT and CGMI.

Defendant Citi is the corporate parent of CGMLT and CGMI. As the sole corporate parent of CGMI and CGMLT, Citi had the practical ability to direct and control the actions of CGMI and CGMLT in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of CGMLT and CGMI in connection with the issuance and sale of the Certificates. 239. Citi expanded its share of the residential mortgage-backed securitization market in

order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 240. Defendant Citi wholly owns CGMR, CGMI and CGMLT. Citi culpably

participated in the violation of Section 13.1-522(A)(ii) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as CGMLT and the issuing trusts to serve as conduits for the mortgage loans. 241. Citi, CGMR, and the Individual Defendants are controlling persons within the

meaning of Section 13.1-522(C) of the Virginia Code by virtue of their actual power over, control of, ownership of, and/or directorship of CGMLT and CGMI at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements.

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242.

Freddie Mac purchased the GSE Certificates, which were issued pursuant to the

Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and were specifically material to Freddie Mac. 243. Freddie Mac did not know, and in the exercise of reasonable diligence could not

have known, of the misstatements and omissions in the Registration Statements. Had Freddie Mac known of those misstatements and omissions, it would not have purchased the GSE Certificates. 244. Freddie Mac has sustained damages as a result of the misstatements and

omissions in the Registration Statements, for which it is entitled to compensation, and for which CGMR, Citi, and the Individual Defendants are jointly and severally liable. 245. This action is brought within three years of the date that the FHFA was appointed

as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). SIXTH CAUSE OF ACTION Violation of Section 31-5606.05(a)(1)(B) of the District of Columbia Code (Against CGMLT and CGMI) 246. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 247. This claim is brought by Plaintiff pursuant to 31-5606.05(a)(1)(B) of the District

of Columbia Code and is asserted on behalf of Fannie Mae with respect to the GSE Certificates identified in Table 11 above that were purchased by Fannie Mae, which were issued pursuant to the Registration Statements for the Securitizations, with the exception of CMLTI 2006-AR2.

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248.

This claim is predicated upon CGMIs negligence in making materially false and

misleading statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter referred to in this Section as Prospectuses) for the Securitizations listed in paragraph 2 that CGMI sold. Defendant CGMLT acted negligently in making materially false and misleading statements in the Prospectuses for the Securitizations carried out under the four Registration Statements, which are applicable to nine of the Securitizations. 249. CGMI is prominently identified in the Prospectuses, the primary documents it

used to sell the Certificates, except for CMLTI 2006-AR2. CGMI offered the Certificates publicly, including selling to Fannie Mae the GSE Certificates, except for CMLTI 2006-AR2, as set forth in the Plan of Distribution or Underwriting sections of the Prospectuses. 250. CGMI offered and sold the GSE Certificates, except for CMLTI 2006-AR2, to

Fannie Mae by means of the Prospectuses, which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading. CGMI reviewed and participated in drafting the Prospectuses. 251. CGMI successfully solicited Fannie Maes purchases of the GSE Certificates,

except for CMLTI 2006-AR2. As underwriter, CGMI obtained substantial commissions based on the amount it received from the sale of the Certificates to the public. 252. CGMI offered the GSE Certificates for sale, sold them, and distributed them,

except for CMLTI 2006-AR2, to Fannie Mae in the District of Columbia. 253. CGMLT is prominently identified in the Prospectuses for the Securitizations

carried out under the Registration Statements it filed. These Prospectuses were the primary documents CGMLT used to sell Certificates for the Securitizations under those Registration

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Statements. CGMLT offered the Certificates publicly and actively solicited their sale, except for CMLTI 2006-AR2, including to Fannie Mae. 254. With respect to the nine Securitizations for which it filed Registration Statements,

including the related Prospectus Supplements, CGMLT offered the GSE Certificates, except for CMLTI 2006-AR2, to Fannie Mae by means of Prospectuses which contained untrue statements of material facts and omitted to state material facts necessary to make the statements, in the light of the circumstances under which they were made, not misleading. Upon information and belief, CGMLT reviewed and participated in drafting the Prospectuses. 255. Each of CGMI and CGMLT actively participated in the solicitation of the Fannie

Maes purchase of the GSE Certificates, except for CMLTI 2006-AR2, and did so in order to benefit itself. Such solicitation included assisting in preparing the Registration Statements, filing the Registration Statements, and assisting in marketing the GSE Certificates, except for CMLTI 2006-AR2. 256. Each of the Prospectuses contained material misstatements of fact and omitted

facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Prospectuses, and specifically to Fannie Mae. 257. The untrue statements of material facts and omissions of material facts in the

Registration Statements, which include the Prospectuses, are set forth above in Section IV, and pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and accurate credit ratings. 258. CGMI and CGMLT offered and sold the GSE Certificates, except for CMLTI

2006-AR2, pursuant to the Registration Statements directly to Fannie Mae pursuant to the

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materially false, misleading, and incomplete Prospectuses. 259. CGMI owed to Fannie Mae, as well as to other investors, a duty to make a

reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure that such statements were true, and to ensure that there was no omission of a material fact required to be stated in order to make the statements contained therein not misleading. CGMLT owed the same duty with respect to the Prospectuses for the Securitizations effected under the four Registration Statements filed by it. 260. CGMI and CGMLT failed to exercise such reasonable care. These defendants in

the exercise of reasonable care should have known that the Prospectuses contained untrue statements of material facts and omissions of material facts at the time of the Securitizations, as set forth above. 261. In contrast, Fannie Mae did not know, and in the exercise of reasonable diligence

could not have known, of the untruths and omissions contained in the Prospectuses at the time it purchased the GSE Certificates. If Fannie Mae had known of those untruths and omissions, it would not have purchased the GSE Certificates. 262. Fannie Mae sustained substantial damages in connection with their investments in

the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE Certificates, with interest thereon. 263. The time period from June 2, 2009 through August 29, 2011 has been tolled for

statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12).

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SEVENTH CAUSE OF ACTION Violation of Section 31-5606.05(c) of the District of Columbia Code (Against CGMR, Citi, and the Individual Defendants) 264. Plaintiff realleges each allegation above as if fully set forth herein, except to the

extent that Plaintiff expressly excludes any allegation that could be construed as alleging fraud. 265. This claim is brought under Section 31-5606.05(c) of the District of Columbia

Code and is asserted on behalf of Fannie Mae. The allegations set forth below in this cause of action pertain only to those GSE Certificates identified in Table 11 above, that were purchased by Fannie Mae, with the exception of CMLTI 2006-AR2. This claim is brought against CGMR, Citi, and the Individual Defendants for controlling-person liability with regard to the Sixth Cause of Action set forth above. 266. The Individual Defendants at all relevant times participated in the operation and

management of CGMLT and its related subsidiaries, and conducted and participated, directly and indirectly, in the conduct of CGMLTs business affairs. Defendant Susan Mills was the Vice President and Managing Director of Defendant CGMLT, and was also the head of CGMIs Mortgage Finance Group. Defendant Richard A. Isenberg was a Director and President of Defendant CGMLT. Defendant Randall Costa was a Director and President of Defendant CGMLT. Defendant Scott Freidenrich was a Treasurer of Defendant CGMLT. Defendant Mark I. Tsesarsky was a Director of Defendant CGMLT. Defendant Peter Patricola was a Controller of Defendant CGMLT. Defendant Jeffrey Perlowitz was a Director of Defendant CGMLT. Defendant Evelyn Echevarria was a Director of Defendant CGMLT. 267. Defendant CGMR was the sponsor for the nine Securitizations carried out under

the four Registration Statements filed by CGMLT, and culpably participated in the violation of Section 31-5606.05(a)(1)(B) set forth above with respect to the offering of GSE Certificates by

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initiating the Securitizations, purchasing the mortgage loans to be securitized, determining the structure of the Securitizations, selecting CGMLT as the special purpose vehicle, and selecting CGMI as the lead underwriter. In its role as sponsor, CGMR knew and intended that the mortgage loans it purchased would be sold in connection with the securitization process, and that certificates representing the ownership interests of investors in the cash-flows would be issued by the relevant trusts. 268. Defendant CGMR also acted as the seller of the mortgage loans for the

Securitizations carried out under the four Registration Statements filed by CGMLT, in that it conveyed such mortgage loans to the CGMLT pursuant to an Assignment and Recognition Agreement or a Mortgage Loan Purchase Agreement. 269. Defendant CGMR also controlled all aspects of the business of CGMLT, as

CGMLT was merely a special purpose vehicle created to for the purpose of acting as a passthrough for the issuance of the Certificates. Upon information and belief, the officers and directors of CGMR overlapped with the officers and directors of CGMLT, such as Susan Mills, who was the Vice President and Managing Director of CGMLT, as well as head of CGMIs Mortgage Finance Group. In addition, because of its position as sponsor, CGMR was able to, and did in fact, control the contents of the Registration Statements filed by CGMLT, including the Prospectuses and Prospectus Supplements, which pertained to nine Securitizations and which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. 270. Defendant Citi controlled the business operations of CGMLT and CGMI.

Defendant Citi is the corporate parent of CGMLT and CGMI. As the sole corporate parent of CGMI and CGMLIT, Citi had the practical ability to direct and control the actions of CGMI and

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CGMLT in issuing and selling the Certificates, and in fact, exercised such direction and control over the activities of CGMLT and CGMI in connection with the issuance and sale of the Certificates. 271. Citi expanded its share of the residential mortgage-backed securitization market in

order to increase revenue and profits. The push to securitize large volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. 272. Defendant Citi wholly owns CGMR, CGMI and CGMLT. Citi culpably

participated in the violation of Section 31-5606.05(a)(1)(B) set forth above. It oversaw the actions of its subsidiaries and allowed them to misrepresent the mortgage loans characteristics in the Registration Statements and established special-purpose financial entities such as CGMLT and the issuing trusts to serve as conduits for the mortgage loans. 273. Citi, CGMR, and the Individual Defendants are controlling persons within the

meaning of Section 31-5606.05(c) of the District of Columbia Code by virtue of their actual power over, control of, ownership of, and/or directorship of CGMLT and CGMI at the time of the wrongs alleged herein and as set forth herein, including their control over the content of the Registration Statements. 274. Fannie Mae purchased the GSE Certificates, which were issued pursuant to the

Registration Statements, including the Prospectuses and Prospectus Supplements, which contained material misstatements of fact and omitted facts necessary to make the facts stated therein not misleading. The facts misstated and omitted were material to a reasonable investor reviewing the Registration Statements, and specifically to Fannie Mae. 275. Fannie Mae did not know, and in the exercise of reasonable diligence could not

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have known, of the misstatements and omissions in the Registration Statements. Had Fannie Mae known of those misstatements and omissions, it would not have purchased the GSE Certificates. 276. Fannie Mae has sustained substantial damages as a result of the misstatements and

omissions in the Registration Statements, for which it is entitled to compensation, and for which CGMR, Citi, and the Individual Defendants are jointly and severally liable. 277. The time period from June 2, 2009 through August 29, 2011 has been tolled for

statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). EIGHTH CAUSE OF ACTION Common Law Negligent Misrepresentation (Against Defendants CGMLT and CGMI) 278. forth herein. 279. This a claim for common law negligent misrepresentation against Defendants Plaintiff realleges each allegation in paragraphs 1 through 164 above as if fully set

CGMLT and CGMI. 280. Between September 13, 2005 and May 31, 2007, CGMI and CGMLT sold the

GSE Certificates to the GSEs as described above. Because CGMLT owned and then conveyed the underlying mortgage loans that collateralized the Securitizations for which it served as depositor, CGMLT had unique, exclusive, and special knowledge about the mortgage loans in the Securitizations through its possession of the loan files and other documentation. 281. Likewise, as lead underwriter of the Securitizations, CGMI was obligated toand

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had the opportunity toperform sufficient due diligence to ensure that the Registration Statements for those Securitizations, including without limitation the corresponding Prospectus Supplements, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As a result of this privileged position as underwriterwhich gave it access to loan file information and obligated it to perform adequate due diligence to ensure the accuracy of the Registration StatementsCGMI had unique, exclusive, and special knowledge about the underlying mortgage loans in the Securitizations. 282. CGMI also had unique, exclusive, and special knowledge of the work of third-

party due diligence providers, such as Clayton, who identified significant failures of originators to adhere to the underwriting standards represented in the Registration Statements. The GSEs, like other investors, had no access to borrower loan files prior to the closing of the Securitizations and their purchase of the Certificates. Accordingly, when determining whether to purchase the GSE Certificates, the GSEs could not evaluate the underwriting quality or the servicing practices of the mortgage loans in the Securitizations on a loan-by-loan basis. The GSEs therefore reasonably relied on CGMIs knowledge and its express representations made prior to the closing of the Securitizations regarding the underlying mortgage loans. 283. CGMLT and CGMI were aware that the GSEs reasonably relied on CGMLTs

and CGMIs reputations and unique, exclusive, and special expertise and experience, as well as their express representations made prior to the closing of the Securitizations, and that the GSEs depended upon these Defendants for complete, accurate, and timely information. The standards under which the underlying mortgage loans were actually originated were known to these Defendants and were not known, and could not be determined, by the GSEs prior to the closing

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of the Securitizations. In purchasing the GSE Certificates from CGMLT and CGMI, the GSEs relied on their special relationship with those Defendants, and the purchases were made, in part, in reliance on that relationship. 284. Based upon their unique, exclusive, and special knowledge and expertise about

the loans held by the trusts in the Securitizations, CGMLT and CGMI had a duty to provide the GSEs complete, accurate, and timely information regarding the mortgage loans and the Securitizations. CGMLT and CGMI breached their duty to provide such information to the GSEs by instead making to the GSEs untrue statements of material facts in the Securitizations, or otherwise misrepresenting to the GSEs material facts about the Securitizations. The misrepresentations are set forth in Section IV above, and include misrepresentations as to the accuracy of the represented credit ratings, compliance with underwriting guidelines for the mortgage loans, and the accuracy of the owner-occupancy statistics and the loan-to-value ratios applicable to the Securitizations, as disclosed in the terms sheets and Prospectus Supplements. 285. In addition, having made actual representations about the underlying collateral in

the Securitizations and the facts bearing on the riskiness of the Certificates, CGMLT and CGMI had a duty to correct misimpressions left by their statements, including with respect to any half truths. The GSEs were entitled to rely upon CGMLT and CGMIs representations about the Securitizations, and these Defendants failed to correct in a timely manner any of their misstatements or half truths, including misrepresentations as to compliance with underwriting guidelines for the mortgage loans. 286. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the

representations by the Citi Defendants as the sponsors, depositors, and lead and selling underwriters in all nine of the Citi-sponsored Securitizations. The Citi Defendants provided term

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sheets to the GSEs that contained critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner occupancy statistics. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization. 287. The GSEs relied upon the accuracy of the data transmitted to them and

subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates based on the information provided by CGMR and CGMI relating to the collateral quality of the underlying loans and the structure of the Securitization. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were AAA quality (or its equivalent)meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 288. The Citi Defendants, as sponsors, depositors, and lead and selling underwriters in

all nine of the Citi-sponsored Securitizations, provided detailed information about the underlying collateral and structure of each Securitization it sponsored to the credit rating agencies. The credit rating agencies based their ratings on the information provided to them by the Citi Defendants, and the agencies anticipated ratings of the Certificates were dependent on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the accuracy of the Citi Defendants representations in the term sheets and Prospectus Supplements. 289. In addition, the GSEs relied on the fact that the originators of the mortgage loans

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in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with underwriting guidelines was a precondition to the GSEs purchase of the GSE Certificates in that the GSEs decision to purchase the Certificates was directly premised on their reasonable belief that the originators complied with applicable underwriting guidelines and standards. 290. In purchasing the GSE Certificates, the GSEs justifiably relied on the Citi

Defendants false representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. 291. But for the above misrepresentations and omissions, the GSEs would not have

purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above. 292. The GSEs were damaged in an amount to be determined at trial as a direct,

proximate, and foreseeable result of CGMLTs and CGMIs misrepresentations, including any half truths. 293. The time period from June 2, 2009 through August 29, 2011 has been tolled for

statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae and Citi, CGMI, CGMLT, Citibank NA, and CGMR. In addition, this action is brought within three years of the date that the FHFA was appointed as Conservator of Fannie Mae and Freddie Mac and is thus timely under 12 U.S.C. 4617(b)(12). PRAYER FOR RELIEF WHEREFORE Plaintiff prays for relief as follows: 294. An award in favor of Plaintiff against all Defendants, jointly and severally, for all

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damages sustained as a result of Defendants wrongdoing, in an amount to be proven at trial, but including: a. Rescission and recovery of the consideration paid for the GSE

Certificates, with interest thereon; b. Each GSEs monetary losses, including any diminution in value of the

GSE Certificates, as well as lost principal and lost interest payments thereon; c. d. e. Attorneys fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper. JURY TRIAL DEMANDED 295. Pursuant to Federal Rule of Civil Procedure 38(b), Plaintiff hereby demands a

trial by jury on all issues triable by jury.

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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK FEDERAL HOUSING FINANCE AGENCY, AS CONSERVATOR FOR THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, -againstCOUNTRYWIDE FINANCIAL CORPORATION; COUNTRYWIDE HOME LOANS, INC.; COUNTRYWIDE CAPITAL MARKETS, LLC; COUNTRYWIDE SECURITIES CORPORATION; CWALT INC.; CWABS, INC.; CWMBS, INC; BANK OF AMERICA CORPORATION; BANK OF AMERICA, N.A.; NB HOLDINGS CORPORATION; BANC OF AMERICA SECURITIES LLC; CITIGROUP GLOBAL MARKETS, INC.; DEUTSCHE BANK SECURITIES INC.; RBS SECURITIES, INC. (f/k/a GREENWICH CAPITAL MARKETS, INC.); UBS SECURITIES, LLC; N. JOSHUA ADLER; THOMAS H. BOONE; JEFFREY P. GROGIN; RANJIT KRIPALANI; STANFORD KURLAND; THOMAS KEITH MCLAUGHLIN; JENNIFER S. SANDEFUR; ERIC SIERACKI; DAVID A. SPECTOR; Defendants.

Index No. _______

COMPLAINT JURY TRIAL DEMANDED

TABLE OF CONTENTS Page NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................9 A. B. C. D. The Countrywide Defendants ................................................................................10 The Bank of America Defendants..........................................................................11 The Underwriter Defendants..................................................................................12 The Individual Defendants .....................................................................................14

JURISDICTION AND VENUE ....................................................................................................16 FACTUAL ALLEGATIONS ........................................................................................................17 I. THE SECURITIZATIONS................................................................................................17 A. B. C. Residential Mortgage-Backed Securitizations In General .....................................17 The Securitizations At Issue In This Case .............................................................18 The Securitization Process .....................................................................................25 1. 2. II. Countrywide Home Loans Groups Mortgage Loans in Special Purpose Trusts ............................................................................................25 The Trusts Issue Securities Backed by the Loans ......................................26

THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS ..........................................................................................................................32 A. The Role of Each of the Countrywide, Underwriter, and Individual Defendants .............................................................................................................32 1. 2. 3. 4. 5. Countrywide Home Loans .........................................................................32 The Depositor Defendants CWALT, CWABS, and CWMBS ..................34 Countrywide Securities ..............................................................................34 Countrywide Capital Markets ....................................................................35 Countrywide Financial ...............................................................................36

6. 7. B. III.

The Underwriter Defendants......................................................................36 The Individual Defendants .........................................................................38

The Defendants Failure To Conduct Proper Due Diligence.................................39

THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS................................................................................................................43 A. B. C. D. Compliance With Underwriting Guidelines ..........................................................43 Statements Regarding Occupancy Status of Borrower ..........................................48 Statements Regarding Loan-to-Value Ratios.........................................................52 Statements Regarding Credit Ratings ....................................................................56

IV.

FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS......................................................................................58 A. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False ....................................58 1. 2. B. Owner-Occupancy Data Was Materially False..........................................59 Loan-to-Value Data Was Materially False ................................................63

Countrywide Systematically Disregarded Its Underwriting Guidelines ................69 1. Government Investigations Have Confirmed That Countrywide Routinely Failed to Adhere to Its Underwriting Guidelines ......................70 a. b. c. 2. Investigations and Actions of Federal Authorities.........................70 Admissions in Countrywides Internal Reporting and Emails ............................................................................................75 Deposition Testimony of Countrywides Top Executives .............78

Actions Brought by State Enforcement Authorities and Private Litigants Have Corroborated that Countrywide Systematically Failed to Adhere to Its Underwriting Guidelines .......................................81 a. b. State Enforcement Actions ............................................................82 Civil Litigation and Settlements ....................................................84

ii

3.

The Collapse of the GSE Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................91 The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines ....................................95

4.

V.

COUNTRYWIDE KNEW ITS REPRESENTATIONS WERE FALSE AND THE GSEs JUSTIFIABLY RELIED ON COUNTRYWIDES REPRESENTATIONS ..........98 A. The Countrywide Defendants Knew Their Representations Were False ..............99 1. 2. 3. 4. 5. 6. 7. B. Countrywide Pursued a Dominant Market Share at All Costs ................100 Countrywides Own Documents Reveal It Knew the Falsity of Its Representations ........................................................................................102 Countrywide Purposefully Abused Its Documentation Programs and Falsified Loan Applications ..............................................................106 Countrywide Cherry Picked the Best Loans While Selling Riskier Loans to Investors .......................................................................109 Countrywide Had Knowledge from Due Diligence Firms that Loans Failed to Comply with Underwriting Guidelines ..........................110 Countrywide Knew The GSE Certificates Ratings Were False .............113 The District Court in the SEC Civil Action Found Triable Issues of Fact as to the Countrywide Executives Knowledge ...............................114

The GSEs Justifiably Relied on Countrywides Representations ........................114

VI. VII.

FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES ...............................................116 THE SUCCESSOR LIABILITY OF THE BANK OF AMERICA DEFENDANTS ...............................................................................................................121 A. B. C. The Structuring of Bank of Americas Merger with Countrywide ......................123 Countrywide Ceases Doing Business and Is Rebranded as Bank of America ................................................................................................................127 Bank of America Takes Steps To Expressly and Impliedly Assume Countrywide Financials Liabilities.....................................................................131

FIRST CAUSE OF ACTION ......................................................................................................137

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SECOND CAUSE OF ACTION .................................................................................................141 THIRD CAUSE OF ACTION .....................................................................................................145 FOURTH CAUSE OF ACTION .................................................................................................149 FIFTH CAUSE OF ACTION ......................................................................................................152 SIXTH CAUSE OF ACTION .....................................................................................................156 SEVENTH CAUSE OF ACTION ...............................................................................................159 EIGHTH CAUSE OF ACTION ..................................................................................................163 NINTH CAUSE OF ACTION .....................................................................................................166 TENTH CAUSE OF ACTION ....................................................................................................169 ELEVENTH CAUSE OF ACTION ............................................................................................171 PRAYER FOR RELIEF ..............................................................................................................172

iv

Plaintiff Federal Housing Finance Agency (FHFA), as conservator of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its Complaint herein against Countrywide Financial Corporation (Countrywide Financial), Countrywide Home Loans, Inc. (Countrywide Home Loans), Countrywide Capital Markets, LLC (Countrywide Capital Markets), Countrywide Securities Corporation (Countrywide Securities); and CWALT, Inc. (CWALT), CWABS, Inc. (CWABS) and CWMBS, Inc. (CWMBS) (the Depositor Defendants) (all collectively, Countrywide or the Countrywide Defendants); Bank of America Corporation (Bank of America), Bank of America, N.A., and NB Holdings Corporation (NB Holdings) (together, the Bank of America Defendants); Banc of America Securities LLC (BOA Securities), CitiGroup Global Markets, Inc. (CGMI), Deutsche Bank Securities, Inc. (DB Securities), RBS Securities, Inc. (RBS Securities), UBS Securities, LLC (UBS Securities) (collectively, with Countrywide Securities, the Underwriter Defendants); and N. Joshua Adler, Thomas H. Boone, Jeffrey P. Grogin, Ranjit Kripalani, Stanford Kurland, Thomas Keith McLaughlin, Jennifer S. Sandefur, Eric Sieracki, and David A. Spector (the Individual Defendants), alleges as follows: NATURE OF ACTION 1. This action arises out of Defendants actionable conduct in connection with the

offer and sale of certain residential mortgage-backed securities to Fannie Mae and Freddie Mac (collectively, the Government Sponsored Enterprises or GSEs). These securities were sold pursuant to registration statements, including prospectuses and prospectus supplements that formed part of those registration statements, which contained materially false or misleading statements and omissions. Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that

significantly overstated the ability of the borrower to repay their mortgage loans. These representations were material to the GSEs, as reasonable investors, and their falsity violates Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77a et seq., Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 315606.05(c) of the District of Columbia Code, and constitutes negligent misrepresentation, common law fraud, and aiding and abetting fraud. 2. Between August 30, 2005 and January 23, 2008, Fannie Mae and Freddie Mac

purchased approximately $26.6 billion in residential mortgage-backed securities (the GSE Certificates) issued in connection with 86 Countrywide-sponsored and/or Countrywideunderwritten securitizations (the Certificates).1 The GSE Certificates purchased by Freddie Mac, along with date and amount of the purchases, are listed below in Table 11. The GSE Certificates purchased by Fannie Mae, along with date and amount of the purchases, are listed below in Table 12. The 86 securitizations at issue (collectively, the Securitizations) are2: Table 1 Transaction
Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-57CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-63 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-67CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-73CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-80CB

Short Name
CWALT 2005-57CB CWALT 2005-63 CWALT 2005-67CB CWALT 2005-73CB CWALT 2005-80CB

For purposes of this Complaint, the securities issued under the Registration Statements (as defined in paragraph 4 n.3 below) are referred to as Certificates, while the particular Certificates that Fannie Mae and Freddie Mac purchased are referred to as the GSE Certificates. Holders of Certificates are referred to as Certificateholders. CHL Mortgage Pass-Through Trust, Series 2005-HYB10, is listed on Bloomberg as CWHL 2005-HY10. Thus, we refer to it by its Bloomberg name, CWHL 2005-HY10.
2

Transaction
Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-83CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-84 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-85CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2005-AR1 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-11CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-14CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-19CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-23CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-33CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OA14 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC1 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC10 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC11 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC3 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC4 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC5 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC6 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC7 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2006-OC8 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2007-5CB Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2007-HY2 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2007-OA10 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2007-OA3 Alternative Loan Trust Mortgage Pass-Through Certificates, Series 2007-OA8 CHL Mortgage Pass-Through Trust Mortgage Pass-Through Certificates, Series 2005-HYB10 CHL Mortgage Pass-Through Trust Mortgage Pass-Through Certificates, Series 2006-HYB1

Short Name
CWALT 2005-83CB CWALT 2005-84 CWALT 2005-85CB CWALT 2005-AR1 CWALT 2006-11CB CWALT 2006-14CB CWALT 2006-19CB CWALT 2006-23CB CWALT 2006-33CB CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC3 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007-OA10 CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006-HYB1

Transaction
CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-11 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-12 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-13 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-14 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-16 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-17 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-8 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-9 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-AB3 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-AB4 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-AB5 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2005-BC5 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-10 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-11 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-12 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-13 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-14 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-16 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-17 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-18 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-19 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-2 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-20 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-21 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-22 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-23

Short Name
CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14 CWL 2005-16 CWL 2005-17 CWL 2005-8 CWL 2005-9 CWL 2005-AB3 CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5 CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-14 CWL 2006-16 CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-2 CWL 2006-20 CWL 2006-21 CWL 2006-22 CWL 2006-23

Transaction
CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-24 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-25 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-26 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-3 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-4 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-5 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-6 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-7 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-8 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-9 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-BC2 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-BC3 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-BC4 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2006-BC5 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-1 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-10 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-11 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-12 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-13 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-2 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-3 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-5 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-6 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-7 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-8 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-9

Short Name
CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-1 CWL 2007-10 CWL 2007-11 CWL 2007-12 CWL 2007-13 CWL 2007-2 CWL 2007-3 CWL 2007-5 CWL 2007-6 CWL 2007-7 CWL 2007-8 CWL 2007-9

Transaction
CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-BC1 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-BC2 CWABS Asset-Backed Certificates Trust Asset-Backed Certificates, Series 2007-BC3

Short Name
CWL 2007-BC1 CWL 2007-BC2 CWL 2007-BC3

3.

The Certificates were offered for sale pursuant to one of nine shelf registration

statements (the Shelf Registration Statements) filed with the Securities and Exchange Commission (the SEC) by CWABS, CWALT, and CWMBS. The nine Shelf Registration Statements and amendments thereto filed by the Depositor Defendants were signed by or on behalf of the Individual Defendants. With respect to 70 of the Securitizations, Countrywide Securities was a lead underwriter and with respect to 69 of the Securitizations, Countrywide Securities was also the underwriter who sold the GSE Certificates to the GSEs. 4. For each Securitization, a prospectus (Prospectus) and prospectus supplement

(Prospectus Supplement) were filed with the SEC as part of the Registration Statement3 for that Securitization. The GSE Certificates were marketed and sold to Fannie Mae and Freddie Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the corresponding Prospectuses and Prospectus Supplements. 5. The Registration Statements contained statements about the characteristics and

credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the borrowers of those underlying mortgage loans, and the origination and underwriting practices used to make and approve the loans. Such statements were material to a reasonable investors decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to

The term Registration Statement, as used herein, incorporates the Shelf Registration Statement, the Prospectus and the Prospectus Supplement for each referenced Securitization, except where otherwise indicated.

Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages of the underlying mortgage loans were not originated in accordance with the represented underwriting standards and origination practices and had materially poorer credit quality than what was represented in the Registration Statements. 6. The Registration Statements also contained statistical summaries of the groups of

mortgage loans in each Securitization, such as the percentage of loans secured by owneroccupied properties and the percentage of the loan groups aggregate principal balance with loan-to-value ratios within specified ranges. This information was also material to reasonable investors. However, a loan level analysis of a sample of loans for each Securitization a review that encompassed thousands of mortgages across all of the Securitizations has revealed that these statistics were also false and omitted material facts due to inflated property values and misstatements of other key characteristics of the mortgage loans. 7. For example, the percentage of owner-occupied properties is a material risk factor

to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who lives in mortgaged property is generally less likely to stop paying his or her mortgage and more likely to take better care of the property. The loan level review reveals that the true percentage of owner-occupied properties for the loans supporting the GSE Certificates was materially lower than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements misrepresented other material factors, including the true value of the mortgaged properties relative to the amount of the underlying loans, and the actual ability of the individual mortgage holders to satisfy their debts. 8. Depositor Defendants CWABS, CWALT, and CWMBS (as depositors), and

certain of the Individual Defendants are directly responsible for the misstatements and omissions

of material fact contained in the Registration Statements because they prepared, signed, filed and/or used these documents to market and sell the Certificates to Fannie Mae and Freddie Mac. Underwriter Defendants Countrywide Securities, BOA Securities, CGMI, DB Securities, RBS Securities, and UBS Securities are also directly responsible for the misstatements and omissions of material fact contained in the Registration Statements for the Securitizations for which they served as underwriters (as reflected in Table 2, below) because they prepared and/or used the Registration Statements to market and sell the Certificates to Fannie Mae and Freddie Mac. 9. Defendants Countrywide Home Loans, Countrywide Financial, and Countrywide

Capital Markets are also responsible for the misstatements and omissions of material fact contained in the Registration Statements by virtue of their direction and control over Countrywide Securities and the Depositor Defendants. Countrywide Home Loans participated in and exercised dominion and control over the business operations of the Depositor Defendants. Countrywide Capital Markets participated in and exercised dominion and control over the business operations of Countrywide Securities. Countrywide Financial participated in and exercised dominion and control over the business operations of Countrywide Securities and the Depositor Defendants. 10. Bank of America, Bank of America, N.A., and NB Holdings are liable for the

exercise of dominion and control over the business operations of Countrywide Securities and the Depositor Defendants by virtue of being Countrywide Financials successor. 11. Fannie Mae and Freddie Mac purchased approximately $26.6 billion of the

Certificates pursuant to the Shelf Registration Statements filed with the SEC. These documents contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate and

underwrite such loans. As a result of Defendants misstatements and omissions of material fact, Fannie Mae and Freddie Mac have suffered substantial losses as the value of their holdings has significantly deteriorated. 12. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against

the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. 77k, 77l(a)(2), 77o, Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for negligent misrepresentation, common law fraud, and aiding and abetting fraud. PARTIES The Plaintiff and the GSEs 13. The Federal Housing Finance Agency is a federal agency located at 1700 G Street

NW in Washington, D.C. FHFA was created on July 30, 2008 pursuant to the Housing and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. 4617) to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of the GSEs, including but not limited to, the authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12 U.S.C. 4617(b)(2). 14. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by

Congress with a mission to provide liquidity, stability and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia.

The Defendants A. 15. The Countrywide Defendants Defendant Countrywide Financial is a Delaware corporation with its principal

place of business in Calabasas, California. Countrywide Financial, itself or through its subsidiaries Countrywide Home Loans, Countrywide Capital Markets, and the Depositor Defendants, is engaged in mortgage lending and other real estate finance-related businesses, including mortgage banking, securities dealing, and insurance underwriting. Pursuant to a merger completed on July 1, 2008, Countrywide Financial has been merged into and is now part of Bank of America. 16. Defendant Countrywide Home Loans, a wholly-owned subsidiary of Countrywide

Financial, is a New York corporation with its principal place of business in Calabasas, California. Countrywide Home Loans originates and services residential home mortgage loans through itself or its subsidiaries, non-parties Countrywide GP, Inc. and Countrywide LP, Inc., and in turn through their subsidiary, Countrywide Home Loans Servicing LP. Countrywide Home Loans was acquired by Bank of America on July 1, 2008 and operates under the trade name Bank of America Home Loans. Countrywide Home Loans was the sponsor of all 86 of the Securitizations. 17. Defendant Countrywide Capital Markets, a wholly-owned subsidiary of

Countrywide Financial, is a California corporation with its principal place of business in Calabasas, California. Countrywide Capital Markets, which is also now part of Bank of America by virtue of the merger of Countrywide Financial into Bank of America, operates through its two main wholly-owned subsidiaries, Defendant Countrywide Securities and non-party Countrywide Servicing Exchange.

10

18.

Defendant Countrywide Securities, a wholly-owned subsidiary of Countrywide

Capital Markets, which in turn is a wholly-owned subsidiary of Countrywide Financial, is a California corporation with its principal places of business in Calabasas, California and in New York, New York. Countrywide Securities is an SEC-registered broker-dealer and underwrites offerings of mortgage-backed securities. Countrywide Securities was a lead underwriter for 70 of the Securitizations, and was intimately involved in those offerings. Countrywide Securities also sold Certificates in 69 of the 86 Securitizations to Fannie Mae or Freddie Mac in its capacity as underwriter. Countrywide Securities was acquired by Bank of America on July 1, 2008. 19. Defendant CWALT is a Delaware corporation and a limited purpose subsidiary of

Countrywide Financial with its principal place of business in Calabasas, California. CWALT was the depositor for 29 of the Securitizations. CWALT, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 20. Defendant CWABS is a Delaware corporation and a limited purpose subsidiary of

Countrywide Financial with its principal place of business in Calabasas, California. CWABS was the depositor for 55 of the Securitizations. CWABS, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. 21. Defendant CWMBS is a Delaware corporation and a limited purpose subsidiary

of Countrywide Financial with its principal place of business in Calabasas, California. CWMBS was the depositor for two of the Securitizations. CWMBS, as depositor, was also responsible for preparing and filing reports required under the Securities Exchange Act of 1934. B. 22. The Bank of America Defendants Defendant Bank of America is a Delaware corporation with its principal place of

business in Charlotte, North Carolina and offices and branches in New York, New York. Bank of America is one of the worlds largest financial institutions, serving individual consumers,

11

small- and middle-market businesses and large corporations with a full range of banking, investing, asset-management and other financial and risk-management products and services. Countrywide Financial merged with Bank of America on July 1, 2008. As explained more fully below in Section VII, Bank of America is a successor-in-interest to the Countrywide Defendants. It is thus vicariously liable for the conduct of the Countrywide Defendants alleged herein. 23. Defendant Bank of America, N.A., is a nationally chartered U.S. bank with

substantial business operations and offices in New York, New York. As explained more fully below in Section VII, Bank of America, N.A. participated in Bank of Americas acquisition of substantially all of Countrywide Financial through a series of acquisitions and shares that commenced on July 1, 2008. Together with Bank of America, it is a successor-in-interest to the Countrywide Defendants. 24. NB Holdings is a Delaware corporation with its principal place of business in

Charlotte, North Carolina. As explained more fully below in Section VII, NB Holdings participated in Bank of Americas acquisition of substantially all of Countrywide Financial through a series of acquisitions and shares that commenced on July 1, 2008. Together with Bank of America, it is a successor-in-interest to the Countrywide Defendants. C. 25. The Underwriter Defendants As described above at paragraph 18, Defendant Countrywide Securities was a

lead underwriter for 70 of the Securitizations and also sold Certificates in 69 of the 86 Securitizations to Fannie Mae or Freddie Mac in its capacity as underwriter. 26. BOA Securities has its principal place of business in New York, New York.

BOA Securities was the lead underwriter for the CWALT 2006-OA14 and CWALT 2007-OA10 Securitizations, among others, and was intimately involved in those offerings. Fannie Mae

12

purchased the GSE Certificates for the CWALT 2006-OA14 and CWALT 2007-OA10 Securitizations from BOA Securities in its capacity as underwriter. 27. Defendant CGMI, formerly known as Salomon Smith Barney or Smith Barney, is

a New York corporation and an SEC-registered broker-dealer, with its principal place of business in New York, New York. CGMI was the lead underwriter for the CWALT 2006-33CB and CWALT 2007-5CB Securitizations and was intimately involved in those offerings. Freddie Mac purchased the GSE Certificates for the CWALT 2006-33CB and CWALT 2007-5CB Securitizations from CGMI in its capacity as underwriter. 28. Defendant DB Securities is a Delaware corporation and an SEC-registered broker-

dealer with its principal place of business in New York, New York. DB Securities acted as a broker-dealer in the issuance and underwriting of residential and commercial mortgage backed securities. DB Securities was the lead underwriter for the CWALT 2005-84, CWALT 200585CB, CWALT 2006-14CB, and CWALT 2006-19CB Securitizations, among others, and was intimately involved in those offerings. Fannie Mae purchased the GSE Certificates for the CWALT 2005-84 and CWALT 2005-85CB Securitizations and Freddie Mac purchased the GSE Certificates for the CWALT 2006-14CB and CWALT 2006-19CB Securitizations from DB Securities in its capacity as underwriter. 29. Defendant RBS Securities is a Delaware corporation and an SEC-registered

broker-dealer with its principal place of business in Greenwich, Connecticut and offices in New York, New York. Prior to April 2009, RBS Securities was known as Greenwich Capital Markets, Inc. RBS Securities was a lead underwriter for the CWALT 2005-73CB, CWALT 2006-11CB, and CWALT 2005-80CB Securitizations and was intimately involved in those offerings. Fannie Mae purchased the GSE Certificate for the CWALT 2005-80CB Securitization

13

and Freddie Mac purchased the GSE Certificates for the CWALT 2005-73CB and CWALT 2006-11CB Securitizations from RBS Securities in its capacity as underwriter. 30. Defendant UBS Securities is a limited liability company incorporated in Delaware

with its principal places of business in Stamford, Connecticut and New York, New York. UBS Securities is an SEC-registered broker-dealer. It was the lead underwriter in the CWALT 200563 Securitization, among others, and was intimately involved in that offering. Fannie Mae purchased the GSE Certificate for the CWALT 2005-63 Securitization from UBS Securities, in its capacity as underwriter. D. 31. The Individual Defendants Defendant N. Joshua Adler served as President, CEO, and member of the Board

of Directors for CWALT and CWABS. Mr. Adler resides in Calabasas, California. Mr. Adler signed two of the Shelf Registration Statements and the amendments thereto. 32. Defendant Thomas H. Boone served as Executive Vice President as well as the

Principal Financial and Accounting Officer for CWMBS. Mr. Boone resides in Westlake Village, California. Mr. Boone signed one of the Shelf Registration Statements and the amendments thereto. 33. Defendant Jeffrey P. Grogin served as Director of CWMBS. Mr. Grogin resides

in Hidden Hills, California. Mr. Grogin signed one of the Shelf Registration Statements and the amendments thereto. 34. Defendant Ranjit Kripalani joined Countrywide Financial and its subsidiary

Countrywide Securities in 1998, as Countrywide Financials Executive Vice President and Countrywide Securities National Sales Manager. He served as a Director of CWALT, CWABS, and CWMBS. Mr. Kripalani resides in Manhattan Beach, California. Mr. Kripalani signed two of the Shelf Registration Statements and the amendments thereto.

14

35.

Defendant Stanford Kurland was President and COO of Countrywide Financial

from 1988 until he ceased working for Countrywide Financial on September 7, 2006. At all relevant times up to that date, Mr. Kurland was also the CEO, President, and Chairman of the Board of CWABS, CWALT, and CWMBS. Mr. Kurland resides in Calabasas, California. Mr. Kurland signed seven of the Shelf Registration Statements and the amendments thereto. 36. Defendant Thomas Keith McLaughlin served as Executive Vice President as well

as Principal Financial and Accounting Officer for CWMBS and CWALT. Mr. McLaughlin resides in Thousand Oaks, California. Mr. McLaughlin signed one of the Shelf Registration Statements and the amendments thereto. 37. Defendant Jennifer S. Sandefur joined Countrywide Financial in 1994 as Vice

President and Assistant Treasurer and was shortly thereafter promoted to Treasurer of Countrywide Home Loans. She was serving as Senior Managing Director and Treasurer of Countrywide Financial at the time of her departure in 2008. She also served as Director of CWALT, CWABS, and CWMBS. Ms. Sandefur resides in Calabasas, California. Ms. Sandefur signed two of the Shelf Registration Statements and the amendments thereto. 38. Defendant Eric Sieracki served as Countrywide Financials Executive Managing

Director and Chief Financial Officer from April 2005 through Countrywides merger with Bank of America in 2008. Prior to his appointment as CFO, Mr. Sieracki occupied other high-level positions within Countrywide, including as Executive Managing Director, Chief Financial Officer, and Treasurer of CWALT, CWABS, and CWMBS. Mr. Sieracki resides in Lake Sherwood, California. Mr. Sieracki signed eight of the Shelf Registration Statements and the amendments thereto.

15

39.

Defendant David A. Spector joined Countrywide in 1990. He was subsequently

promoted to Managing Director in 2001 and served as Senior Managing Director of Secondary Marketing at Countrywide Financial from 2004 to 2006, as well as Managing Director of Secondary Markets at Countrywide Home Loans. He was also a member of the Board of Directors and a Vice President for CWALT, CWABS, and CWMBS. Mr. Spector resides in Tarzana, California. Mr. Spector signed seven of the Shelf Registration Statements and the amendments thereto. JURISDICTION AND VENUE 40. This Court has jurisdiction over the claims herein which arise under Sections 11,

12(a)(2), and 15 of the Securities Act of 1933 pursuant to CPLR 301, 302 and Section 22 of the Securities Act of 1933, 15 U.S.C. 77v. This Court has further jurisdiction over the statutory claims of violations of Section 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Section 31-5605(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, pursuant to this Courts general jurisdiction. Most of the Underwriter Defendants, including Countrywide Securities, are principally located in New York, other Defendants, including Countrywide Home Loans and Bank of America, can be found or transact business in New York, and many of the acts and transactions alleged herein occurred in substantial part in New York. 41. Venue is proper in this Court pursuant to CPLR 503. Many of the defendants,

including Countrywide Home Loans and Countrywide Securities, have their principal offices in this County, and many of the acts and transactions alleged herein, including the preparation and dissemination of the Shelf Registration Statements and the marketing and selling of Certificates, occurred in substantial part in this County.

16

FACTUAL ALLEGATIONS I. THE SECURITIZATIONS A. 42. Residential Mortgage-Backed Securitizations In General Asset-backed securitization distributes risk by pooling cash-producing financial

assets and issuing securities backed by those pools of assets. In residential mortgage-backed securitizations, the cash-producing financial assets are residential mortgage loans. 43. The most common form of securitization of mortgage loans involves a sponsor or

seller the entity that acquires or originates the mortgage loans and initiates the securitization and the creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage loans. The trust is established pursuant to a Pooling and Servicing Agreement entered into by, among others, the depositor for that securitization. In many instances, the transfer of assets to a trust is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly called a depositor, and then the depositor will transfer the assets to the [trust] for the particular asset-backed transactions. Asset-Backed Securities, Securities Act Release No. 33-8518, Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004). 44. Residential mortgage-backed securities are backed by the underlying mortgage

loans. Some residential mortgage-backed securitizations are created from more than one cohort of loans called collateral groups, in which case the trust issues securities backed by different groups. For example, a securitization may involve two groups of mortgages, with some securities backed primarily by the first group, and others primarily by the second group. Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn owns the loans. Within this framework, the purchasers of the securities acquire rights to the

17

cash-flows from the designated mortgage group, such as homeowners payments of principal and interest on the mortgage loans held by the related trust. 45. Residential mortgage-backed securities are issued pursuant to registration

statements filed with the SEC. These registration statements include prospectuses, which explain the general structure of the investment, and prospectus supplements, which contain detailed descriptions of the mortgage groups underlying the certificates. Certificates are issued by the trust pursuant to the registration statement and the prospectus and prospectus supplement. Underwriters sell the certificates to investors. 46. A mortgage servicer is necessary to manage the collection of proceeds from the

mortgage loans. The servicer is responsible for collecting homeowners mortgage loan payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The servicers duties include making collection efforts on delinquent loans, initiating foreclosure proceedings, and determining when to charge off a loan by writing down its balance. The servicer is required to report key information about the loans to the trustee. The trustee (or trust administrator) administers the trusts funds and delivers payments due each month on the certificates to the investors. B. 47. The Securitizations At Issue In This Case This case involves the 86 Securitizations listed in Table 1, above, which were

sponsored and structured by Countrywide Home Loans. The vast majority of the Securitizations were underwritten by Countrywide Securities. For each of the 86 Securitizations, Table 2 identifies the (1) sponsor; (2) depositor; (3) lead underwriters (and in parentheses, the defendant underwriter who sold securities to Fannie Mae or Freddie Mac, when the defendant underwriter

18

was not Countrywide Securities); (4) the principal amount issued for the tranches4 purchased by the GSEs; (5) the date of issuance; and (6) the loan group or groups backing the GSE Certificate for that Securitization (referred to as the Supporting Loan Groups). Table 2
Transaction Tranche Sponsor Depositor Lead Underwriters and Selling Underwriter When Not CW Securities (in parentheses) Countrywide Securities, JP Morgan UBS Securities (UBS Securities) Countrywide Securities, Lehman Brothers Bear Stearns, RBS Securities (RBS Securities5) RBS Securities, Countrywide Securities (RBS Securities) RBS Securities, Countrywide Securities (RBS Securities) Countrywide Securities Countrywide Securities DB Securities (DB Securities) DB Securities, Lehman Brothers, JP Morgan (DB Securities) Countrywide Securities RBS Securities, Countrywide Securities (RBS Securities) DB Securities, JP Morgan (DB Securities) DB Securities, JP Morgan (DB Securities) Principal Amount Issued ($) Date of Issuance Supporting Loan Group(s)

CWALT 2005-57CB

1A1

Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans

CWALT

$199,860,000

10/28/05

Loan Group 1

CWALT 2005-63 CWALT 2005-67CB

1A1 A1

CWALT CWALT

$186,908,000 $199,756,000

10/28/05 11/29/05

Loan Group 1 Single-Group Transaction Loan Group 2

CWALT 2005-73CB

2A2

CWALT

$123,415,000

11/29/05

CWALT 2005-80CB

3A1

CWALT

$220,446,000

12/28/05

Loan Group 3

4A1

Countrywide Home Loans

CWALT

$247,196,000

12/28/05

Loan Group 4

CWALT 2005-83CB

A1 A2

CWALT 2005-84 CWALT 2005-85CB

2A1 1A1

Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans

CWALT CWALT CWALT CWALT

$312,847,000 $34,761,000 $403,111,000 $358,968,000

12/30/05 12/30/05 12/28/05 12/28/05

Single-Group Transaction Single-Group Transaction Loan Group 2 Loan Group 1

CWALT 2005-AR1 CWALT 2006-11CB

1A 1A1

Countrywide Home Loans Countrywide Home Loans

CWALT CWALT

$152,002,000 $45,796,000

12/29/05 3/30/06

Loan Group 1 Loan Group 1

CWALT 2006-14CB

A1

Countrywide Home Loans Countrywide Home Loans

CWALT

$194,097,000

4/27/06

Single-Group Transaction Single-Group Transaction

A6

CWALT

$48,524,000

4/27/06

A tranche is one of a series of certificates or interests created and issued as part of the same transaction.
5

RBS Securities in this table refers to RBS Greenwich Capital, its predecessor.

19

Transaction

Tranche

Sponsor

Depositor

CWALT 2006-19CB

A11

Countrywide Home Loans

CWALT

A30

Countrywide Home Loans

CWALT

CWALT 2006-23CB

1A7

Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans

CWALT

2A1

CWALT

CWALT 2006-33CB

2A1

CWALT

CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC3 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB

1A1 1A1 1A 1A 1A1 1A 1A 1A 1A 1A1 2A3

Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans

CWALT CWALT CWALT CWALT CWALT CWALT CWALT CWALT CWALT CWALT CWALT

CWALT 2007-HY2

1A 2A

CWALT 2007-OA10

1A1 1A2

CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006-HYB1

2A1 1A1 2A1 1A1

Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans

CWALT CWALT CWALT CWALT CWALT

Lead Underwriters and Selling Underwriter When Not CW Securities (in parentheses) DB Securities, Countrywide Securities (DB Securities) DB Securities, Countrywide Securities (DB Securities) UBS Securities, Countrywide Securities UBS Securities, Countrywide Securities CGMI, Countrywide Securities (CGMI) BOA Securities (BOA Securities) Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities CGMI, Countrywide Securities (CGMI) Countrywide Securities Countrywide Securities BOA Securities (BOA Securities) BOA Securities (BOA Securities) BOA Securities

Principal Amount Issued ($)

Date of Issuance

Supporting Loan Group(s)

$201,815,000

6/29/06

Single-Group Transaction

$22,424,000

6/29/06

Single-Group Transaction

$171,694,000

6/30/06

Loan Group 1

$154,973,000

6/30/06

Loan Group 2

$347,668,000

9/29/06

Loan Group 2

$164,097,000 $373,442,000 $165,209,000 $224,171,000 $231,143,000 $165,807,000 $229,217,000 $102,510,000 $139,441,000 $138,111,000 $27,882,000

9/29/06 1/30/06 11/30/06 12/29/06 4/28/06 5/30/06 6/29/06 7/28/06 8/30/06 9/29/06 2/27/07

Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 2

$367,128,000 $117,725,000 $112,645,000 $75,097,000 $208,417,000 $127,393,000

1/31/07 1/31/07 7/30/07 7/30/07 2/28/07 6/28/07 12/29/05 1/31/06

Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 2 Loan Group 1

CWALT CWMBS CWMBS BOA Securities Countrywide Securities Countrywide Securities

$167,974,000 $471,207,000

20

Transaction

Tranche

Sponsor

Depositor

CWL 2005-11

2AV1

Countrywide Home Loans

CWABS

CWL 2005-12

3A

Countrywide Home Loans

CWABS

CWL 2005-13

2AV1

Countrywide Home Loans

CWABS

CWL 2005-14

1A1

Countrywide Home Loans

CWABS

2A1

Countrywide Home Loans

CWABS

CWL 2005-16

1AF

Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans

CWABS

3AV

CWABS

CWL 2005-17

2AV

CWABS

3AV1

Countrywide Home Loans

CWABS

CWL 2005-8

1A1

Countrywide Home Loans Countrywide Home Loans

CWABS

CWL 2005-9

1A1

CWABS

CWL 2005-AB3

1A1

Countrywide Home Loans

CWABS

CWL 2005-AB4

1A

Countrywide Home Loans

CWABS

CWL 2005-AB5

1A1

Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans

CWABS

CWL 2005-BC5

1A

CWABS

2A1

CWABS

Lead Underwriters and Selling Underwriter When Not CW Securities (in parentheses) Countrywide Securities, Morgan Stanley, RBS Securities Countrywide Securities, DB Securities, RBS Securities Countrywide Securities, BOA Securities, Barclays Capital Countrywide Securities, Bear Stearns, RBS Securities Countrywide Securities, Bear Stearns, RBS Securities Countrywide Securities, RBS Securities Countrywide Securities, RBS Securities Countrywide Securities, BNP Paribas Securities, RBS Securities Countrywide Securities, BNP Paribas Securities, RBS Securities Countrywide Securities, Lehman Brothers Countrywide Securities, Merrill Lynch, RBS Securities Countrywide Securities, BOA Securities, Barclays Capital Countrywide Securities, DB Securities, J.P. Morgan Securities Countrywide Securities, RBS Securities Countrywide Securities, RBS Securities Countrywide Securities, RBS Securities

Principal Amount Issued ($)

Date of Issuance

Supporting Loan Group(s)

$552,682,000

9/28/05

Loan Group 2

$167,374,000

9/30/05

Loan Group 3

$711,872,000

11/21/05

Loan Group 2

$29,264,000

12/21/05

Loan Group 1

$386,093,000

12/21/05

Loan Group 2

$388,648,000

12/28/05

Loan Group 1

$487,320,000

12/28/05

Loan Group 3

$111,720,000

12/29/05

Loan Group 2

$407,938,000

12/29/05

Loan Group 3

$243,773,000

8/30/05

Loan Group 1

$529,470,000

9/28/05

Loan Group 1

$324,864,000

9/27/05

Loan Group 1

$553,455,000

11/29/05

Loan Group 1

$202,082,000

12/29/05

Loan Group 1

$279,136,000

12/28/05

Loan Group 1

$246,227,000

12/28/05

Loan Group 2

21

Transaction

Tranche

Sponsor

Depositor

2A2

Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans

CWABS

CWL 2006-10 CWL 2006-11

2AV 2AV

CWABS CWABS

CWL 2006-12

1A

Countrywide Home Loans

CWABS

CWL 2006-13

2AV

Countrywide Home Loans

CWABS

CWL 2006-14

1A

Countrywide Home Loans

CWABS

CWL 2006-16 CWL 2006-17

1A 1A

Countrywide Home Loans Countrywide Home Loans

CWABS CWABS

CWL 2006-18

1A

Countrywide Home Loans

CWABS

CWL 2006-19

1A

Countrywide Home Loans Countrywide Home Loans

CWABS

CWL 2006-2

1A1

CWABS

CWL 2006-20

1A

Countrywide Home Loans

CWABS

CWL 2006-21

1A

Countrywide Home Loans

CWABS

CWL 2006-22

1A

Countrywide Home Loans

CWABS

CWL 2006-23

1A

Countrywide Home Loans

CWABS

CWL 2006-24

1A

Countrywide Home Loans

CWABS

Lead Underwriters and Selling Underwriter When Not CW Securities (in parentheses) Countrywide Securities, RBS Securities Countrywide Securities Countrywide Securities, UBS Securities, Barclays Capital Countrywide Securities, BNP Paribas Securities, Lehman Brothers Countrywide Securities, Bear Stearns, Lehman Brothers Countrywide Securities, DB Securities, HSBC Securities Countrywide Securities Countrywide Securities, DB Securities, Lehman Brothers Countrywide Securities, Bear Stearns, DB Securities Countrywide Securities, Bear Stearns Countrywide Securities, BOA Securities, J.P. Morgan Securities Countrywide Securities, Bear Stearns, HSBC Securities Countrywide Securities, RBS Securities, J.P. Morgan Securities Countrywide Securities, RBS Securities, Barclays Capital Countrywide Securities, RBS Securities, J.P. Morgan Securities Countrywide Securities, RBS Securities

Principal Amount Issued ($)

Date of Issuance

Supporting Loan Group(s)

$27,358,000

12/28/05

Loan Group 2

$118,696,000 $460,174,000

6/30/06 6/29/06

Loan Group 2 Loan Group 2

$492,030,000

6/30/06

Loan Group 1

$399,884,000

7/28/06

Loan Group 2

$447,914,000

9/8/06

Loan Group 1

$140,766,000 $220,938,000

9/28/06 9/25/06

Loan Group 1 Loan Group 1

$495,558,000

9/28/06

Loan Group 1

$259,807,000

9/29/06

Loan Group 1

$281,750,000

2/27/06

Loan Group 1

$292,425,000

11/8/06

Loan Group 1

$328,048,000

11/30/06

Loan Group 1

$608,250,000

11/30/06

Loan Group 1

$465,514,000

12/8/06

Loan Group 1

$423,724,000

12/29/06

Loan Group 1

22

Transaction

Tranche

Sponsor

Depositor

CWL 2006-25

1A

Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans

CWABS

CWL 2006-26

1A

CWABS

CWL 2006-3

1A

CWABS

CWL 2006-4

1A1

Countrywide Home Loans

CWABS

CWL 2006-5

1A

Countrywide Home Loans

CWABS

CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-1

1A1 1A 1A 2AV 1A 1A 1A 1A 1A

Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans

CWABS CWABS CWABS CWABS CWABS CWABS CWABS CWABS CWABS

CWL 2007-10

1A1

CWABS

1A2

Countrywide Home Loans

CWABS

1M1

Countrywide Home Loans

CWABS

1M2

Countrywide Home Loans

CWABS

1M3

Countrywide Home Loans

CWABS

Lead Underwriters and Selling Underwriter When Not CW Securities (in parentheses) Countrywide Securities, RBS Securities Countrywide Securities, RBS Securities Countrywide Securities, DB Securities, Barclays Capital Countrywide Securities, Lehman Brothers, J.P. Morgan Securities Countrywide Securities, Bear Stearns, Lehman Brothers Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities, RBS Securities Countrywide Securities, DB Securities, Barclays Capital Countrywide Securities, DB Securities, Barclays Capital Countrywide Securities, DB Securities, Barclays Capital Countrywide Securities, DB Securities, Barclays Capital Countrywide Securities, DB Securities, Barclays Capital

Principal Amount Issued ($)

Date of Issuance

Supporting Loan Group(s)

$495,720,000

12/29/06

Loan Group 1

$449,571,000

12/29/06

Loan Group 1

$508,785,000

2/27/06

Loan Group 1

$131,072,000

3/17/06

Loan Group 1

$251,100,000

3/28/06

Loan Group 1

$501,329,000 $313,365,000 $330,630,000 $118,400,000 $237,900,000 $173,003,000 $200,970,000 $258,862,000 $540,940,000

3/29/06 6/28/06 6/28/06 6/30/06 5/30/06 8/30/06 9/29/06 12/29/06 2/9/07

Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1

$291,060,000

6/29/07

Loan Group 1

$32,340,000

6/29/07

Loan Group 1

$20,800,000

6/29/07

Loan Group 1

$14,800,000

6/29/07

Loan Group 1

$6,200,000

6/29/07

Loan Group 1

23

Transaction

Tranche

Sponsor

Depositor

CWL 2007-11

1M1

Countrywide Home Loans

CWABS

1M2

Countrywide Home Loans

CWABS

1M3

Countrywide Home Loans

CWABS

1A1

Countrywide Home Loans

CWABS

1A2

Countrywide Home Loans

CWABS

CWL 2007-12

1A1 1A2 1M1

CWL 2007-13

1A 1M1

CWL 2007-2

1A

Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans Countrywide Home Loans

CWABS CWABS CWABS CWABS CWABS CWABS

CWL 2007-3

1A

CWABS

CWL 2007-5

1A

CWABS

CWL 2007-6

1A

CWABS

CWL 2007-7

1A

CWABS

CWL 2007-8

1A1

CWABS

1A2

Countrywide Home Loans

CWABS

CWL 2007-9

1A

Countrywide Home Loans

CWABS

CWL 2007-BC1

1A

Countrywide Home Loans

CWABS

Lead Underwriters and Selling Underwriter When Not CW Securities (in parentheses) Countrywide Securities, Merrill Lynch, HSBC Securities Countrywide Securities, Merrill Lynch, HSBC Securities Countrywide Securities, Merrill Lynch, HSBC Securities Countrywide Securities, Merrill Lynch, HSBC Securities Countrywide Securities, Merrill Lynch, HSBC Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities, RBS Securities Countrywide Securities, RBS Securities Countrywide Securities, RBS Securities Countrywide Securities, RBS Securities Countrywide Securities, RBS Securities Countrywide Securities, Lehman Brothers, RBS Securities Countrywide Securities, Lehman Brothers, RBS Securities Countrywide Securities, Lehman Brothers, RBS Securities Countrywide Securities

Principal Amount Issued ($)

Date of Issuance

Supporting Loan Group(s)

$13,600,000

6/29/07

Loan Group 1

$10,880,000

6/29/07

Loan Group 1

$2,992,000

6/29/07

Loan Group 1

$199,022,000

6/29/07

Loan Group 1

$22,114,000

6/29/07

Loan Group 1

$501,417,000 $55,713,000 $17,953,000 $218,300,000 $9,916,000 $513,888,000

8/13/07 8/13/07 8/13/07 10/30/07 10/30/07 2/28/07

Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1

$237,450,000

3/29/07

Loan Group 1

$372,609,000

3/30/07

Loan Group 1

$272,850,000

3/30/07

Loan Group 1

$276,930,000

5/4/07

Loan Group 1

$424,293,000

5/31/07

Loan Group 1

$47,144,000

5/31/07

Loan Group 1

$443,360,000

6/8/07

Loan Group 1

$113,153,000

2/28/07

Loan Group 1

24

Transaction

Tranche

Sponsor

Depositor

CWL 2007-BC2 CWL 2007-BC3

1A 1A

Countrywide Home Loans Countrywide Home Loans

CWABS CWABS

Lead Underwriters and Selling Underwriter When Not CW Securities (in parentheses) Countrywide Securities Countrywide Securities

Principal Amount Issued ($)

Date of Issuance

Supporting Loan Group(s)

$205,140,000 $185,759,000

4/27/07 6/29/07

Loan Group 1 Loan Group 1

C.

The Securitization Process 1. Countrywide Home Loans Groups Mortgage Loans in Special Purpose Trusts

48.

Countrywide Home Loans acted as the sponsor for each of the 86 Securitizations.

It originated the Mortgage Loans that were pooled together in the securitizations or, in some cases, acquired the Mortgage Loans from other originators or through affiliates of the originators. 49. Countrywide Home Loans then sold the mortgage loans for each of the

Securitizations that it sponsored to one of the three Depositor Defendants, each of which are Countrywide-affiliated entities: CWABS, CWALT, and CWMBS. 50. CWABS, CWALT, and CWMBS were each limited-purpose subsidiaries of

Countrywide Financial. The sole purpose of the Depositor Defendants was to act as a conduit through which loans originated or acquired by Countrywide could be securitized and sold to investors. 51. As depositors for the 86 Securitizations, the Depositor Defendants transferred the

relevant mortgage loans to the trusts pursuant to a Pooling and Servicing Agreement (PSA) that contained various representations and warranties regarding the mortgage loans for the Securitizations. 52. As part of each of the Securitizations, the trustee, on behalf of the

Certificateholders, executed the PSA with the relevant depositor and the parties responsible for

25

monitoring and servicing the mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage loans pursuant to the related PSA and issued Certificates, including the GSE Certificates, backed by such loans. The GSEs purchased the GSE Certificates, through which they obtained an ownership interest in the assets of the trust, including the mortgage loans. 2. 53. The Trusts Issue Securities Backed by the Loans

Once the mortgage loans were transferred to the trusts in accordance with the

PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to a specified portion of the cashflows from the underlying mortgages in the Supporting Loan Group. The level of risk inherent in the Certificates was a function of the capital structure of the related transaction and the credit quality of the underlying mortgages. 54. The Certificates were issued pursuant to one of nine Shelf Registration

Statements, filed with the SEC on a Form S-3. The Registration Statements were amended by one or more Forms S-3/A filed with the SEC (the Amendments). Each Individual Defendant signed one or more of the Shelf Registration Statements and the Amendments that were filed by the Depositor Defendants. The SEC filing number, registrants, signatories and filing dates of the Shelf Registration Statements and Amendments, as well as the Certificates covered by each Shelf Registration Statement, are set forth in Table 3 below.

26

Table 3
SEC File No. Date Shelf Registration Statement Filed 10/8/2002 Date(s) Amended Shelf Registration Statement Filed 10/28/2002 Registrant Covered Certificates Signatories of Shelf Registration Statement Stanford L. Kurland; Thomas Keith McLaughlin; Thomas H. Boone; David Spector; Jeffrey P. Grogin Stanford L. Kurland; Eric P. Sieracki; David A. Spector Signatories of Amendments

333-100418

CWMBS

CWHL 2005-HY10

333-125164

5/23/2005

6/10/2005

CWABS

333-125902

6/17/2005

7/25/2005

CWALT

333-125963

6/20/2005

7/25/2005

CWMBS

CWL 2005-8 CWL 2005-9 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14 CWL 2005-16 CWL 2005-17 CWL 2005-AB3 CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5 CWALT 2005-57CB CWALT 2005-63 CWALT 2005-67CB CWALT 2005-73CB CWALT 2005-80CB CWALT 2005-83CB CWALT 2005-84 CWALT 2005-85CB CWALT 2005-AR CWALT 2006-OC1 CWHL 2006-HYB1

Stanford L. Kurland; Thomas Keith McLaughlin; Thomas H. Boone; David Spector; Jeffrey P. Grogin Stanford L. Kurland; Eric P. Sieracki; David A. Spector

Stanford L. Kurland; Eric P. Sieracki; David A. Spector

Stanford L. Kurland; Eric P. Sieracki; David A. Spector

333-131591

2/6/2006

2/21/2006

CWABS

CWL 2006-2 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-BC2

Stanford L. Kurland; Eric P. Sieracki; David A. Spector Stanford L. Kurland; Eric P. Sieracki; David A. Spector

Stanford L. Kurland; Eric P. Sieracki; David A. Spector Stanford L. Kurland; Eric P. Sieracki; David A. Spector

27

SEC File No.

333-131630

Date Shelf Registration Statement Filed 2/7/2006

Date(s) Amended Shelf Registration Statement Filed 3/6/2006

Registrant

Covered Certificates

CWALT

333-135846

7/18/2006

8/8/2006

CWABS

333-140960

2/28/2007

4/24/2007

CWABS

333-140962

2/28/2007

4/24/2007

CWALT

CWALT 2006-11CB CWALT 2006-14CB CWALT 2006-19CB CWALT 2006-23CB CWALT 2006-33CB CWALT 2006-OA14 CWALT 2006-OC3 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007-OA3 CWL 2006-14 CWL 2006-16 CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-20 CWL 2006-21 CWL 2006-22 CWL 2006-23 CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-1 CWL 2007-2 CWL 2007-3 CWL 2007-5 CWL 2007-6 CWL 2007-BC1 CWL 2007-7 CWL 2007-8 CWL 2007-9 CWL 2007-10 CWL 2007-11 CWL 2007-12 CWL 2007-13 CWL 2007-BC2 CWL 2007-BC3 CWALT 2007-OA8 CWALT 2007-OA10

Signatories of Shelf Registration Statement Stanford L. Kurland; Eric P. Sieracki; David A. Spector

Signatories of Amendments

Stanford L. Kurland; Eric P. Sieracki; David A. Spector

Stanford L. Kurland; Eric P. Sieracki; David A. Spector

Stanford L. Kurland; Eric P. Sieracki; David A. Spector

N. Joshua Adler; Eric P. Sieracki; Ranjit Kripalani; Jennifer S. Sandefur

N. Joshua Adler; Eric P. Sieracki; Ranjit Kripalani; Jennifer S. Sandefur

N. Joshua Adler; Eric P. Sieracki; Ranjit Kripalani; Jennifer S. Sandefur

N. Joshua Adler; Eric P. Sieracki; Ranjit Kripalani; Jennifer S. Sandefur

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55.

The Prospectus Supplement for each Securitization describes the underwriting

guidelines that purportedly were used in connection with the origination of the underlying mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics regarding the mortgage loans in each group, including the ranges of and weighted average FICO credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the loans, the ranges of and weighted average outstanding principal balances of the loans, the debtto-income ratios, the geographic distribution of the loans, the extent to which the loans were for purchase or refinance purposes; information concerning whether the loans were secured by a property to be used as a primary residence, second home, or investment property; and information concerning whether the loans were delinquent. 56. The Prospectus Supplements associated with each Securitization were filed with

the SEC as part of the Registration Statements. The Form 8-Ks attaching the PSAs for each Securitization were also filed with the SEC. The date on which the Prospectus Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the Shelf Registration Statement related to each, are set forth in Table 4 below. Table 4
Transaction CWALT 2005-57CB CWALT 2005-63 CWALT 2005-67CB CWALT 2005-73CB CWALT 2005-80CB CWALT 2005-83CB CWALT 2005-84 CWALT 2005-85CB CWALT 2005-AR1 CWALT 2006-11CB CWALT 2006-14CB CWALT 2006-19CB Date Prospectus Supplement Filed 11/2/05 10/31/05 11/30/05 12/1/05 1/3/06 1/3/06 12/29/05 12/30/05 12/30/05 3/30/06 5/1/06 6/30/06 Date of Filing Form 8-K Attaching PSA Filed 1/18/06 1/10/06 1/12/06 1/12/06 1/17/06 1/17/06 1/17/06 1/23/06 1/17/06 4/14/06 5/12/06 7/14/06 Filing No. of Related Registration Statement 333-125902 333-125902 333-125902 333-125902 333-125902 333-125902 333-125902 333-125902 333-125902 333-131630 333-131630 333-131630

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Transaction CWALT 2006-23CB CWALT 2006-33CB CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC3 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007-OA10 CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006-HYB1 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14 CWL 2005-16 CWL 2005-17 CWL 2005-8 CWL 2005-9 CWL 2005-AB3 CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5 CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-14 CWL 2006-16 CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-2

Date Prospectus Supplement Filed 6/30/06 10/3/06 10/4/06 2/1/06 12/4/06 1/3/07 5/2/06 6/1/06 7/3/06 8/1/06 9/1/06 10/3/06 3/1/07 2/1/07 8/1/07 3/5/07 7/2/07 12/29/05 1/31/06 9/29/05 10/4/05 11/21/05 12/23/05 12/29/05 12/30/05 9/6/05 9/26/05 9/30/05 11/29/05 12/30/05 12/28/05 7/5/06 7/3/06 7/5/06 8/1/06 9/12/06 10/2/06 9/28/06 10/2/06 10/3/06 2/28/06

Date of Filing Form 8-K Attaching PSA Filed 7/13/06 10/13/06 10/20/06 2/14/06 12/15/06 1/10/07 5/12/06 6/14/06 7/14/06 8/10/06 10/23/06 10/23/06 3/16/07 5/24/07 8/17/07 4/2/07 7/13/07 1/24/06 2/13/06 10/13/05 11/4/05 12/7/05 1/30/06 1/27/06 1/27/06 11/4/05 11/4/05 10/12/05 1/27/06 1/27/06 1/17/06 8/8/06 8/8/06 8/7/06 8/11/06 11/20/06 11/20/06 11/17/06 11/17/06 11/17/06 3/13/06

Filing No. of Related Registration Statement 333-131630 333-131630 333-131630 333-125902 333-131630 333-131630 333-131630 333-131630 333-131630 333-131630 333-131630 333-131630 333-131630 333-131630 333-140962 333-131630 333-140962 333-100418 333-125963 333-125164 333-125164 333-125164 333-125164 333-125164 333-125164 333-125164 333-125164 333-125164 333-125164 333-125164 333-125164 333-131591 333-131591 333-131591 333-131591 333-135846 333-135846 333-135846 333-135846 333-135846 333-131591

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Transaction CWL 2006-20 CWL 2006-21 CWL 2006-22 CWL 2006-23 CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-1 CWL 2007-10 CWL 2007-11 CWL 2007-12 CWL 2007-13 CWL 2007-2 CWL 2007-3 CWL 2007-5 CWL 2007-6 CWL 2007-7 CWL 2007-8 CWL 2007-9 CWL 2007-BC1 CWL 2007-BC2 CWL 2007-BC3

Date Prospectus Supplement Filed 11/13/06 12/4/06 12/4/06 12/13/06 1/4/07 1/4/07 1/4/07 2/28/06 3/20/06 3/28/06 3/30/06 6/30/06 6/30/06 7/5/06 5/31/06 8/31/06 9/28/06 1/3/07 2/12/07 7/3/07 7/3/07 8/15/07 11/1/07 3/2/07 4/2/07 4/3/07 4/3/07 5/8/07 6/4/07 6/12/07 3/1/07 4/30/07 6/29/07

Date of Filing Form 8-K Attaching PSA Filed 11/22/06 12/15/06 12/29/06 12/22/06 1/12/07 1/12/07 1/12/07 3/14/06 4/3/06 4/12/06 4/14/06 8/3/06 8/3/06 8/8/06 6/15/06 9/19/06 12/20/06 1/30/07 2/23/07 7/16/07 7/16/07 8/28/07 11/14/07 5/10/07 4/13/07 5/11/07 4/16/07 6/20/07 6/15/07 6/25/07 5/2/07 6/26/07 8/8/07

Filing No. of Related Registration Statement 333-135846 333-135846 333-135846 333-135846 333-135846 333-135846 333-135846 333-131591 333-131591 333-131591 333-131591 333-131591 333-131591 333-131591 333-131591 333-131591 333-135846 333-135846 333-135846 333-140960 333-140960 333-140960 333-140960 333-135846 333-135846 333-135846 333-135846 333-140960 333-140960 333-140960 333-135846 333-140960 333-140960

57.

The Certificates were issued pursuant to the PSAs, and the Underwriter

Defendants offered and sold the GSE Certificates to Fannie Mae and Freddie Mac pursuant to

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the Registration Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements.6 II. THE DEFENDANTS PARTICIPATION IN THE SECURITIZATION PROCESS A. 58. The Role of Each of the Countrywide, Underwriter, and Individual Defendants Each of the Countrywide Defendants, including the Individual Defendants, had a

role in the securitization process and the marketing for most or all of the Certificates, which included purchasing the mortgage loans from the originators, arranging the Securitizations, selling the mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the Certificateholders, underwriting the public offering of the Certificates, structuring and issuing the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and Freddie Mac. 59. With respect to each Securitization, the Depositor Defendants, the Underwriting

Defendants, and the Individual Defendants who signed the Registration Statement, as well as the Defendants who exercised control over their activities, are liable, jointly and severally, as participants in the registration, issuance, and offering of the Certificates, including issuing, causing, or making materially misleading statements in the Registration Statements, and omitting material facts required to be stated therein or necessary to make the statements contained therein not misleading. 1. 60. Countrywide Home Loans

Defendant Countrywide Home Loans, which has been involved in the

securitization of home loans since 1969, was at all times relevant to this Complaint a leading Countrywide Securities was a selling underwriter for 69 of the Securitizations; the selling underwriter for each Securitization is reflected at Tables 11 and 12, below at paragraphs 248 and 249.
6

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sponsor of mortgage-backed securities and loan originator. The volume of loans originated and aggregated by Countrywide Home Loans made it possible for Countrywide Financial to [take] the crown as the biggest mortgage originator from 2004 until 2007. See Financial Crisis Inquiry Commission (FCIC), Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States at 105 (Jan. 2011) (hereinafter FCIC Report). According to the SEC, by 2005, Countrywide was the largest mortgage lender in the United States, originating over $490 billion in mortgage loans in 2005, over $450 billion in 2006, and over $408 billion in 2007. See Complaint, SEC v. Mozilo, No. 09-03994, Docket Entry 1 (C.D. Cal, filed June 4, 2009) (hereinafter SEC Complaint). Countrywide achieved a 16.8 percent market share by 2007. Goldstein & Fligstein, The Rise and Fall of the Nonconventional Mortgage Industry at Table 1 (July 2010). 61. In its capacity as sponsor of all 86 Securitizations, Countrywide Home Loans

determined the structure of the Securitizations, initiated the Securitizations, determined distribution of principal and interest, and provided data to the rating agencies to secure investment grade ratings for the Certificates. Countrywide Home Loans originated most of the mortgage loans that were pooled together before being sold or transferred to the Depositor Defendants in anticipation of securitization. Countrywide Home Loans also selected the Depositor Defendants as the special purpose vehicles that would be used to transfer the mortgage loans from Countrywide Home Loans to the trusts, and selected Countrywide Securities as the underwriter for most of the Securitizations. In its role as sponsor, Countrywide Home Loans knew and intended that the mortgage loans it originated or acquired would be sold in connection with the securitization process, and that certificates representing such loans would be issued by the relevant trusts.

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62.

For the 86 Securitizations that it sponsored, Countrywide Home Loans also

conveyed the mortgage loans to the Depositor Defendants pursuant to the PSAs. In these agreements, Countrywide Home Loans made certain representations and warranties to the Depositor Defendants regarding the groups of loans collateralizing the Certificates. These representations and warranties were assigned by the Depositor Defendants to the trustees for the benefit of the Certificateholders. 2. 63. The Depositor Defendants CWALT, CWABS, and CWMBS

Each of the Depositor Defendants CWALT, CWABS, and CWMBS was a

special purpose entity formed solely for the 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. 64. The Securitizations in which each Depositor Defendant participated are identified

in Table 2, above. Acting as depositor, each Depositor Defendant purchased mortgage loans from Countrywide Home Loans (as sponsor), pursuant to the PSAs. Each Depositor Defendant then sold, transferred, or otherwise conveyed the mortgage loans to be securitized to the trust. The Depositor Defendants were also responsible for preparing and filing the Registration Statements pursuant to which the Certificates were offered for sale. 65. The trusts in turn held the mortgage loans for the benefit of the Certificateholders,

and issued the Certificates in public offerings for sale to investors such as Fannie Mae and Freddie Mac. 3. 66. Countrywide Securities

Defendant Countrywide Securities was, at all relevant times, an investment bank

and registered broker-dealer and one of the leading underwriters of mortgage and other asset-

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backed securities in the United States. In 2007, Inside Mortgage Finance ranked Countrywide as one of the top non-agency mortgage-backed securities issuers, with 13.6 percent of the market share.7 Goldstein & Fligstein, The Rise and Fall of the Nonconventional Mortgage Industry at Table 1 (July 2010). Countrywide ranked number one in issuance of securities backed by subprime mortgages for the years 2005 to 2007, generating almost $86 billion in such issuances over those three years. Mortgage Repurchases Part II: Private Label RMBS Investors Take Aim Quantifying the Risks, Mortgage Finance at 8 (Aug. 17, 2010). 67. Defendant Countrywide Securities was the lead underwriter for the vast majority

of the Securitizations. In that role, it was responsible for underwriting and managing the offer and sale of the Certificates to Fannie Mae and Freddie Mac and other investors. Countrywide Securities was also obligated to conduct meaningful due diligence to ensure that the Registration Statements did not contain any material misstatements or omissions, including as to the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 4. 68. Countrywide Capital Markets

Defendant Countrywide Capital Markets was the sole parent of Countrywide

Securities. As such, it had the practical ability to direct and control the actions of Countrywide Securities related to the Securitizations in which its wholly-owned subsidiary participated as underwriter and in fact exercised such control over the activities of its subsidiary related to the issuance and sale of the Certificates.

Agency mortgage-backed securities are guaranteed by a government agency or government-sponsored enterprise such as Fannie Mae or Freddie Mac, while non-agency mortgage-backed securities are issued by banks and financial companies not associated with a government agency or government sponsored enterprise.

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5. 69.

Countrywide Financial

Countrywide Financial employed its wholly-owned subsidiaries, Countrywide

Home Loans, Countrywide Securities, and each of the Depositor Defendants, in the key steps of the securitization process. Unlike typical arms length transactions, the Securitizations here involved various Countrywide subsidiaries and affiliates at virtually each step in the chain with few exceptions, the sponsor was Countrywide Home Loans, the depositors were CWABS, CWALT, or CWMBS, and the lead or co-lead underwriter was Countrywide Securities. 70. As the sole corporate parent of these entities, Countrywide Financial had the

practical ability to direct and control the actions of Countrywide Home Loans, Countrywide Securities, and the Depositor Defendants related to the Securitizations, and in fact exercised such direction and control over their activities related to the issuance and sale of the Certificates. 6. 71. The Underwriter Defendants

Like Underwriter Defendant Countrywide Securities, the remaining Underwriter

Defendants BOA Securities, CGMI, DB Securities, RBS Securities, and UBS Securities were all registered broker-dealers, participated in underwriting one or more Securitizations, and in those capacities sold Certificates to Fannie Mae and Freddie Mac and other investors. The Securitizations in which each Underwriter Defendant sold GSE Certificates to Fannie Mae and Freddie Mac are identified below at Tables 11 and 12. 72. Defendant BOA Securities was the lead underwriter for the CWALT 2006-OA14

and CWALT 2007-OA10 Securitizations, among other Securitizations. In that role, BOA Securities was responsible for underwriting and managing the offer and sale of the Certificates issued in those Securitizations. BOA Securities managed the offer and sale of GSE Certificates to Fannie Mae in the CWALT 2006-OA14 and CWALT 2007-OA10 Securitizations.

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73.

Defendant CGMI was at all relevant times CitiGroup Inc.s private label securities

arm, specializing in nonconforming and alternative pools of loans. Mortgage Banking Magazine, CitiMortgage on the Move, December 2006. CGMI was the lead underwriter for the CWALT 2006-33CB, and CWALT 2007-5CB Securitizations and in that role was responsible for underwriting and managing the offer and sale of the Certificates issued in those Securitizations. CGMI managed the offer and sale of GSE Certificates to Freddie Mac in the CWALT 2006-33CB and CWALT 2007-5CB Securitizations. 74. Defendant DB Securities was at all relevant times one of the leading underwriters

of mortgage and other asset-backed securities in the United States. DB Securities was the lead underwriter for the CWALT 2005-84, CWALT 2005-85CB, CWALT 2006-14CB, and CWALT 2006-19CB Securitizations, among other Securitizations. In that role, DB Securities was responsible for underwriting and managing the offer and sale of the Certificates issued in those Securitizations. DB Securities managed the offer and sale of GSE Certificates to Fannie Mae in the CWALT 2005-84 and CWALT 2005-85CB Securitizations and to Freddie Mac in the CWALT 2006-14CB and CWALT 2006-19CB Securitizations. 75. Defendant RBS Securities was at all relevant times one of the leading

underwriters of mortgage and other asset-backed securities in the United States. RBS Securities was a lead underwriter for the CWALT 2005-73CB, CWALT 2006-11CB, and CWALT 200580CB Securitizations, among other Securitizations. In that role, RBS Securities was responsible for underwriting and managing the offer and sale of the Certificates issued in those Securitizations. RBS Securities also managed the offer and sale of the GSE Certificates to Fannie Mae in the CWALT 2005-80CB Securitization and to Freddie Mac in the CWALT 200573CB and CWALT 2006-11CB Securitizations.

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76.

Defendant UBS Securities was at all relevant times one of the leading

underwriters of mortgage and other asset-backed securities in the United States. UBS Securities was the lead underwriter for the CWALT 2005-63 Securitization, among other Securitizations. In that role, UBS Securities was responsible for underwriting and managing the offer and sale of the Certificates issued in those Securitizations. UBS Securities also managed the offer and sale of the GSE Certificate to Fannie Mae in the CWALT 2005-63 Securitization. 77. Each of the Underwriter Defendants was obligated to conduct meaningful due

diligence to ensure that the Registration Statements for the Securitizations they underwrote did not contain any material misstatements or omissions, including the manner in which the underlying mortgage loans were originated, transferred, and underwritten. 7. 78. The Individual Defendants

Defendant N. Joshua Adler served as President, CEO, and member of the Board

of Directors for CWALT and CWABS. Mr. Adler signed two of the Shelf Registration Statements and the amendments thereto. 79. Defendant Thomas H. Boone served as Executive Vice President as well as the

Principal Financial and Accounting Officer for CWMBS. Mr. Boone signed one of the Shelf Registration Statements and the amendments thereto. 80. Defendant Jeffrey P. Grogin served as Director of CWMBS. Mr. Grogin signed

one of the Shelf Registration Statements and the amendments thereto. 81. Defendant Ranjit Kripalani served as Countrywide Financials Executive Vice

President and Countrywide Securities National Sales Manager. He also served as Director of CWALT, CWABS, and CWMBS. Mr. Kripalani signed two of the Shelf Registration Statements and the amendments thereto.

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82.

Defendant Stanford Kurland was President and COO of Countrywide Financial

and also the CEO, President, and Chairman of the Board of CWABS, CWALT, and CWMBS. Mr. Kurland signed seven of the Shelf Registration Statements and the amendments thereto. 83. Defendant Thomas Keith McLaughlin served as Executive Vice President as well

as Principal Financial and Accounting Officer for CWMBS and CWALT. Mr. McLaughlin signed one of the Shelf Registration Statements and the amendments thereto. 84. Defendant Jennifer S. Sandefur served as Vice-President and Assistant Treasurer

of Countrywide Financial and Treasurer of Countrywide Home Loans. She served as Director of CWALT, CWABS, and CWMBS. Ms. Sandefur signed two of the Shelf Registration Statements and the amendments thereto. 85. Defendant Eric Sieracki served as Countrywide Financials Executive Managing

Director and Chief Financial Officer. Prior to becoming CFO of Countrywide Financial, Mr. Sieracki occupied other high-level positions within Countrywide, including as Executive Managing Director, Chief Financial Officer, and Treasurer of CWALT, CWABS, and CWMBS. Mr. Sieracki signed eight of the Shelf Registration Statements and the amendments thereto. 86. Defendant David A. Spector joined Countrywide in 1990. He served as

Managing and Senior Managing Director at Countrywide Financial from 2004 to 2006, as well as Managing Director of Secondary Markets at Countrywide Home Loans. He was also a member of the Board of Directors and a Vice President for CWALT, CWABS, and CWMBS. Mr. Spector signed seven of the Shelf Registration Statements and the amendments thereto. B. 87. The Defendants Failure To Conduct Proper Due Diligence The Defendants failed to conduct adequate and sufficient due diligence to ensure

that the mortgage loans underlying the Securitizations complied with the representations in the

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Registration Statements, and failed to abide by their own stated underwriting standards in originating and underwriting loans. 88. During the time period in which the Certificates were issued approximately

2005 through 2007 Countrywides involvement in the mortgage-backed securitization market was rapidly expanding. Countrywides CEO, Angelo Mozilo, stated on a conference call with analysts in 2003 that his goal for Countrywide Financial was to dominate the mortgage market and to get our market share to the ultimate 30% by 2006, 2007. Q2 2003 Countrywide Financial Corporation Earnings Conference Call (July 22, 2003). As described below, in the drive to achieve this objective, Countrywide abandoned its underwriting guidelines and failed to perform the due diligence necessary to ensure the accuracy of the Registration Statements. 89. Defendants had enormous financial incentives to complete as many offerings as

quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, the Depositor Defendants were paid a percentage of the total dollar amount of the offerings upon completion of the Securitizations, and the Underwriting Defendants, including but not limited to Countrywide Securities, were paid a commission based on the amount received from the sale of the Certificates to the public. 90. The push to securitize large volumes of mortgage loans contributed to the absence

of controls needed to prevent the inclusion of untrue statements of material facts and omissions of material facts in the Registration Statements. In particular, Defendants failed to conduct adequate diligence or otherwise to ensure the accuracy of the statements in the Registrations Statements pertaining to the Securitizations.

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91.

For instance, Countrywide retained third-parties, including Clayton Holdings, Inc.

(Clayton), to analyze the loans it was considering placing in its securitizations, but waived a significant number of loans into the Securitizations that these firms had recommended for exclusion, and did so without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines or had compensating factors that excused the loans non-compliance with those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement with the New York Attorney General (the NYAG) to provide documents and testimony regarding its due diligence reports, including copies of the actual reports provided to its clients. According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending expectations and some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio. 92. Countrywide was negligent in allowing into the Securitizations a substantial

number of mortgage loans that, as reported to Countrywide by third-party due diligence firms, did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements. Even upon learning from the third-party due diligence firms that there were high percentages of defective or at least questionable loans in the sample of loans reviewed by the third-party due diligence firms, Countrywide failed to take any additional steps to verify that the population of loans in the Securitizations did not include a similar percentage of defective and/or questionable loans. 93. Claytons trending reports reveal that from the fourth quarter of 2006 to the first

quarter of 2007, 26 percent of the mortgages Countrywide submitted to Clayton to review in residential mortgage-backed securities groups were rejected by Clayton as falling outside of the

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applicable underwriting guidelines. Of the mortgages that Clayton found defective, twelve percent were subsequently waived in by Countrywide and included in securitizations like the ones in which Fannie Mae and Freddie Mac invested. See All Clayton Trending Reports Q1 2006-Q2 2007, at 3 (Clayton Services Inc. 2007). 94. Clayton also produced a report containing the rejection and waiver rates for loans

originated by Countrywide. This report stated that between thirteen and 24 percent of the loans Countrywide originated during the same time frame did not comply with applicable underwriting guidelines. Clayton Originator Trending Report (Clayton Services Inc. 2007). 95. The Underwriting Defendants other than Countrywide also failed to perform

adequate due diligence when underwriting securitizations of mortgage-backed securities. These Defendants were negligent in allowing into their securitizations a substantial number of mortgage loans that, as reported to them by third-party due diligence firms, did not conform to the underwriting standards stated in the registration statements pursuant to which they made offerings, including the prospectuses and prospectus supplements that formed part of those registration statements. Claytons trending reports revealed that, in the period from the first quarter of 2006 to the second quarter of 2007, the non-Countrywide Underwriter Defendants, and their affiliates, routinely waived into pools for securitizations loans that had been recommended for exclusion, without taking adequate steps to ensure that these loans had in fact been underwritten in accordance with applicable guidelines. These reports are described below:

Bank of America: Clayton rejected 30 percent of the total pool of loans it reviewed for Bank of America. Nonetheless, Bank of America waived in 27 percent of those rejected loans. Citigroup: Clayton rejected 42 percent of the total pool of loans it reviewed for Citigroup. Nonetheless, Citigroup waived in nearly a third of those rejected loans.

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Deutsche Bank: Clayton rejected 35 percent of the total pool of loans it reviewed for Deutsche Bank. Nonetheless, Deutsche Bank waived in seventeen percent of these rejected loans. RBS: Clayton rejected eighteen percent of the total pool of loans it reviewed for RBS. Nonetheless, RBS waived in 53 percent of these rejected loans. UBS: Clayton rejected 20 percent of the total pool of loans it reviewed for UBS. Nonetheless, UBS waived in thirteen percent of these loans.

See All Clayton Trending Reports Q1 2006-Q2 2007, at 3 (Clayton Services Inc. 2007). 96. Based on the information provided to them by the third-party due diligence firms,

the Underwriter Defendants should have known that a substantial number of the mortgage loans did not conform to the underwriting standards stated in the Registration Statements, including the Prospectuses and Prospectus Supplements, and that the mortgage loans did not have the characteristics represented in those documents. III. THE REGISTRATION STATEMENTS AND THE PROSPECTUS SUPPLEMENTS A. 97. Compliance With Underwriting Guidelines The Prospectuses and Prospectus Supplements for each Securitization describe

the mortgage loan underwriting guidelines pursuant to which the mortgage loans underlying the related Securitizations were to have been originated. These guidelines were intended to assess the creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy of the mortgaged property as security for the loan. 98. The statements made in the Prospectuses and Prospectus Supplements, which, as

discussed, formed part of the Registration Statement for each Securitization, were material to a reasonable investors decision to purchase and invest in the Certificates because the failure to originate a mortgage loan in accordance with the applicable guidelines creates a higher risk of

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delinquency and default by the borrower, as well as a risk that losses upon liquidation will be higher, thus resulting in a greater economic risk to an investor. 99. The Prospectuses and Prospectus Supplements for the Securitizations contained

several key statements with respect to the underwriting standards of the entities that originated the loans in the Securitizations. 100. For example, the Prospectus Supplement for the CWALT 2007-OA10

Securitization, for which Countrywide Home Loans was the sponsor, CWALT was the depositor, and BOA Securities was the underwriter, stated that all mortgage loans had been originated under Countrywide Home Loans underwriting guidelines. The Prospectus Supplement set forth that Countrywide Home Loans underwriting standards are applied by or on behalf of Countrywide Home Loans to evaluate the prospective borrowers credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. 101. Further, according to the Prospectus Supplement, the same underwriting standards

applied regardless of whether the loan was originated or acquired by Countrywide Home Loans. The Prospectus Supplement represented that all loans will have been originated or acquired by Countrywide Home Loans in accordance with its credit, appraisal and underwriting process. 102. With respect to the information evaluated by the originator, the Prospectus to

which the Prospectus Supplement refers stated that, In general, a prospective borrower applying for a loan is required to fill out a detailed application designed to provide to the underwriting officer pertinent credit information. As part of the description of the borrowers financial condition, the borrower generally is required to provide a current list of assets and liabilities and a statement of income and expenses, as well as an authorization to apply for a

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credit report which summarizes the borrowers credit history with local merchants and lenders and any record of bankruptcy. 103. The central purpose of the collection of information regarding each mortgage loan

was to assess the borrowers ability to repay the loan. As the Prospectus Supplement stated: Once all applicable employment, credit and property information is received, a determination generally is made as to whether the prospective borrower has sufficient monthly income available to meet monthly housing expenses and other financial obligations and monthly living expenses . . . . 104. The Prospectus Supplement specified that although exceptions could be made to

Countrywide Home Loans underwriting guidelines, in each instance there must be compensating factors . . . demonstrated by a prospective borrower. 105. Additionally, the Prospectus Supplement claimed that to assess the adequacy of

the value of the mortgaged property as collateral, Countrywide Home Loans obtained independent appraisals of the subject property. According to the Prospectus Supplement, the appraisers inspect and appraise the proposed mortgaged property and verify that the property is in acceptable condition. 106. With respect to approximately 60 percent of the Securitizations, the Prospectus

Supplement specified that substantially all of the mortgage loans had been made to borrowers with blemished credit histories. The Prospectus Supplement applicable to the CWL 2007-10 Securitization, for example, stated that all of the mortgage loans in the loan group supporting the Certificate purchased by the GSEs were originated by Countrywide Home Loans in accordance with its underwriting standards for credit-blemished mortgage loans.

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107.

The guidelines applied for the credit-blemished mortgage loans nonetheless

required a determination that the borrower was able to repay the loan. The Prospectus Supplement for the CWL 2007-10 Securitization stated: While more flexible, Countrywide Home Loans underwriting guidelines [for credit-blemished mortgage loans] still place primary reliance on a borrowers ability to repay; however Countrywide Home Loans may require lower loan-to-value ratios than for loans underwritten to more traditional standards. The Prospectus Supplement for the CWL 2007-10 Securitization represented that that through use of an internal credit grading system for credit-blemished mortgage loans, Countrywide Home Loans was able to grade the likelihood that the mortgagor will satisfy the repayment conditions of the mortgage loans. 108. The Prospectus Supplement for the CWL 2007-10 Securitization stated, as did the

Prospectuses and Prospectus Supplements for Securitizations involving non-blemished mortgage loans: Countrywide Home Loans underwriting standards are primarily intended to evaluate the value and adequacy of the mortgaged property as collateral for the proposed mortgage loan and the borrowers credit standing and repayment ability. 109. The Prospectus Supplement for the CWL 2007-10 Securitization stated that loans

were evaluated on a case-by-case basis, and that compensating factors must exist for an exception. The compensating factors enumerated in the Prospectus Supplement included: low loan-to-value ratio or combined loan-to-value ratio, as applicable, low debt-to-income ratio, stable employment, time in the same residence or other factors. 110. As in the case of non-blemished loans, moreover, the Prospectus Supplement for

the CWL 2007-10 Securitization represented that every property had been subjected to an independent appraisal. The Prospectus Statement also stated that before the mortgage loans were

46

funded, a representative of Countrywide Home Loans had reviewed the appraisal and that generally Countrywide Home Loans required an additional appraisal in connection with appraisals not provided by Landsafe Appraisals, Inc., a wholly-owned subsidiary of Countrywide Home Loans. 111. The Prospectuses and Prospectus Supplements for each of the Securitizations had

similar representations to those quoted above. The relevant representations in the Prospectuses and Prospectus Supplements pertaining to originating entity underwriting standards for each Securitization are reflected in Appendix A to this Complaint. As discussed below in Section IV, in fact, Countrywide Home Loans and the other originators of the mortgage loans in the Supporting Loan Group for the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the description of those guidelines in the Prospectuses and Prospectus Supplements false and misleading. 112. Further, for many of the Securitizations, the Prospectuses and Prospectus

Supplements described additional representations and warranties concerning the mortgage loans backing the Securitizations that were made by the originator to the depositor in the PSA. The Prospectus Supplement for the CWALT 2007-OA10 Securitization, for example, stated that Under the [PSA], Countrywide Home Loans will make certain representations, warranties and covenants to the depositor relating to, among other things . . . certain characteristics of the Mortgage Loans, including that the originator was the sole owner of those Mortgage Loans free and clear of any pledge, lien, encumbrance or other security interest . . . . The representations and warranties in the PSAs for additional Securitizations are described in greater detail in Appendix A.

47

113.

The inclusion of these representations in the Prospectuses and Prospectus

Supplements had the purpose and effect of providing additional assurances to investors regarding the quality of the mortgage collateral underlying the Securitizations and the compliance of that collateral with the underwriting guidelines described in the Prospectuses and Prospectus Supplements. These representations were material to a reasonable investors decision to purchase the Certificates. B. 114. Statements Regarding Occupancy Status of Borrower The Prospectus Supplements contained collateral group-level information about

the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status refers to whether the property securing a mortgage is to be the primary residence of the borrower, a second home, or an investment property. The Prospectus Supplements for each of the Securitizations presented this information in tabular form, usually in a table entitled Occupancy Types for the . . . Mortgage Loans. This table divided all the loans in the collateral group by occupancy status, e.g., into the following categories: (i) Primary, or OwnerOccupied; (ii) Second Home, or Secondary; and (iii) Investment or Non-Owner. For each category, the table stated the number of loans in that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were reported in the Prospectus Supplements as follows:8 Table 5
Transaction Supporting Loan Group Group 1 Primary or Owner-Occupied (%) 100.00 Second Home/Secondary (%) 0.00 Investor (%) 0.00

CWALT 2005-57CB

Each Prospectus Supplement provides the total number of loans and the number of loans in the following categories: owner occupied, investor, and second home. These numbers have then been converted to percentages.

48

Transaction

Supporting Loan Group Group 1 Single-Group Transaction Group 2 Group 3 Group 4 Single-Group Transaction Group 2 Group 1 Group 1 Group 1 Single-Group Transaction Single-Group Transaction Group 1 Group 2 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 3 Group 2 Group 1

CWALT 2005-63 CWALT 2005-67CB CWALT 2005-73CB CWALT 2005-80CB CWALT 2005-83CB CWALT 2005-84 CWALT 2005-85CB CWALT 2005-AR1 CWALT 2006-11CB CWALT 2006-14CB CWALT 2006-19CB CWALT 2006-23CB CWALT 2006-33CB CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC3 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007-OA10 CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006-HYB1 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14

Primary or Owner-Occupied (%) 82.90 100.00 76.79 60.65 82.44 100.00 80.49 77.57 92.41 83.46 88.28 90.08 89.70 80.23 88.92 71.87 79.82 76.50 53.67 75.93 63.33 78.18 71.25 81.21 81.52 79.57 68.94 74.68 73.97 69.24 74.86 79.47 75.15 98.49 100.00 95.01 95.59

Second Home/Secondary (%) 11.37 0.00 5.83 5.19 4.90 0.00 12.78 5.46 1.72 5.38 4.37 4.09 4.23 6.74 5.26 9.17 2.36 9.28 9.78 3.71 9.69 1.76 8.97 4.34 6.13 4.80 9.80 6.87 5.01 8.71 8.53 8.28 6.53 0.46 0.00 1.35 1.08

Investor (%) 5.73 0.00 17.38 34.17 12.67 0.00 6.73 16.97 5.86 11.15 7.36 5.82 6.08 13.04 5.82 18.96 17.82 14.22 36.55 20.36 26.98 20.07 19.78 14.45 12.35 15.63 21.26 18.45 21.03 22.05 16.61 12.24 18.31 1.06 0.00 3.64 3.32

49

Transaction

Supporting Loan Group Group 2

Primary or Owner-Occupied (%) 96.85 97.62 96.50 100.00 95.98 96.66 97.49 92.19 92.23 92.63 95.47 98.34 92.42 97.10 92.69 97.99 97.49 95.87 95.64 97.48 96.81 92.42 93.91 95.70 93.98 95.69 94.84 94.60 92.18 94.34 94.59 92.92 97.65 96.47 97.55 94.57 95.75 96.22 97.44

Second Home/Secondary (%) 1.01 0.38 0.63 0.00 0.81 0.51 0.39 1.41 1.07 2.27 0.58 0.44 1.34 0.43 1.36 0.16 0.35 0.90 0.99 0.70 0.54 2.16 0.99 0.71 1.35 0.90 0.78 0.91 1.38 0.83 1.08 1.51 0.48 0.88 0.45 1.45 0.50 0.61 0.80

Investor (%) 2.14 2.01 2.87 0.00 3.21 2.83 2.12 6.40 6.70 5.10 3.94 1.22 6.24 2.47 5.95 1.86 2.16 3.23 3.37 1.82 2.65 5.41 5.10 3.59 4.67 3.41 4.38 4.49 6.43 4.83 4.32 5.57 1.87 2.65 2.00 3.99 3.75 3.18 1.76

CWL 2005-16 CWL 2005-17 CWL 2005-8 CWL 2005-9 CWL 2005-AB3 CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5 CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-14 CWL 2006-16 CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-2 CWL 2006-20 CWL 2006-21 CWL 2006-22 CWL 2006-23 CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4

Group 1 Group 3 Group 2 Group 3 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 2 Group 2 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 1 Group 1

50

Transaction

Supporting Loan Group Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1

CWL 2006-BC5 CWL 2007-1 CWL 2007-10 CWL 2007-11 CWL 2007-12 CWL 2007-13 CWL 2007-2 CWL 2007-3 CWL 2007-5 CWL 2007-6 CWL 2007-7 CWL 2007-8 CWL 2007-9 CWL 2007-BC1 CWL 2007-BC2 CWL 2007-BC3

Primary or Owner-Occupied (%) 97.62 95.22 96.39 96.71 94.89 95.95 92.52 91.76 90.27 93.90 90.55 96.28 95.09 95.44 93.26 90.10

Second Home/Secondary (%) 0.53 1.49 0.99 0.58 0.55 0.67 2.08 2.09 2.24 1.84 1.87 0.54 0.90 1.85 1.54 0.67

Investor (%) 1.84 3.29 2.62 2.71 4.55 3.37 5.40 6.15 7.50 4.26 7.58 3.18 4.01 2.71 5.19 9.23

115.

As Table 5 makes clear, the Prospectus Supplements for most of the

Securitizations reported that an overwhelming majority of the mortgage loans in the Supporting Loan Groups were owner-occupied, while a small percentage were reported to be non-owneroccupied (i.e., a second home or investor property). 116. The statements about occupancy status were material to a reasonable investors

decision to invest in the Certificates. Information about occupancy status is an important factor in determining the credit risk associated with a mortgage loan and, therefore, the securitization that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to default and more likely to care for their primary residence than borrowers who purchase homes as second homes or investments and live elsewhere, the percentage of loans in the collateral group of a securitization that are not secured by mortgage loans on owner-occupied residences is an important measure of the risk of the certificates sold in that securitization.

51

117.

Other things being equal, the higher the percentage of loans not secured by

owner-occupied residences, the greater the risk of loss to the certificateholders. Even small differences in the percentages of primary/owner-occupied, second home/secondary, and investment properties in the collateral group of a securitization can have a significant effect on the risk of each certificate sold in that securitization, and thus, are important to the decision of a reasonable investor whether to purchase any such certificate. As discussed below at paragraphs 129 through 132, the Registration Statement for each Securitization materially overstated the percentage of loans in the Supporting Loan Groups that were owner-occupied, thereby misrepresenting the degree of risk of the GSE Certificates. C. 118. Statements Regarding Loan-to-Value Ratios The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the

balance of the mortgage loan to the value of the mortgaged property when the loan is made. 119. The denominator in the LTV ratio is the value of the mortgaged property and is

generally the lower of the purchase price or the appraised value of the property. In a refinancing or home-equity loan, there is no purchase price to use as the denominator, so the denominator is often equal to the appraised value at the time of the origination of the refinanced loan. Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated appraisal will understate, sometimes greatly, the credit risk associated with a given loan. 120. The Prospectus Supplements for each Securitization also contained group-level

information about the LTV ratio for the underlying group of loans as a whole. The percentage of loans with an LTV ratio at or less than 80 percent and the percentage of loans with an LTV ratio

52

greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan Groups are reflected in Table 6 below.9 Table 6
Transaction Supporting Loan Group Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80 87.26 88.73 85.83 90.70 78.89 88.10 88.06 90.80 90.56 99.09 91.37 94.73 93.34 90.60 90.23 96.60 92.22 94.75 89.61 92.05 92.09 92.63 Percentage of loans, by aggregate principal balance, with LTV greater than 100 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

CWALT 2005-57CB CWALT 2005-63 CWALT 2005-67CB CWALT 2005-73CB CWALT 2005-80CB CWALT 2005-83CB CWALT 2005-84 CWALT 2005-85CB CWALT 2005-AR1 CWALT 2006-11CB CWALT 2006-14CB CWALT 2006-19CB CWALT 2006-23CB CWALT 2006-33CB CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC3 CWALT 2006-OC4

Group 1 Group 1 Single-group transaction Group 2 Group 3 Group 4 Single-group transaction Group 2 Group 1 Group 1 Group 1 Single-group transaction Single-group transaction Group 1 Group 2 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1

As used in this Complaint, LTV refers to the original loan-to-value ratio for first lien mortgages and for properties with second liens that are subordinate to the lien that was included in the securitization (i.e., only the securitized lien is included in the numerator of the LTV calculation). However, for second lien mortgages, where the securitized lien is junior to another loan, the more senior lien has been added to the securitized one to determine the numerator in the LTV calculation (this latter calculation is sometimes referred to as the combined-loan-to-value ratio, or CLTV).

53

Transaction

Supporting Loan Group

Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80 93.97 88.51 85.61 87.48 91.47 92.52 87.31 81.69 85.81 71.37 95.06 96.56 55.80 47.70 66.49 58.90 61.93 70.02 69.38 70.73 71.77 61.35 90.93 38.27 57.85 54.46 62.95 73.00 67.67 63.09 61.09 66.62 64.04 58.85 62.95 63.15 61.32 63.55 59.83

Percentage of loans, by aggregate principal balance, with LTV greater than 100 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007-OA10 CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006-HYB1 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14 CWL 2005-16 CWL 2005-17 CWL 2005-8 CWL 2005-9 CWL 2005-AB3 CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5 CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-14 CWL 2006-16 CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-2 CWL 2006-20

Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 3 Group 2 Group 1 Group 2 Group 1 Group 3 Group 2 Group 3 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 2 Group 2 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1

54

Transaction

Supporting Loan Group

Percentage of loans, by aggregate principal balance, with LTV less than or equal to 80 63.28 62.53 50.04 55.15 49.52 51.88 65.74 74.72 67.88 65.25 60.78 63.41 58.37 54.52 62.50 66.48 56.64 55.26 60.53 62.32 61.06 69.15 52.22 48.78 44.97 59.09 53.60 60.62 60.00 62.12 46.38 56.21

Percentage of loans, by aggregate principal balance, with LTV greater than 100 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

CWL 2006-21 CWL 2006-22 CWL 2006-23 CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-1 CWL 2007-10 CWL 2007-11 CWL 2007-12 CWL 2007-13 CWL 2007-2 CWL 2007-3 CWL 2007-5 CWL 2007-6 CWL 2007-7 CWL 2007-8 CWL 2007-9 CWL 2007-BC1 CWL 2007-BC2 CWL 2007-BC3

Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1

121.

As Table 6 makes clear, the Prospectus Supplements for most of the

Securitizations reported that the majority of the mortgage loans in most of the Supporting Loan Groups had an LTV ratio of 80 percent or less, and the Prospectus Supplement for all of the

55

Securitizations reported that zero mortgage loans in the Supporting Loan Group had an LTV over 100 percent. 122. The LTV ratio is among the most important measures of the risk of a mortgage

loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the property will wipe out an owners equity, and thereby give an owner an incentive to stop making mortgage payments and abandon the property. This ratio also predicts the severity of loss in the event of default. The lower the LTV, the greater the equity cushion, so the greater the likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan. 123. Thus, the LTV ratio is a material consideration to a reasonable investor in

deciding whether to purchase a certificate in a securitization of mortgage loans. Even small differences in the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant effect on the likelihood that the collateral groups will generate sufficient funds to pay certificateholders in that securitization, and thus are material to the decision of a reasonable investor whether to purchase any such certificate. As discussed below at paragraphs 133 through 138, the Registration Statements for the Securitizations materially overstated the percentage of loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent, and materially understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100 percent, thereby misrepresenting the degree of risk of the GSE Certificates. D. 124. Statements Regarding Credit Ratings Credit ratings are assigned to the tranches of mortgage-backed securitizations by

the credit rating agencies, including Standard & Poors, Moodys Investors Service, and Fitch Ratings. Each credit rating agency uses its own scale with letter designations to describe various levels of risk. In general, AAA or its equivalent ratings are at the top of the credit rating scale

56

and are intended to designate the safest investments. C and D ratings are at the bottom of the scale and refer to investments that are currently in default and exhibit little or no prospect for recovery. At the time the GSEs purchased the GSE Certificates, investments with AAA or its equivalent ratings historically experienced a loss rate of less than .05 percent. Investments with a BBB rating, or its equivalent, historically experienced a loss rate of less than one percent. As a result, securities with credit ratings between AAA or its equivalent through BBB- or its equivalent were generally referred to as investment grade. 125. Rating agencies determine the credit rating for each tranche of a mortgage-backed

securitization by comparing the likelihood of contractual principal and interest repayment to the credit enhancements available to protect investors. Rating agencies determine the likelihood of repayment by estimating cashflows based on the quality of the underlying mortgages by using sponsor-provided loan level data. Credit enhancements, such as subordination, represent the amount of cushion or protection from loss incorporated into a given deal.10 This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal to which they are contractually entitled. The level of credit enhancement offered is based on the make-up of the loans in the underlying collateral group and entire securitization. Riskier loans underlying the securitization necessitate higher levels of credit enhancement to insure payment to senior certificate holders. If the collateral within the deal is of a higher quality, then rating agencies require less credit enhancement for AAA or its equivalent rating.

Subordination refers to the fact that the certificates for a mortgage-backed securitization are issued in a hierarchical structure, from senior to junior. The junior certificates are subordinate to the senior notes in that, should the underlying mortgage loans become delinquent or default, the junior certificates suffer losses first. These subordinate certificates thus provide a degree of protection to the senior certificates from losses on the underlying loans.

10

57

126.

Credit ratings have been an important tool to gauge risk when making investment

decisions. For almost a hundred years, investors like pension funds, municipalities, insurance companies, and university endowments have relied heavily on credit ratings to assist them in distinguishing between safe and risky investments. Fannie Maes and Freddie Macs respective internal policies limited their purchases of private label residential mortgage-backed securities to those rated AAA (or its equivalent) and in very limited instances, AA or A bonds (or their equivalent). 127. Each tranche of the Securitizations received a credit rating upon issuance, which

purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for each tranche in the Prospectus Supplements. The credit rating provided for each of the GSE Certificates was investment grade, almost always AAA or its equivalent. The accuracy of these ratings was material to a reasonable investors decision to purchase the GSE Certificates. As set forth in Table 9, below at paragraph 196, the ratings for the Securitizations were inflated as a result of Defendants provision of incorrect data concerning the attributes of the underlying mortgage collateral to the ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates in almost all cases as AAA (or its equivalent), when, in fact, they were not. IV. FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND PROSPECTUS SUPPLEMENTS A. 128. The Statistical Data Provided in the Prospectus Supplements Concerning Owner Occupancy and LTV Ratios Was Materially False A review of loan-level data was conducted in order to assess whether the

statistical information provided in the Prospectus Supplements was true and accurate. For each Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan Group, or all the loans in the group if there were fewer than 1,000 loans in the Supporting Loan Group. The sample data confirms, on a statistically significant basis, material misrepresentations

58

of underwriting standards and of certain key characteristics of the mortgage loans across the Securitizations. The data review demonstrates that the data concerning owner occupancy and LTV ratios was materially false and misleading. 1. 129. Owner-Occupancy Data Was Materially False

The data review has revealed that the owner-occupancy statistics were materially

false and inflated. In fact, far fewer underlying properties were occupied by their owners than disclosed in the Prospectus Supplements, and more correspondingly were held as second homes or investment properties. 130. To determine whether a given borrower actually occupied the property as

claimed, a number of tests were conducted, including, inter alia, whether, months after the loan closed, the borrowers tax bill was being mailed to the property or to a different address; whether the borrower had claimed a tax exemption on the property; and whether the mailing address of the property was reflected in the borrowers credit reports, tax records, or lien records. Failing two or more of these tests is a strong indication that the borrower did not live at the mortgaged property and instead used it as a second home or an investment property, both of which make it much more likely that a borrower will not repay the loan. 131. A significant number of the loans failed two or more of these tests, indicating that

the owner-occupancy statistics provided to Fannie Mae and Freddie Mac were materially false and misleading. For example, the CWALT 2007-HY2 Securitization, for which Countrywide Home Loans was the sponsor and Countrywide Securities was the underwriter, the Prospectus Supplement stated that 25.32 percent of the underlying properties by loan count in the Supporting Loan Group 2 were not owner-occupied. But the data review revealed that, for 26.09 percent of the properties represented as owner-occupied, the owners lived elsewhere, indicating

59

that the true percentage of non-owner occupied properties was 44.80 percent, approximately 1.75 times the percentage reported in the Prospectus Supplement.11 132. The data review revealed that for each Securitization, the Prospectus Supplement

misrepresented the percentage of non-owner occupied properties. The true percentage of nonowner-occupied properties, as determined by the data review, versus the percentage stated in the Prospectus Supplement for each Securitization is reflected in Table 7 below. Table 7 demonstrates that the Prospectus Supplements for each Securitization understated the percentage of non-owner-occupied properties by at least 6.27 percent, and for nearly two-thirds of the Securitizations by 10 percent or more. Table 7
Transaction Supporting Loan Group Reported Percentage of NonOwner Occupied Properties Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-Owner Occupancy12 10.79 16.20 11.43 14.86 17.99 18.02 14.90 16.10 Actual Percentage of NonOwner Occupied Properties Prospectus Percentage Understate ment of NonOwner Occupied Properties 10.79 13.43 11.43 11.41 10.91 14.85 14.90 12.96

CWALT 2005-57CB CWALT 2005-63 CWALT 2005-67CB CWALT 2005-73CB CWALT 2005-80CB CWALT 2005-83CB CWALT 2005-84
11

Group 1 Group 1 Single-group transaction Group 2 Group 3 Group 4 Single-group transaction Group 2

0.00 17.10 0.00 23.21 39.35 17.56 0.00 19.51

10.79 30.53 11.43 34.62 50.26 32.41 14.90 32.47

This conclusion is arrived at by summing (a) the stated non-owner-occupied percentage in the Prospectus Supplement (here, 25.32 percent), and (b) the product of (i) the stated owneroccupied percentage (here, 74.68 percent) and (ii) the percentage of the properties represented as owner-occupied in the sample that showed strong indications that their owners in fact lived elsewhere (here, 26.09 percent). Strong indication is defined for purposes of this Complaint as failing two or more owner occupancy tests, as explained in paragraph 131.
12

60

Transaction

Supporting Loan Group

Reported Percentage of NonOwner Occupied Properties

CWALT 2005-85CB CWALT 2005-AR1 CWALT 2006-11CB CWALT 2006-14CB CWALT 2006-19CB CWALT 2006-23CB CWALT 2006-33CB CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC3 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007-OA10 CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006-HYB1 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14 CWL 2005-16 CWL 2005-17

Group 1 Group 1 Group 1 Single-group transaction Single-group transaction Group 1 Group 2 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 3 Group 2 Group 1 Group 2 Group 1 Group 3 Group 2

22.43 7.59 16.54 11.72 9.92 10.30 19.77 11.08 28.13 20.18 23.50 46.33 24.07 36.67 21.82 28.75 18.79 18.48 20.43 31.06 25.32 26.03 30.76 25.14 20.53 24.85 1.51 0.00 4.99 4.41 3.15 2.38 3.50 0.00

Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-Owner Occupancy12 15.80 9.68 17.72 14.50 14.95 13.06 16.31 12.33 17.54 12.17 10.88 13.91 16.52 16.92 14.23 13.85 13.88 14.84 16.63 21.94 26.09 24.68 22.01 18.48 11.36 18.87 12.48 11.51 10.09 11.82 10.36 7.74 10.26 11.64

Actual Percentage of NonOwner Occupied Properties

Prospectus Percentage Understate ment of NonOwner Occupied Properties 12.25 8.95 14.79 12.80 13.47 11.71 13.09 10.96 12.60 9.71 8.32 7.46 12.54 10.72 11.12 9.86 11.27 12.10 13.23 15.12 19.48 18.26 15.24 13.84 9.03 14.18 12.29 11.51 9.59 11.30 10.03 7.56 9.90 11.64

34.68 16.54 31.33 24.52 23.39 22.01 32.86 22.04 40.74 29.89 31.82 53.80 36.62 47.39 32.95 38.62 30.06 30.58 33.67 46.19 44.80 44.29 46.00 38.98 29.55 39.03 13.81 11.51 14.58 15.71 13.18 9.94 13.40 11.64

61

Transaction

Supporting Loan Group

Reported Percentage of NonOwner Occupied Properties

Group 3 CWL 2005-8 CWL 2005-9 CWL 2005-AB3 CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5 CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-14 CWL 2006-16 CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-2 CWL 2006-20 CWL 2006-21 CWL 2006-22 CWL 2006-23 CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 2 Group 2 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 1 Group 1

4.02 3.34 2.51 7.81 7.77 7.37 4.53 1.66 7.58 2.90 7.31 2.01 2.51 4.13 4.36 2.52 3.19 7.58 6.09 4.30 6.02 4.31 5.16 5.40 7.82 5.66 5.41 7.08 2.35 3.53 2.45 5.43 4.25 3.78 2.56

Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-Owner Occupancy12 13.73 12.23 12.84 14.27 14.27 14.34 10.25 14.02 9.09 10.47 11.08 9.98 10.93 10.98 10.90 12.09 11.61 10.93 10.43 10.86 12.56 11.31 10.67 11.37 10.42 10.39 11.92 10.64 9.63 9.35 10.46 10.48 9.33 9.14 8.93

Actual Percentage of NonOwner Occupied Properties

Prospectus Percentage Understate ment of NonOwner Occupied Properties 13.18 11.82 12.52 13.15 13.16 13.28 9.79 13.78 8.40 10.17 10.27 9.77 10.66 10.53 10.43 11.79 11.24 10.10 9.80 10.40 11.81 10.82 10.12 10.76 9.61 9.81 11.28 9.88 9.41 9.02 10.21 9.91 8.94 8.79 8.70

17.20 15.16 15.03 20.96 20.93 20.65 14.31 15.44 15.98 13.07 17.58 11.79 13.17 14.65 14.79 14.31 14.43 17.68 15.88 14.70 17.83 15.13 15.28 16.16 17.43 15.47 16.68 16.97 11.76 12.55 12.65 15.35 13.18 12.57 11.26

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Transaction

Supporting Loan Group

Reported Percentage of NonOwner Occupied Properties

CWL 2006-BC5 CWL 2007-1 CWL 2007-10 CWL 2007-11 CWL 2007-12 CWL 2007-13 CWL 2007-2 CWL 2007-3 CWL 2007-5 CWL 2007-6 CWL 2007-7 CWL 2007-8 CWL 2007-9 CWL 2007-BC1 CWL 2007-BC2 CWL 2007-BC3

Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1

2.38 4.78 3.61 3.29 5.11 4.05 7.48 8.24 9.73 6.10 9.45 3.72 4.91 4.56 6.74 9.90

Percentage of Properties Reported as OwnerOccupied With Strong Indication of Non-Owner Occupancy12 11.23 9.68 10.29 9.81 10.86 9.65 12.47 9.53 9.66 12.05 9.11 12.41 12.40 6.57 8.44 7.92

Actual Percentage of NonOwner Occupied Properties

Prospectus Percentage Understate ment of NonOwner Occupied Properties 10.96 9.21 9.92 9.49 10.30 9.26 11.54 8.74 8.72 11.32 8.25 11.95 11.79 6.27 7.87 7.14

13.34 14.00 13.53 12.78 15.41 13.31 19.02 16.99 18.45 17.42 17.70 15.67 16.70 10.83 14.60 17.04

2. 133.

Loan-to-Value Data Was Materially False

The data review has further revealed that the LTV ratios disclosed in the

Prospectus Supplements were materially false and understated as more specifically set out below. For each of the sampled loans, an industry standard automated valuation model (AVM) was used to calculate the value of the underlying property at the time the mortgage loan was originated. AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review and servicing. AVMs rely upon similar data as appraisers primarily county assessor records, tax rolls, and data on comparable properties. AVMs produce independent, statistically-derived valuation estimates by applying modeling techniques to this data.

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134.

Applying the AVM to the available data for the properties securing the sampled

loans shows that the appraised value given to such properties was significantly higher than the actual value of such properties. The result of this overstatement of property values is a material understatement of LTV. That is, if a propertys true value is significantly less than the value used in the loan underwriting, then the loan represents a significantly higher percentage of the propertys value. This, of course, increases the risk a borrower will not repay the loan as well as the risk of greater losses in the event of a default. Mortgage loans with higher loan-to-value ratios present a greater risk of loss than mortgage loans with loan-to-value ratios of 80 percent or below. 135. For example, for the CWALT 2007-OA10 Securitization, which was sponsored

by Countrywide Home Loans and underwritten by Countrywide Securities, the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above 100 percent. In fact, 26.25 percent of the sample of loans included in the data review had LTV ratios above 100 percent. In addition, the Prospectus Supplement stated that 81.69 percent of the loans had LTV ratios at or below 80 percent. The data review indicated that only 42.14 percent of the loans had LTV ratios at or below 80 percent. 136. The data review revealed that for each Securitization, the Prospectus Supplement

misrepresented the percentage of loans with an LTV ratio above 100 percent, as well as the percentage of loans that had an LTV ratio at or below 80 percent. Table 8 reflects (i) the true percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent, versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of mortgages in the Supporting Loan Group with LTV ratios at or below 80 percent, versus the

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percentage reported in the Prospectus Supplement. The percentages listed in Table 8 were calculated by aggregated principal balance. Table 8
PROSPECTUS Transaction Supporting Loan Group(s) Percentage of Loans Reported to Have LTV Ratio At Or Less Than 80 DATA REVIEW Percentage of Loans in Data Review With LTV Ratio At Or Less Than 80 PROSPECTUS Percentage of Loans Represented in Prospectus to Have LTV Ratio Over 100 DATA REVIEW Percentage of Loans in Data Review With LTV Ratio Over 100

CWALT 200557CB CWALT 2005-63 CWALT 200567CB CWALT 200573CB CWALT 200580CB CWALT 200583CB CWALT 2005-84 CWALT 200585CB CWALT 2005-AR1 CWALT 200611CB CWALT 200614CB CWALT 200619CB CWALT 200623CB CWALT 200633CB CWALT 2006OA14 CWALT 2006-OC1 CWALT 2006OC10 CWALT 2006OC11 CWALT 2006-OC3 CWALT 2006-OC4

Group 1 Group 1 Singlegroup transaction Group 2 Group 3 Group 4 Singlegroup transaction Group 2 Group 1 Group 1 Group 1 Singlegroup transaction Singlegroup transaction Group 1 Group 2 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1

87.26 88.73 85.83 90.70 78.89 88.10 88.06 90.80 90.56 99.09 91.37 94.73

57.31 51.63 56.13 64.85 48.30 50.78 51.38 52.12 64.75 45.06 62.65 62.99

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

3.98 5.76 4.91 6.97 9.98 8.16 8.30 6.56 5.02 6.97 6.65 6.76

93.34 90.60 90.23 96.60 92.22 94.75 89.61 92.05 92.09 92.63

67.91 64.28 58.73 69.90 48.39 48.06 44.53 47.12 43.72 50.29

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

5.34 5.69 7.75 3.17 11.93 7.59 14.34 14.18 8.35 7.87

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PROSPECTUS Transaction Supporting Loan Group(s) Percentage of Loans Reported to Have LTV Ratio At Or Less Than 80

DATA REVIEW Percentage of Loans in Data Review With LTV Ratio At Or Less Than 80

PROSPECTUS Percentage of Loans Represented in Prospectus to Have LTV Ratio Over 100

DATA REVIEW Percentage of Loans in Data Review With LTV Ratio Over 100

CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007OA10 CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006HYB1 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14

Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 3 Group 2 Group 1 Group 2 Group 1 Group 3 Group 2 Group 3 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 2 Group 2 Group 1 Group 2 Group 1 Group 1

93.97 88.51 85.61 87.48 91.47 92.52 87.31 81.69 85.81 71.37 95.06 96.56 55.80 47.70 66.49 58.90 61.93 70.02 69.38 70.73 71.77 61.35 90.93 38.27 57.85 54.46 62.95 73.00 67.67 63.09 61.09 66.62 64.04 58.85

44.62 46.33 49.39 47.75 63.09 56.72 62.86 42.14 48.89 33.93 52.70 53.46 38.29 38.27 48.98 41.70 45.43 55.75 48.15 45.96 47.71 42.42 63.66 23.22 31.99 35.58 45.37 46.46 42.05 44.07 40.62 43.87 45.48 31.33

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

8.53 10.91 13.38 7.78 8.36 9.35 7.58 26.25 14.48 24.50 2.97 6.14 15.23 14.55 11.20 14.25 12.36 8.17 10.15 10.16 12.23 13.34 5.94 22.96 13.04 14.54 12.33 9.94 9.69 9.89 17.87 14.40 13.02 17.58

CWL 2005-16

CWL 2005-17 CWL 2005-8 CWL 2005-9 CWL 2005-AB3 CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5 CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-14 CWL 2006-16

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PROSPECTUS Transaction Supporting Loan Group(s) Percentage of Loans Reported to Have LTV Ratio At Or Less Than 80

DATA REVIEW Percentage of Loans in Data Review With LTV Ratio At Or Less Than 80

PROSPECTUS Percentage of Loans Represented in Prospectus to Have LTV Ratio Over 100

DATA REVIEW Percentage of Loans in Data Review With LTV Ratio Over 100

CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-2 CWL 2006-20 CWL 2006-21 CWL 2006-22 CWL 2006-23 CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-1 CWL 2007-10 CWL 2007-11 CWL 2007-12 CWL 2007-13 CWL 2007-2 CWL 2007-3 CWL 2007-5 CWL 2007-6 CWL 2007-7 CWL 2007-8 CWL 2007-9 CWL 2007-BC1

Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 2 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1

62.95 63.15 61.32 63.55 59.83 63.28 62.53 50.04 55.15 49.52 51.88 65.74 74.72 67.88 65.25 60.78 63.41 58.37 54.52 62.50 66.48 56.64 55.26 60.53 62.32 61.06 69.15 52.22 48.78 44.97 59.09 53.60 60.62 60.00 62.12

44.35 44.46 39.05 45.68 44.40 44.63 42.10 36.57 33.49 36.62 35.10 44.82 47.58 43.81 42.09 37.48 46.40 40.94 34.63 45.22 49.06 42.07 39.12 44.60 41.58 42.46 48.11 36.25 31.52 28.56 43.37 41.42 44.94 43.17 36.97

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

14.66 15.18 15.53 11.48 15.32 15.01 16.98 15.29 17.37 18.16 17.55 11.96 10.10 14.62 15.11 14.28 12.02 14.83 18.03 14.71 14.96 15.18 21.11 17.94 18.41 20.05 17.38 20.19 24.33 25.78 18.76 20.05 17.26 18.99 18.96

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PROSPECTUS Transaction Supporting Loan Group(s) Percentage of Loans Reported to Have LTV Ratio At Or Less Than 80

DATA REVIEW Percentage of Loans in Data Review With LTV Ratio At Or Less Than 80

PROSPECTUS Percentage of Loans Represented in Prospectus to Have LTV Ratio Over 100

DATA REVIEW Percentage of Loans in Data Review With LTV Ratio Over 100

CWL 2007-BC2 CWL 2007-BC3

Group 1 Group 1

46.38 56.21

28.36 33.55

0.00 0.00

27.12 23.70

137.

As Table 8 demonstrates, the Prospectus Supplements for each Securitization

reported that none of the mortgage loans in the Supporting Loan Groups had an LTV ratio over 100 percent. In contrast, the data review revealed that at least 2.97 percent of the mortgage loans for each Securitization had an LTV ratio over 100 percent, and for most Securitizations this figure was much larger. Indeed, for 58 of the 86 Securitizations, the data review revealed that more than ten percent of the mortgages in the Supporting Loan Groups had a true LTV ratio of over 100 percent. For 33 Securitizations, the data review revealed that more than fifteen percent of the mortgages in the Supporting Loan Groups had a true LTV ratio over 100 percent. The Prospectus Supplements also routinely overstated the percentage of loans with LTV ratios of 80 percent or less in fact, for all but one Securitization, the difference between the representation in the Prospectus Supplement and the percentage revealed by the data review was over ten percent. 138. These inaccuracies with respect to reported LTV ratios also indicate that the

representations in the Registration Statements relating to appraisal practices were false, and that the appraisers themselves, in many instances, furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationship to the actual value of the underlying properties. Indeed, independent appraisers following proper practices, and providing genuine estimates as to valuation, would not systematically generate appraisals that deviate so

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significantly (and so consistently upward) from the true values of the appraised properties. This conclusion is further confirmed by the findings of the FCIC, which identified inflated appraisals as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See FCIC Report at 91. B. 139. Countrywide Systematically Disregarded Its Underwriting Guidelines A vast majority of the loans at issue in the Securitizations were stated in the

Registration Statements to have been originated in accordance with Countrywide Home Loans underwriting guidelines. Countrywide Home Loans originated, or acquired according to its own guidelines, all the mortgage loans in 62 of the 86 Securitizations. For these 62 Securitizations, no other originators than Countrywide Home Loans were identified. Prospectus Supplements for two of the Securitizations state that the sum total of loans acquired from other originators was less than ten percent. The Prospectus Supplements relating to approximately 22 more Securitizations identify at least one originator other than Countrywide Home Loans. Based on the Prospectus Supplements, however, it appears that no identifiable non-Countrywide Home Loans entity originated more than three percent of the total number of loans at issue in this Complaint. 140. The Registration Statements contained material misstatements and omissions

regarding compliance with underwriting guidelines. Indeed, Countrywide Home Loans systematically disregarded its underwriting guidelines during the relevant period in order to increase production and profits derived from its mortgage lending businesses. 141. This is confirmed by the systematically misreported owner-occupancy and LTV

statistics, discussed above, and by (1) government investigations into Countrywides underwriting practices, which have documented widespread abandonment of Countrywides

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reported underwriting guidelines during the relevant period; (2) information disclosed as a result of additional investigations and actions by state enforcement authorities and private actors; (3) the collapse of the Certificates credit ratings; and (4) the surge in delinquency and default in the mortgages in the Securitizations. 1. 142. Government Investigations Have Confirmed That Countrywide Routinely Failed to Adhere to Its Underwriting Guidelines

Numerous government reports and investigations have described rampant

underwriting failures at Countrywide throughout the period of the Securitizations. In addition, in the case of Countrywide, those reports and investigations have led to disclosures of admissions and acknowledgments made by top Countrywide executives of the abandonment of adherence to underwriting guidelines. Courts including the federal court that presided over a civil action brought by the SEC against Countrywides former leaders have found that allegations of Countrywides failure to comply with underwriting guidelines, and lack of diligence regarding the accuracy of representations made in registration statements relating to offerings of securitizations of mortgage loans, are facially valid and raise genuine issues of material fact. a. 143. Investigations and Actions of Federal Authorities

In November 2008, the Office of the Comptroller of the Currency, an office

within the United States Department of the Treasury, issued a report identifying Countrywide as one of the Worst Ten mortgage originators in the Worst Ten metropolitan areas. The worst originators were defined as those with the largest number of non-prime mortgage foreclosures for 2005-2007 originations. Countrywide, which the report defined to include Countrywide Home Loans and Countrywide Bank, another Countrywide origination entity, was on that list. See Press Release, Office of the Comptroller of the Currency, Comptroller Dugan Testifies before the FCIC, Appendix B, Attachment 2 at 1 (Apr. 8, 2010).

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144.

In January 2011, the FCIC issued its final report, which detailed, among other

things, the collapse of mortgage underwriting standards and subsequent collapse of the mortgage market and wider economy. Created to examine the causes of the current financial and economic crisis in the United States, the FCIC reviewed millions of pages of documents, interviewed more than 700 witnesses, and held 19 days of public hearings in New York, Washington, D.C., and communities across the country. FCIC Report at xi. The FCIC Report singled out Countrywide for its role, specifically identifying Countrywide in its summary discussions of the Reports conclusions about the systemic breakdown in accountability and ethics. Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities. As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in catastrophic consequences. Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in financial and reputational catastrophe for the firm. But they did not stop. Id. at xxii. 145. The SEC and the U.S. Department of Justice investigated potential securities law

violations by Countrywide and its personnel in the securitizations of mortgage loans and offerings of mortgage-backed securities in the secondary market, including allegations that Countrywide made false and misleading disclosures to influence the stock trading price, and allegations of insider trading by the three most senior executives of Countrywide Financial: Angelo Mozilo (Countrywides CEO), David Sambol (Countrywides President and COO), and Individual Defendant Eric Sieracki (Countrywides CFO). 146. On June 4, 2009, the SEC filed a complaint in the U.S. District Court for the

Central District of California against Mozilo, Sambol, and Sieracki for their fraudulent disclosures relating to Countrywides purported adherence to conservative loan origination and

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underwriting guidelines, as well as insider trading by Mozilo. See SEC Complaint. On September 16, 2010, the District Court rejected the defendants motion for summary judgment, finding that the SEC had raised genuine issues of fact as to, among other things, whether the defendants had misrepresented the quality of its underwriting processes. In its decision, the court stated: The SEC has presented evidence that these statements regarding the quality of Countrywides underwriting guidelines and loan production were misleading in light of Defendants failure to disclose, inter alia, that: (1) As a consequence of Countrywides matching strategy, Countrywides underwriting guidelines would end up as a composite of the most aggressive guidelines in the market . . . and (2) Countrywide routinely ignored its official underwriting guidelines, and in practice, Countrywides only criterion for approving a loan was whether the loan could be sold into the secondary market. For example, Countrywides Chief Risk Officer, John McMurray, explained in his deposition that Countrywide mixed and matched guidelines from various lenders in the industry, which resulted in Countrywides guidelines being a composite of the most aggressive guidelines in the industry . . . . SEC has also presented evidence that Countrywide routinely ignored its official underwriting to such an extent that Countrywide would underwrite any loan it could sell into the secondary mortgage market. According to the evidence presented by the SEC, Countrywide typically made four attempts to approve a loan. . . . As a result of this process, a significant portion (typically in excess of 20%) of Countrywides loans were issued as exceptions to its official underwriting guidelines. . . . In light of this evidence, a reasonable jury could conclude that Countrywide all but abandoned managing credit risk through its underwriting guidelines, that Countrywide would originate any loan it could sell, and therefore that the statements regarding the quality of Countrywides underwriting and loan production were misleading. SEC v. Mozilo, No. 09-03994, 2010 WL 3656068, at *10, 12-14 (C.D. Cal. Sept. 16, 2010) (hereinafter SEC Order). After this decision was rendered, Messrs. Mozilo, Sambol, and Sieracki settled with SEC, agreeing to pay substantial fines. See Press Release, SEC, Former

72

Countrywide CEO Angelo Mozilo to Pay SECs Largest Ever Financial Penalty Against a Public Companys Senior Executive (Oct. 15, 2010). 147. The matching strategy described in the Courts decision in the SEC action, by

which Countrywide mixed and matched the least demanding guideline requirements of other lenders, led Countrywide to deliberately abandon its guidelines and instead to apply the most lax underwriting guidelines in the market. The SECs allegations, based on information that came to light during discovery, were deemed to create a genuine issue of material fact that Countrywide, in its drive to increase market share, created an underwriting process in which repeated attempts were made to approve loans in circumvention of Countrywides established guidelines. SEC Order at *19. 148. First, loans were processed by an automated system that would either approve the

loan or refer it to manual underwriting. The manual underwriter would then seek to determine if the loan could be approved under his or her exception authority. If the loan exceeded the underwriters exception authority, it was then referred to the Structured Lending Desk, where underwriters with broader exception authority attempted to get the loan approved. Finally, if all prior attempts to find an exception failed, it would be referred to the Secondary Markets Structured Lending Desk, where the sole criterion for approving was whether it could be sold, not whether it complied with applicable guidelines. Id. at *11. These steps were what the court in the SEC action found to be Countrywides four attempts at approving a loan, a methodology that led to in excess of 20 percent of mortgage loans typically being approved as exceptions to Countrywides guidelines. Id. At one point, nearly a quarter of Countrywides subprime firstlien loans 23 percent were generated as exceptions. Id. at *17.

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149.

To apply its matching strategy effectively, Countrywide expanded the number

of employees who were authorized to grant exceptions. A wide range of employees were given authority to grant exceptions and to change the terms of a loan, including underwriters, their superiors, branch managers, and regional vice presidents. If Countrywides automated system recommended denying a loan, for example, an underwriter could override that denial by obtaining permission from his or her supervisor. SEC Complaint at 11-12. 150. The SEC action established that it was openly known at Countrywide that loans

were being approved for securitization based solely on Countrywides ability to sell the loan in the market, rather than on compliance with underwriting criteria. Countrywides high-volume computer system, called the Exception Processing System, was known to approve virtually every borrower and loan profile, albeit with a pricing add-on by which Countrywide charged the borrowers extra points and fees. The Exception Processing System was known within Countrywide as the Price Any Loan system. Through the Exception Processing System, Countrywide was able not only to generate enormous profits from these higher fees, but also routinely approve loans that did not satisfy even its weakened theoretical underwriting criteria. 151. According to a class action securities complaint against Countrywide, Amended

Complaint, In re Countrywide Financial Corp. Securities Litigation, No. CV-07-05295 (C.D. Calif. filed Jan. 6, 2009), a former supervising underwriter at Countrywide provided information that up to 15 percent or 20 percent of the loans that Countrywide generated were processed via the Exception Processing System, of which very few were ever rejected. Id. at 64. One former Countrywide employee, also referenced in the complaint, remarked that he could count on one finger the number of loans that his supervisors permitted him to reject as an underwriter with Countrywides Structured Loan Desks. Id. at 68.

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b. 152.

Admissions in Countrywides Internal Reporting and Emails

The SEC action also led to the disclosure of internal Countrywide reports and e-

mails among Countrywide employees that provide contemporaneous documentation of Countrywides routine failure to comply with its underwriting guidelines and abandonment of case-by-case determinations of the borrowers ability to repay the loan. 153. In November 2007, by which time Countrywide was learning of the poor

performance of its loans, Countrywide prepared a lessons learned analysis. See Exs. A-I to Declaration Of Randall S. Luskey in Support of David Sambols Motion In Limine No. 4 To Preclude Evidence Of Countrywides Lessons Learned Analysis, SEC v. Mozilo, No. 0903994, Docket Entry 391-1 (C.D. Cal., filed Sept. 24, 2010) (Luskey Decl.). In these quotes from this internal presentation, Countrywide repeatedly admits that its exclusive focus on market share led it to ignore underwriting guidelines:

We were driven by market share, and wouldnt say no (to guideline expansion). Ex. C at 9 to Luskey Decl. The strategies that could have avoided the situation were not very appealing at the time. Do not produce risky loans in the first place: This strategy would have hurt our production franchise and reduced earnings. Ex. D at 13 to Luskey Decl. Market share, size and dominance were driving themes. . . . Created huge upside in good times, but challenges in todays environment. Id. at 15.

154.

Countrywide also admitted that applying its matching strategy came at the price

of compliance with risk assessment procedures, including application of Countrywides underwriting guidelines. The Lessons Learned Analysis noted:

With riskier products, you need to be exquisite in off-loading the risk. This puts significant pressure on risk management. Our systems never caught up with the risks, or with the pace of change. Ex. D at 16 to Luskey Decl.

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Risk indicators and internal control systems may not have gotten enough attention in the institutional risk and Board committees. Id. at 13. Not enough people had an incentive to manage risk. Id. at 14. Decentralized and local decision making were another characteristic of our model. . . . The downside was fewer risk controls and less focus on risk, as the local decision makers were not directly measured on risk. Id. Our wide guidelines were not supported by the proper infrastructure (credit, risk management). Id. at 16. [W]e did not put meaningful boundaries around the [broad product] strategy, even when our instincts might have suggested that we do so, and we allowed the model to outrun its critical support infrastructure in investment and credit risk management. . . . Our risk management systems were not able to provide enough counterbalance . . . . Ex. E at 28 to Luskey Decl. The focus of production was volume and margin, not credit risk. There was also massive emphasis on share. Ex. I at 71 to Luskey Decl.

155.

Emails from CEO Mozilo himself admitted Countrywides lack of compliance

with its own underwriting guidelines. See Ex. 28 at 1 to Declaration of Lynn M. Dean in Support of Plaintiff Securities and Exchange Commissions Opposition to Defendants Motion for Summary Judgment or Adjudication (Dean Decl.): Part 4, SEC v. Mozilo, No. 09-03994, Docket Entry 230-2 (C.D. Cal., filed Aug. 16, 2010). In early 2006, HSBC, the global bank based in London, had begun to contractually force Countrywide to buy back loans that did not comply with underwriting guidelines. In an April 13, 2006 e-mail, Mr. Mozilo wrote to Mr. Sieracki and others that he was concerned that his company had originated the HSBC loans with serious disregard for process [and] compliance with guidelines, resulting in the delivery of loans with deficient documentation. Ex. 16 at 2 to Dean Decl.: Part 3, SEC v. Mozilo, No. 09-03994, Docket Entry 227-5 (C.D. Cal., filed Aug. 16, 2010). Mr. Mozilo further stated that,

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I have personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan[s]. Id. 156. According to the SEC, in mid-2006 attendees at an internal Countrywide credit

meeting were informed that one-third of the loans referred out of Countrywides automated underwriting system violated major underwriting guidelines, 23 percent of the subprime firstlien loans were generated as exceptions, and that exception loans were performing 2.8 times worse than loans written within guidelines. As the court presiding over the SEC action noted, the circumstance that the loans approved by exceptions were performing so much worse than other similar loans is itself strong evidence that the exceptions were not being granted based on any purported countervailing circumstances in the borrowers credit profile. SEC Order at *12. 157. Nearly a year later, on May 29, 2007, Messrs. Sambol and Sieracki attended a

Credit Risk Committee Meeting, in which they learned that loans continue[d] to be originated outside guidelines, primarily via the Secondary Structured Lending Desk without formal guidance or governance surrounding the approvals. Id. at *17. 158. The SEC complaint also described a December 13, 2007 internal memo from

Countrywides enterprise risk assessment officer to Mr. Mozilo, in which the officer reported that Countrywide had re-reviewed mortgages originated by Countrywide in 2006 and 2007 to get a sense of the quality of file documentation and underwriting practices, and to assess compliance with internal policies and procedures. The memo concluded that borrower repayment capacity was not adequately assessed by the bank during the underwriting process for home equity loans. SEC Complaint at 23.

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159.

Ultimately, Countrywides exception policy was designed to ensure that all loans

were approved. For example, in an April 14, 2005 e-mail chain, various managing directors were discussing what FICO scores Countrywide would accept. One Managing Director wrote that the spirit of the exception policy was to provide flexibility and authority to attempt to approve all loans submitted under an approved program/guideline which are later determined to be outside. He continued: I would argue that the [exception] policy would also contemplate more general exceptions such as . . . to keep pace with fast changing markets prior to submitting a formal product change. Ex. 213 to Declaration Of John M. McCoy III in Support of SECs Opposition To Defendants Motions For Summary Judgment Or Adjudication (McCoy Decl.), Part 1, SEC v. Mozilo, No. 09-03994, Docket Entry 253 (C.D. Cal., filed Aug. 16, 2010). 160. Another internal Countrywide document described the objectives of

Countrywides Exception Processing System to include [a]pprov[ing] virtually every borrower and loan profile, with pricing add on (i.e., additional fees to be charged by Countrywide). The objectives also included providing [p]rocess and price exceptions on standard products for high risk borrowers. See Ex. C to Sentencing Memorandum by Kourosh Partow, United States v. Partow, No. 06-cr-00104, Docket Entry 39 (D. Alaska, filed Aug. 16, 2007). In his testimony in the SEC proceeding, Mr. Sambol identified a February 13, 2005 e-mail in which he stated that the purpose of the [Structured Loan Desk] and our pricing philosophy should be expanded. Mr. Sambol wrote, [W]e should be willing to price virtually any loan that we reasonably believe we can sell/securitize without losing money, even if other lenders cant or wont do the deal. Ex. 276 at 50 to McCoy Decl. c. 161. Deposition Testimony of Countrywides Top Executives

The SEC also annexed to court filings the deposition testimony given by

Countrywides former executives in the civil action. In the testimony, Countrywides top

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executives conceded that Countrywide stopped ensuring compliance with underwriting guidelines as a consequence of attempting to out-do its competitors in increasing its volume of mortgage-backed securitizations. 162. For instance, in his testimony, John McMurray, Countrywides Chief Risk

Officer, admitted that the matching strategy was a corporate principle and practice that had a profound effect on credit policy. Investigative Testimony Relied Upon in Plaintiff SECs Opposition to Defendants Motion for Summary Judgment: Witness John McMurray, SEC v. Mozilo, No. 09-03994, Docket Entry 290, at 80 (C.D. Cal., filed Aug. 16, 2010) (McMurray Investigative Testimony). He testified that it was indeed not possible to understand Countrywides underwriting policies without knowing of and understanding the matching strategy, and that the strategy was rolled out by use of the exception desks. Id. at 81-83. He also testified that exceptions were being made without determinations that sufficient compensating factors existed. Id. at 101-02. 163. Mr. McMurray conceded that the use of exceptions, even as a general matter, was

associated with higher risk of poor loan performance: [a]lmost by definition, you are dealing with a riskier transaction when the loan is approved by an exception, and in fact there were areas in which his group found a big disparity in performance between exception loans and others. Id. at 25, 87. 164. Mr. McMurray also testified that there were composite negative effects of

Countrywides matching strategy. Ex. 266 to McCoy Decl. He explained that when Countrywide matched the guidelines of different lenders on separate products, the match would be more aggressive than either one of those competitor reference points viewed in isolation. Id. at 133-34. Mr. McMurray was concerned that Countrywides competitors imposed additional

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requirements for their loan products not factored into Countrywides system, such as credit history requirements. These standards might enable competitors to use their products safely, whereas Countrywide could be ceding our credit policy to the most aggressive players in the market. Id. at 151-52. 165. The testimony of Frank Aguilera, a Managing Director responsible for risk

management, established that Countrywide even created a large database of products offered by competitors so Countrywide personnel could check the database when a new product was proposed, to see if a competitor had already approved the product. Investigative Testimony Relied Upon in Plaintiff SECs Opposition to Defendants Motions for Summary Judgment: Witness Frank Aguilera, SEC v. Mozilo, No. 09-03994, Docket Entry 219 at 5-7 (C.D. Cal., filed Aug. 16, 2010). Mr. Aguilera also confirmed that the matching strategy was implemented through Countrywides exception processes. Id. at 10. Indeed, Mr. Aguilera testified that 90 percent of his time as the person responsible for Countrywides technical manuals was spent on expansions of the guidelines. Ex. 236 at 40:7 to McCoy Decl. 166. Mr. Aguilera also authored an e-mail regarding the particularly alarming results

of an internal review on June 12, 2006. He reported to others in Countrywide that 23 percent of the subprime loans at the time were generated as exceptions, even taking into account all guidelines, published and not published, approved and not yet approved. Ex. 217 to McCoy Decl. Mr. Aguilera wrote at the time that [t]he results speak towards our inability to adequately impose and monitor controls on production operations. Id. 167. In February 21, 2007 Mr. Aguilera disputed a belief expressed in a prior meeting

that there were adequate controls with regard to exceptions, and stressed that the guidelines were meaningless when so many exceptions were being granted: Our review of January data

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suggests that these controls need to be reviewed. Any Guideline tightening should be considered purely optics with little change in overall execution unless these exceptions can be contained. Ex. 86 to Dean Decl. As an example, Mr. Aguilera provided data on loans that were approved as exceptions despite having high loan-to-value ratios. He found significant levels of exceptions under all high risk programs. Id. 168. In his testimony, CEO Mozilo admitted that Countrywides practice of matching

competitors heightened the risk that the loans would perform poorly. He stated: if the only reason why you offered a product, without any other thought, any other study, any other actuarial work being done is because someone else was doing it, thats a dangerous game to play. Testimony of Angelo Mozilo, SEC Investigation, at 157 (Aug. 8, 2008). 169. Nathan Adler, the President of many of the Depositor Defendants here and also an

Individual Defendant in this action, testified that at Countrywide, the application of guidelines was wholly secondary to selling the loan. He testified that Countrywides exception policy had core guidelines. Deposition Testimony Relied Upon in Plaintiff SECs Opposition to Defendants Motions for Summary Judgment: Witness Nathan Joshua Adler, SEC v. Mozilo, No. 09-03994, Docket Entry 237 at 2 (C.D. Cal., filed Aug. 16, 2010). If those were not met, the company applied what he termed shadow guidelines. Id. If even the shadow guidelines were not met, the loans were given to Secondary Marketing to determine if the loan could be sold given the exception that was being asked for. Id. at 3. Thus, Mr. Adler conceded, saleability was a factor in the determination of whether to make a loan on an exception basis. Id. 2. Actions Brought by State Enforcement Authorities and Private Litigants Have Corroborated that Countrywide Systematically Failed to Adhere to Its Underwriting Guidelines

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170.

Countrywides systematic failure to adhere to its underwriting guidelines,

resulting in the material misstatements in the Registration Statements, has also been revealed in a substantial number of investigations and suits brought by State enforcement authorities and in private suits. Like the SEC, a number of state attorneys general have investigated Countrywides lending practices and commenced enforcement actions in which they have alleged that Countrywide abandoned its underwriting guidelines, which were intended to ensure borrowers ability to repay their loans. Countrywide also faces substantial civil litigation brought by private parties and alleging that Countrywides lending practices were deficient and fraudulent. After initially vowing to fight these cases, Countrywides successor, Bank of America, recently has begun entering into settlements, obligating it to pay the billions of dollars in liabilities arising from Countrywides routinely deficient origination of mortgage loans bound for securitizations like the Securitization at issue here. a. 171. State Enforcement Actions

In People of the State of California v. Countrywide Financial Corp. et al., the

Attorney General for the State of California filed a civil action on behalf of Countrywide borrowers in California against Countrywide and its senior executives, asserting statutory claims for false advertising and unfair competition based on a plan to increase the volume of mortgage loans for securitization without regard to borrower creditworthiness. Complaint, California v. Countrywide Financial Corp. et al., No. LC081846 (Cal Super., L.A. County, filed June 24, 2008). 172. In People of the State of Illinois v. Countrywide Financial Corp. et al., the

Attorney General for the State of Illinois filed a civil suit on behalf of Illinois borrowers against Countrywide and Mozilo, asserting state consumer protection and unfair competition statutory claims, alleging that beginning in or around 2004, Countrywide engaged in unfair and deceptive

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practices, including loosening underwriting standards, structuring unfair loan products with risky features, and engaging in misleading marketing and sales practices. Complaint, Illinois v. Countrywide Financial Corp. et al., No. 08CH22994 (Ill. Cir. Ct. Ch. Div., Cook County, filed June 25, 2008). 173. In State of Connecticut v. Countrywide Financial Corp. et al., the Connecticut

Insurance Commissioner commenced a civil action asserting that Countrywide violated state unfair and deceptive practices law by deceiving consumers into obtaining mortgage loans for which they were not suited and could not afford. Complaint, Connecticut v. Countrywide Financial Corp. et al., No. 1207 (Conn. Super., Hartford, filed July 28, 2008). 174. In Office of the Attorney General for the State of Florida v. Countrywide

Financial Corp. et al., the Florida Attorney General commenced a civil action against Countrywide and Mozilo, asserting state unfair practices statutory claims, and alleging that since January 2004, Countrywide promoted a scheme to originate subprime mortgage loans to unqualified borrowers, and relatedly engaged in securities law violations. The Attorney General alleges that Countrywide violated state statutory lender laws by falsely representing that Countrywide originated each mortgage loan in accordance with its underwriting guidelines and that each borrower had the ability to repay the mortgage loan. Complaint, Florida v. Countrywide Financial Corp. et al., No. 08 30105 (Fla. Cir. Ct. 17th Judicial Circuit, filed June 30, 2008). 175. In State of Indiana v. Countrywide Financial Corp. et al., the State of Indiana

filed a civil action asserting that Countrywide violated the states unfair and deceptive practices law from 2005 through 2008 by deceiving consumers into obtaining mortgage loans for which they were not suited and could not afford. Complaint, State of Indiana, County of Steuben v.

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Countrywide Financial Corp. et al., No. 76C01-0808-PL-0952 (Ind. Cir. Ct., filed Aug. 22, 2008). 176. On October 6, 2008, these states, plus 23 others, all joined in a settlement with

Bank of America, pursuant to which Bank of America (as the successor-in-interest to the Countrywide Defendants) agreed to pay $150 million for state foreclosure relief programs and loan modifications for borrowers totaling $8.4 billion. See Press Release, Securities and Exchange Commission, Bank of America Agrees in Principle to ARS Settlement (Oct. 8, 2008). b. 177. Civil Litigation and Settlements

On June 28, 2011, Bank of America announced an $8.5 billion proposed

settlement with Bank of New York Mellon (BoNY), as Trustee for trusts established in Countrywide-sponsored securitizations of mortgage-backed securities. The proposed settlement applies to claims that could be brought by BoNY, on behalf of major institutional investors, in connection with 530 securitizations of mortgage-backed securities that were underwritten by Countrywide, in the same time period relevant here. Investors claimed that units of Countrywide Financial failed to honor contracts obligating it to repurchase over $400 billion dollars worth of loans that had been originated in violation of underwriting guidelines and thus failed to live up to the represented quality. Under the proposed settlement, Bank of America is responsible for payment of the $8.5 billion settlement, indemnification of the Trustee, and payment of $85 million in legal fees to counsel for the group of investors that negotiated the settlement. See Press Release, Bank of America, Bank of America Announces Agreement on Legacy Countrywide Mortgage Repurchase and Servicing Claims (June 29, 2011). 178. The settlement was widely reported to be Bank of Americas recognition of the

lingering and poisonous issues created by the deficient lending practices of Countrywide for its acquirer, Bank of America. The New York Times, for example, reported in an article published

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on June 29, 2011, that the settlement represents a major acknowledgment of just how flawed the
mortgage process became in the giddy years leading up to the financial crisis of 2008, typified by the excesses at Countrywide Financial, the subprime mortgage lender Bank of America acquired in 2008. CEO Brian Moynihan, who had vowed in November 2010 to engage in hand to hand

combat in litigation arising from Countrywides securitizations of mortgage-backed securities, see Hugh Son & David Mildenberg, Bank of America in Hand-to-Hand Combat Over Mortgage Disputes, CEO Says, Bloomberg (Nov. 16, 2010), conceded in announcing the BoNY settlement that cleaning up Countrywides mortgage issues had become a paramount objective. Press Release, Bank of America, Bank of America Announces Agreement on Legacy Countrywide Mortgage Repurchase and Servicing Claims (June 29, 2011) (This is another important step we are taking in the interest of our shareholders to minimize the impact of future economic uncertainty and put legacy issues behind us . . . . We will continue to act aggressively, and in the best interest of our shareholders, to clean up the mortgage issues largely stemming from our purchase of Countrywide.). 179. Multiple other investors in Countrywide-issued securities have filed suits against

Countrywide for misrepresentations relating to its origination practices and the credit quality of the loans it originated from 2004 to early 2008. Indeed, as Countrywide noted in its motion to consolidate many of these cases in a federal multidistrict litigation, the actions include twelve securities disclosure cases currently pending around the country in connection with equity, debt, and mortgage-backed securities issued by Countrywide or its subsidiaries, the allegations of which include that Countrywide abandoned its loan underwriting standards, that Countrywide made exceptions to its underwriting standards without determining whether compensating factors offset the increased credit risk, and that Countrywide ignored borrowers ability to repay their

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loans. See In re Countrywide Financial Corp. Sec. Litig. Cases, MDL Docket No. 11-59 (C.D. Cal., filed May 23, 2011). 180. The monoline insurers hired by Countrywide to provide financial guaranty

insurance for Countrywide-sponsored securitizations are among those suing Countrywide and Bank of America, its successor. MBIA Insurance Corporation (MBIA) and Syncora Insurance Company (Syncora) have alleged that Countrywide and Bank of America induced them to provide insurance for the securitizations based on false representations and warranties about the quality of the loans originated by Countrywide, and in particular, Countrywides adherence to its own underwriting guidelines. MBIA and Syncora, who gained access to the origination files for the loans underlying the securitizations for which they provided insurance, have publicized in court filings the result of their analyses of those origination files. Their analyses show that Countrywide systematically failed to comply with its stated underwriting guidelines when originating mortgage loans intended for securitization. 181. After paying over $1.4 billion dollars in claims to investors in fifteen

Countrywide-sponsored securitizations because of the poor performance of the underlying Countrywide-originated mortgage loans, MBIA obtained and reviewed nearly five thousand loan origination files for the defaulted and delinquent loans among the tens of thousands of loans in the pools backing the securitizations. MBIAs analysis found an extraordinarily high incidence of material deviations from the underwriting guidelines Countrywide represented it would follow. See Amended Complaint, MBIA Ins. Corp. v. Countrywide et al., No. 602825/08, Docket Entry No. 9 at *24 (Sup. Ct. N.Y. County filed Aug. 24, 2009). 182. The trial court deemed MBIAs claims of fraud and breach of contract sufficient

to withstand a motion to dismiss, a decision that was affirmed on appeal. According to MBIA,

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91 percent of the defaulted or delinquent loans in the pools contained these material deviations. As described in the complaint, the loan applications frequently (i) lack key documentation, such as verification of borrower assets or income; (ii) include an invalid or incomplete appraisal; (iii) demonstrate fraud by the borrower on the face of the application; or (iv) reflect that any of borrower income, FICO score, debt, DTI [debt-to-income,] or CLTV [combined loan-to-value] ratios, fails to meet stated Countrywide guidelines (without any permissible exception). Id. at 24. The defective loans covered Countrywides securitizations from 2004 to 2007, encompassing the same time period that the loans in this case were originated and securitized by Countrywide. 183. Syncora conducted a similar re-review of defaulted loans underlying two

Countrywide-sponsored securitizations that it insured in 2005 and 2006, based on loan origination files it was able to obtain through exercise of contractual rights. Syncora found that 75 percent of the loans it reviewed were . . . materially in breach of Countrywides representations and warranties, representing over $187 million in defective loans. Complaint, Syncora Guarantee Inc. v. Countrywide Home Loans et al., No. 650042/09, at 38 (Sup. Ct. N.Y. County, filed Jan. 28, 2009). The trial court denied Countrywides motion to dismiss Syncoras fraud claims. Syncora Guarantee Inc. v. Countrywide Home Loans, No. 650042/20 (Sup. Ct. N.Y. County Apr. 2, 2010). Through additional information gained in discovery, Syncora identified more than 2,700 loans that were underwritten in violation of Countrywides own lending guidelines, lack any compensating factors that could justify their increased risk, and should never have been made. Amended Complaint, Syncora Guarantee Inc. v. Countrywide Home Loans et al., No. 650042/09, at 6 (Sup. Ct. N.Y. County, filed May 6, 2010).

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184.

Many of the loans, according to Syncora, had DTI and LTV ratios that exceeded

limits set forth in Countrywides underwriting guidelines, without adequate compensating factors to justify the increased risk of default. Loan amounts routinely exceeded the maximum amounts permitted under Countrywides guidelines based on a borrowers credit score, documentation, and the value of the mortgaged property. Syncora found that Countrywide also improperly issued loans to borrowers when their loan files lacked adequate documentation of borrowers income, assets, credit, employment, cash reserves, or property values. Id. at 39-43. Syncora also found that, despite a representation that all loans would be apprised by an independent thirdparty appraiser, the vast majority of appraisals were performed by a Countrywide affiliate, LandSafe, Inc. (LandSafe); and Syncoras review of non-performing loans revealed that LandSafe appraisers consistently and significantly exceeded contemporaneous sale prices for comparable properties in the same location, artificially reducing CLTV ratios. Id. at 43-44. 185. Former Countrywide employees have also stated that Countrywide was not

following its underwriting guidelines insofar as those guidelines represented that independent appraisals, sufficient to assess the adequacy of the collateral underlying the loans, had been carried out. 186. Mark Zachary, a former Regional Vice President of Countrywide, informed

Countrywide executives in 2006 that in the case of appraisals performed on properties built by national home manufacturer KB Home and purchased with mortgage loans originated by Countrywide, appraisers were strongly encouraged to inflate appraisal values by as much as six percent to allow homeowners to roll up all closing costs. According to Mr. Zachary, Countrywide executives had knowledge of this practice, which also resulted in borrowers being

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duped as to the true values of their homes. Complaint, Capitol West Appraisals v. Countrywide Financial Corp., No. 2:08-cv-01520-RAJ (W.D. Wash., filed Dec. 15, 2008). 187. Mr. Zacharys claims have been echoed by allegations made in lawsuits related to

Countrywides appraisal practices. According to Capitol West Appraisals, LLC, a company that has provided real estate appraisals to mortgage brokers and lenders since 2005, and is a review appraiser for many major mortgage lenders, Countrywide Financial and Countrywide Home Loans engaged in a pattern and practice of pressuring even non-affiliated, purportedly independent real estate appraisers to increase appraisal values artificially for properties underlying mortgages Countrywide Home Loans originated. Capitol West has sued, among others, Countrywide Financial and Countrywide Home Loans, alleging that Countrywide Home Loans officers sought to pressure Capitol West to increase appraisal values in three loan transactions. Capitol West has alleged that Countrywide Home Loans retaliated against it when it refused to vary the appraisal values from what it independently determined was appropriate. 188. In particular, according to Capitol West, from at least 2004, and continuing

through at least 2007, Countrywide Home Loans maintained a database titled the Field Review List containing the names of appraisers whose reports Countrywide Home Loans would not accept unless the mortgage broker also submitted a report from a second appraiser. Countrywide Home Loans placed Capitol West on the Field Review List, according to Capitol West, after Capitol West refused to buckle under the pressure to inflate the value of the properties. 189. Countrywide Home Loans created additional procedures to further enforce its

blacklisting of uncooperative appraisers like Capitol West for instance, subjecting properties appraised by an appraiser on the Field Review List to an additional review by its wholly-owned subsidiary, LandSafe. LandSafe then issued another appraisal for the subject designed to shoot

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holes in the appraisal performed by the blacklisted appraiser such that the mortgage transaction could not close based on that appraisal. According to Capitol West, LandSafe found defects in the appraisal from the blacklisted appraiser even if another (and non-blacklisted) appraiser appraised the underlying property at the same value. 190. Capitol West has alleged that given Countrywides significant mortgage lending

business and likelihood that it would be the ultimate lender, brokers had a strong incentive to refrain from using a blacklisted appraiser. 191. Additionally, as the FCIC has confirmed, mortgage loan originators throughout

the industry pressured appraisers, during the period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially when the originators intended to sell the mortgages for securitization. This resulted in lower LTV ratios, discussed above, which in turn made the loans appear to the investors less risky than they were. 192. As described by Patricia Lindsay, a former wholesale lender who testified before

the FCIC in April 2010, appraisers fear[ed] for their livelihoods, and therefore cherry-picked data that would help support the needed value rather than finding the best comparables to come up with the most accurate value. See Written Testimony of Patricia Lindsay to the FCIC, Apr. 7, 2010, at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his testimony that [i]n many cases, appraisers are ordered or severely pressured to doctor their reports and to convey a particular, higher value for a property, or else never see work from those parties again . [T]oo often state licensed and certified appraisers are forced into making a Hobsons Choice. See Testimony of Jim Amorin to the FCIC, Apr. 23, 2009, at 5, available at www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRA-

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NAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers systematically abandoned applicable guidelines and over-valued properties in order to facilitate the issuance of mortgages that could then be collateralized into mortgage-backed securitizations. 3. The Collapse of the GSE Certificates Credit Ratings Further Indicates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines

193.

The total collapse in the credit ratings of the GSE Certificates, typically from

AAA or its equivalent to non-investment speculative grade in many instances is further evidence of the originators systematic disregard of underwriting guidelines, amplifying that the GSE Certificates were impaired from the start. 194. Almost all of the GSE Certificates that Fannie Mae and Freddie Mac purchased

were originally assigned credit ratings of AAA or its equivalent, which purportedly reflected the description of the mortgage loan collateral and underwriting practices set forth in the Registration Statements. These ratings were artificially inflated, however, as a result of the very same misrepresentations that the Defendants made to investors in the Prospectus Supplements. 195. Countrywide provided or caused to be provided loan-level information to the

rating agencies that they relied upon in order to calculate the Certificates assigned ratings, including the borrowers LTV ratio, debt-to income ratio, owner-occupancy status, and other loan-level information described in aggregation reports in the Prospectus Supplements. Because the information that Countrywide provided or caused to be provided was false, the ratings were inflated and the level of subordination that the rating agencies required for the sale of the GSE Certificates was inadequate to provide investors with the level of protection that those ratings signified. As a result, the GSEs paid Defendants inflated prices for purported investment grade Certificates, unaware that those Certificates actually carried a severe risk of loss and carried inadequate credit enhancement.

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196.

Since the issuance of the Certificates, the ratings agencies have dramatically

downgraded their ratings to reflect the revelations regarding the true underwriting practices used to originate the mortgage loans, and the true value and credit quality of the mortgage loans. Table 9 details the extent of the downgrades.13 Table 9
Transaction CWALT 2005-57CB CWALT 2005-63 CWALT 2005-67CB CWALT 2005-73CB CWALT 2005-80CB CWALT 2005-83CB CWALT 2005-84 CWALT 2005-85CB CWALT 2005-AR1 CWALT 2006-11CB CWALT 2006-14CB CWALT 2006-19CB CWALT 2006-23CB CWALT 2006-33CB CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC3 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 Tranche 1A1 1A1 A1 2A2 3A1 4A1 A1 A2 2A1 1A1 1A 1A1 A1 A6 A11 A30 1A7 2A1 2A1 1A1 1A1 1A 1A 1A1 1A 1A 1A Rating at Issuance (Moodys/S&P/Fitch) Aaa/---/AAA Aaa/AAA/--Aaa/---/AAA Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/---/AAA Aaa/---/AAA Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/---/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/AAA/AAA Aaa/---/AAA Aaa/---/AAA Aaa/---/AAA Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Rating as of July 31, 2011 (Moodys/S&P/Fitch) Caa2/---/C Caa3/CCC/--Caa2/---/CC Caa3/CCC/--Ca/D/--Ca/D/--Caa2/---/CC C/---/D Ca/D/--Caa3/CCC/--Ca/D/--Ca/---/D Caa2/B-/CC C/D/D Caa2/CCC/CC C/CC/C Caa3/---/D Ca/---/D Caa3/---/C Ca/B-/--Caa3/CCC/--Ca/D/--Ca/D/--Ca/CC/--Ca/D/--Ca/D/--Ca/D/---

Applicable ratings are shown in sequential order separated by forward slashes: Moodys/S&P/Fitch. A hyphen between forward slashes indicates that the relevant agency did not provide a rating at issuance.

13

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Transaction CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007-OA10 CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006-HYB1 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14 CWL 2005-16 CWL 2005-17 CWL 2005-8 CWL 2005-9 CWL 2005-AB3 CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5

Tranche 1A 1A1 2A3 1A 2A 1A1 1A2 2A1 1A1 2A1 1A1 2AV1 3A 2AV1 1A1 2A1 1AF 3AV 2AV 3AV1 1A1 1A1 1A1 1A 1A1 1A 2A1 2A2

Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/--Aaa/AAA/--Aaa/AAA/AAA Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/AAA Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/-----/AAA/AAA Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/---

Rating as of July 31, 2011 (Moodys/S&P/Fitch) Ca/D/--Caa3/D/--Ca/D/D Ca/D/--Ca/D/--Caa3/CCC/--Aa3/AA+/--Caa3/CCC/CC Caa3/CCC/--Ca/CCC/--Ca/CCC/--Aa1/AAA/--Baa1/AAA/--B2/B/--B1/BB+/--Ba3/BBB/--Caa2/CCC/--B1/BBB/--Caa2/CCC/--B1/BB/--Aa1/AAA/-----/AAA/CCC Caa3/AA/--Caa3/CCC/--Ca/CCC/--A2/AAA/--Baa2/AA/--Baa3/AA/--Caa3/CCC/--Caa3/CCC/--Caa3/CCC/--Caa2/CCC/--Caa2/CCC/--Caa3/B-/--Caa2/BB-/--Caa2/BB-/--Caa2/BB+/--Caa1/A/--Caa3/B+/--Caa3/B+/---

CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-14 CWL 2006-16 CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-2 CWL 2006-20 CWL 2006-21

2AV 2AV 1A 2AV 1A 1A 1A 1A 1A 1A1 1A 1A

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Transaction CWL 2006-22 CWL 2006-23 CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-1 CWL 2007-10

Tranche 1A 1A 1A 1A 1A 1A 1A1 1A 1A1 1A 1A 2AV 1A 1A 1A 1A 1A 1A1 1A2 1M1 1M2 1M3

Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aa1/AA+/--Aa2/AA/--Aa3/AA-/--Aa1/AA+/--Aa2/AA/--Aa3/AA-/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aa1/AA+/--Aaa/AAA/--Aa1/AA+/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/--Aaa/AAA/---

Rating as of July 31, 2011 (Moodys/S&P/Fitch) Caa3/CCC/--Caa3/CCC/--Caa3/CCC/--Caa3/CCC/--Caa3/CCC/--B1/AA+/--Caa2/BBB-/--Caa2/BBB/--Caa2/BB/--Caa3/B-/--Caa2/B/--Caa3/B-/--B1/AA/--Ba2/BB-/--Caa3/BB/--Ca/CCC/--Caa3/B-/--Caa3/CCC/--Ca/CCC/--C/CCC/--C/CCC/--C/CCC/--C/CCC/--C/CCC/--C/CCC/--Caa3/CCC/--Ca/CCC/--Caa2/CCC/--C/CCC/--C/CCC/--Caa3/CCC/--C/CCC/--Caa3/B-/--Caa3/BB/--Ca/CCC/--Caa3/CCC/--Ca/B/--Caa3/BBB/--C/BB/--Ca/B/---

CWL 2007-11

1M1 1M2 1M3 1A1 1A2

CWL 2007-12

1A1 1A2 1M1

CWL 2007-13 CWL 2007-2 CWL 2007-3 CWL 2007-5 CWL 2007-6 CWL 2007-7 CWL 2007-8 CWL 2007-9

1A 1M1 1A 1A 1A 1A 1A 1A1 1A2 1A

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Transaction CWL 2007-BC1 CWL 2007-BC2 CWL 2007-BC3

Tranche 1A 1A 1A

Rating at Issuance (Moodys/S&P/Fitch) Aaa/AAA/--Aaa/AAA/--Aaa/AAA/---

Rating as of July 31, 2011 (Moodys/S&P/Fitch) Ca/B-/--Ca/CCC/--Ca/B-/---

4.

The Surge in Mortgage Delinquency and Default Further Demonstrates that the Mortgage Loans Were Not Originated in Adherence to the Stated Underwriting Guidelines

197.

Even though the Certificates purchased by Fannie Mae and Freddie Mac were

supposed to represent long-term, stable investments, a staggering percentage of the mortgage loans backing the Certificates frequently over half of the supporting loan group have defaulted, have been foreclosed upon, or are delinquent, resulting in massive losses to the Certificateholders. The overall poor performance of the mortgage loans is a direct consequence of the fact that they were not underwritten in accordance with applicable underwriting guidelines as represented in the Registration Statements. 198. Loan groups that were properly underwritten and contained loans with the

characteristics represented in the Registration Statements would have experienced substantially fewer payment problems and substantially lower percentages of defaults, foreclosures, and delinquencies than occurred here. Table 10 reflects the percentage of loans in the Supporting Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011. Table 10
Transaction Supporting Loan Group(s) Loan Group 1 Loan Group 1 Single-group transaction Loan Group 2 Loan Group 3 Loan Group 4 CWALT 2005-83CB Single-group transaction Percentage of Delinquent/Defaulted/Foreclosed Loans 20.6 39.6 17.2 28.6 48.7 39.5 27.3

CWALT 2005-57CB CWALT 2005-63 CWALT 2005-67CB CWALT 2005-73CB CWALT 2005-80CB

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Transaction

Supporting Loan Group(s) Loan Group 2 Loan Group 1 Loan Group 1 Loan Group 1 Single-group transaction Single-group transaction Loan Group 1 Loan Group 2 Loan Group 2 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 2 Loan Group 3 Loan Group 2 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 3 Loan Group 2 Loan Group 3 Loan Group 1 Loan Group 1 Loan Group 1

CWALT 2005-84 CWALT 2005-85CB CWALT 2005-AR1 CWALT 2006-11CB CWALT 2006-14CB CWALT 2006-19CB CWALT 2006-23CB CWALT 2006-33CB CWALT 2006-OA14 CWALT 2006-OC1 CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC3 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2 CWALT 2007-OA10 CWALT 2007-OA3 CWALT 2007-OA8 CWHL 2005-HY10 CWHL 2006-HYB1 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14 CWL 2005-16 CWL 2005-17 CWL 2005-8 CWL 2005-9 CWL 2005-AB3

Percentage of Delinquent/Defaulted/Foreclosed Loans 45.2 29.5 61.7 36.0 33.1 27.7 29.5 43.6 35.9 56.2 55.6 61.8 57.0 57.9 65.3 58.6 51.5 59.8 54.8 35.5 44.8 38.7 48.2 58.2 58.2 42.3 40.9 71.8 74.2 63.5 64.2 63.7 42.9 63.3 70.0 63.6 59.6 64.2 71.0

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Transaction

Supporting Loan Group(s) Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 2 Loan Group 2 Loan Group 2 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 2 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1

CWL 2005-AB4 CWL 2005-AB5 CWL 2005-BC5 CWL 2005-BC5 CWL 2006-10 CWL 2006-11 CWL 2006-12 CWL 2006-13 CWL 2006-14 CWL 2006-16 CWL 2006-17 CWL 2006-18 CWL 2006-19 CWL 2006-2 CWL 2006-20 CWL 2006-21 CWL 2006-22 CWL 2006-23 CWL 2006-24 CWL 2006-25 CWL 2006-26 CWL 2006-3 CWL 2006-4 CWL 2006-5 CWL 2006-6 CWL 2006-7 CWL 2006-8 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-1 CWL 2007-10 CWL 2007-11 CWL 2007-12 CWL 2007-13 CWL 2007-2 CWL 2007-3

Percentage of Delinquent/Defaulted/Foreclosed Loans 66.6 70.2 58.3 59.8 65.9 63.2 73.2 61.4 66.2 72.2 65.3 67.1 69.2 60.9 68.5 66.9 67.1 64.7 65.3 67.9 65.2 61.3 60.8 66.6 70.3 69.5 59.9 56.1 71.0 63.6 71.3 71.3 67.5 59.9 62.8 62.2 58.4 64.1 69.2

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Transaction

Supporting Loan Group(s) Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1 Loan Group 1

CWL 2007-5 CWL 2007-6 CWL 2007-7 CWL 2007-8 CWL 2007-9 CWL 2007-BC1 CWL 2007-BC2 CWL 2007-BC3

Percentage of Delinquent/Defaulted/Foreclosed Loans 68.0 70.5 63.8 61.4 63.1 64.0 68.5 65.0

199.

The confirmed misstatements concerning owner occupancy and LTV ratios, the

confirmed systematic underwriting failures by Countrywide, which was primarily responsible for the mortgage loans across the Securitizations, and the extraordinary drop in credit rating and rise in delinquencies across those Securitizations all confirm that the mortgage loans in the Supporting Loan Groups, contrary to the representations in the Registration Statements, were not originated in accordance with the stated underwriting guidelines. V. COUNTRYWIDE KNEW ITS REPRESENTATIONS WERE FALSE AND THE GSEs JUSTIFIABLY RELIED ON COUNTRYWIDES REPRESENTATIONS 200. The allegations in this Section V are made in support of Plaintiffs common law

fraud claim against Countrywide Securities, Countrywide Home Loans, and the Depositor Defendants (the Countrywide Fraud Defendants), and not in support of Plaintiffs claims under (i) Sections 11, 12(a)(2) and 15 of the Securities Act, (ii) Sections 13.1-522(A)(ii) and 13.1522(C) of the Virginia Code, (iii) Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, which are based solely on strict liability and negligence, or (iv) negligent misrepresentation. See CPLR 3014 (permitting alternative statements of a claim); Raglan Realty Corp. v. Tudor Hotel Corp., 149 A.D.2d 373, 374 (1st Dept 1989) (same).

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A. 201.

The Countrywide Defendants Knew Their Representations Were False The same evidence discussed above not only shows that Countrywides

representations were untrue, but that the Countrywide Fraud Defendants knew, or were reckless in not knowing, that they were falsely representing that the mortgage loans collateralizing the GSE Certificates had been originated in compliance with Countrywides underwriting guidelines. These Defendants also knew, or were reckless in not knowing, that they were falsely representing the fundamental risk characteristics of the mortgage loans. 202. For instance, the incidence of material discrepancies is so high as discussed

above, there were material discrepancies in Countrywides representations about owneroccupancy data and LTV ratios for all 86 Securitizations that it could not have been the result of human error. Instead, Countrywide was clearly ignoring sound underwriting methodology and knew that its failure to follow its underwriting guidelines would result in the origination of loans which the borrower would not be able to repay. Other evidence of Countrywides knowledge of its disregard of underwriting guidelines includes the following: Countrywides post-mortem internal analysis admitted that it did not heed the warnings, and that [l]ots of experienced people were uncomfortable. Countrywides CEOs e-mails showed that he saw errors of both judgment and protocol, massive disregard for the guidelines, and serious lack of compliance within our origination system. Countrywides internal audits discovered that a staggering percentage of loans were being approved as exceptions. For instance, one particularly alarming audit found that over 23 percent of subprime loans were at the time being processed as exceptions, and another found that 52 percent of the subprime divisions 100 percent financings were done with exceptions. The amount of loans approved as exceptions was seen within Countrywide as speak[ing] toward our inability to adequately impose and monitor controls on production operations.

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Other correspondence and testimony confirmed that the exceptions were just a tool being used to keep pace and to implement the matching strategy. Countrywides credit officers viewed the matching strategy as ceding Countrywides policies to the market. Another saw Countrywides underwriting policies as theoretical, and saw it as indefensible that Countrywide continued to use saleability as the sole criterion for approval. Countrywides risk officers wrote that the company basically continued to act as though they never received policies the credit officers circulated, and that it was frustrating to have their judgment overridden with whining and escalations. Countrywides documents referred to several recent examples where products were approved despite explicit rejections by the companys credit risk department. According to former employees, borrowers who could not qualify for a loan were steered into low-documentation products, then coached on how to falsify the application to ensure it would be approved. According to former borrowers, in some instances Countrywides loan officers were the ones to fill out the application with misrepresentations without the borrowers knowledge. Countrywides internal reviews found at one point that 40 percent of the reduced-documentation loans had income overstatements of ten percent or more and a significant percent of those loans would have income overstated by 50% or more. Countrywide Pursued a Dominant Market Share at All Costs

1. 203.

Countrywides fraudulent representations were the means by which it pursued

dominant market share. Around May 2003, Mr. Sambol became particularly close to Mr. Mozilo and emerged as a major force within Countrywide Financial and Countrywide Home Loans, taking complete charge of loan production in 2004. Countrywide executives, and Mr. Sambol in particular, sent a clear message to loan origination and underwriting employees that overall volume was far more important than creditworthiness. Rather than relying on its publicly stated underwriting standards to maintain Countrywides profitability, Mr. Sambol argued that by

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originating and procuring a large volume of loans, regardless of their relative risk, Countrywide would be able to cover any losses incurred on the riskier loans by the profits it generated on other loans. 204. At the same time that Mr. Mozilo issued Countrywides market share mandate

for the ultimate 30% by 2006, 2007, see Q2 2003 Countrywide Financial Corporation Earnings Conference Call (July 22, 2003) Countrywide gave assurances to the public that its growth in originations would not compromise its strict underwriting standards. Indeed, Mr. Mozilo publicly stated that Countrywide would target the safest borrowers in this market in order to maintain its commitment to quality: Going for 30% mortgage share here is totally unrelated to quality of loans we go after. . . . There will be no compromise in that as we grow market share. Nor is there a necessity to do that. Q4 2003 Countrywide Financial Corporation Earnings Conference Call (Jan. 27, 2004). 205. During a March 15, 2005 conference with analysts, Mr. Mozilo responded to a

question about Countrywides strategy for increasing market share, and again assured Countrywides constituents that Countrywide would not sacrifice its strict and disciplined underwriting standards: Your question is 30 percent, is that realistic, the 30 percent goal that we set for ourselves 2008? . . . Is it achievable? Absolutely. . . . But I will say this to you, that under no circumstances will Countrywide ever sacrifice sound lending and margins for the sake of getting to that 30 percent market share. Countrywide Financial Corp. at Piper Jaffray Financial Conference 2005 at 5-6 (Mar. 15, 2005). 206. Contrary to its public assurances, Mr. Mozilos mandate of a 30 percent market

share required Countrywide to systemically depart from its underwriting standards. A former senior regional vice president of Countrywide was quoted in a January 17, 2008 Business Week article as saying that Countrywide approached making loans like making widgets, focusing on

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cost to produce and not risk or compliance. Chris Palmeri, One Insiders View of Countrywide, Business Week (Jan. 17, 2008). 207. Indeed, in an interview with the FCIC, Mr. Mozilo stated that a gold rush

mentality overtook the housing market during the relevant time frame, and that he was swept up in it. FCIC Staff Interview with Angelo Mozilo, Sept. 24, 2010. Confirming that saleability was the sole criteria for approving a loan, Mr. Sambol stated in his interview with the FCIC that Countrywide was selling virtually all of its production to Wall Street in the form of mortgagebacked securities or in the form of mortgage whole loans and that Countrywides essential business strategy was originating that which was saleable into the secondary market. FCIC Staff Interview with David Sambol, Sept. 27, 2010. 2. 208. Countrywides Own Documents Reveal It Knew the Falsity of Its Representations

The Countrywide Fraud Defendants knowledge of the falsity of their

representations is established by evidence from Countrywides own documents and employees. For example, Countrywides 2007 Lessons Learned analysis (discussed above at paragraphs 153 through 154) showed that Countrywide knew at the time what it was doing was wrong, but proceeded anyway:

We did not fully heed the warnings of our credit models. Delinquencies were rising, and models predicted worse to come. Ex. I at 68 to Luskey Decl. Early indicators of credit risk exposure existed. Internal control systems highlighted many of the risks that eventually transpired. Id. at 69. Lots of experienced people were uncomfortable with underwriting guidelines. Going forward, we need to rely on our experience and instinct when business practices dont make sense. In particular, stated income and high LTV was highly counter-intuitive. Id. at 72.

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209.

These concerns mirrored concerns that Countrywides Credit Risk Committee

raised long before Countrywides problems became public, demonstrating that Countrywides admissions were not mere hindsight. In a February 13, 2007 Board of Directors Credit Risk Committee presentation highlighting areas of concern, alternatively known as a wall of worries, one of the Credit Risk Committees areas of concern was Countrywides loan quality, including increased fraud, exception underwriting, guideline drift, [a]ttribute deterioration, and [a]ppraisal quality. Ex. 142 at 23 to Dean Decl. 210. Mr. McMurray (Countrywides then-Chief Risk Officer) gave repeated, explicit,

and alarming warnings to Messrs. Sambol, Mozilo, and others that the companys matching strategy and use of exceptions resulted in riskier loans with high default rates. Countrywide ignored the risk management departments warnings about the consequences of abandoning underwriting standards and continued with its efforts to increase market share and loan volume. 211. As early as 2005, Mr. McMurray warned Mr. Sambol that loans which were

originated as exceptions to Countrywides stated origination guidelines would likely experience higher default rates. On May 22, 2005, he wrote that exceptions are generally done at terms even more aggressive than our guidelines. Ex. 84 to Dean Decl. In a May 22, 2005 e-mail, McMurray warned Sambol that the company would face liability for its faulty underwriting practices and misrepresentations to investors: Weve sold much of the credit risk associated with high risk transactions away to third parties. Nevertheless, we will see higher rates of default on the riskier transactions and third parties coming back to us seeking a repurchase or indemnification based on an alleged R&W breach as the rationale. Ex. 84 to Dean Decl. 212. Mr. McMurray continued to express concern throughout 2006 and 2007. Indeed,

in a November 2, 2006 e-mail to Kevin Bartlett, Countrywides Chief Investment Officer, Mr.

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McMurray directly asked whether Countrywide want[ed] to effectively cede its underwriting policies to the market. This email was forwarded to Mr. Sambol. See Ex. 105 to Dean Decl. 213. In a February 11, 2007 e-mail to Mr. Sambol, Mr. McMurray reiterated his

concerns about Countrywides strategy of matching any type of loan product offered by its competitors, which he said could expose the company to the riskiest offerings in the market: I doubt this approach would play well with regulators, investors, rating agencies[,] etc. To some, this approach might seem like weve simply ceded our risk standards . . . to whoever has the most liberal guidelines. E-mail from John McMurray to Dave Sambol (Feb. 11, 2007). 214. Yet when Mr. McMurray attempted to enforce a set of underwriting guidelines,

his efforts were quashed, and his repeated warnings were ignored by Countrywides senior executives. On November 16, 2006, Mr. McMurray wrote to Mr. Sambol regarding the fundamental deficiencies within Countrywide with regard to risk: First, we need to agree on a risk vision and guiding principles that the entire enterprise will follow. I previously created a set of guiding principles, but there hasnt been acceptance from some of the key business units. The most widely held belief is that our guiding principle is simply doing what anyone else in the market is doing; if its in the market, we have to do it. Second, we should require everyone to follow established risk guidance and policies[;] a product cannot be rolled out or transactions closed without required approvals. There are several recent examples where products or transactions proceeded without the required risk approvals or in contradiction of established policy. Ex. 94 to Dean Decl. 215. On September 7, 2007, over a year after circulating his proposed policy, Mr.

McMurray concluded in an e-mail: I was never supported on this and Secondary [Marketing], [the] Production [Division], and [Countrywide Capital Markets] basically continued to operate as though they never received this policy. Ex. 187 to Dean Decl.

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216.

Mr. McMurray identified during his SEC testimony his own notes from

November 3, 2006, wherein he indicated that he had discussed with Mr. Sambol that he was concerned that he would be personally blamed for products that he never advocated and often recommended against. Id. at 16-17. His testimony also indicates he raised concerns about inadequate controls, infrastructure, etc. Id. 217. Mr. Aguilera, who also managed the risk management department, testified that

he did not think investors were aware of Countrywides internal matching strategy. Ex. 236 at 21 to McCoy Decl. He stated that the use of this strategy to originate riskier subprime loans was not a tolerable process and that he had raised his concerns formally with at least two other managers at Countrywide. Id. at 13-14. 218. Christian Ingerslev, Countrywides Executive Vice President of Credit Risk

Management, also warned Mr. Sambol and others about the consequences of Countrywides failure to adhere to underwriting guidelines. In his testimony, Mr. Ingerslev confirmed that internal documentation from November 2006 showed that products and transactions were going forward without the required risk approvals or in contradiction of established policy. Mr. Ingerslev said it was part of the culture to have pressure to [] move things along and say yes to things, and you felt that pressure. He also testified that he thought the companys guidelines had gone too far given the additional layers of risk in the product mix and changing interest rates. 219. He also testified there was no consequence or penalty for originating loans that

had not been approved by Mr. McMurray. Testimony of Christian Ingerslev (Ingerslev Test.) at 151-53, SEC Investigation (Aug. 19, 2008). Instead, the sales team ruled at Countrywide. In a March 7, 2005 e-mail, Mr. Ingerslev complained:

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[S]ounds like they got on the line with the traders, and long story short, they now think they can sell them . . . . [I]ts frustrating to try and hold the line and then just be overridden with whining and escalations . . . . [J]ust reinforces that sales can have anything they want if they yell loud enough to [D]rew [Gissinger, President of Countrywide Home Loans]. Exhibit 303 to Declaration of Spencer E. Bendell in Opposition to Motion for Summary Judgment (Bendell Decl.), SEC v. Mozilo, No. 09-03994, Docket Entry 305-10 (C.D. Cal., filed Aug. 16, 2010). 220. Mr. Ingerslev also confirmed that Countrywide was made aware internally of the

risks that its shoddy procedures were creating: In an organization like Countrywide, sales, the strategy of the company was predominantly, you know, a sales-oriented one because of our history as a mortgage banker and, you know, being able to sell off a lot of credit risk, that was one instant, one probability factor that contributes to the culture that we have. So that - and ultimately, you know, disagreements or ties were broken, you know, to the - you know, to the side of erring on, well, we dont want to lose volume, we want to keep up the volume and keep up our market share. That was a strategy that the company had. But, you know, John [McMurray] and I and those of us in credit still felt like it was our obligation to make sure that there was perspective, and we were doing it with eyes wide open. In other words, in that environment, there was conflict. Some of it youd expect, and some of it went beyond what you would expect and was tough. Ingerslev Test. at 132-33. 221. As stated above, the top Countrywide executive, Mr. Mozilo himself, admitted

that he saw a serious lack of compliance within our origination system. Ex. 16 to Dean Decl. 3. 222. Countrywide Purposefully Abused Its Documentation Programs and Falsified Loan Applications

Countrywide used low-documentation loan programs as a tool to get around

Countrywides theoretical underwriting standards. When a loan officer knew an application would not be approved on the basis of the applicants actual financial condition, the officer often steered applicants into low-documentation products. Once in those programs, Countrywide

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coached borrowers on how to falsify the application to ensure it would be approved, and in some instances would even fill out the required misrepresentations without the borrowers knowledge. 223. According to Mr. Zachary, a former Regional Vice President of Countrywide, a

high executive at Countrywide KB Home Loans sanctioned the falsification of information. In an October 25, 2006 e-mail, Mr. Zachary posed to the executive a situation in which a loan officer confessed that a potential borrower did not have a job in the local area, when that is a requirement of the mortgage for which the borrower was applying. Even more drastically, Mr. Zachary wondered what would happen if the loan officer mentioned that the borrower was applying for a stated-income loan because he was unemployed. Mr. Zachary asked for confirmation that in those circumstances, when there was evidence that the borrower and/or loan officer were falsifying the borrowers information, the company would reject the loan. Shockingly, the senior executive wrote back that I wouldnt deny it [the loan] because I didnt hear anything. I would definitely tell the [loan officer] to shut up or shoot him! Second Amended Complaint, Zachary v. Countrywide Financial Corp., No. 08 Civ. 00214, at 5-6 (S.D. Tex., filed Apr. 9, 2008). 224. According to Mr. Zachary, he refused to unconditionally approve borrowers that

did not meet Countrywides stated guidelines, at which point he was taken out of the approval process and the loans were approved anyway, by his supervisor. Id. 225. A former Countrywide loan officer described in the California Attorney Generals

complaint against Countrywide reiterated the fact that borrowers were coached on how to lie. He explained that a loan officer might say, with your credit score of X, for this payment, and to make X payment, X is the income you need to make. Complaint, California v. Countrywide Fin. Corp. et al., No. LC081846, at 21 (Cal. Super. Ct. N.W. Dist., filed June 24, 2008). And

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NBC News reported that it spoke to six other former Countrywide employees, who worked in different parts of the country, who described the same anything goes corrupt culture and practices. Some of those employees even said that borrowers W-2 forms and other documents were falsified to allow for loan approval. One employee stated that Ive seen supervisors stand over employees shoulders and watch them . . . change incomes and things like that to make the loan work. Lisa Myers, Countrywide Whistleblower Reports Liar Loans, NBC News (July 1, 2008). 226. Borrowers have confirmed that Countrywide falsified loan applications and

encouraged them to falsify their loan applications. Julie Santoboni, who took out a Countrywide mortgage on her familys home in Washington, D.C., was interviewed on National Public Radio. Ms. Santoboni stated a Countrywide loan officer pressured her to lie about her income to obtain a more attractive loan, and that he wanted her to write a letter stating she made $60,000 during each of the past two years and get her accountant to sign it, even though that would have been fraudulent, since she had no income. See Chris Arnold, Woman: Countrywide Proposed Fibbing to Get Loan, NPR (May 6, 2008). Another Countrywide borrower, Bruce Rose, described obtaining a mortgage loan from Countrywide that stated his monthly income as $12,166, as he realized only later, even though his income at the time was only around $16,000 a year. See Nick Carey, Option ARMs, Next Chapter in Housing Crisis, Reuters (Feb. 1, 2008). Yet another borrower told NBC News that her Countrywide loan officer told her to claim she made more than twice her actual income in order to gain approval for her loan. See Lisa Myers, Countrywide Whistleblower Reports Liar Loans, NBC News (July 1, 2008). 227. In a June 2006 e-mail chain that included both Mr. McMurray and Mr. Sambol,

Countrywide circulated the results of an audit it had conducted. Among the findings were that

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approximately 40% of the Banks reduced documentation loans . . . could potentially have income overstated by more than 10% and a significant percent of those loans would have income overstated by 50% or more. Ex. 117 to Dean Decl. Mr. McMurray stated that was obviously the case that perhaps many of these overstatements were the result of misrepresentations. Id. Another Countrywide Risk Officer, Clifford Rossi, agreed, testifying to the SEC that the vast majority of the overstated income amounts was likely due to misrepresentations. Deposition Testimony Relied Upon in Plaintiff SECs Opposition to Defendants' Motions for Summary Judgment: Witness Clifford Rossi, SEC v. Mozilo, No. 09-03994, Docket Entry 278 at 8-9 (C.D. Cal., filed Aug. 16, 2010). 4. 228. Countrywide Cherry Picked the Best Loans While Selling Riskier Loans to Investors

Additionally, Countrywide knowingly offloaded its high-risk assets onto investors

by selectively cherry picking high quality loans to keep on its own balance sheet, while securitizing the riskier loans and selling them on the secondary market. 229. On August 2, 2005, Mr. Sambol openly acknowledged and questioned the

companys policy of cherry picking the best loans for itself while leaving the higher-risk leftovers for securitization: While it makes sense for us to be selective as to the loans which the Bank retains, we need to analyze the securitization implications on what remains if the bank is only cherry-picking and what remains to be securitized/sold is overly concentrated with higher risk loans. This concern and issue gets magnified as we put a bigger percentage of our pay option production into the Bank because the remaining production then increasingly looks like an adversely selected pool. Ex. 297 to Bendell Decl. 230. practice: Mr. Mozilo responded the same day, expressing his preference to continue the

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I absolutely understand your position however there is a price we will pay no matter what we do. The difference being that by placing less attractive loans in the secondary market we know exactly the economic price we will pay when the sales settle. By placing, even at 50%, into the Bank we have no idea what economic and reputational losses we will suffer not to say anything about restrictions placed upon us by the regulators. Id. 231. Mr. McMurray testified that he also raised concerns about Countrywides policy

of picking the best loans to keep on its balance sheet: [T]heres another element that we need to bring in here thats important with respect to securities performance. Countrywides bank tended to - on - on some of the key products, tended to select the best loans out of the ones that were originated. By best - Im talking about from a credit risk standpoint, so let me clarify that. So as - as those loans are drawn out of the population, whats left to put into the securities were not - are not as good as what you started out with, and then that can have an adverse effect on securities performance. Ex. 266-1 to McCoy Decl. 232. That Countrywide was cherry-picking the loans it would keep for itself was also

confirmed by the testimony of Clifford Rossi, a Countrywide Risk Officer, who testified that the general strategy of the bank was to originate and to cherry pick the better quality assets. Deposition Testimony Relied Upon in Plaintiff SECs Opposition to Defendants Motions for Summary Judgment: Witness Clifford Rossi, SEC v. Mozilo, No. 09-03994, Docket Entry 278 at 30 (C.D. Ca. Aug. 16, 2010). 5. 233. Countrywide Had Knowledge from Due Diligence Firms that Loans Failed to Comply with Underwriting Guidelines

The Countrywide Fraud Defendants also knew that the loans Countrywide placed

in investments like the Securitizations failed to comply with Countrywides underwriting standards because of due diligence performed by firms like Clayton and the Bohan Group

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(Bohan), who were routinely hired by investment banks, and Countrywide, to perform due diligence on mortgage loans intended for securitization. 234. Due to strong demand, originators such as Countrywide gained bargaining power

over investment banks seeking to purchase mortgage loans and sponsor securitizations. One way originators exercised this bargaining power was to insist that investment banks limit their due diligence to smaller percentages of loan pools prior to purchase. If an investment bank chose to kick out a large number of loans from a pool (e.g., because the loans failed to conform to the mortgage originators guidelines or did not contain adequate documentation), it risked being excluded from future loan purchases. As a result, investment banks performed increasingly cursory due diligence on the loans they securitized. 235. As reported by the Los Angeles Times, Clayton and Bohan employees (including

eight former loan reviewers who were cited in the article) raised plenty of red flags about flaws so serious that mortgages should have been rejected outright such as borrowers incomes that seemed inflated or documents that looked fake but the problems were glossed over, ignored, or stricken from reports. E. Scott Reckard, Sub-Prime Mortgage Watchdogs Kept On Leash, Los Angeles Times, March 17, 2008. Ironically, while the investment banks pressured third-party reviewers to make exceptions for defective loans, they often utilized information about bad loans to negotiate for themselves a lower price for the pool of loans from the seller (i.e., the originator). Indeed, according to September 2010 testimony before the FCIC by Claytons former president, D. Keith Johnson, this was one of the primary purposes of the due diligence review. 236. Countrywide knew of the red flags raised by the due diligence conducted by

Clayton and Bohan. As an originator, Countrywide was aware of the pressure on investment

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banks to scale back their due diligence and limit the number of loans kicked out of a securitization. In addition, Countrywide itself retained third-party due diligence firms such as Clayton to perform due diligence with respect to the securitizations it sponsored. 237. Clayton provided the FCIC with documents showing the defect and waiver rates

for some of the investment banks that retained Clayton to conduct loan pool due diligence. Clayton produced a report containing the rejection and waiver rates for loans originated by Countrywide. Clayton Originator Trending Report (Clayton Services Inc. 2007). Those rates are as follows: 1Q 2006 24% 8% 2Q 2006 23% 14% 3Q 2006 13% 16% 4Q 2006 14% 11% 1Q 2007 16% 14%

Rejection rate Waiver rate 238.

The Clayton documents also include statistics on the rejection and waiver rates for

loans Countrywide submitted to Clayton for review and that Countrywide was considering including in its own securitizations. Claytons report reveals that from the fourth quarter of 2006 to the first quarter of 2007, 26 percent of the mortgages Countrywide submitted for potential inclusion in its securitizations were rejected, which included a finding by Clayton that the loans had been granted despite the lack of any purported compensating factors justifying an exception. Of the mortgages that Clayton rejected, twelve percent were subsequently waived in by Countrywide and included in securitizations like the ones in which Fannie Mae and Freddie Mac invested. See All Clayton Trending Reports Q1 2006-Q2 2007, at 3 (Clayton Services Inc. 2007). 239. Countrywide never disclosed to Fannie Mae and Freddie Mac that the due

diligence conducted by Clayton and Bohan demonstrated that a substantial number of the loans in the pools backing Countrywides securities were defective, that Countrywide had waived the

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defects as to a substantial number of the loans, or that the underwriters were using this information to negotiate a lower price for the loan pools. 6. 240. Countrywide Knew The GSE Certificates Ratings Were False

Countrywide also failed to disclose that the GSE Certificates credit ratings were

false and misleading because Countrywide fed the same misinformation found in the Registration Statements to the ratings agencies in an attempt to manufacture predetermined ratings. In testimony before the Senate Permanent Subcommittee on Investigations, Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005 to 2008, confirmed that the rating agencies relied upon investment banks to provide accurate information about the loan pools: The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reported to both S&P and investors about those loans. S&P relies on the data produced by others and reported to both S&P and investors about those loans. S&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. Senate Homeland Security and Governmental Affairs Subcommittee on Investigations, Hearings on Wall Street and the Financial Crisis: The Role of Credit Rating Agencies, Apr. 23, 2010 (emphasis added). The ratings obtained for the Securitizations themselves failed to reflect accurately the actual risk underlying the GSE Certificates because the ratings agencies were in fact analyzing a mortgage pool that had no relation to the pool that actually backed the Certificates marketed to investors, like the GSEs.

113

7. 241.

The District Court in the SEC Civil Action Found Triable Issues of Fact as to the Countrywide Executives Knowledge

In the SEC civil action, in the course of rejecting Messrs. Mozilos, Sambols, and

Sierackis motions for summary judgment, the court found that a triable issue of fact existed on the question of scienter based on evidence presented in that case, and discussed above: Here, the SEC has presented evidence from which a reasonable jury could conclude that Defendants possessed the requisite scienter. For example, the SEC has demonstrated that Defendants were aware that Countrywide routinely ignored its underwriting guidelines and that Defendants understood the accompanying risks. The SEC has also presented evidence that Sambol was aware that Countrywides matching strategy resulted in Countrywides composite guidelines being the most aggressive guidelines in the industry. Moreover, in addition to demonstrating that Defendants were aware of the facts which made their statements misleading, the SEC has presented evidence that Sambol and Sieracki knew that Countrywides Chief Risk Officer John McMurray firmly believed that Countrywide should include greater credit risk disclosures in its SEC filings. Accordingly, the SECs evidence is sufficient to raise a genuine issue of material fact with respect to Defendants scienter, and summary judgment is inappropriate. SEC Order at *16-20 (emphasis added). B. 242. The GSEs Justifiably Relied on Countrywides Representations Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the

representations by the Countrywide Fraud Defendants as the sponsor, depositors, and lead and selling underwriter in the Securitizations (as set forth in Tables 2, 11, and 12). Countrywide provided term sheets to the GSEs that contained critical data as to the Securitizations, including with respect to anticipated credit ratings by the credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying collateral, and owner-occupancy statistics. This data was subsequently incorporated into Prospectus Supplements that were received by the GSEs upon the close of each Securitization.

114

243.

The GSEs relied upon the accuracy of the data transmitted to them and

subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the credit ratings that the credit rating agencies indicated they would bestow on the Certificates. These credit ratings represented a determination by the credit rating agencies that the GSE Certificates were AAA quality (or its equivalent) meaning the Certificates had an extremely strong capacity to meet the payment obligations described in the respective PSAs. 244. The Countrywide Fraud Defendants, as the sponsor, depositors, and lead and

selling underwriter in the vast majority of the Securitizations (as set forth in tables 2, 11, and 12), provided detailed information about the underlying collateral and structure of each Securitization to the credit rating agencies. The credit rating agencies based their ratings on the information provided to them by these Defendants, and the agencies anticipated ratings of the Certificates were dependant on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and upon the accuracy of the representations of the Countrywide Fraud Defendants in the term sheets and Prospectus Supplements as to the strength of the Securitizations. 245. In addition, the GSEs relied on the fact that the originators of the mortgage loans

in the Securitizations had acted in conformity with their underwriting guidelines, which were described in the Prospectus Supplements. Compliance with underwriting guidelines was a sine qua non to agreeing to purchase the Certificates, since the strength of the mortgage loan collateral and the GSEs decision to purchase the Certificates was directly premised on the GSEs reasonable belief that applicable underwriting standards had been observed.

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246.

In purchasing the GSE Certificates, the GSEs justifiably relied on Countrywides

false representations and omissions of material fact detailed above, including the misstatements and omissions in the term sheets about the underlying collateral, which were reflected in the Prospectus Supplements. These representations materially altered the total mix of information upon which the GSEs made their purchasing decisions. 247. But for the above misrepresentations and omissions, the GSEs would not have

purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decision to acquire the GSE Certificates, as described above. VI. FANNIE MAES AND FREDDIE MACS PURCHASES OF THE GSE CERTIFICATES AND THE RESULTING DAMAGES 248. In total, between August 30, 2005 and January 23, 2008, Fannie Mae and Freddie

Mac purchased approximately $26.6 billion in residential mortgage-backed securities issued in connection with the Securitizations. Table 11 reflects each of Freddie Macs purchases of the Certificates.14 Table 11
Transaction Tranche CUSIP Settlement Date of Purchase by Freddie Mac 10/31/2005 11/30/2005 10/15/2007 10/31/2007 CWALT 2005-83CB A1 A2 CWALT 2005-AR1 CWALT 2006-11CB 1A 1A1 12668BGX5 12668BGY3 12668A4P7 12668BVY6 12/30/2005 12/30/2005 12/29/2005 9/10/2007 Initial Unpaid Principal Balance $199,860,000 $199,756,000 $13,800,000 $100,000,000 $312,847,000 $34,761,000 $152,002,000 $44,446,000 Purchase Price (% of Par) Seller to Freddie Mac

CWALT 2005-57CB CWALT 2005-67CB CWALT 2005-73CB

1A1 A1 2A2

12668AYE9 12668AJ89 12668AV44

99.96875 99.8515625 97.59375 97.96875 98.0625 98.0625 100 97.9140625

Countrywide Securities Countrywide Securities RBS Securities N/A Countrywide Securities Countrywide Securities Countrywide Securities RBS Securities

Purchased securities in Tables 11 and 12 are stated in terms of the unpaid principal balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par.

14

116

Transaction

Tranche

CUSIP

CWALT 2006-14CB

A1 A6

021468AA1 021468AF0 02147QAL6 02147QBF8 02147RAG5 02147RAN0 02148BAC8 23245FAA1 23244JAA4 021455AA8 02147HAA0 23243DAA8 23243VAA8 232434AA8 02150ECA9 02148LAA0 02148LAB8 02150TAD2 02148GAA1 126670CW6 126670EX2 126670HD3 126670LH9 126670NV6 126670PC6 126670QX9 1266735Q1 1266736A5

Settlement Date of Purchase by Freddie Mac 4/28/2006 4/28/2006 6/30/2006 6/30/2006 9/28/2007 9/14/2007 9/28/2007 11/30/2006 12/29/2006 5/30/2006 6/29/2006 7/28/2006 8/30/2006 9/29/2006 9/14/2007 1/31/2007 1/31/2007 1/23/2008 1/23/2008 9/28/2005 9/30/2005 11/21/2005 12/21/2005 12/28/2005 12/28/2005 12/29/2005 8/30/2005 9/28/2005

Initial Unpaid Principal Balance $194,097,000 $48,524,000 $201,815,000 $22,424,000 $44,085,000 $100,473,000 $73,910,000 $165,209,000 $224,171,000 $165,807,000 $229,217,000 $102,510,000 $139,441,000 $138,111,000 $27,882,000 $367,128,000 $117,725,000 $208,417,000 $127,393,000 $552,682,000 $167,374,000 $711,872,000 $429,264,000 $388,648,000 $487,320,000 $111,720,000 $243,773,000 $529,470,000

Purchase Price (% of Par)

Seller to Freddie Mac

100.1679688 100.1679688 98.7109375 98.7109375 98.125 100.125 98.140625 100 100 100 100 100 100 100 98.19140625 101.2765 101.3989 93.75 93.75 100 100 100 100 99.77192 100 100 100 100

DB Securities DB Securities DB Securities DB Securities N/A15 N/A CGMI Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities CGMI Countrywide Securities Countrywide Securities N/A N/A Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities Countrywide Securities N/A Countrywide Securities

CWALT 2006-19CB

A11 A30

CWALT 2006-23CB

1A7 2A1

CWALT 2006-33CB CWALT 2006-OC10 CWALT 2006-OC11 CWALT 2006-OC4 CWALT 2006-OC5 CWALT 2006-OC6 CWALT 2006-OC7 CWALT 2006-OC8 CWALT 2007-5CB CWALT 2007-HY2

2A1 1A 1A 1A 1A 1A 1A 1A1 2A3 1A 2A

CWALT 2007-OA3 CWALT 2007-OA8 CWL 2005-11 CWL 2005-12 CWL 2005-13 CWL 2005-14 CWL 2005-16

2A1 1A1 2AV1 3A 2AV1 1A1 1AF 3AV

CWL 2005-17 CWL 2005-8 CWL 2005-9

2AV 1A1 1A1

N/A in Tables 11 and 12 indicates that there is no claim for purposes of Section 12 (and relatedly, Section 15) against the entity which sold the Certificate to Freddie Mac or Fannie Mae.

15

117

Transaction

Tranche

CUSIP

CWL 2005-AB3 CWL 2005-AB4 CWL 2005-BC5 CWL 2006-10 CWL 2006-12 CWL 2006-16 CWL 2006-19 CWL 2006-2 CWL 2006-20 CWL 2006-22 CWL 2006-24 CWL 2006-26 CWL 2006-3 CWL 2006-5 CWL 2006-7 CWL 2006-9 CWL 2006-BC2 CWL 2006-BC3 CWL 2006-BC4 CWL 2006-BC5 CWL 2007-2 CWL 2007-5 CWL 2007-7 CWL 2007-9 CWL 2007-BC1 CWL 2007-BC2 CWL 2007-BC3

1A1 1A 1A 2AV 1A 1A 1A 1A1 1A 1A 1A 1A 1A 1A 1A 2AV 1A 1A 1A 1A 1A 1A 1A 1A 1A 1A 1A

126670BM9 126670KJ6 126670MY1 12666PAR5 12667AAA4 23242FAA4 12667CAA0 126670UR7 12667HAA9 12666BAA3 23243HAA9 12668HAA8 126670VW5 126670YE2 232422AA3 12666RAR1 22237JAA5 23242HAA0 12667NAA6 12666SAA6 12668NAA5 12668KAA1 12669VAA6 12670FAA8 12668TAA2 12669QAA7 23246LAA7

Settlement Date of Purchase by Freddie