SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
X

PHOENIX LIGHT SF LIMITED, BLUE
HERON FUNDING II LTD., BLUE HERON
FUNDING V LTD., BLUE HERON
FUNDING VI LTD., BLUE HERON
FUNDING VII LTD., SILVER ELMS CDO
PLC, SILVER ELMS CDO II LIMITED and
KLEROS PREFERRED FUNDING V PLC,
Plaintiffs,

vs.

CREDIT SUISSE AG, CREDIT SUISSE
SECURITIES (USA) LLC, DLJ MORTGAGE
CAPITAL, INC., CREDIT SUISSE FIRST
BOSTON MORTGAGE SECURITIES CORP.
and ASSET BACKED SECURITIES CORP.,
Defendants.

EXCERPTS:

285. The constant pressure appraisers routinely faced from originators such as those at
issue herein was described by Jim Amorin, President of the Appraisal Institute, who stated in his
April 23, 2009 FCIC 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 ‘Hobson’s Choice.’” This complete lack of independence by appraisers was also
noted by Alan Hummel, Chair of the Appraisal Institute, in his testimony before the U.S. Senate,
where Hummel noted that the dynamic between lenders and appraisers created a “terrible conflict of
interest” by which appraisers “experience[d] systemic problems with coercion” and were “ordered
to doctor their reports” or else they would never “see work from those parties again” and were
placed on “‘exclusionary appraiser lists.’” Testimony on “Legislative Proposals on Reforming
Mortgage Practices” presented by Alan E. Hummel before the House Committee on Financial
Services, at 5 (Oct. 24, 2007).

…

408. These massive downgrades – in many cases, from “safest of the safe” “AAA” ratings
to “junk” (anything below Baa3 or BBB-) – show that, due to defendants’ knowing use of bogus
loan data, the initial ratings for the certificates, as stated in the Offering Documents, were false.
Indeed, the fact that all of the certificates are now rated at “junk” status or below, and more than
80% of the certificates are now in default, is compelling evidence that the initial high ratings touted
by defendants in the Offering Documents were grossly overstated and false.

E. Defendants Materially Misrepresented that Title to the Underlying
Loans Was Properly and Timely Transferred

409. An essential aspect of the mortgage securitization process is that the issuing trust for
each RMBS offering must obtain good title to the mortgage loans comprising the pool for that
offering. This is necessary in order for plaintiffs and the other certificate holders to be legally
entitled to enforce the mortgage and foreclose in case of default. Accordingly, at least two
documents relating to each mortgage loan must be validly transferred to the trust as part of the
securitization process – a promissory note and a security instrument (either a mortgage or a deed of
trust).

410. The rules for these transfers are governed by the law of the state where the property is
located, by the terms of the pooling and servicing agreement (“PSA”) for each securitization, and by
the law governing the issuing trust (with respect to matters of trust law). Generally, state laws and
the PSAs require that the trustee have physical possession of the original, manually signed note in
order for the loan to be enforceable by the trustee against the borrower in case of default.

411. In addition, in order to preserve the bankruptcy-remote status of the issuing trusts in
RMBS transactions, the notes and security instruments are generally not transferred directly from the
mortgage loan originators to the trusts. Rather, the notes and security instruments are generally
initially transferred from the originators to the sponsors of the RMBS offerings. After this initial
transfer to the sponsor, the sponsor in turn transfers the notes and security instruments to the
depositor. The depositor then transfers the notes and security instruments to the issuing trust for the
particular securitization. This is done to protect investors from claims that might be asserted against
a bankrupt originator. Each of these transfers must be valid under applicable state law in order for
the trust to have good title to the mortgage loans.

412. Moreover, the PSAs generally require the transfer of the mortgage loans to the trusts
to be completed within a strict time limit – three months – after formation of the trusts in order to
ensure that the trusts qualify as tax-free real estate mortgage investment conduits (“REMICs”). In
order for the trust to maintain its tax free status, the loans must have been transferred to the trust no
later than three months after the “startup day,” i.e., the day interests in the trust are issued. See
Internal Revenue Code §860D(a)(4). That is, the loans must generally have been transferred to the
trusts within at least three months of the “closing” dates of the offerings. In this action, all of the
closing dates occurred in 2005, 2006 or 2007, as the offerings were sold to the public. If loans are
transferred into the trust after the three-month period has elapsed, investors are injured, as the trusts
lose their tax-free REMIC status and investors like plaintiffs may face several adverse draconian tax
consequences, including: (1) the trust’s income becoming subject to corporate “double taxation”; (2)
the income from the late-transferred mortgages being subject to a 100% tax; and (3) if latetransferred
mortgages are received through contribution, the value of the mortgages being subject to
a 100% tax. See Internal Revenue Code §§860D, 860F(a), 860G(d).

413. In addition, applicable state trust law generally requires strict compliance with the
trust documents, including the PSAs, so that failure to strictly comply with the timeliness,
endorsement, physical delivery, and other requirements of the PSAs with respect to the transfers of
the notes and security instruments means the transfers would be void and the trust would not have
good title to the mortgage loans.

414. To this end, all of the Offering Documents relied upon by plaintiffs stated that the
loans would be timely transferred to the trusts. See §V, supra. For example, in the HEAT 2006-4
offering materials, the Credit Suisse Defendants represented:
On the closing date for the initial mortgage loans and on any subsequent
transfer date for the subsequent mortgage loans, the depositor will sell, transfer,
assign, set over and otherwise convey without recourse to the trustee in trust for the
benefit of the certificateholders all right, title and interest of the depositor in and to
each mortgage loan.
HEAT 2006-4 Pros. Supp. at S-34. The Offering Documents for each of the offerings at issue herein
contained either the same or very similar language, uniformly representing that defendants would
ensure that the proper transfer of title to the mortgage loans to the trusts occurred in a timely fashion.
See §V, supra.

415. However, defendants’ statements were materially false and misleading when made.
Contrary to defendants’ representations that they would legally and properly transfer the promissory
notes and security instruments to the trusts, defendants in fact systematically failed to do so. This
failure was driven by defendants’ desire to complete securitizations as fast as possible and maximize
the fees they would earn on the deals they closed. Because ensuring the proper transfer of the
promissory notes and mortgages hindered and slowed defendants’ securitizations, defendants
deliberately chose to disregard their promises to do so to plaintiffs.

416. Defendants’ failure to ensure proper transfer of the notes and the mortgages to the
trusts at closing has already resulted in damages to investors in securitizations underwritten by
defendants. Trusts are unable to foreclose on loans because they cannot prove they own the
mortgages, due to the fact that defendants never properly transferred title to the mortgages at the
closing of the offerings. Moreover, investors are only now becoming aware that, while they thought
they were purchasing “mortgaged-backed” securities, in fact they were purchasing non-mortgagedbacked
securities.

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