SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
ROYAL PARK INVESTMENTS SA/NV,
Plaintiff,
vs.
CREDIT SUISSE AG, CREDIT SUISSE
SECURITIES (USA) LLC, DLJ MORTGAGE
CAPITAL, INC. and CREDIT SUISSE FIRST
BOSTON MORTGAGE SECURITIES
CORP.,
Defendants.
EXCERPTS-
274. As previously discussed, the certificates never should have received the safe,
“investment grade” ratings touted by defendants in the Offering Documents. In truth, the certificates
were anything but safe, “investment grade” securities, as defendants well knew. In fact, the
certificates were exactly the opposite – extremely risky, speculative grade “junk” bonds or worse,
backed by low credit quality, extremely risky loans. As defendants were well aware, the certificates
were each backed by numerous loans that had not been originated pursuant to their stated
underwriting guidelines, with many loans being made without any regard for the borrowers’ true
repayment ability, and/or on the basis of falsely inflated incomes and property values, as alleged
above. Moreover, as also alleged above, the LTV ratios and Primary Residence Percentages for the
loans had been falsified so as to make the loans (and thus, the certificates) appear to be of much
higher credit quality than they actually were.
275. In order to obtain “investment grade” credit ratings for the certificates, defendants
were required to work with the Credit Rating Agencies. Specifically, defendants were required to
provide the Credit Rating Agencies with information concerning the underlying loans, which the
Credit Rating Agencies then put into their computerized ratings models to generate the credit ratings.
In order to procure the falsely inflated ratings defendants desired for the certificates, defendants fed
the Credit Rating Agencies falsified information on the loans, including, without limitation, false
loan underwriting guidelines, false LTV ratios, false borrower FICO scores, false borrower DTI
ratios, and false Primary Residence Percentages. Among other things, defendants falsely represented
to the Credit Rating Agencies that virtually none of the loans in any of the offerings had LTV ratios
in excess of 100%. Defendants also misrepresented and underreported the numbers of loans that had
LTV ratios in excess of 80% in many cases. Defendants further misrepresented that the loans had
much higher Primary Residence Percentages than they actually did. Defendants also concealed from
the Credit Rating Agencies that most of the loans were not originated pursuant to the underwriting
guidelines stated in the Offering Documents and/or were supported by falsely inflated incomes,
appraisals and valuations. Defendants also never informed the Credit Rating Agencies that Clayton
had detected defect rates of 32% in the samples of loans it tested for the Credit Suisse Defendants or
that Credit Suisse had put 33.4% of those identifiably defective loans into the offerings. Defendants
also never told the Credit Rating Agencies that defendants did no further testing on the vast majority
of loans despite their awareness that there were significant numbers of defective loans detected by
the test samples.
276. That the credit ratings stated in the Offering Documents were false and misleading is
confirmed by subsequent events, as set forth supra. Specifically, after the sales of the certificates to
plaintiff were completed, staggering percentages of the loans underlying the certificates began to go
into default because they had been made to borrowers who either could not afford them or never
intended to pay them. Indeed, in a majority of the loan groups at issue herein, at least 33% of the
loans currently in the trusts are in default. A substantial number of loan groups have default
rates above 37%.
277. The average default rate for all the certificates at issue herein currently hovers at
around 32.5%. In other words, over three in ten loans currently in the trusts are in default. It is also
important to understand that these reported default rates are for loans that are currently still in the
trusts. Any prior loans that were in default and which had been previously liquidated or sold, and
thus written off and taken out of the trusts, have not been included in the calculations. Therefore, the
foregoing default rates do not include earlier defaults, and thus understate the cumulative default
rates for all of the loans that were originally part of the trusts.
278. Further proving that the credit ratings stated in the Offering Documents were false
and misleading is the fact that all of the certificates have since been downgraded to reflect their true
credit ratings, now that the true credit quality (or more accurately, lack of quality) and riskiness of
their underlying loans is known. Indeed, all of plaintiff’s 20 certificates have now been
downgraded to speculative “junk” status or below by S&P and/or Moody’s. Moreover, 12 of
plaintiff’s 20 certificates now have a credit rating of “D” by S&P and/or “C” by Moody’s,
indicating that they are in “default,” and reflecting that they have suffered losses and/or
writedowns, and/or have completely stopped paying. In other words, approximately 60% of
plaintiff’s certificates are in default. This is strong evidence that defendants lied about the credit
ratings. This is so because the high, “investment grade” credit ratings assigned to plaintiff’s
certificates had a probability of default of between “less than 1%” (Levin-Coburn Report at 6) for
the highest rated certificates and 2.6% (according to Moody’s) for certificates rated even lower than
plaintiff’s. The huge discrepancy in the actual default rates (60%) and the historically expected
default rates (less than 2.6%) demonstrates the falsity of defendants’ statements regarding the credit
ratings.
279. 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 100% of the certificates are now rated at “junk” status or below, and
approximately 60% 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
280. 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 plaintiff 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).
281. 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.
282. 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.
283. 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 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 plaintiff 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 late
transferred 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).
284. 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.
285. To this end, all of the Offering Documents relied upon by plaintiff stated that the
loans would be timely transferred to the trusts. See §V, supra. For example, in the HEAT 2007-3
Offering Materials, the Credit Suisse Defendants represented that “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 2007-3 Pros. Supp. at S-33.
286. 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 plaintiff.
287. 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.
[…]
293. Other public reports corroborate the fact that the loans were not properly transferred.
For example, Cheryl Samons, an office manager for the Law Office of David J. Stern – a
“foreclosure mill” under investigation by the Florida Attorney General for mortgage foreclosure
fraud that was forced to shut down in March 2011 – signed tens of thousands of documents
purporting to establish mortgage transfers for trusts that closed in 2005 and 2006 in 2008, 2009 and
2010 from Mortgage Electronic Registration Services, an electronic registry that was intended to
eliminate the need to file transfers in the county land records. In depositions in foreclosure actions,
Samons has admitted that she had no personal knowledge of the facts recited on the mortgage
transfers that were used in foreclosure actions to recover the properties underlying the mortgages
backing RMBS. See, e.g., Deposition of Cheryl Samons, Deutsche Bank Nat’l Trust Co., as Trustee
for Morgan Stanley ABS Capital 1 Inc. Trust 2006-HE4 v. Pierre, No. 50-2008-CA-028558-XXXMB
(Fla. Cir. Ct., 15th Jud. Cir., Palm Beach City, May 20, 2009).
294. The need to fabricate or fraudulently alter mortgage assignment documentation
provides compelling evidence that, in many cases, title to the mortgages backing the certificates
plaintiff purchased was never properly or timely transferred. This fact is confirmed by an
investigation conducted by plaintiff concerning one of the specific offerings at issue herein, which
revealed that the vast majority of loans underlying the offering were not properly or timely
transferred to the trust.
295. Specifically, plaintiff performed an investigation concerning the mortgage loans
purportedly transferred to the trust for the Credit Suisse Defendants’ HEAT 2007-3 offering. The
closing date for this offering was on or about May 1, 2007. Plaintiff reviewed the transfer history for
272 loans that were supposed to be timely transferred to this trust. Thirty-five (35) of the loans were
not and have never been transferred to the trust. Twenty-one (21) additional loans were never
assigned to the trust, and were paid in full in the name of the originator (or a third party). In
addition, two (2) other loans that were supposed to be transferred to the trust were transferred to
entities other than the trust, but not to the trust. The remainder of the loans (214) were eventually
transferred to the trust, but all such transfers occurred between late 2007 and the present, well
beyond the three-month time period required by the trust documents. In other words, none of the
reviewed mortgage loans were timely transferred to the trust, a 100% failure rate.
296. The foregoing example, coupled with the public news, lawsuits and settlements
discussed above, plainly establishes that defendants failed to properly and timely transfer title to the
mortgage loans to the trusts. Moreover, it shows that defendants’ failure to do so was widespread
and pervasive. In fact, the specific example discussed above shows that defendants utterly and
completely failed to properly and timely transfer title. Defendants’ failure has caused plaintiff (and
other RMBS investors) massive damages. As noted by law professor Adam Levitin of Georgetown
University Law Center on November 18, 2010, in testimony he provided to the a U.S. House
Subcommittee investigating the mortgage crisis, “[i]f the notes and mortgages were not properly
transferred to the trusts, then the mortgage-backed securities that the investors[] purchased were in
fact non-mortgaged-backed securities” (emphasis in original), and defendants’ failure “ha[d]
profound implications for [R]MBS investors” like plaintiff.
[…]
