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Ally Financial Inc. PDF

143 Pages·2012·1 MB·English
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Case 1:11-cv-07010-DLC Document 114 Filed 06/12/12 Page 1 of 143 Case 1:11-cv-07010-DLC Document 114 Filed 06/12/12 Page 2 of 143 TABLE OFCONTENTS Page NATUREOF ACTION..................................................................................................................1 PARTIES........................................................................................................................................5 PlaintiffandFreddieMac...................................................................................................5 Defendants..........................................................................................................................6 AllyDefendants......................................................................................................6 Non-AllyDefendants..............................................................................................7 Non-PartyAllyDebtors........................................................................................10 Non-PartyOriginators.......................................................................................................11 JURISDICTIONANDVENUE...................................................................................................11 FACTUALALLEGATIONS.......................................................................................................12 I. FACTUALALLEGATIONS APPLICABLETO ALLCLAIMS...................................12 A. TheSecuritizations................................................................................................13 1. Residential Mortgage-BackedSecuritizations Generally.........................13 2. Securitizations at Issueinthis Case..........................................................14 3. SecuritizationProcess...............................................................................17 a. TheSponsors Grouped Mortgage Loans in Special-PurposeTrusts..................................................................17 b. TheTrusts IssuedSecurities Backedbythe Loans.......................18 B. Defendants’andthe AllyDebtors’Participationin the SecuritizationProcess...........................................................................................21 1. TheAllySponsor: RFC...........................................................................22 2. TheAllyDepositors: RALI,RASC andRAMP......................................24 3. TheAllyUnderwriter: Defendant AllySecurities...................................25 4. TheAllyControl Persons: Defendants AllyFinancial andGMACM.....25 i Case 1:11-cv-07010-DLC Document 114 Filed 06/12/12 Page 3 of 143 5. Non-AllyDefendants................................................................................31 C. Statements intheRegistrationStatements............................................................31 1. CompliancewithUnderwritingGuidelines..............................................32 2. OccupancyStatus ofBorrower.................................................................36 3. Loan-to-ValueRatios................................................................................38 4. Credit Ratings...........................................................................................41 D. FalsityofStatements intheRegistrationStatements............................................43 1. TheStatistical DataProvidedintheProspectus Supplements ConcerningOwner-Occupancyand Loan-to-Value Ratios WereMateriallyFalseor Misleading.......................................................43 a. Owner-OccupancyData Was MateriallyFalseor Misleading.....43 b. Loan-to-ValueDataWas MateriallyFalse...................................46 2. TheOriginators ofthe UnderlyingMortgage Loans Systematically DisregardedTheir UnderwritingGuidelines............................................50 a. AForensicReviewof LoanFiles Has RevealedPervasive FailuretoAdheretoUnderwritingGuidelines.............................50 i. Stated IncomeWas Not Reasonable.................................53 ii. Evidenceof OccupancyMisrepresentations.....................57 iii. Debts IncorrectlyCalculated; DTIExceeded Guidelines.........................................................................59 iv. Credit Inquiries That IndicatedMisrepresentations ofDebts.............................................................................61 b. BothGovernment andPrivate Investigations Confirm that theOriginators ofthe Loans intheSecuritizations SystematicallyFailedto AdheretoTheirUnderwriting Guidelines.....................................................................................64 i. NewCenturyViolated Its UnderwritingGuidelines........65 ii. HFNViolated Its UnderwritingGuidelines......................69 iii. MLNViolated Its UnderwritingGuidelines.....................71 ii Case 1:11-cv-07010-DLC Document 114 Filed 06/12/12 Page 4 of 143 iv. Ownit Violated Its UnderwritingGuidelines....................72 v. EquiFirst Violated Its UnderwritingGuidelines...............72 vi. InflatedAppraisals............................................................73 c. TheCollapseoftheCertificates’Credit Ratings Further Shows that theMortgage Loans Werenot Originatedin AdherencetotheStated UnderwritingGuidelines.......................74 d. TheSurgeinMortgage Delinquencyand Default Further Demonstrates that theMortgage Loans WereNot Originated inAdherencetotheStatedUnderwritingGuidelines...................76 E. FreddieMac’s Purchases oftheCertificates.........................................................78 F. FreddieMacWas DamagedbyDefendants’Violations ofSections 11,12 and15oftheSecurities Act..................................................................................79 II. ADDITIONALFACTUALALLEGATIONS.................................................................80 A. TheFraudDefendants Were IncentivizedtoFund RiskyResidential Mortgage Loans andtoSecuritizeandSell Them to Investors.............................................81 B. TheFraudDefendants’ Material Misrepresentations andOmissions inthe OfferingMaterials.................................................................................................83 C. TheFraudDefendants, AllySponsor,andAllyDepositors Knewor WereReckless innot Knowingthat TheirRepresentations Were Falseand Misleading............................................................................................88 1. TheFraudDefendants IgnoredDue DiligenceResults............................89 2. Warehouse Lendingand Vertical IntegrationGave TheFraud Defendants InsideKnowledgeofUnderwritingDefects..........................97 3. OtherEvidenceDemonstratingthat TheFraudDefendants Knew OrWereReckless InNot KnowingThat TheirRepresentations Were False........................................................................................................101 D. FreddieMacJustifiablyReliedontheMisrepresentations andOmissions intheOfferingMaterials andWas DamagedbytheFraudDefendants’ Fraudulent Conduct...............................................................................................................116 FIRSTCAUSEOFACTION.....................................................................................................120 SECONDCAUSEOFACTION................................................................................................122 THIRDCAUSEOFACTION....................................................................................................124 iii Case 1:11-cv-07010-DLC Document 114 Filed 06/12/12 Page 5 of 143 FOURTHCAUSEOFACTION................................................................................................127 FIFTHCAUSEOFACTION.....................................................................................................130 SIXTHCAUSEOFACTION....................................................................................................133 SEVENTHCAUSEOF ACTION..............................................................................................135 PRAYER FOR RELIEF.............................................................................................................137 iv Case 1:11-cv-07010-DLC Document 114 Filed 06/12/12 Page 6 of 143 PlaintiffFederal HousingFinanceAgency(“Plaintiff”or“FHFA”),as Conservatorofthe Federal Home LoanMortgageCorporation(“FreddieMac”),byits attorneys Kasowitz,Benson, Torres &Friedman LLP, forits Complaint against thedefendants namedherein(“Defendants”), alleges as follows: NATURE OFACTION 1. This actionarises from falseandmisleadingstatements andomissions in registrationstatements, prospectuses, andotherofferingmaterials, pursuant towhichcertain residential mortgage-backedsecurities (“RMBS”) werepurchasedbyFreddieMac. Among otherthings, thesedocuments falselyrepresented that themortgageloans underlyingtheRMBS compliedwithcertainunderwritingguidelines and standards, andpresented afalsepictureofthe characteristics and riskiness ofthoseloans. These representations werematerial toFreddieMac, as theywouldhavebeen toanyreasonableinvestor,andtheirfalsityviolates Sections 11, 12(a)(2),and15oftheSecurities Act of1933,15 U.S.C.§77aet seq.,as well as Sections 13.1- 522(A)(ii)and13.1-522(C)oftheVirginiaCode(the“VirginiaSecurities Act”). FreddieMac justifiablyreliedonDefendants’misrepresentations andomissions ofmaterial fact toits detriment. Inadditiontoits strict statutoryliabilityunderfederal securities lawandliability understatelaw, Defendants’statements andomissions giverisetoliabilityunderstatecommon law. 2. BetweenSeptember23, 2005andMay30,2007, FreddieMacpurchasedover$6 billioninCertificates issuedinconnectionwith21securitizations that werevirtuallyall underwrittenbyDefendants.1 1 Forpurposes ofthis AmendedComplaint,thesecurities issuedundertheRegistration Statements (definedinnote2andparagraph3, infra)are referredtoas “Certificates.” Holders of Certificates arereferredtoas “Certificateholders.” Case 1:11-cv-07010-DLC Document 114 Filed 06/12/12 Page 7 of 143 3. TheCertificates wereofferedforsalepursuant tooneofsix shelfregistration statements (the“ShelfRegistrationStatements”) filedwiththeSecurities andExchange Commission(the“SEC”). Foreachofthe21securitizations soldtoFreddieMac(the “Securitizations”),aprospectus (“Prospectus”) andprospectus supplement (“Prospectus Supplement,”togetherwiththeShelfRegistration Statements andProspectus Supplements, the “RegistrationStatements”)werefiledwiththeSEC as part oftheRegistrationStatement forthat Securitization.2 TheCertificates weremarketed andsoldtoFreddieMacpursuant tothe RegistrationStatements andotherofferingmaterials (“OfferingMaterials”). 4. TheOfferingMaterials containedrepresentations concerning, amongother things, thecharacteristics andcredit qualityofthemortgageloans underlyingtheSecuritizations, the creditworthiness oftheborrowers onthoseunderlyingmortgageloans, and theoriginationand underwritingpractices usedtomakeand approvetheloans. Suchrepresentations werematerial toareasonableinvestor’s decisiontoinvest intheCertificates, andtheywerematerial toFreddie Mac. Unbeknownst toFreddieMac,thoserepresentations weremateriallyfalsebecause, among otherreasons,manyoftheunderlyingmortgageloans werenot originatedinaccordancewiththe representedunderwritingstandards andoriginationpractices, anddidnot havethecredit quality andothercharacteristics set forthintheOfferingMaterials. 5. Amongotherthings, the OfferingMaterials presentedtheloanorigination guidelines ofthemortgageloanoriginators whooriginatedtheloans that underliethe Certificates. The OfferingMaterials falselyrepresentedthat those guidelines wereadheredto 2 Theterm “RegistrationStatement”as usedherein, andinAppendix Aattachedhereto, incorporates theShelfRegistrationStatement,the Prospectus, andtheProspectus Supplement for eachreferencedSecuritization,except whereotherwiseindicated. 2 Case 1:11-cv-07010-DLC Document 114 Filed 06/12/12 Page 8 of 143 except inspecifiedcircumstances, wheninfact theguidelines systematicallyweredisregardedin that theloans werenot originatedinaccordancewiththoseguidelines. 6. Aninitial forensicreviewofloanoriginationfiles has revealedthat thevast majorityofloans revieweddidnot adheretotheoriginator’s underwritingguidelines as representedintheOfferingMaterials. Amaterial discrepancyfrom underwritingguidelines is veryserious, andmeans that theloanshouldnever havebeenincludedintheSecuritizations. For example,theloanapplicationmay: (i)lackkeydocumentationnecessaryto properlyunderwrite theloan; (ii)includeaninvalid,incomplete,orunsupportedappraisal; (iii)evidencethe underwriter’s failuretoconfirm thereasonableness oftheborrower’s stated income; or(iv) reflect that theborrower’s income,FICOscore,debt,debt-to-incomeratio(“DTI”),orloan-to- valueratio(“LTV”)areoutsideoftherangepermittedunderthe guidelines. Adherenceto underwritingguidelines, particularlyonsuchkeycriteriabearingonloan eligibility,is amaterial considerationtoreasonableinvestors. 7. TheOfferingMaterials also set forthforeachSecuritizationstatistical summaries ofthecharacteristics oftheunderlyingmortgageloans, suchas thepercentageofloans secured byowner-occupiedproperties andthepercentageoftheloan group’s aggregateprincipal balance withloan-to-valueratios withinspecifiedranges. This informationwas material toreasonable investors, andit was material toFreddieMac. However, aloan-level analysis ofasampleof loans foreachSecuritization--areviewthat encompassedintheaggregate thousands of mortgages across all oftheSecuritizations --has revealedthat foreachSecuritizationthese statistical summaries werefalse andmisleading. Thestatistics reflectedor werebasedupon misrepresentations ofotherkeycharacteristics ofthemortgageloans andinflatedproperty values. 3 Case 1:11-cv-07010-DLC Document 114 Filed 06/12/12 Page 9 of 143 8. Forexample,thepercentageofowner-occupiedproperties intheloanpool underlyingaRMBS is a material risk factortothe purchasers ofcertificates, suchas Freddie Mac,because aborrower whoactuallylives ina mortgagedpropertyis generallyless likelyto stoppayingthemortgage andmorelikelytotakecareoftheproperty. The loan-level review revealedthat thetruepercentageofowner-occupiedproperties fortheloans supportingthe Certificates was materiallylowerthanthat representedintheOfferingMaterials. Likewise,the OfferingMaterials misrepresentedsuchmaterial informationas loan-to-valueratios --that is, the relationshipbetweenthe principal amount oftheloans andthetruevalueofthemortgaged properties securingthose loans --andthe abilityoftheindividual mortgage holders tosatisfy theirdebts. 9. TheOfferingMaterials also set forthratings foreachoftheSecuritizations. ThoseAAAratings were material toareasonable investor’s decisiontopurchasetheCertificates, andtheywerematerial toFreddieMac. Theratings fortheSecuritizations werebaseduponfalse informationsuppliedbyDefendants andweremateriallymisleadingwithrespect tothecredit qualityoftheCertificates. Uponinformationand belief,neitherthe Defendants northerating agencies that issuedthe ratings believedorhad anysound basis tobelieveintheirtruthfulness. 10. Defendants, whoareunderwriters and/orcontrolledtheissuers andsponsors of theCertificates purchasedbyFreddieMac areliableforthemisstatements andomissions of material fact containedin theRegistrationStatements andotherOfferingMaterials becausethey prepared,filed,and/orusedthesedocuments tomarket andsell theCertificates toFreddieMac, orbecausetheydirected andcontrolledtheentities that didso.3 3 TheCertificates purchasedbyFreddieMac areidentifiedbelowinparagraph46andare listed infra inTable10. 4 Case 1:11-cv-07010-DLC Document 114 Filed 06/12/12 Page 10 of 143 11. Defendants’misstatements andomissions ofmaterial facts havecausedloss and injurytoFreddieMac. FreddieMacpurchasedthehighest ratedtranches ofCertificates offered forsalebyDefendants. FreddieMacwouldnot havepurchasedtheseCertificates but for Defendants’material misrepresentations andomissions concerningthemortgageloans underlyingtheRMBS. As thetruthconcerningthemisrepresentedandomittedfacts has cometo light,andas thehidden risks havematerialized,themarket valueoftheCertificates purchasedby FreddieMachas declined. FreddieMachas sufferedenormous financial losses as aresult of Defendants’misrepresentations andomissions. FHFA,as Conservatorfor FreddieMac,now seeks rescissionanddamages forthoselosses. PARTIES Plaintiff and FreddieMac 12. Plaintiff,theFederal HousingFinance Agency,is afederal agencylocated at 400 7thStreet,S.W.inWashington,D.C. FHFA was createdonJuly30,2008, pursuant tothe HousingandEconomic RecoveryAct of2008,Pub L.No.110-289,122Stat.2654,codifiedat 12U.S.C.§4617 et seq.(“HERA”),tooverseetheFederal National MortgageAssociation (“FannieMae”), Freddie Macandthe Federal Home LoanBanks. OnSeptember6,2008,the Directorof FHFA, also pursuant toHERA,placed FreddieMacintoconservatorshipand appointedFHFAas Conservator. Inthat capacity, FHFAhas the authoritytoexerciseall rights andremedies ofFreddie Mac,including,but not limitedto,theauthorityto bringsuits onbehalf ofand/orforthebenefit ofFreddieMac. 12U.S.C.§4617(b)(2). 13. FreddieMacis a government-sponsoredenterprisecharteredbyCongress witha missiontoprovideliquidity,stabilityand affordabilitytotheUnitedStates housingandmortgage markets. As part ofthis mission,FreddieMacinvestedinRMBS. Freddie Macis located at 8200Jones BranchDrive inMcLean,Virginia. 5

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Jun 12, 2012 The Fraud Defendants Were Incentivized to Fund Risky Residential Mortgage. Loans and to . However, a loan-level analysis of a sample of loans for . Prior to 2010, Ally Financial was known as GMAC,. LLC. 15. In the most common form of securitization of mortgage loans, a sponsor -- th
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