Manal Mehta of Sunesis Capital points us towards this litigation:
2. Discovery Revealed Bear Stearns’s Fraud
42. Unbeknownst to MBIA at the time the transaction closed, the due-diligence report that MBIA received from Bear Stearns was not a complete and accurate set of the loan-file due diligence results that Bear Stearns had obtained from MDMC. Discovery in a case against GMAC Mortgage filed by MBIA in 2010 revealed that Bear Stearns had intentionally altered MDMC’s report to conceal from MBIA that MDMC had found serious credit and compliance problems with respect to approximately one-third of the loansin the sample that it reviewed.
43. After a review of a number of the delinquent and charged-off loans in transactions including the 2006-HE4 Securitization revealed that an overwhelming number of those loans were in breach of representations and warranties made by GMAC Mortgage, MBIA brought fraud and breach of contract claims against GMAC Mortgage in a complaint filed in April of 2010. MBIA Ins. Corp. v. GMAC Mortgage, LLC, Index No. 10/600837 (N.Y. Sup. Ct., N.Y. Cnty.)
44. In that case, MBIA obtained discovery related to MDMC’s due-diligence review in connection with the 2006-HE4 Securitization. Documents produced by MDMC and GMAC Mortgage included correspondence among MDMC, GMAC Mortgage, and Bear Stearns about the results of its review. J.P. Morgan Securities was also subpoenaed, but to date has not produced any documents in that case. Among the documents produced by MDMC in a March 29, 2011 production was the final report that MDMC sent to Bear Stearns on September 25, 2006, of the results of its due-diligence review, in the form of two spreadsheets.
45. When MBIA compared the two spreadsheets that MDMC had provided Bear Stearns on September 25, 2006, with the single spreadsheet that Bear Stearns had provided to MBIA on September 27, 2006, MBIA discovered that the results reported by MDMC were very different from those reported by Bear Stearns. In particular, Bear Stearns had removed approximately 50 columns of information from the spreadsheets it received from MDMC, and left the rest of the data intact, combining it into a single spreadsheet before sending it to MBIA. Critically, the approximately 50 columns that Bear Stearns removed from MDMC’s spreadsheets were results indicating that approximately one-third of the loans in the collateral pool had not been underwritten generally in compliance with GMAC Mortgage’s underwriting standardsor in compliance with applicable laws. MBIA never received those results from Bear Stearns.
55. Bear Stearns actively and intentionally concealed the adverse results of MDMC’s due-diligence review from MBIA by removing each of these approximately 50 columns indicating serious credit or compliance problems from the version of the spreadsheet that it sent to MBIA. Bear Stearns combined the worksheets from the two electronic spreadsheets that it had received from MDMC into one; removed the 50 columns describing adverse results; and left intact the remainder of the spreadsheet.
To induce MBIA to insure the 2006-HE4 Securitization, Bear Stearns agreed to provide MBIA the results of a due-diligence review designed to test the accuracy of the representations and warranties that GMAC Mortgage made to MBIA. Bear Stearns hired a thirdparty underwriting firm—Mortgage Data Management Corporation (“MDMC”)—to perform the due-diligence review on a random sample of the loans within the collateral pool. That review was designed to assess the extent to which the originators of the loans in the pool may have failed to adhere to the loan-underwriting guidelines of GMAC Mortgage and applicable laws and regulations when originating the loans. It was an explicit condition of MBIA’s bid to provide financial guaranty insurance that Bear Stearns must provide MBIA with the results of this due diligence review.
When MDMC reviewed the loan files for the sample of the loans in the 2006 HE-4 transaction, it found a host of serious problems. Most importantly, MDMC concluded that approximately one-third of the loans in the sample had not been originated in compliance with GMAC Mortgage’s loan-underwriting guidelinesor with applicable laws. MDMC provided these results to Bear Stearns in the form of electronic spreadsheets that assigned a “grade” from “1” to “3” for each loan (with a grade of 3 indicating a “large, possibly unacceptable risk” or an “unacceptable serious compliance violation”), and described the numerous problems that MDMC found.
Rather than share the actual results with MBIA, as was its obligation, Bear Stearns altered these spreadsheets to fraudulently conceal the problems that MDMC found. In particular, Bear Stearns knowingly removed from MDMC’s spreadsheets approximately 50 columns of information indicating underwriting and compliance problems with loans, including the columns specifying the grades for each loan and each entry that indicated MDMC had given a loan a failing “grade 3.” Bear Stearns then sent the altered report to MBIA.
The losses experienced by the 2006-HE4 Securitization have caused MBIA to pay, as of March 2012, approximately $168 million in claims. Because Bear Stearns’s fraud and concealment caused MBIA to issue a policy that it never would have issued otherwise, MBIA is entitled to recover from Bear Stearns, at a minimum, the value of claims payments that MBIA has made and will make in the future.
Bear Stearns was well aware that MBIA would rely on the results of the thirdparty due-diligence review in deciding whether to enter into the Insurance Agreements and that MBIA would not agree to provide financial guaranty insurance if the results revealed significant credit or compliance violations. MBIA had no contractual right to review loan-origination files before the 2006-HE4 Securitization closed, nor any meaningful opportunity to do so. Accordingly, MBIA relied on MDMC’s due-diligence review to ensure that risks in the loan files were known and fully disclosed and that MBIA would not face additional hidden risks.
2. Discovery Revealed Bear Stearns’s Fraud
42. Unbeknownst to MBIA at the time the transaction closed, the due-diligence report that MBIA received from Bear Stearns was not a complete and accurate set of the loan-file due diligence results that Bear Stearns had obtained from MDMC. Discovery in a case against GMAC Mortgage filed by MBIA in 2010 revealed that Bear Stearns had intentionally altered MDMC’s report to conceal from MBIA that MDMC had found serious credit and compliance problems with respect to approximately one-third of the loansin the sample that it reviewed.
43. After a review of a number of the delinquent and charged-off loans in transactions including the 2006-HE4 Securitization revealed that an overwhelming number of those loans were in breach of representations and warranties made by GMAC Mortgage, MBIA brought fraud and breach of contract claims against GMAC Mortgage in a complaint filed in April of 2010. MBIA Ins. Corp. v. GMAC Mortgage, LLC, Index No. 10/600837 (N.Y. Sup. Ct., N.Y. Cnty.)
44. In that case, MBIA obtained discovery related to MDMC’s due-diligence review in connection with the 2006-HE4 Securitization. Documents produced by MDMC and GMAC Mortgage included correspondence among MDMC, GMAC Mortgage, and Bear Stearns about the results of its review. J.P. Morgan Securities was also subpoenaed, but to date has not produced any documents in that case. Among the documents produced by MDMC in a March 29, 2011 production was the final report that MDMC sent to Bear Stearns on September 25, 2006, of the results of its due-diligence review, in the form of two spreadsheets.
45. When MBIA compared the two spreadsheets that MDMC had provided Bear Stearns on September 25, 2006, with the single spreadsheet that Bear Stearns had provided to MBIA on September 27, 2006, MBIA discovered that the results reported by MDMC were very different from those reported by Bear Stearns. In particular, Bear Stearns had removed approximately 50 columns of information from the spreadsheets it received from MDMC, and left the rest of the data intact, combining it into a single spreadsheet before sending it to MBIA. Critically, the approximately 50 columns that Bear Stearns removed from MDMC’s spreadsheets were results indicating that approximately one-third of the loans in the collateral pool had not been underwritten generally in compliance with GMAC Mortgage’s underwriting standardsor in compliance with applicable laws. MBIA never received those results from Bear Stearns.
3. Bear Stearns Concealed the Results of MDMC’s Review
46. MDMC had performed its due-diligence review on site at GMAC Mortgage’s offices in Horsham, Pennsylvania between September 13–15, 2006. During this three-day review, an underwriting team from MDMC undertook a comprehensive review of each loan file within a sample of approximately 150 loans. MDMC’s review checked for critical data deficiencies, deficiencies in legal documentation, adherence to GMAC Mortgage’s Underwriting Guidelines, and compliance with federal, state, and local laws.
47. The approximately 150 loans reviewed by MDMC were chosen by Bear Stearns as a random sample of the more than 17,000 loans that constituted the collateral for the 2006-HE4 Securitization. The sample was random by design so that the results could be extrapolated to the entire collateral pool.
48. Following its review of the sample, on September 18, 2006, MDMC sent to both GMAC Mortgage and Bear Stearns a voluminous report that identified 85 of the approximately 150 loans within the reviewed sample as receiving a credit or compliance decision of “fails” or “unacceptable.” The report identified each of these 85 loans as having been assigned credit or compliance grades of “3,” indicating that the loans failed to conform to GMAC Mortgage’s Underwriting Guidelines or to comply with applicable laws and regulations. This report was never shared with MBIA.
49. GMAC Mortgage chose to ignore MDMC’s findings, even though MDMC’s report indicated that more than half of the loans in the sample and, consequently, more than half of the loans in the collateral pool, suffered from serious credit or compliance defects. It did so because the transaction would not have otherwise been able to close, causing GMAC Mortgage to keep these loans on its balance sheet. On September 19, 2006, GMAC Mortgage informed Bear Stearns by email that it had received the 173-page report that MDMC had sent the day before, and that “[t]o receive such an extensive report at this late stage seems unreasonable.” GMAC Mortgage nevertheless informed Bear Stearns that it “considered the pool final with no drops,” and further stated that it “would like sign off from Bear that the pool is final so [GMAC Mortgage’s] analysts can begin to run the collateral tables.”
50. The same day, MBIA submitted its bid letter to Bear Stearns. That letter expressly imposed as a condition of MBIA’s provision of financial guaranty insurance that Bear Stearns share the results of MDMC’s loan-file due-diligence review with MBIA.
51. Consistent with GMAC Mortgage’s request, Bear Stearns did not seek to have any of the defective loans removed from the collateral pool. On September 25, 2006, MDMC sent its final due-diligence report to Bear Stearns. This report indicated that no loans had been removed from the sample. In addition, although MDMC informed Bear Stearns that it had been able to clear 33 of the loans of credit and compliance issues that had been previously reported, MDMC’s report continued to identify 52 of the approximately 150 loans in the sample—or approximately one-third—as receiving failing credit or compliance grades of “3.”
52. Recognizing that MBIA would not agree to issue an insurance policy if it learned of the credit and compliance defects that MDMC had found in the sample, and that it stood to lose millions of dollars in commissions and fees as a result, Bear Stearns fraudulently altered the results that it received from MDMC on September 25 to conceal the information identifying those defects. Bear Stearns knew that MBIA would understand the true results of MDMC’s review to indicate that a significant percentage of the collateral pool suffered from serious credit or compliance defects and, therefore, that the securitization was far riskier than one that MBIA would be willing to insure.
53. Bear Stearns received the September 25 results from MDMC in the form of two electronic spreadsheets, each of which contained three different “worksheets,” or tabs, containing information about each of the loans within the sample. Columns within each worksheet recorded data or information about each loan: the name of each borrower, the address and location of the property securing the borrower’s loan, and information about the loan amount, interest rate, and originator.
54. Approximately 50 columns within the spreadsheets contained information about the defects that MDMC found among loans within the sample. The spreadsheets contained, for example, 10 different columns that indicated a Credit Event Grade, a Compliance Event Grade, or an Overall Grade of 1, 2, or 3, including the failing grades of “3” that MDMC had assigned to 52 loans within the sample. Other columns described the underwriting issues found by MDMC, comments by MDMC underwriters, and information about compensating factors or potential remedies.
55. Bear Stearns actively and intentionally concealed the adverse results of MDMC’s due-diligence review from MBIA by removing each of these approximately 50 columns indicating serious credit or compliance problems from the version of the spreadsheet that it sent to MBIA. Bear Stearns combined the worksheets from the two electronic spreadsheets that it had received from MDMC into one; removed the 50 columns describing adverse results; and left intact the remainder of the spreadsheet.
56. Bear Stearns sent the electronic spreadsheet that contained the due-diligence results that it had altered to MBIA by email on September 27, 2006, hours before the closing of the transaction, with the subject “GMAC 2006 HE-4 DUE DIL REPORT,” which stated: “Attached is the due diligence report for the above deal, let me know if you have any questions.” Bear Stearns did not disclose that it had altered the results, give any indication to MBIA that it had omitted any information that it had received from MDMC, or otherwise suggest the existence of results or information from MDMC’s due-diligence review other than the spreadsheet that Bear Stearns sent to MBIA on September 27.
57. The purported due-diligence results and accompanying email sent by Bear Stearns to MBIA on September 27 were false and misleading. The attached spreadsheet appeared to be a complete and accurate set of the results of the due-diligence review performed by MDMC that concluded all of the loans within the sample as having been originated generally in compliance with GMAC Mortgage’s Underwriting Guidelines and with applicable laws. In fact, the spreadsheet was incomplete and inaccurate. For Bear Stearns to delete the information showing that approximately one-third of the loans in the sample received failing grades from MDMC rendered the purported due-diligence results that Bear Stearns provided to MBIA misleading.
58. The purported due-diligence results received by MBIA and the information omitted from the reports were material to MBIA’s decision to insure the 2006-HE4 Securitization. Because the payment streams from loan borrowers ultimately fund the return to investors, and MBIA insured investors against a shortfall in that return, MBIA would be required to pay claims by investors if enough loans in the pool were to default. Any information bearing on the riskiness of the underlying mortgage loans was thus highly material, including information about the extent to which those loans were originated in conformity with GMAC Mortgage’s Underwriting Guidelines and applicable laws.
59. MBIA reviewed the spreadsheet that it received from Bear Stearns, which MBIA understood to be the complete, unaltered results of MDMC’s due-diligence review. In the light of the information contained in the “altered” spreadsheet, MBIA concluded that the duediligence review had uncovered no significant defects in the loan pool that weighed against providing financial guaranty insurance. MBIA reasonably believed that the results of MDMC’s due diligence confirmed that the collateral for the 2006-HE4 Securitization had in fact been underwritten generally in compliance with GMAC Mortgage’s underwriting standards and applicable laws.
60. In entering into the Insurance Agreement, MBIA justifiably relied on Bear Stearns’s false and misleading statements and omissions of material facts, including the altered spreadsheet that purportedly contained the results of MDMC’s due-diligence review. MBIA reasonably believed that the spreadsheet that it received from Bear Stearns contained a complete and accurate set of results from MDMC’s due-diligence review and that those results did not identify any loans as having serious credit or compliance defects or receiving grades of “3.” MBIA would not have entered into the Insurance Agreement had all of the information that Bear Stearns received from MDMC been included in the spreadsheet provided to MBIA.
61. Since closing, the 2006-HE4 Securitization has performed poorly. Delinquencies and charge-offs for mortgage loans in the loan pools have been much higher than would be expected for pools of loans that conformed to GMAC Mortgage’s Underwriting Guidelines and complied with applicable laws, even taking into account the downturn in the housing market. By March 2012, for example, loans representing over 25% of the original pool balance in the 2006- HE4 Securitization had defaulted and been charged off. A total of at least $286 million has been lost from that original balance.
62. The losses experienced by the 2006-HE4 Securitization have caused MBIA to make approximately $168 million in net claims payments as of March 2012. MBIA has made a total of approximately $250 million in gross claims payments, and has received reimbursements of approximately $82 million from excess spread generated by the 2006-HE4 Securitization.
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