Preview
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Warren 2006-S3
Rebuttal Report
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SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
IN RE: PART 60 RMBS PUTBACK LITIGATION
NOMURA ASSET ACCEPTANCE
CORPORATION, ALTERNATIVE LOAN
TRUST SERIES 2006-S3, by HSBC Bank
USA, National Association, as Trustee,
Plaintiff, Index No. 652619/2012
IAS Part 60
-against-
NOMURA CREDIT & CAPITAL, INC.,
Defendant.
NOMURA CREDIT & CAPITAL, INC.,
Third-Party Plaintiff,
-against- Third Party Index No.
595353/2014
WELLS FARGO BANK, N.A. and
OCWEN LOAN SERVICING, LLC,
Third-Party Defendants.
EXPERT REPORT
OF
SAMUEL WARREN
December 2, 2019
HIGHLY CONFIDENTIAL
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TABLE OF CONTENTS
Page
I. INTRODUCTION ...................................................................................................1
II. BACKGROUND .....................................................................................................1
A. Related Litigation by HSBC Against Nomura.............................................1
B. Nomura’s Suit Against Ocwen ....................................................................7
1. Nomura’s Expert Anthony M. Lendez.............................................7
2. Nomura’s Expert Jerry Hausman ...................................................10
C. Scope of Engagement ................................................................................11
III. QUALIFICATIONS AND EXPERIENCE ...........................................................12
IV. RMBS SECURITIZATION BACKGROUND .....................................................15
A. Overview of the Securitization Process .....................................................15
1. Loan Originators Create Loans Securitized in RMBS Trusts ........18
2. Sponsors Perform Diligence to Evaluate Loan Quality and
Purchase Loans for the Purpose of Securitizing Them ..................19
3. The Sponsor Transfers the Loans to the Depositor, Which
Deposits Them Into a Trust in Exchange for Certificates..............22
4. The Certificates Are Sold to Investors ...........................................23
5. The Servicer’s Role........................................................................24
B. PSAs Reflect A Carefully Calibrated Distribution Of Risks
Between And Among The Parties And Certificateholders Related
To The Quality Of The Loans. ...................................................................25
1. Sponsors Assume and Seek to Minimize Repurchase Risk
Related to the Characteristics and Quality of the Mortgage
Loans ..............................................................................................25
2. Servicers Assume Different Risks Unrelated to the Quality
or Performance of the Mortgage Loans .........................................26
3. The Economics of RMBS Reflect the Risk Allocation in
PSAs ...............................................................................................30
4. Sponsors Such as Nomura Could and Did Seek to Mitigate
Their Repurchase Risk by Insisting on Early Payment
Default Protection from Originators, but Nomura Accepted
Payment in Lieu of Invoking this Protection, and Retained
the Risk ..........................................................................................31
V. REBUTTAL OF NOMURA’S DAMAGES EXPERT .........................................33
A. Summary of Dr. Jerry A. Hausman’s Assumptions and Findings .............33
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B. In Calculating Damages, Dr. Hausman Ignores Nomura’s
Admission That Its Damages Claim Against Ocwen Is Contingent
on the Existence of Material Breaches, Which Nomura Has Denied ........36
C. Dr. Hausman’s Calculation of Damages from Ocwen’s Alleged
Failure to Notify of Breaches is Based on Mr. Lendez’s Baseless
Assumption that the Relevant Loans “Had No Equity”.............................38
D. Dr. Hausman’s Calculation of Damages from Ocwen’s Alleged
Failure to Notify of Breaches is Incorrect..................................................39
1. There is No Basis to Conclude That Ocwen Discovered
Any Breaches or That Nomura Would Have Repurchased
Claim Loans Even if Ocwen Had Provided Notice .......................40
i. The 347 Claim Loans for Which Nomura’s Expert
Found No Breaches Should Be Excluded From
Hausman’s Damages Calculation ......................................41
ii. The 27 Loans For Which Nomura’s Expert
Affirmatively Found Insufficient Information To
Establish Breaches Of Representations And
Warranties Should Be Excluded From Damages
That Dr. Hausman Attributes To Ocwen ...........................43
2. The Loans That, According To Mr. Lendez, Defaulted For
Reasons Other Than Alleged Breaches Of Representations
And Warranties Should Be Excluded From Damages That
Dr. Hausman Attributes To Ocwen ...............................................44
3. Dr. Hausman Ignores the Fact Nomura Has Been Notified
of Potential Breaches of Representations and Warranties
and Has Not Repurchased the Loans .............................................47
4. Dr. Hausman Ignores His Own Criticisms of Dr. Snow’s
Methodology, Which When Applied, Materially Reduces
His Damages Calculation ...............................................................49
i. Dr. Hausman Does Not Consider Whether Nomura
Received “Reprice” Payments from Originators ...............51
E. Dr. Hausman’s Calculation Of Damages Based On Ocwen’s
Alleged Failure To “Make Prudent Servicing Decisions” Is
Unreliable and are Miscalculated...............................................................52
i. Dr. Hausman’s Assertion That High Loss Severities
are the Result of Purported Servicer Misconduct Is
Baseless and Renders the Related Damages
Calculation Unreliable .......................................................56
ii. Neither Mr. Lendez Nor Dr. Hausman
Appropriately Account For The Expectation that
Second Lien Loans Are Expected To Have A Loss
Severity of 100%................................................................58
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2. Dr. Hausman’s Calculation of Damages Attributable to
Ocwen’s Alleged Misconduct Related to Loans with Loss
Severities in Excess of 100% Is Unreliable and Overstated ..........59
i. Dr. Hausman’s Methodology for Calculating
Damages for Purported Misconduct Related to
Loans with Loss Severities in Excess of 100%
Overstates Nomura’s Hypothetical Damages
Because It Is Based on a Faulty Calculation ......................60
VI. CONCLUSION ......................................................................................................63
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I. Introduction
1. My name is Samuel Warren. I am the head of the Advisory Group within
Brean Strategic Advisors LLC (“Brean”). My qualifications are detailed in Section III, and
my Curriculum Vitae is included as Appendix A of this Report.
2. I have been retained by Chelney Law Group PLLC and Locke Lord LLP to
provide expert opinions on behalf of Ocwen Loan Servicing, LLC (“Ocwen”), a defendant
in Nomura Credit & Capital Inc. v. Wells Fargo Bank, N.A., and Ocwen Loan Servicing,
LLC, (NY Sup. Ct., New York Cty., Third-Party Index No. 595353/2014).
II. Background
A. Related Litigation by HSBC Against Nomura
3. I understand that in a related case, HSBC Bank USA, National Association
(“HSBC”), as Trustee of the Nomura Asset Acceptance Corporation Alternative Loan
Trust, Series 2006-S3 (the “Trust” or the “NAAC 2006-S3 Trust” or the “NAAC 2006-S3
Securitization”), has brought a suit against Nomura Credit & Capital, Inc. (“Nomura”), as
securitization sponsor1, alleging that Nomura breached its representations and warranties
related to certain of the loans securitized in the Trust (the “First Party Action”).
4. In the First Party Action, HSBC demands that Nomura repurchase certain
mortgage loans in accordance with the repurchase protocol described in Section 2.03 of the
Pooling and Servicing Agreement (the “PSA” or the “NAAC 2006-S3 PSA”), dated July
1, 2006, between Nomura Asset Acceptance Corporation, as depositor, Nomura Credit &
Capital, Inc., as seller, GMAC Mortgage Corporation and Ocwen Loan Servicing, LLC
1
I note that the NAAC 2006-S3 PSA designated Nomura as the seller, which in the context of non-agency
RMBS securitizations carries the same meaning as securitization sponsor. See NOM_ZAMBEZIIV
02452442. Therefore, for the purposes of this report, I refer to Nomura as the sponsor.
1
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(“Ocwen”), as servicers, HSBC Bank USA, National Association, as trustee, and Wells
Fargo Bank, N.A., as Securities Administrator, Master Servicer and Custodian.
5. I also understand that HSBC engaged Robert W. Hunter to perform a “re-
underwriting review” of a sample of 400 loans (the “Sample Loans”) underlying NAAC
2006-S3 Securitization, 2 and in reviewing the Sample Loans, Mr. Hunter purportedly
“determined whether one or more violations of Representations were present, and, as to
each such violation, whether the violation was material.”3 Mr. Hunter found that “374 of
the 400 Sample Loans in the NAAC 2006-S3 did not comply with the Representations in
the MPLA in a manner than, as of the date of breach and continuously thereafter, has
materially and adversely affected the value of any Mortgage Loan….”4
6. Mr. Hunter apparently found no material representation and warranty
(“R&W”) breaches in the remaining 26 Sample Loans.5
7. I understand that HSBC also engaged Peter D. Rubinstein “to opine on the
meaning of the Rating Agency Warranty, what breaches of the Rating Agency Warranty
have a material and adverse effect, and identify whether any breaches of the Rating Agency
Warranty have a material and adverse effect.”6 Dr. Rubinstein found in total that “311
2
Amended Expert Report of Robert W. Hunter, Nomura Asset Acceptance Corporation Alternative Loan
Trust, Series 2006-S3, by HSBC Bank USA, National Association, in its capacity as Trustee v. Nomura
Credit & Capital, Inc. (Sup. Ct. N.Y. Co., No. 652619/2012) (December 6, 2018) (the “Amended Hunter
Report”), p. 3.
3
Amended Hunter Report, p. 76.
4
Id. at pp. 77-78.
5
I note that based on Exhibit D to the Amended Hunter Report, it appears Mr. Hunter found 375 loans had
material and adverse breaches, but it is unclear whether Mr. Hunter found no material breaches of
representations and warranties for 25 or 26 of the 400 reviewed loans.
6
Amended Expert Report of Peter D. Rubinstein, Nomura Asset Acceptance Corporation Alternative Loan
Trust, Series 2006-S3, by HSBC Bank USA, National Association, in its capacity as Trustee v. Nomura
Credit & Capital, Inc. (Sup. Ct. N.Y. Co., No. 652619/2012) (December 6, 2018) (the “Amended
Rubinstein Report”), pp. 1-2.
2
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loans had breaches with a material and adverse effect in one or more of the loan
characteristics….”7
8. Dr. Rubinstein apparently found no material representation and warranty
breaches in the remaining 89 Sample Loans.8
9. I understand that HSBC also engaged Karl N. Snow to “draw a random
sample from the population of Mortgage Loans underlying the Trust that had been charged
off in full for accounting purposes with a loss of greater than or equal to $100 and that had
not been repurchased as of January 31, 2016….”9 Dr. Snow refers to these 2,289 loans10
as the “Liquidated Loans” and the “Liquidated Population.”11 For the purposes of this
report, I refer to these 2,289 loans as the “Liquidated Loan Population.” Dr. Snow’s
“Primary Sample” included 40012 “Liquidated Loans.” Dr. Snow received a “Defective
Liquidated Loan List,” which includes the 394 allegedly “Defective Liquidated Loans”
based on Mr. Hunter’s and Dr. Rubinstein’s findings.13 For the purposes of this report, I
refer to these 394 loans as the “Claim Loans.” Based on the rate of “Defective Liquidated
Loans” in the sample (394/400 = 98.5%), Dr. Snow extrapolates to the rest of the 2,289
7
Amended Rubinstein Report, p. 54.
8
I note that based on Appendix F to the Amended Rubinstein Report’, which purports to be a “Schedule of
Breaching Mortgage Loans with a Material and Adverse Effect,” Dr. Rubinstein only references 305 loans.
Therefore, it is unclear whether Dr. Rubinstein found no material breaches of representations and
warranties for 89 or 95 of the 400 reviewed loans.
9
Amended Expert Report of Karl N. Snow, Nomura Asset Acceptance Corporation Alternative Loan Trust,
Series 2006-S3, by HSBC Bank USA, National Association, in its capacity as Trustee v. Nomura Credit &
Capital, Inc. (Sup. Ct. N.Y. Co., No. 652619/2012) (December 6, 2018) (the “Amended Snow Report”), p.
6.
10
Amended Snow Report, p. 6.
11
Id. at p. 5.
12
Id. at p. 19.
13
Id. at p. 6.
3
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“Liquidated Loans.” Dr. Snow refers to the resulting 2,255 derived loan population as the
“Extrapolated Defective Liquidated Loans in Population.”14
10. Dr. Snow calculated “Repurchase Damages” for all 2,289 “Liquidated
Loans” under six 15 scenarios, involving different assumptions about the date Nomura
would have hypothetically repurchased the loans. 16 Dr. Snow calculated damages of
$293.3 million to $296.8 million due to “Nomura’s failure to repurchase the Defective
Liquidated Loans,” depending on the scenario.17
11. It is also my understanding that Nomura denied that it breached its
representations and warranties as alleged by HSBC and has challenged the damages
calculated by HSBC’s expert, Dr. Snow.
12. Nomura engaged Michael Forester who “evaluated the 374 Hunter Claim
Loans for the presence of alleged material breaches of the Representations, as claimed by
Hunter….”18 In conducting his review, Mr. Forester relied on his “extensive experience
and knowledge of underwriting, re-underwriting and the mortgage industry….”19
13. After reviewing the 374 loans, Mr. Forester found “Hunter’s opinions as to
the existence and/or materiality of claimed breaches of Representations as to 347 of those
loans are unfounded and/or lack adequate support.”20 Mr. Forester also found that “[f]or
27 of the Hunter Claim Loans, I am not able to reach a definitive opinion based on the
14
Id.
15
I note Dr. Snow states he used five scenarios, but he lists six scenarios. See id. at pp. 6-8.
16
Id. at p. 6.
17
Id. at p. 8.
18
Expert Report of Michael Forester, Nomura Asset Acceptance Corporation Alternative Loan Trust,
Series 2006-S3, by HSBC Bank USA, National Association, in its capacity as Trustee v. Nomura Credit &
Capital, Inc. (Sup. Ct. N.Y. Co., No. 652619/2012) (May 15, 2019) (the “Forester Report”), p. 4.
19
Forester Report, p. 4.
20
Id. at p. 6.
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currently available information.”21 Mr. Forester also notes that “Hunter improperly bases
various allegations on breach on purported violations of underwriting guidelines, even
though there is no underwriting guidelines representation in the MLPA.”22
14. Nomura also engaged Jerry A. Hausman to among other things, “provide
[his] opinions in response to allegations of ‘materiality’ and amounts recoverable contained
in the Amended Expert Report of Robert W. Hunter … the Amended Confidential Expert
Report of Peter D. Rubinstein, Ph.D . . . and the Amended Expert Report of Karl N. Snow,
Ph.D., as well as to opine on whether these reports demonstrate that the alleged breaches
of representations and warranties caused losses with respect to the mortgage loans at
issue.”23
15. Dr. Hausman noted that “[i]n the years before the NAAC 2006-S3
securitization closed in July 2006, the United States housing market experienced an
unprecedented increase in housing prices, followed shortly thereafter by the worst financial
crisis since the Great Depression.”24 Dr. Hausman further stated: “the subsequent collapse
in housing prices and rise in unemployment led to a substantial increase in the seriously
delinquency rate at the national level, as well as increasing losses to the owners of the
mortgage loans. All of these changes were generally even more pronounced in the regions
where loans in the Trust were concentrated.”25 In the same vein, Dr. Hausman also stated
that “[e]conomic theory and experience indicate that housing prices have a significant
21
Id.
22
Id. at p. 7.
23
Expert Report of Jerry A. Hausman, Nomura Asset Acceptance Corporation Alternative Loan Trust,
Series 2006-S3, by HSBC Bank USA, National Association, in its capacity as Trustee v. Nomura Credit &
Capital, Inc. (Sup. Ct. N.Y. Co., No. 652619/2012) (May 15, 2019) (the “Hausman First-Party Report”),
pp. 2-3.
24
Hausman First-Party Report, p. 31.
25
Id. at 32.
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effect on the likelihood of borrower default as well as the amount of loss in the event of
foreclosure.”26
16. With respect to the “Mr. Hunter and Dr. Rubinstein [contention] generally
that certain ‘defects’ associated with underwriting and origination of the at-issue loans (as
alleged by Mr. Hunter) are ‘material,’” Dr. Hausman found that “neither Mr. Hunter nor
Dr. Rubinstein conducts any empirical analysis linking the specific alleged defects that
they identify to the performance of the at-issue loans” and “[i]n the absence of such an
analysis, their opinions that certain alleged breaches were ‘material and adverse’ are
unsupported.”27 Dr. Hausman further stated, “Dr. Rubinstein gives no consideration to
differences in the performance of the loans in the Trust and the different time periods,
geographies, and loan characteristics.”28
17. Dr. Hausman also found: “None of the Plaintiff’s experts demonstrate that
any losses were caused by the alleged defects in the Claim Loans. Plaintiff’s expert reports
contain no empirical analyses to assess whether those alleged defects, as opposed to other
factors, caused any losses wither at the individual loan level or to the certificates. To the
contrary, as discussed above, factors other than alleged defects caused a substantial amount
of the losses on the mortgage loans underlying the Trust.”29 Of note, Dr. Hausman does
not reference servicer conduct among factors which cause losses on the mortgage loans.
26
Id.
27
Id. at p. 47.
28
Id. at pp. 48-49.
29
Id. at p. 50.
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B. Nomura’s Suit Against Ocwen
18. I understand that Nomura subsequently sued Ocwen, the servicer for the
loans in the NAAC 2006-S3 Securitization (the “Third Party Action”).30 Nomura alleges
that Ocwen failed to perform its obligations under the NAAC 2006-S3 PSA and that
Nomura suffered damages from Ocwen’s conduct.31
1. Nomura’s Expert Anthony M. Lendez
19. In Nomura’s suit against Ocwen, Nomura engaged Anthony M. Lendez to
opine on “(i) whether borrower defaults on certain mortgage loans were causally related to
breaches of origination-related representations and warranties; and (ii) whether Ocwen …
complied with … servicing obligations.”32
20. Mr. Lendez noted the Offering Circular for the NAAC 2006-S3
Securitization, which stated, “an overall general decline in residential real estate values
could cause a particularly severe decline in the value of the mortgaged properties relating
to mortgage loans in the trust.”33 Mr. Lendez further noted, “[a]s of the Measurement Date,
for the 2,289 Liquidated Loan Population, over 53% of the Realized Losses had occurred
in California, Florida, Arizona and Nevada…” and “between 2007 and 2009, these four
states sustained substantial decreases in property values.”34
21. Mr. Lendez identified 4 of the 2,289 loans in the “Liquidated Loan
Population” were still active as of Mr. Lendez’s “Measurement Date,” and 2 loans which
30
Nomura Credit & Capital, Inc., v. Wells Fargo Bank, N.A. and Ocwen Loan Servicing, LLC (Sup. Ct.
N.Y. Co., Third Party Index No. 595353/2014).
31
Id. at ¶¶ 43-67.
32
Amended Expert Report of Anthony M. Lendez, Nomura Credit & Capital, Inc., v. Wells Fargo Bank,
N.A. and Ocwen Loan Servicing, LLC (Sup. Ct. N.Y. Co., Third Party Index No. 595353/2014) (May 31,
2019) (the “Amended Lendez Report”), p. 1.
33
Amended Lendez Report, p. 11.
34
Id. at 14.
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were paid off with no losses35 and thus, could not be repurchased by Nomura under the
repurchase protocol in Section 2.05 of the PSA.36 Mr. Lendez cites Section 2.05 of the
PSA,37 which states, in relevant part, that “with respect to any Mortgage Loan that is not in
default or as to which default is not imminent, no substitution pursuant to Sections 2.02 or
2.03 shall be made unless Seller delivers to the Trustee an [REMIC] Opinion of Counsel.”38
Mr. Lendez stated that he is “not aware that the Trustee received any REMIC Opinions that
would permit the repurchase of performing Mortgage Loans in the Trust.”39
22. Mr. Lendez also opined that it is “highly unlikely that a delinquency or
default was the result of an origination deficiency the longer a loan performs.”40 Relying
upon the Representations & Warranties Framework used by the GSEs, “which suggests
that they will not pursue origination-based claims once a loan has performed for a specified
period of time,”41 Mr. Lendez “eliminates the losses” associated with 87 Claim Loans and
597 loans in the Liquidated Loan Population that fit the GSE’s criteria.42
23. Mr. Lendez also concluded that for the 151 Claim Loans and 849 of the
loans in the Liquidated Loan Population, where the delinquencies and defaults were
traceable to a “change of life event” suffered by the borrower, the defaults of the loans
35
Id. p. 14.
36
Id. at pp. 19-20 n.39 (4 active loans and 2 loans paid off that were inappropriately included in the
Liquidated Loan Population by Dr. Snow in his report).
37
Id.
38
NAAC 2006-S3 PSA Section 2.05.
39
Amended Lendez Report, pp. 19-20, n.39.
40
Id. at p. 25.
41
Id. at p. 26. According to Mr. Lendez, “the GSE Framework will not seek to enforce origination-based
claims upon payment by the borrower of the first 36 monthly payments due following the mortgage loan
acquisition date, provided the borrower: (i) had no more than two 30-day delinquencies; (ii) had no 60-day
or greater delinquencies; and (iii) is not 30 or more days delinquent with respect to the 36th monthly
payment.” See i.d. at pp. 25-26 n.50 (citing “Lender Selling Representations and Warranties Framework
Updates.” Selling Guide Announcement SEL-2014-05, Fannie Mae, May 12, 2014).
42
Id. at p. 26.
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were likely caused by those events and not by any breach of Nomura’s representations and
warranties.43
24. Mr. Lendez then concluded that Ocwen “failed to make prudent servicing
decisions, often leading to unnecessary losses and avoidable expenses…”44 on 295 of the
394 Claim Loans and 1,631 of the 2,289 loans in the Liquidated Loan Population.45 In
support of this claim, Mr. Lendez states that “if the Servicer makes prudent servicing
decision with respect to any particular Mortgage Loan, the Trust should never incur a loss
greater than 100% of that Mortgage Loan.” 46 Mr. Lendez cites Ocwen’s policies and
procedures as outlined in the Offering Circular (also known as the prospectus supplement)
for the NAAC 2006-S3 Securitization, which stated:
If the projected loss severity reaches or exceeds 100%
(proceeds less expenses) then future advances on the
mortgage loan are deemed nonrecoverable and a
recommendation is then made to stop making advances. A
more in-depth analysis is conducted to determine if charge-
off is appropriate.47
25. Mr. Lendez also concluded that Ocwen “failed to provide prompt written
notice” of Nomura’s breaches of “origination-related representations and warranties that
materially and adversely affect[ed] the interest of the Certificateholders” on 374 of the 394
Claim Loans and 2,146 of the 2,289 loans in the Liquidated Loan Population.48 Mr. Lendez
does not opine that Ocwen knew that Nomura breached its representations and warranties
with respect to any particular loan, nor does he identify any information in Ocwen’s
43
Id. at pp. 21-27.
44
Id. at p. 35.
45
Id. at p. 38.
46
Id. at p. 37.
47
NAAC 2006-S3 Offering Circular (July 28, 2006), p. 49. See Index No. 652619/2012, Dkt. No. 9.
48
See Amended Lendez Report, p. 42.
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possession showing that Ocwen had discovered that Nomura breached its representations
and warranties. Mr. Lendez does not articulate any basis to conclude that the terms of the
PSA expressly require, or that, as a matter of Accepted Servicing Practices (as that term is
defined in the PSA), servicers are expected to review delinquent or defaulted loans to
determine if a sponsor, such as Nomura, materially breached its representations and
warranties.
26. Nevertheless, Mr. Lendez opines that Ocwen should have provided notice
of Nomura’s alleged breaches of representations and warranties to Nomura, upon the
earlier of when a borrower became 90 days delinquent or entered foreclosure, plus 30
days. 49 According to Mr. Lendez, “[h]ad the Servicers undertaken a review of the
origination-related materials shortly after delinquency in their efforts to determine the best
course for maximizing recoveries, there is no reason that they too would not have identified
the breaches” alleged by the Trust.50
2. Nomura’s Expert Jerry Hausman
27. In its suit against Ocwen, Nomura also engaged Jerry A. Hausman to
“determine the amount of damages calculated by Dr. Snow… for loans where Nomura’s
Expert Anthony M. Lendez … has opined in his May 31, 2019, amended expert report that
Nomura’s alleged breaches are unlikely to have caused default” and “result from certain
servicing practices identified by Mr. Lendez.”51 Based on Mr. Lendez’s conclusions, Dr.
Hausman recalculated the Trust’s damages using Dr. Snow’s methodology, but reduced
49
See id. at p. 41. As a shorthand throughout this report, I refer to such breaches as “material” breaches.
50
See id.
51
Amended Expert Report of Jerry A. Hausman Report, Nomura Credit & Capital, Inc., v. Wells Fargo
Bank, N.A. and Ocwen Loan Servicing, LLC (Sup. Ct. N.Y. Co., Third Party Index No. 595353/2014) (May
31, 2019) (the “Amended Hausman Report”), p. 3.
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damages and attributed a portion of those damages to Ocwen52 based on “certain servicing
practices identified by Mr. Lendez.”53 Dr. Hausman relied upon Mr. Lendez’s allegation
of Ocwen’s “(i) failure to make sound decisions on defaulted mortgage loans; and
(ii) failure to provide prompt notice.”54
28. Based on Mr. Lendez’s opinions, Dr. Hausman also reduced damages that
Nomura allegedly caused to the NAAC 2006-S3 Trust, by excluding from his calculations
loans that went delinquent or defaulted after a significant number of payments were made
and loans which likely went delinquent or defaulted due to a “change of life event” suffered
by the borrower.55
C. Scope of Engagement
29. I have been retained to provide an overview of the securitization process for
RMBS securitizations and the roles, responsibilities, and expectations of parties to RMBS
securitizations and evaluate Dr. Hausman’s calculation of damages he attributed to Ocwen
based on Mr. Lendez’s findings.
30. In connection with this engagement, I have reviewed and analyzed the fact
discovery materials provided to me. I also have reviewed and analyzed publicly available
information and data pertaining to RMBS. A list of the documents and data I relied upon
in forming my expert opinions is listed in Appendix B.
31. The aforementioned background, evaluation, and review of relevant
materials, are informed by my experience purchasing, valuing, and modelling the
52
See Amended Hausman Report, p. 8.
53
Id. at p. 3.
54
See id. at p. 8.
55
See id. at pp. 6-7.
11
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performance of mortgage loans collateralizing RMBS, structuring and modelling RMBS,
and negotiation, sale, and oversight of sub-servicing contracts.
32. All of the opinions in this report are my own. I am being compensated for
my work on this matter at my regular hourly rate of $750. I have been assisted in this
matter by staff of Brean, who work under my direction.
33. My compensation for this report is not contingent upon the substance of my
opinions, the substance of any testimony I provide related to this report, or the outcome of
this Action or any proceeding within this Action. I reserve the right to amend and/or
sup
Preview
FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 Warren 2006-S3 Rebuttal Report FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK IN RE: PART 60 RMBS PUTBACK LITIGATION NOMURA ASSET ACCEPTANCE CORPORATION, ALTERNATIVE LOAN TRUST SERIES 2006-S3, by HSBC Bank USA, National Association, as Trustee, Plaintiff, Index No. 652619/2012 IAS Part 60 -against- NOMURA CREDIT & CAPITAL, INC., Defendant. NOMURA CREDIT & CAPITAL, INC., Third-Party Plaintiff, -against- Third Party Index No. 595353/2014 WELLS FARGO BANK, N.A. and OCWEN LOAN SERVICING, LLC, Third-Party Defendants. EXPERT REPORT OF SAMUEL WARREN December 2, 2019 HIGHLY CONFIDENTIAL FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 TABLE OF CONTENTS Page I. INTRODUCTION ...................................................................................................1 II. BACKGROUND .....................................................................................................1 A. Related Litigation by HSBC Against Nomura.............................................1 B. Nomura’s Suit Against Ocwen ....................................................................7 1. Nomura’s Expert Anthony M. Lendez.............................................7 2. Nomura’s Expert Jerry Hausman ...................................................10 C. Scope of Engagement ................................................................................11 III. QUALIFICATIONS AND EXPERIENCE ...........................................................12 IV. RMBS SECURITIZATION BACKGROUND .....................................................15 A. Overview of the Securitization Process .....................................................15 1. Loan Originators Create Loans Securitized in RMBS Trusts ........18 2. Sponsors Perform Diligence to Evaluate Loan Quality and Purchase Loans for the Purpose of Securitizing Them ..................19 3. The Sponsor Transfers the Loans to the Depositor, Which Deposits Them Into a Trust in Exchange for Certificates..............22 4. The Certificates Are Sold to Investors ...........................................23 5. The Servicer’s Role........................................................................24 B. PSAs Reflect A Carefully Calibrated Distribution Of Risks Between And Among The Parties And Certificateholders Related To The Quality Of The Loans. ...................................................................25 1. Sponsors Assume and Seek to Minimize Repurchase Risk Related to the Characteristics and Quality of the Mortgage Loans ..............................................................................................25 2. Servicers Assume Different Risks Unrelated to the Quality or Performance of the Mortgage Loans .........................................26 3. The Economics of RMBS Reflect the Risk Allocation in PSAs ...............................................................................................30 4. Sponsors Such as Nomura Could and Did Seek to Mitigate Their Repurchase Risk by Insisting on Early Payment Default Protection from Originators, but Nomura Accepted Payment in Lieu of Invoking this Protection, and Retained the Risk ..........................................................................................31 V. REBUTTAL OF NOMURA’S DAMAGES EXPERT .........................................33 A. Summary of Dr. Jerry A. Hausman’s Assumptions and Findings .............33 i FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 B. In Calculating Damages, Dr. Hausman Ignores Nomura’s Admission That Its Damages Claim Against Ocwen Is Contingent on the Existence of Material Breaches, Which Nomura Has Denied ........36 C. Dr. Hausman’s Calculation of Damages from Ocwen’s Alleged Failure to Notify of Breaches is Based on Mr. Lendez’s Baseless Assumption that the Relevant Loans “Had No Equity”.............................38 D. Dr. Hausman’s Calculation of Damages from Ocwen’s Alleged Failure to Notify of Breaches is Incorrect..................................................39 1. There is No Basis to Conclude That Ocwen Discovered Any Breaches or That Nomura Would Have Repurchased Claim Loans Even if Ocwen Had Provided Notice .......................40 i. The 347 Claim Loans for Which Nomura’s Expert Found No Breaches Should Be Excluded From Hausman’s Damages Calculation ......................................41 ii. The 27 Loans For Which Nomura’s Expert Affirmatively Found Insufficient Information To Establish Breaches Of Representations And Warranties Should Be Excluded From Damages That Dr. Hausman Attributes To Ocwen ...........................43 2. The Loans That, According To Mr. Lendez, Defaulted For Reasons Other Than Alleged Breaches Of Representations And Warranties Should Be Excluded From Damages That Dr. Hausman Attributes To Ocwen ...............................................44 3. Dr. Hausman Ignores the Fact Nomura Has Been Notified of Potential Breaches of Representations and Warranties and Has Not Repurchased the Loans .............................................47 4. Dr. Hausman Ignores His Own Criticisms of Dr. Snow’s Methodology, Which When Applied, Materially Reduces His Damages Calculation ...............................................................49 i. Dr. Hausman Does Not Consider Whether Nomura Received “Reprice” Payments from Originators ...............51 E. Dr. Hausman’s Calculation Of Damages Based On Ocwen’s Alleged Failure To “Make Prudent Servicing Decisions” Is Unreliable and are Miscalculated...............................................................52 i. Dr. Hausman’s Assertion That High Loss Severities are the Result of Purported Servicer Misconduct Is Baseless and Renders the Related Damages Calculation Unreliable .......................................................56 ii. Neither Mr. Lendez Nor Dr. Hausman Appropriately Account For The Expectation that Second Lien Loans Are Expected To Have A Loss Severity of 100%................................................................58 ii FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 2. Dr. Hausman’s Calculation of Damages Attributable to Ocwen’s Alleged Misconduct Related to Loans with Loss Severities in Excess of 100% Is Unreliable and Overstated ..........59 i. Dr. Hausman’s Methodology for Calculating Damages for Purported Misconduct Related to Loans with Loss Severities in Excess of 100% Overstates Nomura’s Hypothetical Damages Because It Is Based on a Faulty Calculation ......................60 VI. CONCLUSION ......................................................................................................63 iii FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 I. Introduction 1. My name is Samuel Warren. I am the head of the Advisory Group within Brean Strategic Advisors LLC (“Brean”). My qualifications are detailed in Section III, and my Curriculum Vitae is included as Appendix A of this Report. 2. I have been retained by Chelney Law Group PLLC and Locke Lord LLP to provide expert opinions on behalf of Ocwen Loan Servicing, LLC (“Ocwen”), a defendant in Nomura Credit & Capital Inc. v. Wells Fargo Bank, N.A., and Ocwen Loan Servicing, LLC, (NY Sup. Ct., New York Cty., Third-Party Index No. 595353/2014). II. Background A. Related Litigation by HSBC Against Nomura 3. I understand that in a related case, HSBC Bank USA, National Association (“HSBC”), as Trustee of the Nomura Asset Acceptance Corporation Alternative Loan Trust, Series 2006-S3 (the “Trust” or the “NAAC 2006-S3 Trust” or the “NAAC 2006-S3 Securitization”), has brought a suit against Nomura Credit & Capital, Inc. (“Nomura”), as securitization sponsor1, alleging that Nomura breached its representations and warranties related to certain of the loans securitized in the Trust (the “First Party Action”). 4. In the First Party Action, HSBC demands that Nomura repurchase certain mortgage loans in accordance with the repurchase protocol described in Section 2.03 of the Pooling and Servicing Agreement (the “PSA” or the “NAAC 2006-S3 PSA”), dated July 1, 2006, between Nomura Asset Acceptance Corporation, as depositor, Nomura Credit & Capital, Inc., as seller, GMAC Mortgage Corporation and Ocwen Loan Servicing, LLC 1 I note that the NAAC 2006-S3 PSA designated Nomura as the seller, which in the context of non-agency RMBS securitizations carries the same meaning as securitization sponsor. See NOM_ZAMBEZIIV 02452442. Therefore, for the purposes of this report, I refer to Nomura as the sponsor. 1 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 (“Ocwen”), as servicers, HSBC Bank USA, National Association, as trustee, and Wells Fargo Bank, N.A., as Securities Administrator, Master Servicer and Custodian. 5. I also understand that HSBC engaged Robert W. Hunter to perform a “re- underwriting review” of a sample of 400 loans (the “Sample Loans”) underlying NAAC 2006-S3 Securitization, 2 and in reviewing the Sample Loans, Mr. Hunter purportedly “determined whether one or more violations of Representations were present, and, as to each such violation, whether the violation was material.”3 Mr. Hunter found that “374 of the 400 Sample Loans in the NAAC 2006-S3 did not comply with the Representations in the MPLA in a manner than, as of the date of breach and continuously thereafter, has materially and adversely affected the value of any Mortgage Loan….”4 6. Mr. Hunter apparently found no material representation and warranty (“R&W”) breaches in the remaining 26 Sample Loans.5 7. I understand that HSBC also engaged Peter D. Rubinstein “to opine on the meaning of the Rating Agency Warranty, what breaches of the Rating Agency Warranty have a material and adverse effect, and identify whether any breaches of the Rating Agency Warranty have a material and adverse effect.”6 Dr. Rubinstein found in total that “311 2 Amended Expert Report of Robert W. Hunter, Nomura Asset Acceptance Corporation Alternative Loan Trust, Series 2006-S3, by HSBC Bank USA, National Association, in its capacity as Trustee v. Nomura Credit & Capital, Inc. (Sup. Ct. N.Y. Co., No. 652619/2012) (December 6, 2018) (the “Amended Hunter Report”), p. 3. 3 Amended Hunter Report, p. 76. 4 Id. at pp. 77-78. 5 I note that based on Exhibit D to the Amended Hunter Report, it appears Mr. Hunter found 375 loans had material and adverse breaches, but it is unclear whether Mr. Hunter found no material breaches of representations and warranties for 25 or 26 of the 400 reviewed loans. 6 Amended Expert Report of Peter D. Rubinstein, Nomura Asset Acceptance Corporation Alternative Loan Trust, Series 2006-S3, by HSBC Bank USA, National Association, in its capacity as Trustee v. Nomura Credit & Capital, Inc. (Sup. Ct. N.Y. Co., No. 652619/2012) (December 6, 2018) (the “Amended Rubinstein Report”), pp. 1-2. 2 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 loans had breaches with a material and adverse effect in one or more of the loan characteristics….”7 8. Dr. Rubinstein apparently found no material representation and warranty breaches in the remaining 89 Sample Loans.8 9. I understand that HSBC also engaged Karl N. Snow to “draw a random sample from the population of Mortgage Loans underlying the Trust that had been charged off in full for accounting purposes with a loss of greater than or equal to $100 and that had not been repurchased as of January 31, 2016….”9 Dr. Snow refers to these 2,289 loans10 as the “Liquidated Loans” and the “Liquidated Population.”11 For the purposes of this report, I refer to these 2,289 loans as the “Liquidated Loan Population.” Dr. Snow’s “Primary Sample” included 40012 “Liquidated Loans.” Dr. Snow received a “Defective Liquidated Loan List,” which includes the 394 allegedly “Defective Liquidated Loans” based on Mr. Hunter’s and Dr. Rubinstein’s findings.13 For the purposes of this report, I refer to these 394 loans as the “Claim Loans.” Based on the rate of “Defective Liquidated Loans” in the sample (394/400 = 98.5%), Dr. Snow extrapolates to the rest of the 2,289 7 Amended Rubinstein Report, p. 54. 8 I note that based on Appendix F to the Amended Rubinstein Report’, which purports to be a “Schedule of Breaching Mortgage Loans with a Material and Adverse Effect,” Dr. Rubinstein only references 305 loans. Therefore, it is unclear whether Dr. Rubinstein found no material breaches of representations and warranties for 89 or 95 of the 400 reviewed loans. 9 Amended Expert Report of Karl N. Snow, Nomura Asset Acceptance Corporation Alternative Loan Trust, Series 2006-S3, by HSBC Bank USA, National Association, in its capacity as Trustee v. Nomura Credit & Capital, Inc. (Sup. Ct. N.Y. Co., No. 652619/2012) (December 6, 2018) (the “Amended Snow Report”), p. 6. 10 Amended Snow Report, p. 6. 11 Id. at p. 5. 12 Id. at p. 19. 13 Id. at p. 6. 3 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 “Liquidated Loans.” Dr. Snow refers to the resulting 2,255 derived loan population as the “Extrapolated Defective Liquidated Loans in Population.”14 10. Dr. Snow calculated “Repurchase Damages” for all 2,289 “Liquidated Loans” under six 15 scenarios, involving different assumptions about the date Nomura would have hypothetically repurchased the loans. 16 Dr. Snow calculated damages of $293.3 million to $296.8 million due to “Nomura’s failure to repurchase the Defective Liquidated Loans,” depending on the scenario.17 11. It is also my understanding that Nomura denied that it breached its representations and warranties as alleged by HSBC and has challenged the damages calculated by HSBC’s expert, Dr. Snow. 12. Nomura engaged Michael Forester who “evaluated the 374 Hunter Claim Loans for the presence of alleged material breaches of the Representations, as claimed by Hunter….”18 In conducting his review, Mr. Forester relied on his “extensive experience and knowledge of underwriting, re-underwriting and the mortgage industry….”19 13. After reviewing the 374 loans, Mr. Forester found “Hunter’s opinions as to the existence and/or materiality of claimed breaches of Representations as to 347 of those loans are unfounded and/or lack adequate support.”20 Mr. Forester also found that “[f]or 27 of the Hunter Claim Loans, I am not able to reach a definitive opinion based on the 14 Id. 15 I note Dr. Snow states he used five scenarios, but he lists six scenarios. See id. at pp. 6-8. 16 Id. at p. 6. 17 Id. at p. 8. 18 Expert Report of Michael Forester, Nomura Asset Acceptance Corporation Alternative Loan Trust, Series 2006-S3, by HSBC Bank USA, National Association, in its capacity as Trustee v. Nomura Credit & Capital, Inc. (Sup. Ct. N.Y. Co., No. 652619/2012) (May 15, 2019) (the “Forester Report”), p. 4. 19 Forester Report, p. 4. 20 Id. at p. 6. 4 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 currently available information.”21 Mr. Forester also notes that “Hunter improperly bases various allegations on breach on purported violations of underwriting guidelines, even though there is no underwriting guidelines representation in the MLPA.”22 14. Nomura also engaged Jerry A. Hausman to among other things, “provide [his] opinions in response to allegations of ‘materiality’ and amounts recoverable contained in the Amended Expert Report of Robert W. Hunter … the Amended Confidential Expert Report of Peter D. Rubinstein, Ph.D . . . and the Amended Expert Report of Karl N. Snow, Ph.D., as well as to opine on whether these reports demonstrate that the alleged breaches of representations and warranties caused losses with respect to the mortgage loans at issue.”23 15. Dr. Hausman noted that “[i]n the years before the NAAC 2006-S3 securitization closed in July 2006, the United States housing market experienced an unprecedented increase in housing prices, followed shortly thereafter by the worst financial crisis since the Great Depression.”24 Dr. Hausman further stated: “the subsequent collapse in housing prices and rise in unemployment led to a substantial increase in the seriously delinquency rate at the national level, as well as increasing losses to the owners of the mortgage loans. All of these changes were generally even more pronounced in the regions where loans in the Trust were concentrated.”25 In the same vein, Dr. Hausman also stated that “[e]conomic theory and experience indicate that housing prices have a significant 21 Id. 22 Id. at p. 7. 23 Expert Report of Jerry A. Hausman, Nomura Asset Acceptance Corporation Alternative Loan Trust, Series 2006-S3, by HSBC Bank USA, National Association, in its capacity as Trustee v. Nomura Credit & Capital, Inc. (Sup. Ct. N.Y. Co., No. 652619/2012) (May 15, 2019) (the “Hausman First-Party Report”), pp. 2-3. 24 Hausman First-Party Report, p. 31. 25 Id. at 32. 5 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 effect on the likelihood of borrower default as well as the amount of loss in the event of foreclosure.”26 16. With respect to the “Mr. Hunter and Dr. Rubinstein [contention] generally that certain ‘defects’ associated with underwriting and origination of the at-issue loans (as alleged by Mr. Hunter) are ‘material,’” Dr. Hausman found that “neither Mr. Hunter nor Dr. Rubinstein conducts any empirical analysis linking the specific alleged defects that they identify to the performance of the at-issue loans” and “[i]n the absence of such an analysis, their opinions that certain alleged breaches were ‘material and adverse’ are unsupported.”27 Dr. Hausman further stated, “Dr. Rubinstein gives no consideration to differences in the performance of the loans in the Trust and the different time periods, geographies, and loan characteristics.”28 17. Dr. Hausman also found: “None of the Plaintiff’s experts demonstrate that any losses were caused by the alleged defects in the Claim Loans. Plaintiff’s expert reports contain no empirical analyses to assess whether those alleged defects, as opposed to other factors, caused any losses wither at the individual loan level or to the certificates. To the contrary, as discussed above, factors other than alleged defects caused a substantial amount of the losses on the mortgage loans underlying the Trust.”29 Of note, Dr. Hausman does not reference servicer conduct among factors which cause losses on the mortgage loans. 26 Id. 27 Id. at p. 47. 28 Id. at pp. 48-49. 29 Id. at p. 50. 6 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 B. Nomura’s Suit Against Ocwen 18. I understand that Nomura subsequently sued Ocwen, the servicer for the loans in the NAAC 2006-S3 Securitization (the “Third Party Action”).30 Nomura alleges that Ocwen failed to perform its obligations under the NAAC 2006-S3 PSA and that Nomura suffered damages from Ocwen’s conduct.31 1. Nomura’s Expert Anthony M. Lendez 19. In Nomura’s suit against Ocwen, Nomura engaged Anthony M. Lendez to opine on “(i) whether borrower defaults on certain mortgage loans were causally related to breaches of origination-related representations and warranties; and (ii) whether Ocwen … complied with … servicing obligations.”32 20. Mr. Lendez noted the Offering Circular for the NAAC 2006-S3 Securitization, which stated, “an overall general decline in residential real estate values could cause a particularly severe decline in the value of the mortgaged properties relating to mortgage loans in the trust.”33 Mr. Lendez further noted, “[a]s of the Measurement Date, for the 2,289 Liquidated Loan Population, over 53% of the Realized Losses had occurred in California, Florida, Arizona and Nevada…” and “between 2007 and 2009, these four states sustained substantial decreases in property values.”34 21. Mr. Lendez identified 4 of the 2,289 loans in the “Liquidated Loan Population” were still active as of Mr. Lendez’s “Measurement Date,” and 2 loans which 30 Nomura Credit & Capital, Inc., v. Wells Fargo Bank, N.A. and Ocwen Loan Servicing, LLC (Sup. Ct. N.Y. Co., Third Party Index No. 595353/2014). 31 Id. at ¶¶ 43-67. 32 Amended Expert Report of Anthony M. Lendez, Nomura Credit & Capital, Inc., v. Wells Fargo Bank, N.A. and Ocwen Loan Servicing, LLC (Sup. Ct. N.Y. Co., Third Party Index No. 595353/2014) (May 31, 2019) (the “Amended Lendez Report”), p. 1. 33 Amended Lendez Report, p. 11. 34 Id. at 14. 7 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 were paid off with no losses35 and thus, could not be repurchased by Nomura under the repurchase protocol in Section 2.05 of the PSA.36 Mr. Lendez cites Section 2.05 of the PSA,37 which states, in relevant part, that “with respect to any Mortgage Loan that is not in default or as to which default is not imminent, no substitution pursuant to Sections 2.02 or 2.03 shall be made unless Seller delivers to the Trustee an [REMIC] Opinion of Counsel.”38 Mr. Lendez stated that he is “not aware that the Trustee received any REMIC Opinions that would permit the repurchase of performing Mortgage Loans in the Trust.”39 22. Mr. Lendez also opined that it is “highly unlikely that a delinquency or default was the result of an origination deficiency the longer a loan performs.”40 Relying upon the Representations & Warranties Framework used by the GSEs, “which suggests that they will not pursue origination-based claims once a loan has performed for a specified period of time,”41 Mr. Lendez “eliminates the losses” associated with 87 Claim Loans and 597 loans in the Liquidated Loan Population that fit the GSE’s criteria.42 23. Mr. Lendez also concluded that for the 151 Claim Loans and 849 of the loans in the Liquidated Loan Population, where the delinquencies and defaults were traceable to a “change of life event” suffered by the borrower, the defaults of the loans 35 Id. p. 14. 36 Id. at pp. 19-20 n.39 (4 active loans and 2 loans paid off that were inappropriately included in the Liquidated Loan Population by Dr. Snow in his report). 37 Id. 38 NAAC 2006-S3 PSA Section 2.05. 39 Amended Lendez Report, pp. 19-20, n.39. 40 Id. at p. 25. 41 Id. at p. 26. According to Mr. Lendez, “the GSE Framework will not seek to enforce origination-based claims upon payment by the borrower of the first 36 monthly payments due following the mortgage loan acquisition date, provided the borrower: (i) had no more than two 30-day delinquencies; (ii) had no 60-day or greater delinquencies; and (iii) is not 30 or more days delinquent with respect to the 36th monthly payment.” See i.d. at pp. 25-26 n.50 (citing “Lender Selling Representations and Warranties Framework Updates.” Selling Guide Announcement SEL-2014-05, Fannie Mae, May 12, 2014). 42 Id. at p. 26. 8 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 were likely caused by those events and not by any breach of Nomura’s representations and warranties.43 24. Mr. Lendez then concluded that Ocwen “failed to make prudent servicing decisions, often leading to unnecessary losses and avoidable expenses…”44 on 295 of the 394 Claim Loans and 1,631 of the 2,289 loans in the Liquidated Loan Population.45 In support of this claim, Mr. Lendez states that “if the Servicer makes prudent servicing decision with respect to any particular Mortgage Loan, the Trust should never incur a loss greater than 100% of that Mortgage Loan.” 46 Mr. Lendez cites Ocwen’s policies and procedures as outlined in the Offering Circular (also known as the prospectus supplement) for the NAAC 2006-S3 Securitization, which stated: If the projected loss severity reaches or exceeds 100% (proceeds less expenses) then future advances on the mortgage loan are deemed nonrecoverable and a recommendation is then made to stop making advances. A more in-depth analysis is conducted to determine if charge- off is appropriate.47 25. Mr. Lendez also concluded that Ocwen “failed to provide prompt written notice” of Nomura’s breaches of “origination-related representations and warranties that materially and adversely affect[ed] the interest of the Certificateholders” on 374 of the 394 Claim Loans and 2,146 of the 2,289 loans in the Liquidated Loan Population.48 Mr. Lendez does not opine that Ocwen knew that Nomura breached its representations and warranties with respect to any particular loan, nor does he identify any information in Ocwen’s 43 Id. at pp. 21-27. 44 Id. at p. 35. 45 Id. at p. 38. 46 Id. at p. 37. 47 NAAC 2006-S3 Offering Circular (July 28, 2006), p. 49. See Index No. 652619/2012, Dkt. No. 9. 48 See Amended Lendez Report, p. 42. 9 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 possession showing that Ocwen had discovered that Nomura breached its representations and warranties. Mr. Lendez does not articulate any basis to conclude that the terms of the PSA expressly require, or that, as a matter of Accepted Servicing Practices (as that term is defined in the PSA), servicers are expected to review delinquent or defaulted loans to determine if a sponsor, such as Nomura, materially breached its representations and warranties. 26. Nevertheless, Mr. Lendez opines that Ocwen should have provided notice of Nomura’s alleged breaches of representations and warranties to Nomura, upon the earlier of when a borrower became 90 days delinquent or entered foreclosure, plus 30 days. 49 According to Mr. Lendez, “[h]ad the Servicers undertaken a review of the origination-related materials shortly after delinquency in their efforts to determine the best course for maximizing recoveries, there is no reason that they too would not have identified the breaches” alleged by the Trust.50 2. Nomura’s Expert Jerry Hausman 27. In its suit against Ocwen, Nomura also engaged Jerry A. Hausman to “determine the amount of damages calculated by Dr. Snow… for loans where Nomura’s Expert Anthony M. Lendez … has opined in his May 31, 2019, amended expert report that Nomura’s alleged breaches are unlikely to have caused default” and “result from certain servicing practices identified by Mr. Lendez.”51 Based on Mr. Lendez’s conclusions, Dr. Hausman recalculated the Trust’s damages using Dr. Snow’s methodology, but reduced 49 See id. at p. 41. As a shorthand throughout this report, I refer to such breaches as “material” breaches. 50 See id. 51 Amended Expert Report of Jerry A. Hausman Report, Nomura Credit & Capital, Inc., v. Wells Fargo Bank, N.A. and Ocwen Loan Servicing, LLC (Sup. Ct. N.Y. Co., Third Party Index No. 595353/2014) (May 31, 2019) (the “Amended Hausman Report”), p. 3. 10 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 damages and attributed a portion of those damages to Ocwen52 based on “certain servicing practices identified by Mr. Lendez.”53 Dr. Hausman relied upon Mr. Lendez’s allegation of Ocwen’s “(i) failure to make sound decisions on defaulted mortgage loans; and (ii) failure to provide prompt notice.”54 28. Based on Mr. Lendez’s opinions, Dr. Hausman also reduced damages that Nomura allegedly caused to the NAAC 2006-S3 Trust, by excluding from his calculations loans that went delinquent or defaulted after a significant number of payments were made and loans which likely went delinquent or defaulted due to a “change of life event” suffered by the borrower.55 C. Scope of Engagement 29. I have been retained to provide an overview of the securitization process for RMBS securitizations and the roles, responsibilities, and expectations of parties to RMBS securitizations and evaluate Dr. Hausman’s calculation of damages he attributed to Ocwen based on Mr. Lendez’s findings. 30. In connection with this engagement, I have reviewed and analyzed the fact discovery materials provided to me. I also have reviewed and analyzed publicly available information and data pertaining to RMBS. A list of the documents and data I relied upon in forming my expert opinions is listed in Appendix B. 31. The aforementioned background, evaluation, and review of relevant materials, are informed by my experience purchasing, valuing, and modelling the 52 See Amended Hausman Report, p. 8. 53 Id. at p. 3. 54 See id. at p. 8. 55 See id. at pp. 6-7. 11 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1839 RECEIVED NYSCEF: 08/04/2022 performance of mortgage loans collateralizing RMBS, structuring and modelling RMBS, and negotiation, sale, and oversight of sub-servicing contracts. 32. All of the opinions in this report are my own. I am being compensated for my work on this matter at my regular hourly rate of $750. I have been assisted in this matter by staff of Brean, who work under my direction. 33. My compensation for this report is not contingent upon the substance of my opinions, the substance of any testimony I provide related to this report, or the outcome of this Action or any proceeding within this Action. I reserve the right to amend and/or sup