Preview
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NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022
Cooper 2006-S4 Report
FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013
NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022
Tel: 703-893-0600 8401 Greensboro Drive, Suite 800
Fax: 703-893-2766 McLean, VA 22102
www.bdo.com
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
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NOMURA ASSET ACCEPTANCE CORPORATION
ALTERNATIVE LOAN TRUST, SERIES 2006-S4, by
HSBC BANK USA, NATIONAL ASSOCIATION,
in its capacity as Trustee,
Plaintiff,
Index No. 653390/2012
– against –
NOMURA CREDIT & CAPITAL, INC.,
Defendant.
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NOMURA CREDIT & CAPITAL, INC.,
Third Party Index No.
Third-Party Plaintiff, 595306/2014
– against –
WELLS FARGO BANK, N.A. and OCWEN LOAN
SERVICING, LLC,
Third-Party Defendants.
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Expert Report of Thomas D. Cooper, CPA
BDO USA, LLP
November 25, 2019
HIGHLY CONFIDENTIAL
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Table of Contents
I. SUMMARY OF QUALIFICATIONS ........................................................................................... 2
II. SCOPE OF ENGAGEMENT ........................................................................................................ 3
III. SUMMARY OPINION .................................................................................................................. 8
IV. BACKGROUND............................................................................................................................ 9
A. The Mortgage Loans In The NAAC 2006-S4 Trust ......................................................................... 9
B. The Relevant Provisions Of The PSA ............................................................................................ 10
V. WARREN’S ANALYSIS ............................................................................................................ 15
VI. WARREN’S ANALYSIS IS UNRELIABLE.............................................................................. 18
A. If Nomura Provided Ocwen And Wells Fargo With Prompt Notice,
They Would Have Earned Less Compensation Than They In Fact Earned .................................. 18
B. Warren’s Reliance On Snow’s Sampling Is Fundamentally Flawed.............................................. 19
C. Warren Failed To Account For Ocwen’s Additional Servicing Compensation ............................ 22
D. Warren Failed To Properly Account For The Costs
Associated With The Servicing Of The Mortgage Loans .............................................................. 29
E. Warren’s Conclusion That Ocwen Would Have Earned An 18% Yield Is Unsupportable ........... 30
VII. CONCLUSION ............................................................................................................................ 34
APPENDIX A --- EXPERIENCE & QUALIFICATIONS
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I. SUMMARY OF QUALIFICATIONS
1. I am a Managing Director and Atlantic Lead for BDO USA, LLP (“BDO”)1 Forensic
Accounting and Investigation’s practice. I received a Bachelor of Science degree in
Economics as well as Accounting from Purdue University. I have also received my
Master of Business Administration from the University of Notre Dame. I am a
licensed CPA in the state of Virginia.
2. I have over 20 years of experience in the financial services industry, providing
accounting, auditing, business advisory, and litigation support services. As a
Managing Director, I oversee engagements involving securities litigation, regulatory
compliance reviews, and monitorships. I have also led financial statement audits for
mortgage companies such as, but not limited to, Federal Home Loan Bank of
Indianapolis, Northern Trust, Irwin Mortgage, and Bank One. I served as the lead
Director drafting new mortgage servicing standards for the Monitor of the National
Mortgage Settlement, who oversaw the nation’s largest banks/mortgage servicers’
compliance with the new standards for mortgage servicing, including loan
modifications for distressed borrowers. In addition, I was the lead advisor assisting
the monitors overseeing residential mortgage-backed securities (“RMBS”)
settlements for Bank of America, Morgan Stanley, Goldman Sachs, and the Royal
Bank of Scotland. Prior to joining BDO’s Forensic Accounting and Investigations
practice, I was a Director in BDO’s assurance practice where, for approximately five
years, I assisted the Federal Deposit Insurance Corporation (the “FDIC”) in
1
BDO is a national professional services firm providing assurance, tax, and advisory services to private and publicly-
traded businesses.
2
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performing mortgage servicing compliance reviews related to their Shared Loss
Agreements.
3. Prior to joining BDO, I was a consulting Senior Manager with Ernst & Young and an
assurance Manager with PriceWaterhouseCoopers. I have also been employed as an
Internal Audit Vice President at Fannie Mae where I was responsible for the audits of
the accounting, capital markets, financial models, and various risk groups. In
addition, I held an officer level position at Sallie Mae, where I oversaw the loan
reporting and the analysis group responsible for the allowance for loan loss, analysis
of loan servicing operations, and calculation of net interest margins. A copy of my
curriculum vitae is attached to this report as Appendix A.
II. SCOPE OF ENGAGEMENT
4. I have been retained through BDO by Constantine Cannon LLP (“Counsel”), Counsel
for the Defendant and Third-Party Plaintiff, Nomura Credit & Capital, Inc.
(“Nomura”) to provide expert testimony in connection with litigation involving,
HSBC Bank USA, National Association (“HSBC” or the “Trustee”), Nomura, Ocwen
Loan Servicing, LLC (“Ocwen” or the “Servicer”),2 and Wells Fargo Bank, N.A.
(“Wells Fargo” or the “Master Servicer”).
5. HSBC, in its capacity as Trustee for the Nomura Asset Acceptance Corporation
(“NAAC”) Alternative Loan Trust, Series 2006-S4 (“NAAC 2006-S4” or the
“Trust”) brought the instant action against Nomura (the “First-Party Action”).
Nomura served as the “sponsor” of a residential mortgage-backed securitization
2
“Ocwen” is also used to refer to Ocwen Financial Corporation. Ocwen Loan Servicing, LLC is an operating
company of Ocwen Financial Corporation. See, e.g., Ocwen 2006 Form 10-K at Ex. 21.0.
3
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through which the Trust was created. In that role, Nomura purchased and aggregated
mortgage loans originated by third-party originators that were ultimately deposited
into the Trust. The NAAC 2006-S4 Trust initially contained 4,712 closed-end, fixed
rate mortgage loans secured by second liens on residential properties (the “Mortgage
Loans”).
6. As is common in RMBS securitizations, the Trust issued “certificates,” which were
offered to investors. Certificateholders received distributions derived from principal
and interest collected in connection with the Mortgage Loans.
7. The securitization transaction was governed by two contracts: (i) the Pooling and
Servicing Agreement, among NAAC, Nomura, Ocwen, GMAC Mortgage
Corporation (“GMAC” or, together with Ocwen, the “Servicers”), Wells Fargo, and
HSBC, dated as of September 1, 2006 (the “PSA”); and (ii) the Mortgage Loan
Purchase Agreement, between Nomura and NAAC, dated September 1, 2006 (the
“MLPA”).
8. In the MLPA, Nomura made certain representations and warranties regarding specific
characteristics of the Mortgage Loans (the “Representations”). In the First-Party
Action, the Trustee alleges that some of the Mortgage Loans in the Trust did not
comply with certain of those Representations.3
9. Nomura commenced a related third-party action against Ocwen and Wells Fargo, in
their respective roles as Servicer and Master Servicer for the Mortgage Loans in the
Trust (the “Third-Party Action”).4 In the Third-Party Action, Nomura alleges, inter
3
See First-Party Complaint, dated March 18, 2013.
4
See Third-Party Complaint, dated August 11, 2014 (“Third-Party Complaint”).
4
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alia, that Ocwen and Wells Fargo breached their obligations under the PSA by (i)
failing to provide prompt written notice to Nomura upon discovery of breaches of
Representations that materially and adversely affected the interests of the
Certificateholders; and (ii) failing to service and administer the Mortgage Loans in
the Trust in the best interest of and for the benefit of the Certificateholders in
accordance with PSA.5
10. Ocwen and Wells Fargo asserted counterclaims against Nomura in the Third-Party
Action alleging that Nomura breached its obligation to notify them that certain of the
Mortgage Loans did not comply with the Representations.6 Ocwen and Wells Fargo
further allege that they “suffered damages” as a result.7 And, in its Counterclaims,
Wells Fargo alleges that Nomura’s purported failure to notify “reduced the
compensation that Wells Fargo would have received but for Nomura’s failure to
comply with its obligation to notify Wells Fargo.”8
11. In an effort to quantify their alleged damages, Ocwen and Wells Fargo retained
Samuel Warren (“Warren”) to analyze “whether and to what extent Ocwen and Wells
Fargo, in their respective roles as Servicer and Master Servicer, suffered losses
5
See Third-Party Complaint, ¶¶ 40-49.
6
See Ocwen Answer, Affirmative Defenses, and Counterclaims, dated August 3, 2018 (“Ocwen Counterclaims”),
¶¶ 31-38; Wells Fargo Answer and Affirmative Defenses to Third-Party Complaint and Counterclaims, dated August
3, 2018 (“Wells Fargo Counterclaims”), ¶¶ 26-33.
7
Ocwen Counterclaims, ¶ 37; Wells Fargo Counterclaims, ¶ 32. Both Ocwen and Wells Fargo have also asserted a
Cause of Action for declaratory relief against Nomura requesting “that the Court enter an order declaring that
Nomura is barred from obtaining the reliefsought from” Ocwen and Wells Fargo to the extent of Nomura’s
purported failure to provide Ocwen and Wells Fargo “with notice as provided for by the PSA.” Ocwen
Counterclaims, ¶ 41; Wells Fargo Counterclaims, ¶ 36.
8
Wells Fargo Counterclaims, ¶ 32.
5
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resulting from the underperformance of the Mortgage Loans in the Allegedly
Breaching Loan Population.”9
12. The “Allegedly Breaching Loan Population” was identified by the following experts
engaged by HSBC: Robert W. Hunter (“Hunter”), John A. Kilpatrick, Ph.D.
(“Kilpatrick”), Peter D. Rubenstein, Ph.D. (“Rubinstein”), and Karl N. Snow, Ph.D.
(“Snow”).10 Based on Snow’s analysis, Warren extrapolated his conclusions
regarding the Allegedly Breaching Loan Population to the “Extrapolated Allegedly
Breaching Loan Population.”11
13. For the purposes of his analysis, Warren “assume[d] the validity of the conclusions
stated in ... Hunter’s, Rubinstein’s, Kilpatrick’s and Snow’s reports including ...
Hunter’s and Rubinstein’s conclusions that Nomura materially breached its
[Representations] with respect to loans in the Allegedly Breaching Loan Population,
as well as their conclusions that such breaches were ‘material’ using the materiality
definition set forth in their reports.”12
14. I have been retained by Counsel for Nomura to evaluate the opinions asserted by
Warren with respect to the alleged losses Ocwen and Wells Fargo incurred as a result
of Nomura’s purported failure to provide them with notice that certain of the
Mortgage Loans breached the Representations.13 My report does not assume or
accept the assumption that Nomura breached its Representations. I am also not
9
See Expert Report of Samuel Warren, dated May 24, 2019 (“Warren Report”), ¶ 9.
10
See Warren Report, ¶¶ 4-8.
11
Warren Report, ¶ 7.
12
See Warren Report, ¶ 9; see also Warren Report, ¶¶ 20-23, 29, 33.
13
See Ocwen Counterclaims, ¶¶ 31-38; Wells Fargo Counterclaims, ¶¶ 26-33.
6
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opining with respect to Snow’s use of sampling and extrapolation, nor am I opining
with respect to any of the opinions offered by HSBC’s other experts. It is my
understanding that Nomura objects to the opinions offered in the reports of each of
HSBC’s experts and Nomura’s other experts have and/or will be addressing the
opinions contained therein.
15. My work has been performed in accordance with the American Institute of Certified
Public Accountants consulting standards.14
16. This report was prepared by me, supported by BDO personnel and Covius Real Estate
Services (“CRES”) working under my supervision and direction. It sets forth my
opinions and conclusions in this matter based on the information available to me
through the date of this report.
17. BDO is being compensated for the time that I spend working on this matter at a billing
rate of $650 per hour plus reasonable out-of-pocket costs incurred. BDO is also being
compensated for the services of its professional staff at billing rates ranging from
$215 to $550 per hour. BDO’s fees are not contingent upon the opinions I express
nor the results of this matter.
18. My work in this matter is ongoing, and I reserve the right to amend, modify, or
supplement my analysis and opinions, including if new information becomes
available to me which bears on my opinions or conclusions contained herein.
14
I have not been retained to perform an audit, review, or compilation of any financial statements.
7
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III. SUMMARY OPINION
19. The basis of Ocwen and Wells Fargo’s claim is that Nomura failed to notify the other
parties to the PSA of its breaches of the Representations.15 As a result of this
purported failure to notify, Ocwen and Wells Fargo contend that they suffered
damages in the form of earning less than they would have earned had Nomura
provided such notice.16 In making this claim, Warren assumed that Nomura, in fact,
breached its Representations.17 Nomura’s other experts have concluded that there is
no basis for such an assumption and this report does not make such an assumption.
20. Even if HSBC establishes that Nomura breached the Representations, Ocwen and
Wells Fargo have, nevertheless, failed to demonstrate that they earned less than they
otherwise would have. The PSA provides, and Ocwen and Wells Fargo recognize,18
that the sole remedy as against Nomura should it breach the Representations is for
Nomura to cure the breach, repurchase the Mortgage Loan, or, in certain limited
circumstances, substitute a new mortgage loan for the breaching Mortgage Loan.19
Warren does not offer an expert opinion nor cite to any evidence to the effect that,
had Nomura provided the requisite notice, it would have done anything other than
repurchase the Mortgage Loans in question. And, as more fully demonstrated below,
if Nomura had repurchased the Allegedly Breaching Loan Population or the
15
See Ocwen Counterclaims, ¶¶ 31-38; Wells Fargo Counterclaims, ¶¶ 26-33.
16
See Ocwen Counterclaims, ¶ 37; Wells Fargo Counterclaims, ¶ 32.
17
See Warren Report, ¶ 9.
18
See Ocwen Counterclaims, ⁋ 35; Wells Fargo Counterclaims, ⁋ 21.
19
See PSA § 2.03(c) at pp. 57-58.
8
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Extrapolated Allegedly Breaching Loan Population, Ocwen and Wells Fargo would
have earned less money than they in fact earned.
21. Nor does Warren address the fact that the PSA does not guarantee Ocwen and Wells
Fargo any set amount of income. Rather, the income to which they were entitled was
dependent on a host of factors, including, but not limited to, the number of borrowers
who pre-paid their Mortgage Loans, the number of Mortgage Loans that defaulted,
the time it took to foreclose on properties, and the time it took to sell “real estate
owned” or REO properties. Even if, however, Nomura’s alleged failure to provide
notice afforded Ocwen and Wells Fargo with a basis for damages, Warren’s analysis
suffers from the following fundamental flaws:
Warren’s use of Snow’s sampling results was improper;
Warren fails to account for all the servicing and default related fees that
Ocwen earned;
Warren failed to account for the actual servicing costs in connection with
the servicing of the Mortgage Loans; and
Warren’s use of an 18% discount rate is improper.
IV. BACKGROUND
A. The Mortgage Loans In The NAAC 2006-S4 Trust
22. At inception, the Trust consisted of 4,712 closed-end, fixed rate Mortgage Loans
secured by second liens on residential real properties with an aggregate principal
balance at issuance (“Issuance Balance”) of $253,912,480.20
20
See NAAC 2006-S4 Trust Offering Circular, dated September 28, 2006 (the “Offering Circular”), at p. 28.
9
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23. The division of servicing responsibilities for the Mortgage Loans was such that
GMAC serviced 3,758 Mortgage Loans with an Issuance Balance of $198,144,274
and Ocwen serviced 954 Mortgage Loans with an Issuance Balance of $55,768,206.21
The GMAC serviced Mortgage Loans were service transferred to Ocwen in
December 2006.22
B. The Relevant Provisions Of The PSA
24. PSA § 2.03(c) provides that if a Servicer discovers a breach of the origination-related
representations and warranties that materially and adversely affects the interests of
the Certificateholders, that Servicer must provide the parties to the PSA with prompt
notice of the breach.23 Nomura then has a certain amount of time during which to
cure, repurchase, or, if the breach occurs within the first two years of the Trust, to
substitute the Mortgage Loan at issue.24 The PSA further provides that Nomura’s
obligation to cure, repurchase, or replace such Mortgage Loan is the sole remedy as
against Nomura.25
25. Pursuant to PSA § 3.01, Servicers are retained to provide services in connection with
the underlying assets within the Trust. Specifically:
[e]ach Servicer shall service and administer the related Mortgage Loans
… on behalf of the Trust and in the best interest of and for the benefit of
the Certificateholders (as determined by such Servicer in its reasonable
judgment) in accordance with the terms of this Agreement and the
Mortgage Loans and to the extent consistent with such terms and in
21
See Wells Fargo (as Master Servicer) October 25, 2006 loan-level data file and Wells Fargo (as Master Servicer)
October 25, 2006 distribution report obtained from https://www.ctslink.com. For purposes of my report, percentages
and dollar amounts are generally rounded to the nearest whole number.
22
The date of the servicing transfer was determined based on the Servicer name as indicated on the Master Servicer’s
monthly remittance reports for the trust (the “Remittance Reports”).
23
See PSA § 2.03(c) at pp. 57-58.
24
See PSA § 2.03(c) at p. 58.
25
See PSA § 2.03(c) at p. 59.
10
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accordance with and exercising the same care in performing those
practices that each Servicer customarily employs and exercises in
servicing and administering mortgage loans for its own account
(including, compliance with all applicable federal, state and local laws).26
Consistent with the foregoing, each Servicer “shall seek the timely and complete
recovery of principal and interest on the Mortgage Notes related to the related
Mortgage Loans”27 and, in effect, minimize realized losses passed onto the
Certificateholders of the Trust.
26. Unlike investors, who earn returns based on risk assumed, servicers are compensated
for providing these services and do not receive a premium for assuming more risk.
27. PSA § 3.10 provides that the Servicers are compensated for servicing and
administering the Mortgage Loans within the Trust as follows:
As compensation for its activities hereunder, each Servicer shall be
entitled to retain or withdraw from the related Custodial Account out of
each payment of interest on each Mortgage Loan included in the Trust
Fund an amount equal to the applicable Servicing Fee or Charged Off
Loan Fee, as applicable. In addition, each Servicer shall be entitled to
recover unpaid Servicing Fees out of Liquidation Proceeds, Insurance
Proceeds, condemnation proceeds or otherwise to the extent permitted by
Section 4.02. In connection with the servicing of any Special Serviced
Mortgage Loan, the Special Servicer shall receive the Servicing Fee for
such Special Serviced Mortgage Loan as its compensation and the Seller,
or its designee, shall be responsible for paying the related Servicer the
Servicing Fee with respect to such Mortgage Loan, pursuant to Section
3.24.28
26
PSA § 3.01 at p. 65.
27
PSA §3.01 at p. 65.
28
PSA § 3.10 at p. 77.
11
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28. This monthly Servicing Fee is defined in the PSA as 1/12th of the Servicing Fee Rate
which is further defined as 0.50% per annum multiplied by the “Stated Principal
Balance” of each Mortgage Loan.29
29. The Servicer is entitled to the Servicing Fee for each month that a Mortgage Loan
remains in the Trust until the Mortgage Loan is liquidated, regardless of whether the
Mortgage Loan is performing.30 Servicing Fees that are not paid to the Servicers
while a Mortgage Loan is in default are reimbursed to the Servicer by the Trust to the
extent that such unpaid Servicing Fees are not otherwise recoverable from
“Liquidation Proceeds, Insurance Proceeds or other proceeds from the related
Mortgage Loan….”31
30. PSA § 3.10 also provides that the Servicers are entitled to a “Charged Off Loan
Fee.”32 A Charged Off Loan is any delinquent Mortgage Loan33 for which the
Servicer determines:
pursuant to the procedures set forth in Section 3.09, that there will be (i)
no Significant Net Recoveries with respect to such Mortgage Loan or (ii)
the potential Net Recoveries are anticipated to be an amount, determined
by the applicable Servicer in its good faith judgment and in light of other
mitigating circumstances, that is insufficient to warrant proceeding
through foreclosure or other liquidation of the related Mortgage
29
See PSA § 1.01 at p. 46 (Servicing Fee and Servicing Fee Rate); see also PSA § 1.01 at p. 46 (Stated Principal
Balance).
30
See PSA § 3.10 at p. 77. Once a Mortgage Loan has been charged off, the Servicer is no longer entitled to the
Servicing Fee. See PSA § 3.09(a)(iii) at p. 73.
31
PSA § 4.02(a)(v) at p. 93.
32
PSA § 3.10 at p. 77.
33
A Mortgage Loan becomes “‘delinquent’ if any payment due thereon is not made pursuant to the terms of such
Mortgage Loan by the close of business on the day such payment is scheduled to be due. A Mortgage Loan is ‘30
days delinquent’ if such payment has not been received by the close of business on the corresponding day of the
month immediately succeeding the month in which such payment was due, or, if there is no such corresponding day
(e.g., as when a 30-day month follows a 31-day month in which a payment was due on the 31st day of such month),
then on the last day of such immediately succeeding month. Similarly, for ‘60 days delinquent,’ ‘90 days delinquent’
and so on.” PSA § 1.01 at p. 24.
12
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Property.34
The Charged Off Loan Fee is defined as 35% of the Net Recoveries on any Charged
Off Loan.35
31. Pursuant to PSA § 3.10, Servicers are also entitled to the following additional
servicing compensation:
Excess Liquidation Proceeds, Prepayment Interest Excess, if applicable,
assumption fees, late payment charges, insufficient funds charges and
ancillary income to the extent such fees or charges are received by the
applicable Servicer, all income and gain net of any losses realized from
Permitted Investments with respect to funds in or credited to the
applicable Custodial Account shall be retained by the related Servicer to
the extent not required to be deposited in the applicable Custodial
Account pursuant to Section 4.02.36
32. PSA §§ 4.02(a)(iii) and (a)(v) also entitle the Servicers to reimbursement of “Servicing
Advances” which are defined as:
[a]ll customary, reasonable and necessary “out of pocket” costs and
expenses (including reasonable legal fees) incurred … in the performance
by a Servicer of its servicing obligations hereunder, including, but not
limited to, the cost of (i) the preservation, restoration, inspection,
valuation and protection of a Mortgaged Property, (ii) any enforcement
or judicial proceedings, including foreclosures, … (iii) the management
and liquidation of any REO Property (including, without limitation,
relator’s commissions), (iv) compliance with any obligations under
Section 3.07 hereof to cause insurance to be maintained, (v) payment of
taxes, (vi) obtaining broker price opinions and (vii) obtaining any legal
documentation required to be included in the Mortgage File and/or
correcting any outstanding title issues … reasonably necessary for such
Servicer to perform its obligations under this Agreement. Servicing
Advances also include any reasonable and necessary “out of pocket”
costs and expenses (including reasonable legal fees) incurred by a
Servicer in connection with executing and recording instruments of
satisfaction, deeds of reconveyance or Assignments to the extent not
34
PSA § 1.01 at p. 16 (Charged Off Loan).
35
See PSA § 1.01 at p. 16 (Charged Off Loan Fee); see also PSA § 1.01 at p. 34 (Net Recovery).
36
PSA § 3.10 at p. 77; see also PSA § 4.01(b) at p. 92 (“payments in the nature of late payment charges or assumption
fees, if collected, and any Prepayment Interest Excess need not be deposited” in the Custodial Account by the related
Servicer; if, however, they are, the related Servicer may withdraw such payments).
13
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recovered from the Mortgagor or otherwise payable under this
37
Agreement.
33. PSA § 3A.01 addresses the administration and master servicing of the Mortgage
Loans and specifies the oversight responsibilities of Wells Fargo as Master Servicer
as it relates to the Trust. Pursuant to PSA § 3A.01:
[t]he Master Servicer shall supervise, monitor and oversee the obligation
of the Servicers to service and administer the Mortgage Loans in
accordance with the terms of the Agreement and shall have full power and
authority to do any and all things which it may deem necessary or
desirable in connection with such master servicing and administration. In
performing its obligations hereunder, the Master Servicer shall act in a
manner consistent with Accepted Master Servicing Practices.
Furthermore, the Master Servicer shall oversee and consult with the
Servicer as necessary from time-to-time to carry out the Master Servicer's
obligations hereunder, shall receive, review and evaluate all reports,
information and other data provided to the Master Servicer by the
Servicers and shall cause the Servicers to perform and observe the
covenants, obligations and conditions to be performed or observed by the
Servicers under this Agreement. The Master Servicer shall independently
and separately monitor each Servicer's servicing activities with respect to
each related Mortgage Loan, reconcile the results of such monitoring with
such information provided in the previous sentence on a monthly basis
and coordinate corrective adjustments to each Servicer's and Master
Servicer's records. The Master Servicer shall reconcile the results of its
Mortgage Loan monitoring with the actual remittances of the Servicers to
the Distribution Account....38
34. Pursuant to PSA § 3A.08, the Master Servicer receives a monthly Master Servicing
Fee defined as 1/12th of the Master Servicing Fee Rate which is further defined as
0.045% per annum multiplied by the State Principal Balance of each Mortgage
Loan.39
37
PSA § 1.01 at p. 45 (Servicing Advances); see also PSA § 3.09(a)(i) at p. 72; PSA § 4.02(a)(iii) and (v) at pp. 93-
94. The “Nonrecoverable Advances” referenced in PSA §§ 4.02(a)(iii) are defined in the PSA to include Servicing
Advances. See PSA § 1.01 at p. 34 (Nonrecoverable Advances).
38
PSA § 3A.01 at p. 85; see also PSA § 3A.02 at p. 85 (“The Master Servicer shall be responsible for monitoring
the compliance by each Servicer with its duties under this Agreement.”).
39
See PSA § 1.01 at p. 31 (Master Servicing Fee and Master Servicing Fee Rate); PSA § 3A.08 at pp. 88-89.
14
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V. WARREN’S ANALYSIS
35. Assuming the validity of the conclusions and purported findings of HSBC’s other
experts in the First-Party Action, including those of Snow, Warren purports to analyze
“whether and to what extent Ocwen and Wells Fargo, in their respective roles as
Servicer and Master Servicer, suffered losses” based on the assumption that the
allegedly breaching Mortgage Loans underperformed.40
36. Snow claims to have selected a simple random sample of 400 primary sample loans
(the “400 Liquidated Sample Loans”) from the population of Liquidated Loans in the
Trust (the “Liquidated Loans” or the “Liquidated Population”).41 He defines
Liquidated Loans as loans 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.”42 Hunter then reviewed the 400 Liquidated Sample Loans
selected by Snow, the
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FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 Cooper 2006-S4 Report FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 Tel: 703-893-0600 8401 Greensboro Drive, Suite 800 Fax: 703-893-2766 McLean, VA 22102 www.bdo.com SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK -----------------------------------------------------------------------x NOMURA ASSET ACCEPTANCE CORPORATION ALTERNATIVE LOAN TRUST, SERIES 2006-S4, by HSBC BANK USA, NATIONAL ASSOCIATION, in its capacity as Trustee, Plaintiff, Index No. 653390/2012 – against – NOMURA CREDIT & CAPITAL, INC., Defendant. ------------------------------------------------------------------------x NOMURA CREDIT & CAPITAL, INC., Third Party Index No. Third-Party Plaintiff, 595306/2014 – against – WELLS FARGO BANK, N.A. and OCWEN LOAN SERVICING, LLC, Third-Party Defendants. -----------------------------------------------------------------------x Expert Report of Thomas D. Cooper, CPA BDO USA, LLP November 25, 2019 HIGHLY CONFIDENTIAL FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 Table of Contents I. SUMMARY OF QUALIFICATIONS ........................................................................................... 2 II. SCOPE OF ENGAGEMENT ........................................................................................................ 3 III. SUMMARY OPINION .................................................................................................................. 8 IV. BACKGROUND............................................................................................................................ 9 A. The Mortgage Loans In The NAAC 2006-S4 Trust ......................................................................... 9 B. The Relevant Provisions Of The PSA ............................................................................................ 10 V. WARREN’S ANALYSIS ............................................................................................................ 15 VI. WARREN’S ANALYSIS IS UNRELIABLE.............................................................................. 18 A. If Nomura Provided Ocwen And Wells Fargo With Prompt Notice, They Would Have Earned Less Compensation Than They In Fact Earned .................................. 18 B. Warren’s Reliance On Snow’s Sampling Is Fundamentally Flawed.............................................. 19 C. Warren Failed To Account For Ocwen’s Additional Servicing Compensation ............................ 22 D. Warren Failed To Properly Account For The Costs Associated With The Servicing Of The Mortgage Loans .............................................................. 29 E. Warren’s Conclusion That Ocwen Would Have Earned An 18% Yield Is Unsupportable ........... 30 VII. CONCLUSION ............................................................................................................................ 34 APPENDIX A --- EXPERIENCE & QUALIFICATIONS FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 I. SUMMARY OF QUALIFICATIONS 1. I am a Managing Director and Atlantic Lead for BDO USA, LLP (“BDO”)1 Forensic Accounting and Investigation’s practice. I received a Bachelor of Science degree in Economics as well as Accounting from Purdue University. I have also received my Master of Business Administration from the University of Notre Dame. I am a licensed CPA in the state of Virginia. 2. I have over 20 years of experience in the financial services industry, providing accounting, auditing, business advisory, and litigation support services. As a Managing Director, I oversee engagements involving securities litigation, regulatory compliance reviews, and monitorships. I have also led financial statement audits for mortgage companies such as, but not limited to, Federal Home Loan Bank of Indianapolis, Northern Trust, Irwin Mortgage, and Bank One. I served as the lead Director drafting new mortgage servicing standards for the Monitor of the National Mortgage Settlement, who oversaw the nation’s largest banks/mortgage servicers’ compliance with the new standards for mortgage servicing, including loan modifications for distressed borrowers. In addition, I was the lead advisor assisting the monitors overseeing residential mortgage-backed securities (“RMBS”) settlements for Bank of America, Morgan Stanley, Goldman Sachs, and the Royal Bank of Scotland. Prior to joining BDO’s Forensic Accounting and Investigations practice, I was a Director in BDO’s assurance practice where, for approximately five years, I assisted the Federal Deposit Insurance Corporation (the “FDIC”) in 1 BDO is a national professional services firm providing assurance, tax, and advisory services to private and publicly- traded businesses. 2 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 performing mortgage servicing compliance reviews related to their Shared Loss Agreements. 3. Prior to joining BDO, I was a consulting Senior Manager with Ernst & Young and an assurance Manager with PriceWaterhouseCoopers. I have also been employed as an Internal Audit Vice President at Fannie Mae where I was responsible for the audits of the accounting, capital markets, financial models, and various risk groups. In addition, I held an officer level position at Sallie Mae, where I oversaw the loan reporting and the analysis group responsible for the allowance for loan loss, analysis of loan servicing operations, and calculation of net interest margins. A copy of my curriculum vitae is attached to this report as Appendix A. II. SCOPE OF ENGAGEMENT 4. I have been retained through BDO by Constantine Cannon LLP (“Counsel”), Counsel for the Defendant and Third-Party Plaintiff, Nomura Credit & Capital, Inc. (“Nomura”) to provide expert testimony in connection with litigation involving, HSBC Bank USA, National Association (“HSBC” or the “Trustee”), Nomura, Ocwen Loan Servicing, LLC (“Ocwen” or the “Servicer”),2 and Wells Fargo Bank, N.A. (“Wells Fargo” or the “Master Servicer”). 5. HSBC, in its capacity as Trustee for the Nomura Asset Acceptance Corporation (“NAAC”) Alternative Loan Trust, Series 2006-S4 (“NAAC 2006-S4” or the “Trust”) brought the instant action against Nomura (the “First-Party Action”). Nomura served as the “sponsor” of a residential mortgage-backed securitization 2 “Ocwen” is also used to refer to Ocwen Financial Corporation. Ocwen Loan Servicing, LLC is an operating company of Ocwen Financial Corporation. See, e.g., Ocwen 2006 Form 10-K at Ex. 21.0. 3 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 through which the Trust was created. In that role, Nomura purchased and aggregated mortgage loans originated by third-party originators that were ultimately deposited into the Trust. The NAAC 2006-S4 Trust initially contained 4,712 closed-end, fixed rate mortgage loans secured by second liens on residential properties (the “Mortgage Loans”). 6. As is common in RMBS securitizations, the Trust issued “certificates,” which were offered to investors. Certificateholders received distributions derived from principal and interest collected in connection with the Mortgage Loans. 7. The securitization transaction was governed by two contracts: (i) the Pooling and Servicing Agreement, among NAAC, Nomura, Ocwen, GMAC Mortgage Corporation (“GMAC” or, together with Ocwen, the “Servicers”), Wells Fargo, and HSBC, dated as of September 1, 2006 (the “PSA”); and (ii) the Mortgage Loan Purchase Agreement, between Nomura and NAAC, dated September 1, 2006 (the “MLPA”). 8. In the MLPA, Nomura made certain representations and warranties regarding specific characteristics of the Mortgage Loans (the “Representations”). In the First-Party Action, the Trustee alleges that some of the Mortgage Loans in the Trust did not comply with certain of those Representations.3 9. Nomura commenced a related third-party action against Ocwen and Wells Fargo, in their respective roles as Servicer and Master Servicer for the Mortgage Loans in the Trust (the “Third-Party Action”).4 In the Third-Party Action, Nomura alleges, inter 3 See First-Party Complaint, dated March 18, 2013. 4 See Third-Party Complaint, dated August 11, 2014 (“Third-Party Complaint”). 4 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 alia, that Ocwen and Wells Fargo breached their obligations under the PSA by (i) failing to provide prompt written notice to Nomura upon discovery of breaches of Representations that materially and adversely affected the interests of the Certificateholders; and (ii) failing to service and administer the Mortgage Loans in the Trust in the best interest of and for the benefit of the Certificateholders in accordance with PSA.5 10. Ocwen and Wells Fargo asserted counterclaims against Nomura in the Third-Party Action alleging that Nomura breached its obligation to notify them that certain of the Mortgage Loans did not comply with the Representations.6 Ocwen and Wells Fargo further allege that they “suffered damages” as a result.7 And, in its Counterclaims, Wells Fargo alleges that Nomura’s purported failure to notify “reduced the compensation that Wells Fargo would have received but for Nomura’s failure to comply with its obligation to notify Wells Fargo.”8 11. In an effort to quantify their alleged damages, Ocwen and Wells Fargo retained Samuel Warren (“Warren”) to analyze “whether and to what extent Ocwen and Wells Fargo, in their respective roles as Servicer and Master Servicer, suffered losses 5 See Third-Party Complaint, ¶¶ 40-49. 6 See Ocwen Answer, Affirmative Defenses, and Counterclaims, dated August 3, 2018 (“Ocwen Counterclaims”), ¶¶ 31-38; Wells Fargo Answer and Affirmative Defenses to Third-Party Complaint and Counterclaims, dated August 3, 2018 (“Wells Fargo Counterclaims”), ¶¶ 26-33. 7 Ocwen Counterclaims, ¶ 37; Wells Fargo Counterclaims, ¶ 32. Both Ocwen and Wells Fargo have also asserted a Cause of Action for declaratory relief against Nomura requesting “that the Court enter an order declaring that Nomura is barred from obtaining the reliefsought from” Ocwen and Wells Fargo to the extent of Nomura’s purported failure to provide Ocwen and Wells Fargo “with notice as provided for by the PSA.” Ocwen Counterclaims, ¶ 41; Wells Fargo Counterclaims, ¶ 36. 8 Wells Fargo Counterclaims, ¶ 32. 5 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 resulting from the underperformance of the Mortgage Loans in the Allegedly Breaching Loan Population.”9 12. The “Allegedly Breaching Loan Population” was identified by the following experts engaged by HSBC: Robert W. Hunter (“Hunter”), John A. Kilpatrick, Ph.D. (“Kilpatrick”), Peter D. Rubenstein, Ph.D. (“Rubinstein”), and Karl N. Snow, Ph.D. (“Snow”).10 Based on Snow’s analysis, Warren extrapolated his conclusions regarding the Allegedly Breaching Loan Population to the “Extrapolated Allegedly Breaching Loan Population.”11 13. For the purposes of his analysis, Warren “assume[d] the validity of the conclusions stated in ... Hunter’s, Rubinstein’s, Kilpatrick’s and Snow’s reports including ... Hunter’s and Rubinstein’s conclusions that Nomura materially breached its [Representations] with respect to loans in the Allegedly Breaching Loan Population, as well as their conclusions that such breaches were ‘material’ using the materiality definition set forth in their reports.”12 14. I have been retained by Counsel for Nomura to evaluate the opinions asserted by Warren with respect to the alleged losses Ocwen and Wells Fargo incurred as a result of Nomura’s purported failure to provide them with notice that certain of the Mortgage Loans breached the Representations.13 My report does not assume or accept the assumption that Nomura breached its Representations. I am also not 9 See Expert Report of Samuel Warren, dated May 24, 2019 (“Warren Report”), ¶ 9. 10 See Warren Report, ¶¶ 4-8. 11 Warren Report, ¶ 7. 12 See Warren Report, ¶ 9; see also Warren Report, ¶¶ 20-23, 29, 33. 13 See Ocwen Counterclaims, ¶¶ 31-38; Wells Fargo Counterclaims, ¶¶ 26-33. 6 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 opining with respect to Snow’s use of sampling and extrapolation, nor am I opining with respect to any of the opinions offered by HSBC’s other experts. It is my understanding that Nomura objects to the opinions offered in the reports of each of HSBC’s experts and Nomura’s other experts have and/or will be addressing the opinions contained therein. 15. My work has been performed in accordance with the American Institute of Certified Public Accountants consulting standards.14 16. This report was prepared by me, supported by BDO personnel and Covius Real Estate Services (“CRES”) working under my supervision and direction. It sets forth my opinions and conclusions in this matter based on the information available to me through the date of this report. 17. BDO is being compensated for the time that I spend working on this matter at a billing rate of $650 per hour plus reasonable out-of-pocket costs incurred. BDO is also being compensated for the services of its professional staff at billing rates ranging from $215 to $550 per hour. BDO’s fees are not contingent upon the opinions I express nor the results of this matter. 18. My work in this matter is ongoing, and I reserve the right to amend, modify, or supplement my analysis and opinions, including if new information becomes available to me which bears on my opinions or conclusions contained herein. 14 I have not been retained to perform an audit, review, or compilation of any financial statements. 7 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 III. SUMMARY OPINION 19. The basis of Ocwen and Wells Fargo’s claim is that Nomura failed to notify the other parties to the PSA of its breaches of the Representations.15 As a result of this purported failure to notify, Ocwen and Wells Fargo contend that they suffered damages in the form of earning less than they would have earned had Nomura provided such notice.16 In making this claim, Warren assumed that Nomura, in fact, breached its Representations.17 Nomura’s other experts have concluded that there is no basis for such an assumption and this report does not make such an assumption. 20. Even if HSBC establishes that Nomura breached the Representations, Ocwen and Wells Fargo have, nevertheless, failed to demonstrate that they earned less than they otherwise would have. The PSA provides, and Ocwen and Wells Fargo recognize,18 that the sole remedy as against Nomura should it breach the Representations is for Nomura to cure the breach, repurchase the Mortgage Loan, or, in certain limited circumstances, substitute a new mortgage loan for the breaching Mortgage Loan.19 Warren does not offer an expert opinion nor cite to any evidence to the effect that, had Nomura provided the requisite notice, it would have done anything other than repurchase the Mortgage Loans in question. And, as more fully demonstrated below, if Nomura had repurchased the Allegedly Breaching Loan Population or the 15 See Ocwen Counterclaims, ¶¶ 31-38; Wells Fargo Counterclaims, ¶¶ 26-33. 16 See Ocwen Counterclaims, ¶ 37; Wells Fargo Counterclaims, ¶ 32. 17 See Warren Report, ¶ 9. 18 See Ocwen Counterclaims, ⁋ 35; Wells Fargo Counterclaims, ⁋ 21. 19 See PSA § 2.03(c) at pp. 57-58. 8 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 Extrapolated Allegedly Breaching Loan Population, Ocwen and Wells Fargo would have earned less money than they in fact earned. 21. Nor does Warren address the fact that the PSA does not guarantee Ocwen and Wells Fargo any set amount of income. Rather, the income to which they were entitled was dependent on a host of factors, including, but not limited to, the number of borrowers who pre-paid their Mortgage Loans, the number of Mortgage Loans that defaulted, the time it took to foreclose on properties, and the time it took to sell “real estate owned” or REO properties. Even if, however, Nomura’s alleged failure to provide notice afforded Ocwen and Wells Fargo with a basis for damages, Warren’s analysis suffers from the following fundamental flaws: Warren’s use of Snow’s sampling results was improper; Warren fails to account for all the servicing and default related fees that Ocwen earned; Warren failed to account for the actual servicing costs in connection with the servicing of the Mortgage Loans; and Warren’s use of an 18% discount rate is improper. IV. BACKGROUND A. The Mortgage Loans In The NAAC 2006-S4 Trust 22. At inception, the Trust consisted of 4,712 closed-end, fixed rate Mortgage Loans secured by second liens on residential real properties with an aggregate principal balance at issuance (“Issuance Balance”) of $253,912,480.20 20 See NAAC 2006-S4 Trust Offering Circular, dated September 28, 2006 (the “Offering Circular”), at p. 28. 9 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 23. The division of servicing responsibilities for the Mortgage Loans was such that GMAC serviced 3,758 Mortgage Loans with an Issuance Balance of $198,144,274 and Ocwen serviced 954 Mortgage Loans with an Issuance Balance of $55,768,206.21 The GMAC serviced Mortgage Loans were service transferred to Ocwen in December 2006.22 B. The Relevant Provisions Of The PSA 24. PSA § 2.03(c) provides that if a Servicer discovers a breach of the origination-related representations and warranties that materially and adversely affects the interests of the Certificateholders, that Servicer must provide the parties to the PSA with prompt notice of the breach.23 Nomura then has a certain amount of time during which to cure, repurchase, or, if the breach occurs within the first two years of the Trust, to substitute the Mortgage Loan at issue.24 The PSA further provides that Nomura’s obligation to cure, repurchase, or replace such Mortgage Loan is the sole remedy as against Nomura.25 25. Pursuant to PSA § 3.01, Servicers are retained to provide services in connection with the underlying assets within the Trust. Specifically: [e]ach Servicer shall service and administer the related Mortgage Loans … on behalf of the Trust and in the best interest of and for the benefit of the Certificateholders (as determined by such Servicer in its reasonable judgment) in accordance with the terms of this Agreement and the Mortgage Loans and to the extent consistent with such terms and in 21 See Wells Fargo (as Master Servicer) October 25, 2006 loan-level data file and Wells Fargo (as Master Servicer) October 25, 2006 distribution report obtained from https://www.ctslink.com. For purposes of my report, percentages and dollar amounts are generally rounded to the nearest whole number. 22 The date of the servicing transfer was determined based on the Servicer name as indicated on the Master Servicer’s monthly remittance reports for the trust (the “Remittance Reports”). 23 See PSA § 2.03(c) at pp. 57-58. 24 See PSA § 2.03(c) at p. 58. 25 See PSA § 2.03(c) at p. 59. 10 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 accordance with and exercising the same care in performing those practices that each Servicer customarily employs and exercises in servicing and administering mortgage loans for its own account (including, compliance with all applicable federal, state and local laws).26 Consistent with the foregoing, each Servicer “shall seek the timely and complete recovery of principal and interest on the Mortgage Notes related to the related Mortgage Loans”27 and, in effect, minimize realized losses passed onto the Certificateholders of the Trust. 26. Unlike investors, who earn returns based on risk assumed, servicers are compensated for providing these services and do not receive a premium for assuming more risk. 27. PSA § 3.10 provides that the Servicers are compensated for servicing and administering the Mortgage Loans within the Trust as follows: As compensation for its activities hereunder, each Servicer shall be entitled to retain or withdraw from the related Custodial Account out of each payment of interest on each Mortgage Loan included in the Trust Fund an amount equal to the applicable Servicing Fee or Charged Off Loan Fee, as applicable. In addition, each Servicer shall be entitled to recover unpaid Servicing Fees out of Liquidation Proceeds, Insurance Proceeds, condemnation proceeds or otherwise to the extent permitted by Section 4.02. In connection with the servicing of any Special Serviced Mortgage Loan, the Special Servicer shall receive the Servicing Fee for such Special Serviced Mortgage Loan as its compensation and the Seller, or its designee, shall be responsible for paying the related Servicer the Servicing Fee with respect to such Mortgage Loan, pursuant to Section 3.24.28 26 PSA § 3.01 at p. 65. 27 PSA §3.01 at p. 65. 28 PSA § 3.10 at p. 77. 11 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 28. This monthly Servicing Fee is defined in the PSA as 1/12th of the Servicing Fee Rate which is further defined as 0.50% per annum multiplied by the “Stated Principal Balance” of each Mortgage Loan.29 29. The Servicer is entitled to the Servicing Fee for each month that a Mortgage Loan remains in the Trust until the Mortgage Loan is liquidated, regardless of whether the Mortgage Loan is performing.30 Servicing Fees that are not paid to the Servicers while a Mortgage Loan is in default are reimbursed to the Servicer by the Trust to the extent that such unpaid Servicing Fees are not otherwise recoverable from “Liquidation Proceeds, Insurance Proceeds or other proceeds from the related Mortgage Loan….”31 30. PSA § 3.10 also provides that the Servicers are entitled to a “Charged Off Loan Fee.”32 A Charged Off Loan is any delinquent Mortgage Loan33 for which the Servicer determines: pursuant to the procedures set forth in Section 3.09, that there will be (i) no Significant Net Recoveries with respect to such Mortgage Loan or (ii) the potential Net Recoveries are anticipated to be an amount, determined by the applicable Servicer in its good faith judgment and in light of other mitigating circumstances, that is insufficient to warrant proceeding through foreclosure or other liquidation of the related Mortgage 29 See PSA § 1.01 at p. 46 (Servicing Fee and Servicing Fee Rate); see also PSA § 1.01 at p. 46 (Stated Principal Balance). 30 See PSA § 3.10 at p. 77. Once a Mortgage Loan has been charged off, the Servicer is no longer entitled to the Servicing Fee. See PSA § 3.09(a)(iii) at p. 73. 31 PSA § 4.02(a)(v) at p. 93. 32 PSA § 3.10 at p. 77. 33 A Mortgage Loan becomes “‘delinquent’ if any payment due thereon is not made pursuant to the terms of such Mortgage Loan by the close of business on the day such payment is scheduled to be due. A Mortgage Loan is ‘30 days delinquent’ if such payment has not been received by the close of business on the corresponding day of the month immediately succeeding the month in which such payment was due, or, if there is no such corresponding day (e.g., as when a 30-day month follows a 31-day month in which a payment was due on the 31st day of such month), then on the last day of such immediately succeeding month. Similarly, for ‘60 days delinquent,’ ‘90 days delinquent’ and so on.” PSA § 1.01 at p. 24. 12 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 Property.34 The Charged Off Loan Fee is defined as 35% of the Net Recoveries on any Charged Off Loan.35 31. Pursuant to PSA § 3.10, Servicers are also entitled to the following additional servicing compensation: Excess Liquidation Proceeds, Prepayment Interest Excess, if applicable, assumption fees, late payment charges, insufficient funds charges and ancillary income to the extent such fees or charges are received by the applicable Servicer, all income and gain net of any losses realized from Permitted Investments with respect to funds in or credited to the applicable Custodial Account shall be retained by the related Servicer to the extent not required to be deposited in the applicable Custodial Account pursuant to Section 4.02.36 32. PSA §§ 4.02(a)(iii) and (a)(v) also entitle the Servicers to reimbursement of “Servicing Advances” which are defined as: [a]ll customary, reasonable and necessary “out of pocket” costs and expenses (including reasonable legal fees) incurred … in the performance by a Servicer of its servicing obligations hereunder, including, but not limited to, the cost of (i) the preservation, restoration, inspection, valuation and protection of a Mortgaged Property, (ii) any enforcement or judicial proceedings, including foreclosures, … (iii) the management and liquidation of any REO Property (including, without limitation, relator’s commissions), (iv) compliance with any obligations under Section 3.07 hereof to cause insurance to be maintained, (v) payment of taxes, (vi) obtaining broker price opinions and (vii) obtaining any legal documentation required to be included in the Mortgage File and/or correcting any outstanding title issues … reasonably necessary for such Servicer to perform its obligations under this Agreement. Servicing Advances also include any reasonable and necessary “out of pocket” costs and expenses (including reasonable legal fees) incurred by a Servicer in connection with executing and recording instruments of satisfaction, deeds of reconveyance or Assignments to the extent not 34 PSA § 1.01 at p. 16 (Charged Off Loan). 35 See PSA § 1.01 at p. 16 (Charged Off Loan Fee); see also PSA § 1.01 at p. 34 (Net Recovery). 36 PSA § 3.10 at p. 77; see also PSA § 4.01(b) at p. 92 (“payments in the nature of late payment charges or assumption fees, if collected, and any Prepayment Interest Excess need not be deposited” in the Custodial Account by the related Servicer; if, however, they are, the related Servicer may withdraw such payments). 13 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 recovered from the Mortgagor or otherwise payable under this 37 Agreement. 33. PSA § 3A.01 addresses the administration and master servicing of the Mortgage Loans and specifies the oversight responsibilities of Wells Fargo as Master Servicer as it relates to the Trust. Pursuant to PSA § 3A.01: [t]he Master Servicer shall supervise, monitor and oversee the obligation of the Servicers to service and administer the Mortgage Loans in accordance with the terms of the Agreement and shall have full power and authority to do any and all things which it may deem necessary or desirable in connection with such master servicing and administration. In performing its obligations hereunder, the Master Servicer shall act in a manner consistent with Accepted Master Servicing Practices. Furthermore, the Master Servicer shall oversee and consult with the Servicer as necessary from time-to-time to carry out the Master Servicer's obligations hereunder, shall receive, review and evaluate all reports, information and other data provided to the Master Servicer by the Servicers and shall cause the Servicers to perform and observe the covenants, obligations and conditions to be performed or observed by the Servicers under this Agreement. The Master Servicer shall independently and separately monitor each Servicer's servicing activities with respect to each related Mortgage Loan, reconcile the results of such monitoring with such information provided in the previous sentence on a monthly basis and coordinate corrective adjustments to each Servicer's and Master Servicer's records. The Master Servicer shall reconcile the results of its Mortgage Loan monitoring with the actual remittances of the Servicers to the Distribution Account....38 34. Pursuant to PSA § 3A.08, the Master Servicer receives a monthly Master Servicing Fee defined as 1/12th of the Master Servicing Fee Rate which is further defined as 0.045% per annum multiplied by the State Principal Balance of each Mortgage Loan.39 37 PSA § 1.01 at p. 45 (Servicing Advances); see also PSA § 3.09(a)(i) at p. 72; PSA § 4.02(a)(iii) and (v) at pp. 93- 94. The “Nonrecoverable Advances” referenced in PSA §§ 4.02(a)(iii) are defined in the PSA to include Servicing Advances. See PSA § 1.01 at p. 34 (Nonrecoverable Advances). 38 PSA § 3A.01 at p. 85; see also PSA § 3A.02 at p. 85 (“The Master Servicer shall be responsible for monitoring the compliance by each Servicer with its duties under this Agreement.”). 39 See PSA § 1.01 at p. 31 (Master Servicing Fee and Master Servicing Fee Rate); PSA § 3A.08 at pp. 88-89. 14 FILED: NEW YORK COUNTY CLERK 08/04/2022 12:56 PM INDEX NO. 650337/2013 NYSCEF DOC. NO. 1841 RECEIVED NYSCEF: 08/04/2022 V. WARREN’S ANALYSIS 35. Assuming the validity of the conclusions and purported findings of HSBC’s other experts in the First-Party Action, including those of Snow, Warren purports to analyze “whether and to what extent Ocwen and Wells Fargo, in their respective roles as Servicer and Master Servicer, suffered losses” based on the assumption that the allegedly breaching Mortgage Loans underperformed.40 36. Snow claims to have selected a simple random sample of 400 primary sample loans (the “400 Liquidated Sample Loans”) from the population of Liquidated Loans in the Trust (the “Liquidated Loans” or the “Liquidated Population”).41 He defines Liquidated Loans as loans 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.”42 Hunter then reviewed the 400 Liquidated Sample Loans selected by Snow, the