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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK -----------------------------) SYNCORA GUARANTEE, INC., formerly known as XL CAPITAL ASSURANCE, INC, Plaintiff, No. 09 Civ. 3106 (PAC) vs. EMC MORTGAGE CORPORATION, Defendant. -----------------------------) SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK -----------------------------) AMBAC ASSURANCE CORPORATION, PLAINTIFF, Index No. 65041/20111 -againstEMC MORTGAGE LLC (formerly known as EMC MORTGAGE CORPORATION), J.P. MORGAN SECURITIES LLC (formerly known as BEAR, STEARNS & CO. INC.) and JPMORGAN CHASE BANK, N.A., DEFENDANTS. -----------------------------) VIDEOTAPED DEPOSITION OF New York, Ne Saturday, January 21, 2012 Reported by:

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KRISTIN KOCH, RPR, RMR, CRR, CLR

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A. Q. A. Q. A. Q. A. Q. A. Q. A. Q. A. Q. A. Q. A. Q. A. Q.

Yes. You worked on their loans? Yes. For Watterson or Clayton? That was with Watterson. Flag Star? That was with Watterson. You worked on their loans? Yes. Sun Trust? No. First Horizon? Not familiar with them. Watterfield? Not familiar. Maribella? Never heard of them. Impac? No. I want to focus a little bit on your

jobs -- your job as an underwriter at both Watterson and Clayton. What is your understanding of what the role of an underwriter was at Watterson and
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Clayton? A. My understanding at the time was to

re-underwrite the loans to specific guidelines to see if they were met and to give them a risk assessment that ranges from a 1, 2 or 3, so, therefore, the investor can assess whether to buy that group of loans or that particular loan that I underwrote. Q. And the investor that you mentioned,

you are talking about clients of Watterson and Clayton? A. Q. Yes. And let me just turn to paragraph 15

of your declaration, which is on page 5 here. It says here: "Importantly, in reviewing each

loan, the due diligence underwriter also had to assess whether the loan met the criteria set out in the underwriting guidelines. For

example, the underwriting guidelines for stated income loans required, among other things, that the borrower's income listed on the loan application must be reasonable." A. Q. That is correct. Did the underwriting guidelines also
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require the underwriter to look for red flags of fraud? A. Q. Yes. And what do the underwriting

guidelines say about red flags for fraud? A. They were -- they were not

particular -- in other words, they were not particularly good loans and possibly these loans shouldn't have been approved. Q. How did the underwriters receive the

guidelines and directions regarding the guidelines? MR. EDLIN: A. to project. It varied. Objection. It varied from project

Sometimes some project leads would

give you the parameters and write things on a flip pad or also on a dry board eraser, dry board, or sometimes they may have them up there near them, and sometimes we may be on the job and not have any guidelines at all. Q. So let me just clarify. It was the

project leads or the team leads who provided you these guidelines or other instructions relating to guidelines?
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A. Q.

That is correct. To the best of your knowledge, where

did the project leads and the team leads get these guidelines from? A. To the best of my knowledge,

probably the investors or their originators. Q. You mentioned that -- well, I am

going to come back to that a little bit later. Did you find that the guidelines that you were provided by these project leads and team leads of both Watterson and Clayton, did they always apply to the loans that you were reviewing? MR. EDLIN: A. Objection. Some guidelines

No, they did not.

didn't meet any of the parameters of these loans. Q. Okay. And what do you mean when you

say the guidelines did not meet the parameters of the loans? A. Meaning the loans when they were

approved were outside the box of what was given to us, if we had guidelines at all. MR. EDLIN: Objection. Move to

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strike as non-responsive. Q. When you say outside of the box, you

are talking about a time period? A. Yes. The loans may have been

written to one set of guidelines compared to what you was given. MR. EDLIN: strike. Q. So as I understand it, I want to Objection. Move to

make sure that the record is clear on this, that Watterson Prime and Clayton underwriters like yourself were not often provided with the guidelines which were applicable to the loans at the time they were originated? A. That is correct. MR. EDLIN: Objection. Lack of

foundation and leading. A. That is -- that is correct. The

guidelines, the majority of the time you would have them, did not line up or was parallel with the loan approval at that time. These were the

guidelines we were going to go by. THE COURT REPORTER: A. I'm sorry?

These were the guidelines we are

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going to use for this particular project at that time and most of the time they were not parallel or lined up with the approval of how this underwriter came up with that decision. MR. EDLIN: Objection. Move to

strike as non-responsive. Q. What direction, if any, did you

receive from the clients of Watterson Prime and Clayton regarding how to conduct a re-underwriting review? A. Usually it was channeled through the

team lead or the project manager certain problems maybe after the first day we would run through and usually they would say, "hey, the client is -- they are going to ignore that" or "that's not a big concern and they will take care of that." Q. So as I understand it, through the

team leads you received directions that the clients wanted the underwriters to ignore certain defects in loans? MR. EDLIN: A. Objection.

That is correct. MR. EDLIN: Objection. Leading.

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Lack of foundation. Q. Turn to paragraph 17 of your

affidavit, which is on page 5. It says here in the first line: "Clayton supervisors would often inform the due diligence underwriters that the purchasers wanted the underwriters to approve loans that often did not satisfy the underwriting guidelines." A. Q. That is correct. Is the same statement true for

Watterson Prime? A. Q. Yes. Was this a practice which was

pervasive at Watterson and Clayton? A. Q. A. Q. Yes. Across all clients? Yes. What type of deviations from

underwriting guidelines are you referring to in this sentence? A. You have -- you have things for They

appraisals where the value wasn't there. ignore it.

You would have as far as income

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that didn't -- that wasn't jailed, in other words, the income wasn't there. THE COURT REPORTER: wasn't" -A. Jailed, or, in other words, that "That

income wasn't there for these borrowers and they will say find exceptions to compensate or for that loan is not -- that's not lining up correctly, don't worry about it, let's get it done, get the information in there and compensate it out, we will compensate it. Q. We are going to come back to the

issue of compensating factors a little bit later. You said just now that you found that the income wasn't there. by that? A. You would look at -- you would look What do you mean

at underwriters that are front-end underwriters that approve the loan at one income and it's true enough they may have -- if they had the documents -- if you had all the documents in the loan the income may have been that, but based on what you have in front of you the
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income didn't line up, and then sometimes when you look at some of the income even if you had all the documents and recalculated it, it wasn't -- the income wasn't there. In other

words, the loan lacked substance of being approved. MR. EDLIN: strike. Q. Did you work on stated income loans Objection. Move to

at Watterson and Clayton? A. Q. Yes, I did. When you say that the income wasn't

there, could that be related to stated income loans? MR. EDLIN: A. Objection. Leading.

That is correct.

You had some

stated income loans that was out of the box and unreasonable. MR. EDLIN: Objection. Move to

strike as non-responsive. Q. Your testimony is that on stated

income loans you found many times that the income listed on these loan applications was not reasonable?
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A. Q.

Yes, there was. What instructions -MR. EDLIN: Just one second. Do we

have -- just to keep the flow going and lack of -- just save a little time, we have a standing objection, I take it, that any objections are reserved if not made? MR. FARIDI: I don't know what the

usual stips are here. MR. EDLIN: Do we have -- what are

the usual stips on this dep? THE COURT REPORTER: go off the record? MR. EDLIN: record. THE VIDEOGRAPHER: 10:12. The time is Yes, we can go off the Do you want to

We are going off the record. (Discussion off the record.) THE VIDEOGRAPHER: The time is

10:13.

We are back on the record.

BY MR. FARIDI: Q. Let me go back to paragraph 17 of Let me read the second line "I recall specifically
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your declaration. here.

It states that:

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one occasion when representatives of Bear Stearns (the purchaser) told my supervisors that because Bear Stearns was willing to purchase loans that did not meet the underwriting guidelines, we should try to find a compensating factor for every single loan that did not meet the underwriting guidelines." A. Q. That is true. Do you recall any other instances -MR. EDLIN: responsive. Q. A. Q. A. Q. Move to strike as not

Is there a question?

Is that a true statement? That is a true statement. Do you recall any other instances? That's pretty much on all jobs. So you don't recall any of the

specific instances? A. No. Like I said, that -- those

loans -- you are talking about a whole year doing -THE COURT REPORTER: A. I'm sorry?

You are talking about a whole year

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throughout my clear at Clayton. MR. EDLIN: non-responsive. Q. So it's fair to say that even though Move to strike as

you don't remember any other specific occasions when you received similar instructions, that you did receive these types of instructions on a regular basis? MR. EDLIN: A. Q. Leading.

I would say yes, I did. To your knowledge, was it a

pervasive practice at Watterson and Clayton for underwriters to fail to follow the underwriting guidelines? MR. EDLIN: A. Q. Leading.

Ask the question again. To your knowledge, was it a

pervasive practice at Watterson and Clayton for underwriters re-underwriting the loans to not follow the underwriting guidelines? MR. EDLIN: foundation. A. Q. Yes. In paragraph 17 you also state:
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"When I could not find a compensating factor for certain defective loans even after a thorough review of the loan files, I was told to return to my desk and search again. Due

diligence underwriters like myself were forced to find compensating factors for defective loans where none existed." A. Q. A. Q. Yes. Is that a true statement? That is true. Did the same practice take place at

Watterson Prime? A. Q. Yes. How common was it for Clayton and

Watterson Prime underwriters to provide as compensating factors those that were not sufficient or were contrived? A. It was very common. MR. EDLIN: foundation. A. It was very common for that type of Leading and lack of

practice for both Watterson and Clayton. Q. Now, this paragraph in particular,

paragraph 17, refers to a particular Bear

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Stearns job; correct? A. Yes. MR. EDLIN: Q. Objection.

Is it your testimony that on this

particular job you found compensating factors that were contrived? A. Yes. MR. EDLIN: Q. says: Objection. It

Take a look at paragraph 18.

"For example, on one occasion the loan

application for a stated income loan that I processed stated that the borrower made $8,500 per month working as an assistant manager at McDonalds restaurant. I told my supervisor

that the borrower's stated income was unreasonable. I was told to find a The

compensating factor and approve the loan. compensating factor that I found did not sufficiently compensate for the defect." A. Q. A. Q. instances?
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That is correct. That's a true statement? Yes, that is. Do you recall any other specific

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A.

There were several instances that I

can't recall, but that stood out particularly, because I remember it was a California loan and they tried -- and the team lead tried to basically say this is California, of course they are going to pay higher, and at that time I believe 8,500 for someone that's around about 19 or 20 coming out of high school was not reasonable at a hundred thousand and you are not even the owner of a McDonalds. MR. EDLIN: Q. Move to strike.

Even though you may not be able to

recall, as you testified, other specific examples, do you believe that you found loans like this where the stated income was not reasonable on other occasions? A. Q. A. Yes. On Bear Stearns jobs? Yes. MR. EDLIN: Q. or 3s? A. 2. Most of the time it was graded as a Move to strike.

And you graded those loans as 1s, 2s

It was graded as a 2 and later on down the

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line it was changed to a 1. Q. Okay. We are going to come back to

that a little bit later. MR. EDLIN: strike. Q. At Watterson and Clayton, Objection. Move to

logistically speaking, how did the underwriters record the results of the review of loans? A. Once we entered all the information,

we hit "save" and it saves your initials or your user ID name in there. Q. When you say you enter information

and you hit "save," where are you entering information into and what are you hitting "save" on? A. We were provided their laptops,

Watterson and Clayton, and at the very end when you hit "save" to move to the next loan -- hit "save" or either at the very -- at the end of the script on each system that takes you out of that loan and, therefore, your name was -- your name or user ID was dropped in as the person that completed that loan. Q. Was there a particular software
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installed on each of these computers where you entered information into? A. I think the CLAS system was based on

a DOS system, old DOS system, which is called CLAS, and StratQ, I'm not -- I can't remember what their -- what their system was based on. Q. You talked about a CLAS system.

Which company utilized the CLAS system? A. Clayton used -- utilized CLAS. That

was the name of their system, CLAS.

StratQ was

the software that was created by Bruce Watterson for Watterson Prime. Q. So as I understand it, underwriters

enter information into the CLAS and the StratQ systems; correct? A. Q. A. Q. That is correct. Relating to each individual loans? Yes. And I think you testified about a

grading scheme; correct? A. Q. A. Yes. And what was that grading scheme? Both grading schemes were similar.

1s were loans that were pretty much no defects

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and, you know, in other words, they was good loans to buy. 2s were loans that they were

borderline, meaning that there was some type of deficiency, but you had compensating factors that could overcome that deficiency. And 3s

were loans which you graded that were high risk to be defaults or loans that shouldn't have been approved on the front end. Q. Did both Watterson and Clayton

utilize the same grading system? A. Q. A. Q. Yes. StratQ and CLAS? Yes. And I think you talked about I

initials and user names of underwriters.

want to make sure we have covered that and the record is clear. A. Q. Okay. How did Clayton and Watterson track

which underwriter reviewed each loan? A. Each underwriter always had a unique

user name that you use throughout your employment or your contract employment with them.
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Q.

And did you -- do you remember your

user name at Clayton for CLAS? A. Q. My user name at Clayton was Okay. .

Do you remember your user

name at Watterson for StratQ? A. I had several user ID names at that

time, because the system had upgraded several times. was one. A combination of my

last name and last four of my social, and, I think, may have -- was

approximately one of my user ID names. Q. A. Q. A. Q. So for StratQ Correct. D That is correct. And you said there was a third one ?

that you don't remember? A. Yeah, it might have been .

It was always a combination of your name or some type of particular number that you -- that was assigned to you and pretty much stayed up. Q. familiar? A. It doesn't sound familiar, but that
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What about

, does that sound

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would be my -- would be one of my user IDs, because I was the only at the company,

so there was no confusion that that was me. Q. So we can tell what loans you

reviewed at both Clayton and Watterson and what deals you worked on by checking whether your employee user ID number is listed on the reports for these loans and deals? A. Q. That is correct. Paragraph 20 of your declaration "Due diligence underwriters like

states that:

myself often faced significant pressure from supervisors to review loan files quickly as possible and to avoid finding defects." that a correct statement? A. Q. I would say that is true. Okay. And this statement applies Is

equally to Watterson Prime? A. Q. Yes, that is true as well. What pressure, if any, did you

receive as an underwriter to underwrite a large volume of loans and to avoid finding defects? A. Basically the pressure I received

was basically get the loan information into the

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system as quickly as possible. already closed. Q.

These loans

The statement also says that the

pressure was there to avoid finding defects. Do you see that? A. Q. A. Q. Yes. That's a correct statement? That is correct. Do you remember any specific

recollections of times when you were told to avoid finding defects? A. Most of the time it was on a lot of

Countrywide deals and also Bear Stearns and Lehman Brother deals. Q. And do you recall any statements

that were made to you by team leads? A. One particular that stands out like

say it was always any time we did a Bear Stearns job it was pretty much we just entering data into the system like Bear don't care. You

know, that was like the little slogan that they used to just basically throw around. So we

just pretty much put the information in there. MR. EDLIN: Move to strike as
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non-responsive. Q. So the slogan Bear don't care, was

that a slogan which was also used by team leads? A. Pretty much. I have heard one team

leader say that. Q. lead? A. I want to say Steve Shockley, but I Do you recall the name of the team

don't want to put it on that particular team lead, but he pretty much -- you know, he had the attitude like that, but I can't recall if that was the team lead that actually said that at one time. MR. EDLIN: hearsay. Q. Now, you said that there was a Move to strike the

significant amount of pressure here in the statement to review loans quickly. How many

loans were underwriters reviewing per day at both Watterson and Clayton? A. It depends. Each underwriter was

required to complete one loan per hour, so, therefore, if we were there for a ten-hour day,
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you was required at least to complete ten, and some underwriters may have twelve to fifteen and it varies, and if you had too many days where you had less loans than the hours you worked, you would pretty particularly -- you probably were not going to get staffed again. Q. A. How many loans were you reviewing? I was in the middle of the pack. I

was always like one or two loans more than the hours that we worked, but I wasn't at the very top. Q. So if you worked a twelve-hour day,

you would have reviewed at least twelve loans, if not two or three more? A. Correct, I would have no less than

that twelve loans in that twelve-hour period. Probably I'd be around 14 or 15. Q. Now what happens to underwriters

were not doing twelve hours -- twelve loans per day in a twelve-hour day? A. You in particular might not get

staffed again, because you are not producing quantity and it was basically driven by quantity, not quality, because you may have
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2,500 loans and you calculated per underwriter -- it was calculated per underwriter how many we had to get out of each underwriter in order to finish that pool in that particular time. MR. EDLIN: non-responsive. Q. So Clayton and Watterson traded Move to strike as

quality for quantity? A. Yes. MR. EDLIN: Q. Move to strike.

And how did the quality of the loans

or the quality of the loan underwriting, rather, and the review of those loans suffer due to the pressure to increase the volume of loans reviewed? MR. EDLIN: Objection. Leading and

lack of foundation. A. You would ignore -- you would ignore

some things that if you was to take your time writing that -- underwriting that loan that you would have caught -- that you would have caught -- caught mistakes or things that you could have looked at and, say, you know, this
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is not right. MR. EDLIN: Q. Move to strike.

Who put pressure on you to review

that large number of loans per day? A. Q. A. Your team leads, they set the goals. What is 1003 or 1008 underwriting? Basically that is -- like in the

writing world that's basically copying what's already written, plagiarizing. MR. EDLIN: strike. Q. A. Copying what from what? You are basically copying what's Objection. Move to

already written and you are not even bothering to calculate, you are just entering -basically you are just straight data entering, entering information directly from the loan application into the system. looking at the documents. Q. Well, let me just turn to paragraph You are not even

20 of your declaration on page 6 that states, the second sentence: "These pressures" -- and

these pressures are to review loans quickly and not to find defects -- "led many due diligence
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underwriters to simply enter into the CLAS database information found on the loan application rather than entering information from the verification documents in the loan file, as required by the protocol." that? A. Q. Yes. And is that the practice of 1008, Do you see

1003 underwriting? A. Q. That is. And then you continue to write here:

"CLAS was therefore "re-calculating" the same information which already often appeared on the spreadsheet provided by the seller." A. Q. That is correct. So that practice is referred to as

1003 or 1008 underwriting? A. Q. Watterson? A. Q. A. Q. Yes. And Clayton? Yes. How prevalent was 1008 and 1003
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That is correct. Did this practice take place at

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underwriting at Watterson and Clayton? MR. EDLIN: A. Objection. It goes back to

It was very common.

some of the same people who had no experience at underwriting, so, therefore, they were copying straight from those documents. Q. Did this practice take place on jobs

for Bear Stearns? A. Q. Yes. Did this practice take place on jobs

for Credit Suisse? A. Q. A. Q. A. Q. Yes. Countrywide jobs? Yes. Deutsche Bank jobs? Yes. Do you recall any particular

underwriters who engaged in this practice? A. Q. A. Jason Westmore. Any others? Some of the ones that were related

to Barry Barmore. Q. Jason Westmoreland, which company

did he work for?

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A. Q.

Watterson Prime. And Gary Barmore, which company did

he work for? A. Q. Clayton. You said that some of these

individuals engaged in this practice were related to Gary Barmore? A. Barmore. Jason was not related to Gary He is just a particular individual

that stood out that was notorious for doing it at Watterson Prime. MR. EDLIN: A. Objection.

So, therefore, that was a reason why

he couldn't pass an underwriter test, because he was used to just entering information from the 1008 when you had to actually calculate this stuff from verified documents. MR. EDLIN: Objection. Move to

strike the speculation. non-responsiveness. Q.

Move to strike the

And earlier you stated that you know

that relatives of Gary Barmore were also engaged in 1008, 1003 underwriting? A. Yes.
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Q.

And Gary Barmore, you testified

earlier, was a team lead at Clayton? A. Q. Yes, he was. What, if anything, was done with

these 1008, 1003 underwriters who were related to Gary Barmore? A. Q. by Clayton? A. They got staffed at every job No. Were they continued to be employed Were they reprimanded?

because they put out numbers doing that type of underwriting. MR. EDLIN: Objection. Move to

strike as non-responsive. Q. What, if any -- strike that. Do you remember reviewing stated income loans at Watterson and Clayton? A. Q. Yes. Okay. What, if any, instructions

did you get from Watterson and Clayton team leads on how you should review stated income loan products? A. Basically don't look at them as

harsh as -- you know, the loans are already

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closed and these people are already in their homes, just go ahead and enter information what they got down there, what they have stated on the application. MR. EDLIN: hearsay. Q. Were you given any instructions on Move to strike the

whether you should find and mark as defective those loans where the stated incomes were not reasonable? MR. EDLIN: A. Yes. Objection. Leading.

Some -- there is a

particular -- one particular team lead, Steve Shockley, he would have an exception written on a board or written down on a piece of paper, "hey, if you come into this type of problem, put this in your comment section for that stated income." MR. EDLIN: hearsay. Q. And what was that particular Move to strike as

instruction? MR. EDLIN: A. Objection.

You may have it worded -- he would

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have it worded up so it looks uniformly for everyone to use that same exception. MR. EDLIN: Move to strike. Move to

strike the hearsay. Q. Did this particular instruction say

that you should grade the loans as defective or as non-defective? MR. EDLIN: A. Objection.

Basically you would grade them as

2s, instead of being non-defective as 2s and they would clean them up on the back end. MR. EDLIN: hearsay. Q. Move to strike the

More to strike as non-responsive.

We are going to come back to

cleaning them up on the back end a little bit later. Basically what I want to make sure that the record is crystal clear on is whether or not you graded those loans where the income was not reasonable as 3s or 1s or 2s. A. Majority, 2s. MR. EDLIN: Q. Objection.

And I think you already testified

earlier about loans that you graded as 2s;

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correct? A. Q. Yes. You said that 2s are loans which

have a defect but there is a comp factor; correct? MR. EDLIN: A. Q. Yes. And you testified earlier that the Objection.

comp factors that you found at the direction of the team leads were either contrived or not sufficient to overcome the defects? MR. EDLIN: A. Q. Objection.

That is correct. This practice on stated income loans

and comp factors, did that apply to all deals that you worked on? A. Yes. MR. EDLIN: Q. A. Objection.

At Watterson and Clayton? Yes. MR. EDLIN: Objection.

A. Q.

For both. Bear Stearns job -MR. EDLIN: Just -- let's just for
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the purposes of the court reporter being able to take a record, at the end of the question if it's clear I am objecting, just wait for me to finish, then answer. At

least that way the court reporter can get everything down. THE WITNESS: MR. FARIDI: Okay. So just make sure that

after I ask my question he doesn't have an objection, and if he lodges an objection or if he doesn't lodge an objection, then can continue to answer. THE WITNESS: Q. Okay.

This practice on stated income loans

that we were talking about as well as comp factors, did this practice take place on jobs for Bear Stearns? MR. EDLIN: A. Objection.

Yes, this practice did take place on

Bear Stearns jobs. Q. Were there times at Clayton and

Watterson when loans with unreasonable stated incomes were simply graded as 1s? MR. EDLIN: Objection. Lack of

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foundation. A. Yes. There were times they were

graded as 1s. Q. The majority of the times -MR. EDLIN: Q. A. Q. Objection.

-- or minority of the times? It would be the majority. Do you recall during your employment in

at Watterson and Clayton, coming across -- strike that.

Do you recall during your employment at Watterson and Clayton coming across documents in loan files that appeared to be fraudulent? MR. EDLIN: foundation. A. Q. Yes, I have during that time. What instructions, if any, did you Objection. Lack of

receive from Watterson Prime and Clayton supervisors and team leads on what you should do with these documents? MR. EDLIN: and compound. A. Usually the instructions were just
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Objection.

Foundation

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go ahead and keep it moving, enter the information, we will take care of that with the investor, the seller, or we will get the document -- the correct documents later. Q. documents? A. Q. Yes. Were you told ever to grade loans Were you ever told to overlook these

where you found these types of documents as 1s, 2s or 3s? A. Q. What's the question again? Let me rephrase that. How were you told you should grade these loans which had these types of documents? MR. EDLIN: A. Objection.

Once we found a bunch of -- like say

a lot of these documents were missing -THE COURT REPORTER: A. I'm sorry?

Once we -- once a lot of the

documents were missing or it was prevalent that we don't have these documents, we were told to ignore, ignore that and grade them as normal, ignore that document that was needed. MR. EDLIN: Objection. Move to

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strike and move to strike the hearsay. Q. I want to make sure we are talking I was talking about

about the same thing.

loans where the documents appear to be fraudulent and I think you were talking about loans where there were missing documents. A. Q. Okay. Okay.

So let me just ask the question.

When -- if -- strike that. During your employment at Watterson and Clayton if you came across a document or when you came across a document which was -which appeared to be fraudulent, how did you grade such loans? MR. EDLIN: foundation. A. Objection. Lack of

Leading. They

It depends on the team lead.

pretty much sometimes would just ignore it, don't worry about that, that document, we will take care of it later, go ahead and grade it as normal, ignore that document. MR. EDLIN: Objection. Move to

strike the hearsay. Q. And normal, by "normal" you mean as

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a 1? A. If the loan would have been a 1

without that document, go ahead and grade it a 1 or accordingly. MR. EDLIN: hearsay. Q. Was this practice prevalent at both Move to strike the

Watterson and Clayton? MR. EDLIN: A. Q. Yes, it was. Did you ever notice in reviewing Objection.

stated income loan products at Watterson and Clayton W-2s and other tax documents that were left in the loan file? MR. EDLIN: A. Yes. Objection.

There had been plenty of times

that W-2s, pay stubs, other documents that were in the file. Q. A. Q. On stated income loan products? Yes. Did at times any of these documents,

W-2s or the tax documents, contradict or call into question the income listed by the borrower on the loan application?
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MR. EDLIN: A. Q. Yes.

Objection.

What instructions, if any, did you

receive on what you should do with these loans? MR. EDLIN: A. Objection.

Usually it would depend on the job,

either they pull the documents -- they pull those documents out or we were told to turn them over and put them at the very back of the documents. MR. EDLIN: Move to strike as

non-responsive and move to strike the hearsay. Q. When you say "pull those documents

out," what do you mean by that? A. Pull them out of their folder,

meaning that they don't exist. MR. EDLIN: Q. Objection.

And do what with them? MR. EDLIN: Move to strike as

non-responsive. A. We would put them in a pile --

sometimes we would put them in a pile and whatever they did with them, either they
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shredded them or they got -- in other words, they disappeared, they disappeared, and sometimes the explanation would have been, well, this borrower was going for a full doc but they went stated. THE COURT REPORTER: A. I'm sorry?

Sometimes they would tell us, well,

you know, this borrower was going a full doc loan but they went stated. MR. EDLIN: Move to strike as

non-responsive and move to strike the hearsay. Q. So a lot of times these documents

were pulled out of the loan file and just destroyed? MR. EDLIN: A. Objection. Leading.

Yes, they were destroyed, but it was They was hidden. Move to strike as

not by the underwriter. MR. EDLIN: non-responsive. Q.

Let me refer to page 6 of your It states that:

declaration, paragraph 19.

"Supervisors and project managers repeatedly told due diligence underwriters that the loans
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that we were reviewing had already closed and that the borrowers had already moved into their new houses, and as such, the due diligence underwriters should not be too strict in their review." A. Q. Is that a true statement? Yes. Did the similar practices take place

at Watterson? A. Yes. MR. EDLIN: Muhammad, when you are Do you have

at a time for a quick break. much longer to go? MR. FARIDI: break. maybe. MR. EDLIN: break. MR. FARIDI: record. THE VIDEOGRAPHER: 10:41. Okay.

Let's take a quick

I have got another fifteen minutes

Let's take a quick

Let's go off the

The time is

We are going off the record. (Recess was taken from 10:41 to

10:50.) THE VIDEOGRAPHER:

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10:50.

We are back on the record.

BY MR. FARIDI: Q. Turn to paragraph 19 of your It states here

affidavit, which is on page 6.

basically that you were instructed that because the loans had already closed your review of those loans should not be too strict. A. Q. A. Q. That is correct. That's true also? Yes. Okay. And paragraph 21, the first "There was a general attitude

line here reads:

at Clayton that underwriters should not be searching for discrepancies." statement? A. Q. Watterson? A. Q. Yes. Turn to paragraph 30. It states "With Yes. The same practice took place at Is that a true

here in the last line on page 10:

respect to one particular job for Bear Stearns, I recall a Watterson supervisor stating, "I don't care how bad the loans are, I only want
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to see them graded as 1s and 2s"." that? A. Yes. MR. EDLIN: hearsay. A. Q. A. Yes. Is that a true statement? Yes, it is. MR. EDLIN: hearsay. Q. lead here? A. Q. Steve Shockley.

Do you see

Objection to the

Move to strike the

Do you recall the name of the team

You testified earlier that you

believe that these instructions were coming from the clients. A. Q. Do you recall that?

Yes, I did. What basis do you have to say that

these instructions to not focus on finding defects and to grade loans as 1s and 2s were coming from the clients? A. Usually at the beginning of every

project the team lead or project manager would state "here is what the client wants and give
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your parameters as met," and usually either somewhere in between that day or the next day after that either that project manager would get on the phone or go in a private meeting, they would come back and say, "well, the client is not accepting this," that usually come out of the project managers, "the client is not accepting this." Q. So you -MR. EDLIN: Objection. Objection.

Move to strike and move to strike the hearsay. Q. So you heard it from the mouths of

your team leads -A. Q. Yes. -- that the clients did not want you

to find these types of defects? MR. EDLIN: A. Yes. Objection. Leading.

It came out of project

manager's mouth that here -- the client accept this. MR. EDLIN: hearsay. Q. And do you recall whether -- strike
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Move to strike the

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that. Do you recall the names of any particular clients which come to mind? MR. EDLIN: A. Q. Objection. Leading.

Bear Stearns were one of them. Do you recall -MR. EDLIN: Move to strike.

Q.

Do you recall the name of the

particular Bear Stearns representative which the team leads referenced? A. Q. familiar? MR. EDLIN: A. Q. Yes. Okay. Do you recall instances where Objection. Leading. No. Does the name John Mongoluzza sound

the team leads relayed instructions to you from Mr. Mongoluzza? A. Yes. MR. EDLIN: Objection. Leading.

Move to strike the hearsay. Q. Did these instructions -- what were

these instructions? A. Pretty much similar to what we just

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stated before, go ahead -- they gave us instructions to ignore this, go ahead, the client will accept that. That's usually when

you have seen the project manager either talking to the side with Mr. Mongoluzza or on the phone with him. MR. EDLIN: non-responsive. hearsay. Q. I want to go back to paragraph 21 of It states here, Move to strike as More to strike the

your declaration on page 6. the third line:

"It was an understood rule at

Clayton that if a due diligence underwriter graded a significant number of loans as EV-3s, that underwriter would not be hired for the next due diligence job." First off, EV-3s are the same things as 3s that we have been talking about? A. Yes. MR. EDLIN: the question. A. Yeah. Objection. Objection to

Lack of foundation. EV-3s, basically that's just

Clayton's version of just a -- it's a 3 what Watterson Prime grades it as.

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MR. EDLIN: Q.

Move to strike.

And you state here that basically if

underwriters were grading too many loans or a significant number of loans, that's what it says here, as EV-3s, those underwriters were not hired by Clayton for future jobs. A. That is correct. You usually

wouldn't see that underwriter for a while unless we had a huge job and they needed every pretty much body on a project and get a bunch of loans out. MR. EDLIN: non-responsive. Q. So basically the only time Move to strike as

underwriters who graded too many loans as 3s were called back for future jobs were when they needed -- when they didn't have enough people to cover a particular job? MR. EDLIN: Objection. Leading.

Lack of foundation. A. That is -- that is correct. And it

was prevalent with Watterson Prime, because it was small base and you pretty much knew every -- you pretty much knew underwriter.
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MR. EDLIN: non-responsive. Q. A.

Move to strike as

Was it also prevalent at Clayton? Yes, but the thing is it wasn't as

easy to spot, because Clayton had pretty much 500 underwriters. MR. EDLIN: Objection. Move to

strike as non-responsive. Q. Do you recall the -- any specific

instances where underwriters were not called back for future jobs because they were grading too many loans as defective? MR. EDLIN: A. Q. mind? A. Q. Not at this time. I am going to turn to paragraph 25 It Yes. Any particular names which come to Objection.

of your affidavit, which is on page 8. states that -- here that:

"When due diligence

underwriters determined that a particular loan had a defect that was not sufficiently overcome by compensating factors -- resulting in a grade of 3 -- supervisors would frequently change the
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grades for those loans to a 1 or a 2.

remember multiple occasions where I looked back at a loan that I had graded as a 3 and found that the grade had been changed to a 1 or a 2 without justification." statement? A. Q. Yes. Do you believe that the changes Is that a true

which were made to these loans, changes from 3s to 1s and 2s, were justified? MR. EDLIN: A. Objection.

No, I don't believe they were

justified at all, because there were particularly notes I put in there why they were 3s. Q. Could you give us examples of loans

that you had graded as 3s where the grade of those loans was changed to a 1 or 2 for unjustified reasons? A. I have been on multiple loans, but I

couldn't just give any single example, but it did happen. It happened like say I recorded

these loans every night on my scratch-off pad, would have the calculations of everything with
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the loan number and usually I put a circle on that and go back and look at it again with -hoping that, well, let me see if I can see it with a fresh mind and fresh start and usually I will go back and they were changed. MR. EDLIN: Objection. Move to

strike as non-responsive. Q. Okay. So basically as I understand

it, you kept a notebook which indicated loan numbers and how you graded those loans? A. Yes. Because any time -- any time

they had any discrepancy on how many number of loans you have done, I could always refer back to here is the loans I worked on. Q. Okay. And on the next day after you

had done the review for a particular day, you went back and you checked to see whether grades that you had marked as defective on the previous day remained as defective in the Watterson and Clayton computer systems? MR. EDLIN: A. Q. Yes. And you found, as I understand your Objection.

testimony, that on many of these times when you

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checked the following day you noticed that the loans that you had marked as defective the day before were marked now as non-defective? A. Q. Yes. Was this practice prevalent at

Watterson and Clayton? MR. EDLIN: A. Q. Yes. And these changes in grades you Objection.

believe took place for unjustified reasons? MR. EDLIN: A. Q. Yes. Objection. Leading.

Correct. Strike that.

Turn to paragraph 29.

Let's just stay on paragraph 25 for a second. The next line reads: "When such

changes occurred, Watterson's computer system deleted any evidence of the earlier grade." A. Q. A. Q. Yes. That's a true statement? That is true. I want to turn to paragraph 29 now.

I want to read just a couple of lines at the top. "Mr. Weeks pressured due diligence

underwriters to complete a review of loans

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quickly, even if that meant sacrificing quality of loans." A. Do you see that? Yes. MR. EDLIN: Q. A. Objection.

That's a true statement; correct? Yes. MR. EDLIN: Objection.

Q. A.

And who is Mr. Weeks? Mr. Weeks was a project office

manager in the Atlanta office for Watterson Prime. Q. Okay. Next line reads: "He told us

that we should "clear" (approve) the loans quickly and that Watterson would "clean it up on the back end"." A. Q. A. Q. Yes. That's a true statement? Yes. "During this "clean up" process Do you see that?

Mr. Weeks instructed Watterson personnel to change data on Watterson's due diligence reports to ensure that it matched the information on the spreadsheet or "loan tape"." Is that a true statement?
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A. Q.

Yes. Now, how do you know -- strike that. Did Mr. Weeks instruct you to change

data on Watterson's due diligence reports to ensure that it matched the data provided on the loan tape? MR. EDLIN: A. Q. others? A. Q. Yes. And how do you know that he Objection. Leading.

No, he did not instruct me. And how do you -- did he instruct

instructed others? A. He made several occasions "don't

worry about it, we will have the QCers and analysts take care of that on the back end" and they changed this information. MR. EDLIN: read that. Move to strike the hearsay. Q. Were you present when he provided Hold on. Let me just

those instructions? A. Yes, I was. There was many times

when he may be talking openly on the floor to

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personnel and I am sitting right by at my desk. MR. EDLIN: Objection. Move to

strike the hearsay. Q. You also provide here a statement "This changing of the data was

where it says:

done without any review of the documents in the loan file." A. Q. A. Q. Do you see that? Yes. That's a true statement? Yes, it is. And then I think you go on to

provide an example here in paragraph 29. Strike that. up. Was this practice prevalent at Watterson? MR. EDLIN: A. Q. Yes, it was. What about at Clayton? MR. EDLIN: A. way. Objection. Objection. Let me just go back and wrap that

It wasn't as blatantly done that

It was -- like say usually they --

Clayton did it when we went home for the night, the QCers and the project managers stayed back
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maybe about an hour or two later and did that. MR. EDLIN: Non-responsive. Q. 'For example" -- and I am reading Objection.

here from paragraph 29 -- "on numerous occasions, based upon a review of the "HUD-1" forms, the due diligence underwriters found loans defective because they were considered "high cost" loans under state law. For these

loans, Mr. Weeks would routinely delete evidence of many closing charges from Watterson's computer systems despite the fact that these charges were clearly shown on the HUD-1 forms. Deleting evidence of closing

charges from Watterson's computer systems did not change the fact that the HUD-1 forms clearly showed that the borrowers paid those fees. Mr. Weeks was considered the master of

engineering apparent compliance with state law and manipulating the numbers." statement? MR. EDLIN: A. Objection. Leading. Is that a true

That is a true statement. MR. EDLIN: Objection. Move to

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strike. Q. Was this practice prevalent on jobs

where Mr. Weeks was the manager? MR. EDLIN: A. Q. Yes, it was. In summary, just to wrap it up, is Objection.

it your view that the due diligence underwriting practices at Watterson and Clayton did not accurately or properly determine whether loans complied with the underwriting guidelines? MR. EDLIN: A. Q. Yes, it was. Is it your view that Bear Stearns Objection. Leading.

improperly directed Watterson and Clayton to deviate from underwriting guidelines and improperly changed loans ranked defective to loans ranked approved? MR. EDLIN: A. Yes. Objection. Leading.

Bear Stearns was neglect and

negligent on their part as well as Watterson Prime and Clayton. MR. EDLIN: Objection. Move to

strike as non-responsive.
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