In Re Javaheri V JPMORGAN CHASE Scribd

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Federal District Court
Javaheri v. JPMorgan Chase, Case No. CV10-8185 ODW
Otis D. Wright II, Judge, U.S. District Court, Central District of California, Los Angeles
Douglas Gillies, attorney for Daryoush Javaheri
Plaintiff sued to halt a foreclosure initiated by JPMorgan Chase and California Reconveyance
Co. Chase responded with a Motion to Dismiss. Two times the court granted Chase's motion
with leave to amend. Plaintiff filed a Second Amended Complaint and Chase again moved to
dismiss.
In opposing the motion, Plaintiff requested that the court take judicial notice of:
(1) the Congressional Oversight Panel November Oversight Report (COP Report) released on
November 16, 2010 -http://cop.senate.gov/documents/cop-111610-report.pdf
(2) Federal Reserve System Consent Order in the Matter of JPMORGAN CHASE & CO.,
Docket No. 11-023-B-HC and 11- 023-B-DEO, dated April 13, 2011 - www.federalreserve.gov/
newsevents/press/enforcement/enf20110413a5.pdf
Judge Wright denied Chase's motion to dismiss five causes of action - wrongful foreclosure,
quiet title, violation of Cal Civ. Code Sec. 2923.5, quasi contract, and declaratory relief.
Second Amended Complaint 4/12/2011
Chase's Motion to Dismiss SAC 4/28/2011
Opposition to Motion to Dismiss 5/16/2011
Request for Judicial Notice 5/16/2011
Chase's Reply Memorandum 5/23/2011
Order Denying Motion to Dismiss 6/2/2011
Please use the Adobe Bookmarks Navigation Panel to examine this file as it was extensively annotated
during my current review of the case filings included here.
ALL CREDIT is due to Margaret Carswell for posting this case on her website. Without her efforts I would
surely have never have known about this anytime soon. Many thanks to you Margaret for this and all your
other contributions.
My gratitude and utmost respect to Douglas Gillies, Esq. The intellectual capital expended and gritty
tenacity to prevail are exceedingly apparent in these Motions and Pleadings. I pray and perhaps MANY
Californians soon will also pray for your continued success in the search for real JUSTICE in this financial
crisis.
They say the TRUTH will set you FREE. That may be. The truths penned here and the Judicial
Acknowledgment of those truths saddens me. But ultimately GLADDENS my heart that Mr Gillies has
succeeded in this battle. .
Chase JPMorgan Chase - cases t hat could help you save your home
ht t p: / / www.chasechase.org/ cases.ht ml[ 6/ 22/ 2011 11: 55: 02 AM]

JPMor gan Chase Too Bi g Not t o Fai l
"We got trouble right here in River City, with a capital T that rhymes with C and that stands for
CHASE"

HOME
CONTENTS
Federal Court
Bankruptcy
California
Other States
Exhibits
ARTI CLES
Homeowners'
Rebellion
by Ellen Brown
- - -
Underwater and
Not Walking Away:
Shame, Fear, and
Social
Management of a
Housing Crisis
by Brent T. White
- - -
How t o chase Chase
2. RESOURCES Pl eadi ngs, Or der s, and Ex hi bi t s
On this page you will find descriptions and links to various pleadings, orders, and exhibits filed
by attorneys as well as individuals representing themselves. Where the outcome is known, that
information is included. These documents are public records and are made available for your
information, but their accuracy, competency, and effectiveness have not been verified. Only a
judge can rule on a pleading and only an appellate court opinion that is certified for publication
can be cited as precedent. That said, it can be both educational and entertaining to see how the
great race is unfolding in the historic controversy of People v. Banks. For an entertaining public
outing of history's all-time greatest pickpockets, go see the documentary "Inside Job."
Feder al Di st r i ct Cour t
Javaheri v. JPMorgan Chase, Case No. CV10-8185 ODW
Otis D. Wright II, Judge, U.S. District Court, Central District of California, Los Angeles
Douglas Gillies, attorney for Daryoush Javaheri
Co. Chase responded with a Motion to Dismiss. Two times the court granted Chase's motion
with leave to amend. Plaintiff filed a Second Amended Complaint and Chase again moved to
Chase JPMorgan Chase - cases t hat could help you save your home
ht t p: / / www.chasechase.org/ cases.ht ml[ 6/ 22/ 2011 11: 55: 02 AM]
Where's The Note,
Who's The Holder
by Hon. Samuel L.
Bufford, Glen Ayer
- - -
The Great
Collapse
by Kurt Eggert
Connecticut Law
Review
- - -
Subprime
Meltdown
by James R. Barth,
Tong Li, et al.,
Milken Institute
- - -
HAMP=Foreclosure
so HAMP is a
fraud
by Patrick Pulatie
- - -
The Dream
Deferred
by Thomas Brom,
California Lawyer
COLUMNS
Margaret Carswell
Barbara Caldwell
LI NKS
WaMu Support
Shame The Banks
Foreclosure
Hamlet
Implode-O-Meter
Cal State Bar
HUD
- - -
Legal Notices
Send us an email
dismiss.
In opposing the motion, Plaintiff requested that the court take judicial notice of:
(1) the Congressional Oversight Panel November Oversight Report (COP Report) released on
November 16, 2010 - http://cop.senate.gov/documents/cop-111610-report.pdf
(2) Federal Reserve System Consent Order in the Matter of JPMORGAN CHASE & CO., Docket
No. 11-023-B-HC and 11- 023-B-DEO, dated April 13, 2011 -
www.federalreserve.gov/newsevents/press/enforcement/enf20110413a5.pdf
Judge Wright denied Chase's motion to dismiss five causes of action - wrongful foreclosure,
quiet title, violation of Cal Civ. Code Sec. 2923.5, quasi contract, and declaratory relief.
Second Amended Complaint 4/12/2011
Chase's Motion to Dismiss SAC 4/28/2011
Opposition to Motion to Dismiss 5/16/2011
Request for Judicial Notice 5/16/2011
Chase's Reply Memorandum 5/23/2011
Order Denying Motion to Dismiss 6/2/2011
Carswell v. JPMorgan Chase, Case No. CV10-5152 GW
George Wu, Judge, U.S. District Court, Central District of California, Los Angeles
Douglas Gillies, attorney for Margaret Carswell
Co. on the grounds of failure to contract, wrongful foreclosure, unjust enrichment, RESPA and
TILA violations, and fraud. She asked for quiet title and declaratory relief. Chase responded with
a Motion to Dismiss. At a hearing on September 30, 2010, Judge Wu granted defendants'
motion to dismiss with leave to amend. Plaintiff's First Amended Complaint was filed on October
18. It begins:
It was the biggest financial bubble in history. During the first decade of this century,
banks abandoned underwriting practices and caused a frenzy of real estate
speculation by issuing predatory loans that ultimately lowered property values in the
United States by 30-50%. Banks reaped the harvest. Kerry Killinger, CEO of
Washington Mutual, took home more than $100 million during the seven years that
he steered WaMu into the ground. Banks issued millions of predatory loans knowing
that the borrowers would default and lose their homes. As a direct, foreseeable,
proximate result, 15 million families are now in danger of foreclosure. If the legions of
dispossessed homeowners cannot present their grievances in the courts of this great
nation, their only recourse will be the streets.
Chase responded with yet another Motion to Dismiss, Carswell filed her Opposition to the
motion, and at hearing on January 6, 2011, Judge Wu asked Plaintiff for an Offer of Proof. Her
Offer of Proof included written argument, 19 exhibits, and a powerpoint presentation. Judge Wu
granted Chase's Motion to Dismiss, and Carswell appealed to the 9th Circuit (Case No. 11-
55423, 9TH Circuit).
Notice of Intent to Preserve Interest 1/28/2010
First Amended Complaint 10/18/2010
Declaration of Margaret Carswell 7/13/2010
Transcript of Hearing 9/30/2010 re: Motion to Dismiss
Chase's Motion to Dismiss First Amended Complaint 10/27/2010
UNITED STATES OF AMERICA
BEFORE THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C.
In the Matter of
JPMORGAN CHASE & CO.
New York, New York
and
EMC MORTGAGE CORPORATION
Lewisville, Texas
Docket No. 11-023-B-HC
11-023-B-DEO
CONSENT ORDE R
WHEREAS, JPMorgan Chase & Co., New York, New York ("JPMC"), a registered bank
holding company, owns and controls JPMorgan Chase Bank, National Association, Columbus,
Ohio (the "Bank"), a national bank, and numerous direct and indirect nonbank subsidiaries,
including EMC Mortgage Corporation, Lewisville, Texas ("EMC") and its direct and indirect
subsidiaries;
WHEREAS, JPMC has engaged in the business of servicing residential mortgage loans
through non-bank subsidiaries, including EMC and its subsidiaries (collectively, the "Mortgage
Servicing Companies"), as well as through the Bank. The Mortgage Servicing Companies have
serviced residential mortgage loans that are held in the portfolios of: (a) EMC and its
subsidiaries; (b) the Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation, and the Government National Mortgage Association (collectively, the "GSEs"); and
(c) various investors, including securitization trusts pursuant to Pooling and Servicing [page break]
Page 2
Agreements and similar agreements (collectively, the "Servicing Portfolio"). The Mortgage
Servicing Companies have had substantial responsibilities with respect to the Servicing Portfolio
for the initiation and handling of foreclosure proceedings, and loss mitigation activities ("Loss
Mitigation" or "Loss Mitigation Activities" include activities related to special forbearances,
repayment plans, modifications, short refinances, short sales, cash-for-keys, and deeds-in-lieu of
foreclosure);
WHEREAS, on or about April 1, 2011, JPMC transferred all of the residential mortgage
loan servicing rights and certain related assets and liabilities of the Mortgage Servicing
Companies to the Bank (the "EMC Servicing Rights Transfer"). Following consummation of
that transfer, the Mortgage Servicing Companies are no longer in the business of residential
mortgage loan servicing, and only the Bank is conducting residential mortgage loan servicing
within the JPMC organization;
WHEREAS, JPMC, through the Bank and the Mortgage Servicing Companies,
collectively, is the third largest servicer of residential mortgages in the United States and services
a portfolio of 8.5 million residential mortgage loans. During the recent financial crisis, a
substantially larger number of residential mortgage loans became past due than in earlier years.
Many of the past due mortgages have resulted in foreclosure actions. From January 1, 2009, to
December 31, 2010, the Mortgage Servicing Companies initiated 256,179 foreclosure actions;
WHEREAS, in connection with the process leading to certain foreclosures involving the
Servicing Portfolio, the Mortgage Servicing Companies allegedly:
(a) Filed or caused to be filed in state courts and in connection with bankruptcy
proceedings in federal courts numerous affidavits executed by employees of the
Mortgage Servicing Companies or employees of third-party providers making various [page break]
Page 3
assertions, such as the ownership of the mortgage note and mortgage, the amount of
principal and interest due, and the fees and expenses chargeable to the borrower, in which
the affiant represented that the assertions in the affidavit were made based on personal
knowledge or based on a review by the affiant of the relevant books and records, when, in
many cases, they were not based on such knowledge or review;
(b) Filed or caused to be filed in state courts and in connection with bankruptcy
proceedings in federal courts or in the local land record offices, numerous affidavits and
other mortgage-related documents that were not properly notarized, including those not
signed or affirmed in the presence of a notary;
(c) Litigated foreclosure and bankruptcy proceedings and initiated non-judicial
foreclosures without always confirming that documentation of ownership was in order at
the appropriate time, including confirming that the promissory note and mortgage
document were properly endorsed or assigned and, if necessary, in the possession of the
appropriate party;
(d) Failed to respond in a sufficient and timely manner to the increased level of
foreclosures by increasing financial, staffing, and managerial resources to ensure that the
Mortgage Servicing Companies adequately handled the foreclosure process;
failed to respond in a sufficient and timely manner to the increased level of Loss
Mitigation Activities to ensure timely, effective and efficient communication with
borrowers with respect to Loss Mitigation Activities and foreclosure activities; and full
exploration of Loss Mitigation options or programs prior to completion of foreclosure
activities; and [page break]
Page 4
(e) Failed to have adequate internal controls, policies and procedures, compliance
risk management, internal audit, training, and oversight of the foreclosure process,
including sufficient oversight of outside counsel and other third-party providers handling
foreclosure-related services with respect to the Servicing Portfolio.
WHEREAS, the practices set forth above allegedly constitute unsafe or unsound banking
practices;
WHEREAS, as part of a horizontal review of various major residential mortgage
servicers conducted by the Board of Governors of the Federal Reserve System (the "Board of
Governors"), the Federal Deposit Insurance Corporation (the "FDIC"), the Office of the
Comptroller of the Currency (the "OCC"), and the Office of Thrift Supervision, examiners from
the Federal Reserve Bank of New York (the "Reserve Bank") have reviewed certain residential
mortgage loan servicing and foreclosure-related processes at the Mortgage Servicing Companies,
and examiners from the OCC have reviewed certain residential mortgage loan servicing and
foreclosure-related practices at the Bank;
WHEREAS, the Bank and the OCC have entered into a consent order to address areas of
weakness identified by the OCC in residential mortgage loan servicing, Loss Mitigation,
foreclosure activities, and related functions (the "OCC Consent Order"). Following the EMC
Servicing Rights Transfer, the Servicing Portfolio will be subject to the terms of the OCC
Consent Order;
WHEREAS, in the OCC Consent Order, the OCC has made findings, which the Bank
neither admitted nor denied, that there were unsafe or unsound practices with respect to the
manner in which the Bank handled various foreclosure and related activities; [page break]
Page 5
WHEREAS, it is the common goal of the Board of Governors, the Reserve Bank, JPMC,
and the Mortgage Servicing Companies (to the extent that the Mortgage Loan Servicing
Companies engage in residential mortgage loan servicing in the future) ensure that the
consolidated organization operates in a safe and sound manner and in compliance with the terms
of mortgage loan documentation and related agreements with borrowers, all applicable state and
federal laws (including the U.S. Bankruptcy Code and the Servicemembers Civil Relief Act),
rules, regulations, and court orders, as well as the Membership Rules of MERSCORP, Inc. and
MERS, Inc. (collectively, "MERS"), servicing guides with GSEs or investors, and other
contractual obligations including those with the Federal Housing Administration and those
required by the Home Affordable Modification Program ("HAMP"), and loss share agreements
with the FDIC (collectively, "Legal Requirements");
WHEREAS, after the conduct set forth above became known, JPMC and the Mortgage
Servicing Companies have been taking steps to remediate the filing of and reliance on inaccurate
affidavits in foreclosure and bankruptcy proceedings;
WHEREAS, the boards of directors of JPMC and EMC, at duly constituted meetings,
adopted resolutions authorizing and directing Frank J. Bisignano, and Anthony J. Horan to enter
into this Consent Order to Cease and Desist (the "Order") on behalf of JPMC and EMC,
respectively, and consenting to compliance with each and every applicable provision of this
Order by JPMC and EMC, and their institution-affiliated parties, as defined in sections 3(u) and
8(b)(3) of the Federal Deposit Insurance Act, as amended (the "FDI Act") (12 U.S.C. 1813(u)
and 1818(b)(3)), and waiving any and all rights that JPMC and EMC may have pursuant to
section 8 of the FDI Act (12 U.S.C. 1818), including, but not limited to: (i) the issuance of a
notice of charges; (ii) a hearing for the purpose of taking evidence on any matters set forth in this [page break]
Page 6
Order; (iii) judicial review of this Order; (iv) contest the issuance of this Order by the Board of
Governors; and (v) challenge or contest, in any manner, the basis, issuance, validity, terms,
effectiveness or enforceability of this Order or any provision hereof.
NOW, THEREFORE, before the filing of any notices, or taking of any testimony or
adjudication of or finding on any issues of fact or law herein, and without this Order constituting
an admission by JPMC, EMC or its subsidiaries, of any allegation made or implied by the Board
of Governors in connection with this matter, and solely for the purpose of settling this matter
without a formal proceeding being filed and without the necessity for protracted or extended
hearings or testimony, it is hereby ordered by the Board of Governors that, pursuant to
sections 8(b)(1) and (3) of the FDI Act (12 U.S.C. 1818(b)(1) and 1818(b)(3)), JPMC and
EMC, and their institution-affiliated parties shall cease and desist and take affirmative action, as
follows:
Source of Strengt h
1. The board of directors of JPMC shall take appropriate steps to fully utilize
JPMC' s financial and managerial resources, pursuant to section 225.4(a) of Regulation Y of the
Board of Governors (12 C.F.R. 225.4(a)), to serve as a source of strength to the Bank,
including, but not limited to, taking steps to ensure that the Bank complies with the Consent
Order issued by the OCC regarding the Bank' s residential mortgage loan servicing activities.
Board Oversigh t
2. Within 60 days of this Order, the board of directors of JPMC shall submit to the
Reserve Bank an acceptable written plan to strengthen the board' s oversight of JPMC' s
enterprise-wide risk management ("ERM"), internal audit, and compliance programs concerning [page break]
Page 7
the residential mortgage loan servicing, Loss Mitigation, and foreclosure activities conducted
through the Bank. The plan shall, at a minimum, address, consider, and include:
(a) Policies to be adopted by the board of directors of JPMC that are designed
to ensure that the ERM program provides proper risk management oversight with respect to the
Bank' s residential mortgage loan servicing, Loss Mitigation, and foreclosure activities,
particularly with respect to compliance with the Legal Requirements, and supervisory standards
and guidance of the Board of Governors as they develop;
(b) policies and procedures adopted by JPMC to ensure that the ERM
program provides proper risk management of independent contractors, consulting firms, law
firms, or other third parties who are engaged to support residential mortgage loan servicing, Loss
Mitigation, or foreclosure activities or operations, including their compliance with the Legal
Requirements and JPMC' s internal policies and procedures, consistent with supervisory
guidance of the Board of Governors;
(c) steps to ensure that JPMC' s ERM, audit, and compliance programs have
adequate levels and types of officers and staff dedicated to overseeing the Bank' s residential
mortgage loan servicing, Loss Mitigation, and foreclosure activities, and that these programs
have officers and staff with the requisite qualifications, skills, and abilities to comply with the
requirements of this Order; and
(d) steps to improve the information and reports that will be regularly
reviewed by the board of directors of JPMC or authorized committee of the board of directors
regarding residential mortgage loan servicing, Loss Mitigation, and foreclosure activities and
operations, including compliance risk assessments and the status and results of measures taken, [page break]
Page 8
or to be taken, to remediate deficiencies in residential mortgage loan servicing, Loss Mitigation,
and foreclosure activities, and to comply with this Order.
Foreclosure Revie w
3. (a) Within 45 days of this Order, JPMC and EMC shall retain one or more
independent consultant(s) acceptable to the Reserve Bank to conduct an independent review of
certain residential mortgage loan foreclosure actions (including judicial and non-judicial
foreclosures and related bankruptcy proceedings, and other related litigation) regarding
individual borrowers with respect to the Servicing Portfolio that was serviced by EMC. The
review shall include actions or proceedings (including foreclosures that were in process or
completed) for residential mortgage loans serviced by the Mortgage Servicing Companies
whether brought in the name of the JPMC, the Mortgage Servicing Companies, the investor, or
any agent for the mortgage note holder (including MERS) that have been pending at any time
from January 1, 2009, to December 31, 2010, as well as residential foreclosure sales that
occurred during this time period ("Foreclosure Review"). The purpose of the Foreclosure
Review shall be to determine, at a minimum:
(i) whether, at the time the foreclosure action was initiated or the
pleading or affidavit filed (including in bankruptcy proceedings and in defending suits brought
by borrowers), the foreclosing party or agent of the party had properly documented ownership of
the promissory note and mortgage (or deed of trust) under relevant state law, or was otherwise a
proper party to the action as a result of agency or other similar status;
(ii) whether the foreclosure was in accordance with applicable federal
and state laws, including but not limited to, the Servicemembers Civil Relief Act and the U.S.
Bankruptcy Code; [page break]
Page 9
(iii) whether, with respect to non-judicial foreclosures, the procedures
followed with respect to the foreclosure sale (including the calculation of the default period, the
amounts due, and compliance with notice periods) and post-sale confirmation were in
accordance with the terms of the mortgage loan and state law requirements;
(iv) whether a foreclosure sale occurred when the borrower had
requested a loan modification or other loss mitigation and the request was under consideration,
when the loan was performing in accordance with a trial or permanent loan modification, or
when the loan had not been in default for a sufficient period to authorize foreclosure pursuant to
terms of the mortgage loan documentation and related agreements;
(v) whether any delinquent borrower' s account was charged fees or
penalties that were not permissible under the terms of the borrower' s loan documents, state or
federal law, or were otherwise unreasonable. For purposes of this Order, a fee or penalty is
"otherwise unreasonable" if it was assessed: (i) for the purpose of protecting the secured party' s
interest in the mortgaged property, and the fee or penalty was assessed at a frequency or rate,
was of a type or amount, or was for a purpose that was in fact not needed to protect the secured
party' s interest; (ii) for services performed and the fee charged was substantially in excess of the
fair market value of the service; (iii) for services performed, and the services were not actually
performed; or (iv) at an amount or rate that exceeds what was customarily charged in the market
for such a fee or penalty, and the mortgage instruments or other documents executed by the
borrower did not disclose the amount or rate that the lender or servicer would charge for such a
fee or penalty;
(vi) whether Loss Mitigation Activities with respect to foreclosed loans
were handled in accordance with the requirements of HAMP, if applicable, and consistent with [page break]
Page 10
the policies and procedures applicable to the Mortgage Servicing Companies' proprietary loan
modifications or other Loss Mitigation programs, such that each borrower had an adequate
opportunity to apply for a Loss Mitigation option or program, any such application was handled
appropriately, and a final decision was made on a reasoned basis and was communicated to the
borrower before the foreclosure sale; and
(vii) whether any errors, misrepresentations, or other deficiencies
identified in the Foreclosure Review resulted in financial injury to the borrower or the owner of
the mortgage loan.
(b) The independent consultant(s) shall prepare a written report detailing the
findings of the Foreclosure Review (the "Foreclosure Report"). JPMC and EMC shall provide to
the Reserve Bank a copy of the Foreclosure Report at the same time that the report is provided to
them.
(c) Within 30 days of receipt of the Foreclosure Report, JPMC and EMC shall
submit to the Reserve Bank an acceptable plan to:
(i) remediate, as appropriate, errors, misrepresentations, or other
deficiencies in any foreclosure filing or other proceeding;
(ii) reimburse or otherwise provide appropriate remediation to the
borrower for any impermissible or otherwise unreasonable penalties, fees or expenses, or for
other financial injury identified in paragraph 3 of this Order;
(iii) make appropriate adjustments for the account of JPMC, the GSEs,
or any investor; and
(iv) take appropriate steps to remediate any foreclosure sale where the
foreclosure was not authorized as described in paragraph 3. [page break]
Page 11
(d) Within 60 days after the Reserve Bank accepts the plan described in
paragraph 3(c), the JPMC and EMC shall make all reimbursement and remediation payments and
provide all credits required by such plan, and provide the Reserve Bank with a report detailing
such payments and credits;
(e) JPMC shall take all steps necessary to ensure that the Bank provides any
cooperation needed by the independent consultant(s) to complete the independent review.
4. Within 5 days of the engagement of the independent consultant(s) described in
paragraph 3 of this Order, but prior to the commencement of the Foreclosure Review, JPMC and
EMC shall submit to the Reserve Bank for approval an engagement letter that sets forth:
(a) The methodology for conducting the Foreclosure Review, including:
(i) a description of the information systems and documents to be reviewed, including the
selection criteria for cases to be reviewed; (ii) the criteria for evaluating the reasonableness of
fees and penalties under paragraph 3(a)(v); (iii) other procedures necessary to make the required
determinations (such as through interviews of employees and third parties and a process for the
receipt and review of borrower claims and complaints); and (iv) any proposed sampling
techniques. In setting the scope and review methodology, the independent consultant may
consider any work already done by JPMC, EMC, or other third-parties on behalf of JPMC or
EMC. With respect to sampling techniques, the engagement letter shall contain a full description
of the statistical basis for the sampling methods chosen, as well as procedures to increase the size
of the sample depending on the results of initial sampling;
(b) the expertise and resources to be dedicated to the Foreclosure Review;
(c) completion of the Foreclosure Review and the Foreclosure Report within
120 days of the start of the engagement; and [page break]
Page 12
(d) a written commitment that any workpapers associated with the
Foreclosure Review will be made available to the Reserve Bank upon request.
Compliance Progra m
5. Within 60 days of this Order, JPMC shall submit to the Reserve Bank an
acceptable written plan to enhance its enterprise-wide compliance program ("ECP") with respect
to its oversight of residential mortgage loan servicing, Loss Mitigation, and foreclosure activities
and operations. The enhanced plan shall be based on an evaluation of the effectiveness of
JPMC' s current ECP in the areas of residential mortgage loan servicing, Loss Mitigation, and
foreclosure activities and operations, and recommendations to strengthen the ECP in these areas.
The plan shall, at a minimum, be designed to:
(a) Ensure that the fundamental elements of the ECP and any enhancements
or revisions thereto, including a comprehensive annual risk assessment, encompass residential
mortgage loan servicing, Loss Mitigation, and foreclosure activities;
(b) ensure compliance with the Legal Requirements and supervisory guidance
of the Board of Governors; and
(c) ensure that policies, procedures, and processes are updated on an ongoing
basis as necessary to incorporate new or changes to the Legal Requirements and supervisory
guidance of the Board of Governors.
Audit
acceptable written plan to enhance the internal audit program with respect to residential
mortgage loan servicing, Loss Mitigation, and foreclosure activities and operations. The plan
shall be based on an evaluation of the effectiveness of JPMC' s current internal audit program in [page break]
Page 13
the areas of residential mortgage loan servicing, Loss Mitigation, and foreclosure activities and
operations, and shall include recommendations to strengthen the internal audit program in these
areas. The plan shall, at a minimum, be designed to:
(a) Ensure that the internal audit program encompasses residential mortgage
loan servicing, Loss Mitigation, and foreclosure activities;
(b) periodically review the effectiveness of the ECP and ERM with respect to
residential mortgage loan servicing, Loss Mitigation, and foreclosure activities, and compliance
with the Legal Requirements and supervisory guidance of the Board of Governors;
(c) ensure that adequate qualified staffing of the audit function is provided for
(d) ensure timely resolution of audit findings and follow-up reviews to ensure
completion and effectiveness of corrective measures;
(e) ensure that comprehensive documentation, tracking, and reporting of the
status and resolution of audit findings are submitted to the audit committee; and
(f) establish escalation procedures for resolving any differences of opinion
between audit staff and management concerning audit exceptions and recommendations, with
any disputes to be resolved by the audit committee.
Risk Managemen t
acceptable written plan to enhance its ERM program with respect to its oversight of residential
mortgage loan servicing, Loss Mitigation, and foreclosure activities and operations. The
enhanced plan shall be based on an evaluation of the effectiveness of JPMC' s current ERM
program in the areas of residential mortgage loan servicing, Loss Mitigation, and foreclosure [page break]
Page 14
activities and operations, and recommendations to strengthen the risk management program in
these areas. The plan shall, at a minimum, be designed to:
(a) Ensure that the fundamental elements of the risk management program
and any enhancements or revisions thereto, including a comprehensive annual risk assessment,
encompass residential mortgage loan servicing, Loss Mitigation, and foreclosure activities;
(b) ensure that the risk management program complies with supervisory
guidance of the Board of Governors, including, but not limited to, the guidance entitled,
"Compliance Risk Management Programs and Oversight at Large Banking Organizations with
Complex Compliance Profiles," dated October 16, 2008 (SR 08-08/CA 08-11); and
(c) establish limits for compliance, legal, and reputational risks and provide
for regular review of risk limits by appropriate senior management and the board of directors or
authorized committee of the board of directors.
Approval, Implementation, and Progress Report s
8. (a) JPMC and EMC, as applicable, shall submit written plans and an
engagement letter that are acceptable to the Reserve Bank within the applicable time periods set
forth in paragraphs 2, 3(c), 4, 5, 6, and 7 of this Order. Independent consultant(s) acceptable to
the Reserve Bank shall be retained by JPMC and EMC within the applicable period set forth in
paragraph 3(a) of this Order.
(b) Within 10 days of approval by the Reserve Bank, JPMC and EMC, as
applicable, shall adopt the approved plans. Upon adoption, JPMC and EMC, as applicable, shall
implement the approved plans, and thereafter fully comply with them.
(c) During the term of this Order, the approved plans and engagement letter
shall not be amended or rescinded without the prior written approval of the Reserve Bank. [page break]
Page 15
(d) During the term of this Order, JPMC and EMC, as applicable, shall revise
the approved plans as necessary to incorporate new or changes to the Legal Requirements and
supervisory guidance of the Board of Governors. The revised plans shall be submitted to the
Reserve Bank for approval at the same time as the progress reports described in paragraph 9 of
this Order.
9. Within 30 days after the end of each calendar quarter following the date of this
Order, JPMC' s and EMC' s boards of directors shall jointly submit to the Reserve Bank written
progress reports detailing the form and manner of all actions taken to secure compliance with the
provisions of this Order and the results thereof. The Reserve Bank may, in writing, discontinue
the requirement for progress reports or modify the reporting schedule.
Notices
10. All communications regarding this Order shall be sent to:
(a) Ms. Barbara Yelcich
Assistant Vice President
Federal Reserve Bank of New York
33 Liberty Street
New York, New York 10045
(b) Mr. David Lowman
Chief Executive Office
Chase Home Lending
JPMorgan Chase & Co.
194 Wood Avenue South
Iselin, New Jersey 08830
(c) Mr. Anthony J. Horan
Senior Vice President and Assistant Secretary
EMC Mortgage Corporation
270 Park Avenue, 38
th
Floor
New York, New York 10017 [page break]
Page 16
Miscellaneous
11. The provisions of this Order shall be binding on JPMC, EMC and each of their
institution-affiliated parties in their capacities as such, and their successors and assigns.
12. Each provision of this Order shall remain effective and enforceable until stayed,
modified, terminated, or suspended in writing by the Reserve Bank.
13. Notwithstanding any provision of this Order, the Reserve Bank may, in its sole
discretion, grant written extensions of time to JPMC and EMC to comply with any provision of
this Order.
14. The provisions of this Order shall not bar, estop, or otherwise prevent the Board
of Governors, the Reserve Bank, or any other federal or state agency or department from taking
any further or other action affecting JPMC, EMC, or any of their current or former institution-
affiliated parties or their successors or assigns, or any other of JPMC' s subsidiaries. [page break]
Page 17
15. Nothing in this Order, express or implied, shall give to any person or entity, other
than the parties hereto, and their successors hereunder, any benefit or any legal or equitable right,
remedy, or claim under this Order.
By Order of the Board of Governors effective this 13
th
day of April, 2011.
Signed by: Frank J. Bisignano
Chief Administrative Officer
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Signed by: Jennifer J. Johnson
Secretary of the Board
Signed by: Anthony J. Horan
Senior Vice President
Daryoush Javaheri v. JP Morgan Chase Bank N.A. et al :: Justia Dockets & Filings
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Daryoush Javaheri v. JP Morgan Chase Bank N.A. et al
Plaintiff: Daryoush Javaheri
Defendants: California Reconveyance Co., DOES and JP Morgan Chase Bank
N.A.

Case Number: 2:2010cv08185
Filed: October 29, 2010

Court: California Central District Court
ii,: Otis D Wright
Referring Judge: Frederick F. Mumm

Nature of Suit: Other - Other

Available Case Documents
The following documents for this case are available for you to view or download.
Date Filed # Document Text
June 2, 2011 36 MINUTES (IN CHAMBERS): ORDER Granting in part and
Denying in part Defendant's Motion to Dismiss Plaintiff's
Second Amended Complaint 30 (Filed 4/28/11} by Judge
Otis D Wright II. For the foregoing reasons, Defendants
Motion to Dismiss is GRANTED in Part and DENIED in Part.
(See Order for Details). (sch)
March 24, 2011 28 MINUTES (IN CHAMBERS) by Judge Otis D Wright, II:
granting 23 Defendant, JPMorgan Chase Bank, N.A. Motion
to Dismiss plaintiffs first amended complaint. Plaintiff shall
have twenty (20) days from the date of this Order in which
to amend his Complaint, provided that he can, in good faith,
allege sufficient facts to support his claims. If Plaintiff fails to
do so, all claims against WaMu will be dismissed with
prejudice. (lc)
January 11, 2011 20 MINUTES (IN CHAMBERS) by Judge Otis D Wright, II:
Court grants Defendants, JPMorgan Chase Bank, N.A. and
California Reconveyance Companys Motion to dismiss
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complaint {9].Plaintiff shall have twenty (20) days from the
date of this Order to amend his Complaint. If Plaintiff fails to
do so, all claims will be dismissed with prejudice. (lc)
Last Document Downloaded: June 3, 2011 00:09:12 PDT
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Plaintiff: Daryoush Javaheri
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Case docket: Daryoush Javaheri v. JP Morgan Chase Bank N.A. et al
http://ia600202.us.archive.org/9/items/gov.uscourts.cacd.486153/gov.uscourts.cacd.486153.docket.html[6/19/2011 5:05:30 PM]
Case details
Court: cacd
Docket #: 2:10-cv-08185
Case Name: Daryoush Javaheri v. JP Morgan Chase Bank N.A. et al
PACER case #: 486153
Date filed: 2010-10-29
Date of last filing: 2011-04-12
Assigned to: Judge Otis D Wright, II
Referred to: Magistrate Judge Frederick F. Mumm
Case Cause: 28:1331 Fed. Question
Nature of Suit: 220 Real Property: Foreclosure
Jury Demand: Plaintiff
Jurisdiction: Federal Question
Parties
Represented Party Attorney & Contact Info
Daryoush Javaheri
Plaintiff
Douglas Crawford Gillies
Douglas Gillies
3756 Torino Drive
Santa Barbara, CA 93105
805-682-7033
Email: douglasgillies@gmail.com
ATTORNEY TO BE NOTICED
JP Morgan Chase Bank N.A.
Defendant
Frances Q Jett
AlvaradoSmith APC
633 West 5th Street Suite 1100
Los Angeles, CA 90071
213-229-2400
Fax: 213-229-2499
Email: fjett@alvaradosmith.com
California Reconveyance Co.
Defendant
Frances Q Jett
(See above for address)
DOES
Defendant
1-150, inclusive
Documents
Date
Filed
Document
#
Attachment
#
Short
Description
Long
Description
Upload
date
SHA1 hash
COMPLAINT
against
Defendants
California
Reconveyance
2010-
10-
29
1 0
Complaint -
(Discovery)
Co., DOES, JP
Morgan Chase
Bank N.A. Case
assigned to
Judge Otis D
Wright, II for all
further
proceedings.
Discovery
referred to
Magistrate
Judge Frederick
F.
Mumm.(Filing
fee $ 350 PAID)
Jury
Demanded,
filed by plaintiff
Daryoush
Javaheri.(car)
(Additional
attachment(s)
added on
11/3/2010: # 1
Ntc of Asgmt, #
2 Summons, #
3 Civil Cover
Sheet) (mg).
(Entered:
10/29/2010)
2010-
11-04
02:58:09
370986475a1abe2892a3adbda65f25e2228070df
1 1
2010-
11-04
02:58:46
575a51f8475f6fa225237a87e7e6839962f9b02a
1 2
2010-
11-04
02:58:29
6750f7421340f63e5daaa5ec6597a310355d683c
1 3
2010-
11-04
03:00:11
5985ed6ca66604ba2d24c055e309f411947526fd
2010-
10-
29
2 0
Certificate/Notice
of Interested
Parties
CERTIFICATION
AND NOTICE of
Interested
Parties filed by
Plaintiff
Daryoush
Javaheri,
identifying
Other Affiliate
Bank of
America, Other
Affiliate
Washington
Mutual Bank for
Daryoush
Javaheri. (car)
2010-
11-04
03:03:09
45ffa170e04f5b87613a37e3aa202e198cb65735
(mg). (Entered:
10/29/2010)
2010-
10-
29
3 0
Ex Parte
Application for
Temporary
Restraining
Order
PLAINTIFF'S EX
PARTE
APPLICATION
for Temporary
Restraining
Order and
Order to Show
Cause Re:
Preliminary
Injunction -
Immediate
Relief Sought,
filed by plaintiff
Daryoush
Javaheri.
Lodged
Proposed
Order.(car)
(Additional
attachment(s)
added on
11/2/2010: # 1
Proposed
Order) (mg).
(Entered:
10/29/2010)
2010-
11-04
03:04:09
2fd6329b7b017b991b1d0bdf2bda6fd2888f2b96
3 1 Proposed Order
2010-
10-
29
4 0
Memorandum in
Support of
Motion
PLAINTIFF'S
MEMORANDUM
OF POINTS
AND
AUTHORITIES
In Support of
Ex Parte
Application for
Temporary
Restraining
Order and
Order to Show
Cause Re:
Preliminary
Injunction 3 to
Prevent
Foreclosure,
filed by Plaintiff
Daryoush
Javaheri. (car)
(mg). (Entered:
10/29/2010)
2010-
11-04
03:06:53
c03d6f4328c1bb300fd5a55037c3b5051ee8c95f
CERTIFICATE
OF GOOD
FAITH EFFORT
of Douglas
2010-
10-
29
5 0
Declaration
(Motion related)
Gillies In
Support of EX
PARTE
APPLICATION
for Temporary
Restraining
Order EX
PARTE
APPLICATION
for Order to
Show Cause re:
Preliminary
Injunction 3
filed by Plaintiff
Daryoush
Javaheri. (car)
(mg). (Entered:
10/29/2010)
2010-
11-04
03:07:20
3845af533441975e6327971b662f6898a1e994ef
2010-
10-
29
6 0
Order on Ex
Parte Application
for TRO
ORDER by
Judge Otis D
Wright, II:
denying 3
defendants Ex
Parte
Application for
temporary
restraining
order. (lc)
(Entered:
11/02/2010)
2010-
11-
03
7 0 Order
STANDING
ORDER by
Judge Otis D
Wright, II, (sce)
(Entered:
11/03/2010)
2010-
11-
03
8 0
Lis Pendens
Notice
NOTICE of Lis
Pendens filed
by Plaintiff
Daryoush
Javaheri.
(Gillies,
Douglas)
(Entered:
11/03/2010)
NOTICE OF
MOTION AND
MOTION to
Dismiss Case
{as to Plaintiff's
Complaint} filed
by defendants
California
Reconveyance
Co., JP Morgan
2010-
11-
22
9 0
Motion to
Dismiss Case
Chase Bank
N.A.. Motion set
for hearing on
12/27/2010 at
01:30 PM
before Judge
Otis D Wright
II.
(Attachments:
# 1 Proposed
Order)(Jett,
Frances)
(Entered:
11/22/2010)
2010-
11-
22
10 0
Request for
Judicial Notice
REQUEST FOR
JUDICIAL
NOTICE filed by
defendants
California
Reconveyance
Co., JP Morgan
Chase Bank
N.A..
(Attachments:
# 1 Exhibit 1
and 2)(Jett,
Frances)
(Entered:
11/22/2010)
2010-
11-
23
11 0
Notice of
Deficiency in
Electronically
Filed Documents
(G-112)
NOTICE TO
FILER OF
DEFICIENCIES
in Electronically
Filed
Documents.
The following
error(s) was
found: Local
Rule 7.1-1 No
Certification of
Interested
Parties. In
response to this
notice the court
may order (1)
an amended or
correct
document to be
filed (2) the
document
stricken or (3)
take other
action as the
court deems
appropriate.
You need not
take any action
in response to
this notice
unless and until
the court
directs you to
do so. (lc)
(Entered:
11/23/2010)
2010-
12-
07
12 0
Stipulation to
Continue
2010-
12-
13
13 0 Order
2010-
12-
18
14 0
MEMORANDUM
in Opposition to
Motion
2010-
12-
19
15 0
Request for
Judicial Notice
2010-
12-
20
16 0
Request for
Judicial Notice
2010-
12-
20
17 0
Request for
Judicial Notice
2010-
12-
23
18 0
Reply (Motion
related)
2011-
01-
06
19 0
Minutes of In
Chambers
Order/Directive -
no proceeding
held
2011-
01-
11
20 0
Order on Motion
to Dismiss Case
2011-
01-
29
21 0
Request to
Dismiss Party
2011-
01-
03
22 0
Amended
Complaint
2011-
02-04
01:09:38
73ffc3a0216b26cd19cd34e20dcd5d35c00d459f
22 1
2011-
02-04
01:12:56
b7059cfd2c3147c276e1481e634e5844ce44f7ad
2011-
02-
17
23 0
Motion to
Dismiss Case
2011-
02- 24 0
Request for
Judicial Notice
17
2011-
02-
28
25 0
MEMORANDUM
in Opposition to
Motion
2011-
03-
07
26 0
Reply (Motion
related)
2011-
03-
15
27 0
Minutes of In
Chambers
Order/Directive -
no proceeding
held
2011-
03-
24
28 0
Order on Motion
to Dismiss Case
2011-
04-
12
29 0
Amended
Complaint
2011-
04-15
13:57:40
4b14d3f07fa47895bafaf65b2181a5847c2da878
I
2
a
J
4
5
6
7
8
9
10
11
l2
13
I4
15
16
I]
18
T9
20
21
22
23
24
25
26
27
28
DOUGLAS GILLIES, ESQ.
douglas gillies
@gmai1.
com
3756 Torino Drive
(805) 682-7033
Attorney for Plaintiff
DARYOUSH JAVAHERI
DARYOUSH JAVAHERI,
Piaintiii
V.
JP MORGAN CHASE BANK N.A.,
CALIFORNIA RECONVEYANCE
CO., and DOES 1-150, inclusive,
Defendants.
(cA sBN s3602)
LINITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
t
t
il
i-T.I
.5
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
smsu
{fi
ffiW3
ni
i:3
.$5
UUVI-rLAII\ I
1
)
Wrongful Foreclosure
2) Violation of Cal Civ. Code
52923.5
3) Unjust Enrichment
4) RESPA and TILA Violations
5) No Contract
6) Fraud and Concealment
7)
Quiet
Title
8) Declaratory and Injunctive Relief
9) Slander of Title
10) Intentional Infliction of Emotional
Distress
Jury Trial Requested
Complaint
Case 2:10-cv-08185-ODW -FFM Document 1 Filed 10/29/10 Page 1 of 20 Page ID #:18

Complaint - 2 -

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INDEX
INTRODUCTION 3
PARTIESANDJURISDICTION 3
JURYTRIALDEMAND 5
CLAIMFORRELIEF 5
BACKGROUNDFACTS 5
FIRSTCAUSEOFACTIONWRONGFULFORECLOSURE 6
SECONDCAUSEOFACTIONVIOLATIONOFCALCIVCODE2923.5 8
THIRDCAUSEOFACTIONUNJUSTENRICHMENT 9
FOURTHCAUSEOFACTIONRESPAANDTILAVIOLATIONS 10
FIFTHCAUSEOFACTIONNOCONTRACT 11
SIXTHCAUSEOFACTIONFRAUDANDCONCEALMENT 13
SEVENTHCAUSEOFACTIONQUIETTITLE 14
EIGHTHCAUSEOFACTIONDECLARATORY&INJUNCTIVERELIEF 15
NINTHCAUSEOFACTIONSLANDEROFTITLE 17
TENTHCAUSEOFACTIONINTENTIONALINFLICTIONOFEMOTIONALDISTRESS 17
PRAYER 18
VERIFICATION 19
PLAINTIFF'SEXHIBITS 20

Complaint - 3 -

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INTRODUCTION
"The subprime debacle, which I would define as loans that shouldn't have
been made and packaged that originated between 2000 and 2007, was
probably the biggest Ponzi scheme in the history of mankind." Spencer P.
Scheer, esq., opening speaker, "The Subprime Mortgage Fallout," State Bar
of California 29
th
Annual Real Property Law Section Retreat, April 30, 2010.
During the subprime meltdown, banks abandoned traditional underwriting
practices and caused a frenzy of real estate speculation by issuing predatory loans
that ultimately lowered property values in the United States by 30-50%. Banks
reaped an unprecedented harvest. Kerry Killinger, CEO of Washington Mutual,
took home more than $100 million during the seven years that he steered WaMu
into bankruptcy. Banks issued millions of predatory loans knowing that the
borrowers would default and lose their homes, and then committed perjury and
fraud to fabricate documents in the foreclosure process. As a direct, foreseeable,
proximate result, 15 million families are now in danger of foreclosure, and Plaintiff
DARYOUSH JAVAHERI is facing illegal foreclosure of his home at a Trustee's
Sale scheduled for November 8, 2010. The loan application he submitted to
Washington Mutual is attached as Exhibit 1. It consists of his name and address.
PARTIES AND JURISDICTION
1. Plaintiff DARYOUSH JAVAHERI is a resident of California and owner
of a single-family residence located at 10809 Wellworth Avenue, Los Angeles,
California 90024, APN 4325-005-014 (the Property) acquired by Grant Deed on
December 11, 2006. The legal description is:
Lot 8 in Block 31 of Tract No 7803 in the City of Los Angeles, County of
Los Angeles, State of California, as per map recorded in Book 88, Pages 73
to 75 inclusive of Maps, in the Office of the County Recorder of said
County.
2. Defendant JP MORGAN CHASE BANK, NATIONAL ASSOCIATION,

Complaint - 4 -

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(Chase), a New York corporation licensed to do business in California, is an
acquirer of certain assets and liabilities of WAMU from the Federal Deposit
Insurance Corporation (FDIC) acting as receiver, and Chase claims to be the
note holder, beneficiary, or servicer for investment trusts of a loan which is the
subject of this complaint.
3. Defendant CALIFORNIA RECONVEYANCE COMPANY (CRC) is a
California corporation named as Trustee on a Substitution of Trustee describing the
Property allegedly signed by "Deborah Brignac, Vice President, JPMorgan Chase
Bank, National Association successor in interest to Washington Mutual Bank, FA."
It was recorded in Los Angeles County on May 3, 2010. The Notary Public who
acknowledged Deborah Brignac's signature under penalty of perjury was Loren
Lopez. Plaintiff is informed and believes that Deborah Brignac is a robo-signer and
that her signature on the Substitution of Trustee is a forgery.
4. Defendants Does 1-150, inclusive, are sued under fictitious names. When
their true names and capacities are known, Plaintiff will amend this complaint and
insert their names and capacities. Plaintiff is informed and believes and thereon
alleges that each of these fictitiously named defendants claims some right, title,
estate, lien, or interest in the residence adverse to Plaintiffs title and their claims
constitute a cloud on Plaintiffs title to the property, or participated in unlawful or
fraudulent acts that resulted in injury to Plaintiff's person or property.
5. There is diversity of citizenship between Plaintiff and Defendant Chase,
and the matter in controversy exceeds, exclusive of interest and costs, the sum of
$75,000. This court has jurisdiction of the action pursuant to 28 U.S.C. 1332(a).
This Court has jurisdiction over the subject matter of this complaint under 28 USC
1331 and 1337 because it involves a federal question regarding interpretation
and proper application of the Real Estate Settlement Procedures Act, 12 USC 2601
et seq. Declaratory relief is authorized under 28 U.S.C. 2210.

Complaint - 5 -

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JURY TRIAL DEMAND
6. Plaintiff requests a jury trial on all issues.
CLAIM FOR RELIEF
7. Plaintiff brings this action against JPMorgan Chase Bank, NA ("Chase"),
California Reconveyance Company ("CRC"), and Does 1 150 for attempting to
sell Plaintiff's Property at a trustee's sale and deprive Plaintiff of his residence
without any lawful claim to the Property.
BACKGROUND FACTS
8. Plaintiff is the titleholder of the Property according to the terms of a Grant
Deed dated December 11, 2006. Plaintiff financed purchase of the Property in
2006. Plaintiff's loan application was submitted to Washington Mutual Bank
("WaMu") in September 2006. A copy of Plaintiff's Uniform Residential Loan
Application, furnished to him by WaMu with instructions to leave almost all of the
items blank, is attached hereto marked "Exhibit 1".
9. Plaintiff signed the mortgage documents in November 2006 at Chicago
Title Company. He was not given an opportunity to review the documents, other
than to quickly initial or sign various pages. After he signed, a Chicago Title
Company employee told Plaintiff that WaMu would forward the finalized
documents to him. Plaintiff did not receive any documents from WaMu, including
a Notice of Right to Cancel and disclosures required by the Truth in Lending Act
(TILA), and RESPA.
10. Plaintiff requested a copy of his loan application and promissory note at
a Wilshire Blvd. branch of Chase in Los Angeles on October 12, 2010. A bank
officer telephoned a Chase office in Ohio and informed Plaintiff that he would
receive the loan documents in ten days. No documents have been received as of
October 29, 2010.
11. Plaintiff is named as Borrower on a Deed of Trust describing the
Property dated November 14, 2007 ("DOT"). Washington Mutual Bank, FA is

Complaint - 6 -

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identified on the DOT as "Lender" and "the beneficiary under this security
agreement." Chicago Title Company is Trustee. Plaintiff has not received notice
that WaMu's beneficial interest has been transferred.
12. Plaintiff is informed and believes that WaMu securitized Plaintiff's
single-family residential mortgage loan through Washington Mutual Mortgage
Securities Corp., evidenced by references to a "private investor" made by Chase.
13. On May 14, 2010, Defendant CRC recorded a Notice of Default
("NOD") describing the Property with instructions that Plaintiff contact
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION to stop the
foreclosure. The NOD was signed by Silvia Freeberg, Assistant Secretary. A
"Declaration of Compliance (Cal Civil Code Section 2923.5(b)" attached to the
NOD was signed under penalty of perjury by Renee Daniels on behalf of
JPMorgan Chase Bank, National Association, "The undersigned mortgagee,
beneficiary or authorized agent." Washington Mutual is described as beneficiary.
Nowhere is Chase's role described in the papers on which Chase asserts the right to
sell the Property except reference to Chase as servicer on the NOTS.
14. On or about October 15, 2010, Defendant CRC recorded a Notice of
Trustee's Sale ("NOTS") stating that the Property would be sold at public auction
on November 8, 2010. The NOTS included a declaration pursuant to California
Civil Code Section 2923.54 bearing the name of Ann Thorn, First Vice President,
JPMorgan Chase National Association. Chase was identified as a servicer on the
NOTS.
FIRST CAUSE OF ACTION WRONGFUL FORECLOSURE
15. Plaintiff re-alleges and incorporates by reference the allegations
contained in paragraphs 1 through 14.
16. After WaMu originated the loan, Plaintiff is informed and believes that
WaMu transferred all beneficial interest in the loan to a private investor.
17. Neither WaMu, Chicago Title, CRC, Chase, nor anyone else has

Complaint - 7 -

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recorded a transfer of a beneficial interest in the Note Property to Chase. If Chase
is a beneficiary, CRC has breached its fiduciary duty to Plaintiff under the DOT by
not recording the alleged transfer of the beneficial interest and/or servicing duty
from WaMu to Chase, and by not indicating on the Notice of Default that Chase is
the alleged beneficiary. Paragraph 24 of the DOT states:
24. Substitute Trustee. Lender, at its option, may from time to time
appoint a successor trustee to any Trustee appointed hereunder by an
instrument executed and acknowledged by Lender and recorded in the
office of the Recorder of the county in which the property is located. The
instrument shall contain the name of the original Lender, Trustee and
Borrower, the book and page where this Security Instrument is recorded
and the name and address of the successor trustee. Without reconveyance
of the property, the successor trustee shall succeed to all the title, powers
and duties conferred upon the Trustee herein and by Applicable Law.
This procedure for substitution of trustee shall govern to the exclusion of
all other provisions for substitution.
18. Chase does not have standing to enforce the Note because Chase is not
the owner of the Note, Chase is not a holder of the Note, and Chase is not a
beneficiary under the Note. Chase does not have capacity to exercise a power of
sale. Chase does not claim to be a holder of the note or a beneficiary. Chase merely
describes itself as a loan servicer in the Notice of Trustee's Sale. If Chase can
prove that it is a servicer, as it asserts without disclosing any document as proof,
Chase cannot foreclose on Plaintiff's property without joining the owner of the note
because Chase is not a real party in interest.
19. Plaintiff is informed and believes that Chase does not have standing to
sell Plaintiff's property because Chase is not the holder of the Note. Chase did not
pay any consideration to Plaintiff evidenced by a promissory note and cannot
produce a promissory note endorsed to Chase. Chase does not own the loan and

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cannot identify the owner of the loan. Chase did not purchase the loan when it took
over WaMu in September 2008.
SECOND CAUSE OF ACTION VIOLATION OF CAL CIV CODE 2923.5
21. Defendants commenced foreclosure of the Property by recording a
Notice of Default in the Los Angeles County Recorder's Office on May 14, 2010
(Exhibit "2". Attached to the NOD was a Declaration of Compliance with Cal.
Civil Code 2923.5 signed under penalty of perjury by Renee Daniels on behalf of
Chase.
22. Plaintiff is informed and believes that declarant Renee Daniels did not
have personal knowledge of the matters described in her declaration, which
purported to describe attempts by Chase to contact Plaintiff as required by
2923.5. The NOD must include a declaration from one of three entities showing
that it contacted the borrower or tried with due diligence to contact the borrower.
23. On October 1, 2010, California Attorney General Jerry Brown sent a
letter to Chase and ordered Chase to halt all foreclosures in California. A copy of
the letter is posted on the Attorney General's website at ag.ca.gov/newsalerts. Mr.
Brown wrote:
The Office of the Attorney General writes to demand that JP Morgan
Chase demonstrate immediately that it conducts foreclosures in compliance
with California Civil Code, section 2923.5 or, if it cannot, halt all
foreclosures in California until it can.
Section 2923.5, subdivision (b) provides that a lender may not record a
notice of default in California for a California mortgage originated between
January 1, 2003 and December 31, 2007, unless it can declare that it "has
contacted the borrower, has tried with due diligence to contact the
borrower as required by this section, or that no contact was required

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pursuant to subdivision (h)."
JP Morgan Chase has now admitted that employees assigned to handling
foreclosures signed affidavits without first personally reviewing the
contents of borrowers' loan files. Thus, borrowers suffered the foreclosure
of their homes based on affidavits that JP Morgan Chase had not confirmed
to be accurate. This admission strongly suggests that any purported
verification by JP Morgan Chase that it complied with section 2923.5
before commencing a foreclosure in California is similarly suspect.
///
24. On October 8, 2010, the Attorney General called on all lenders in
California to halt foreclosing on California homes until they can demonstrate that
compliance with state law and posted a copy on the Attorney General's website.
25. Foreclosures have been suspended by state attorneys general in many
states based on testimony of employees of Chase, Ally (GMAC), Bank of America
and other banks that declarations and affidavits were manufactured to commence
foreclosures that were not based on the personal knowledge of the robo-signers
whose names and signatures appeared on the foreclosure documents without the
declarants possessing any personal knowledge of the matters stated therein.
26. The declaration of Renee Daniels attached to the NOD (Exhibit 2) does
not meet the requirements of Civil Code 2923.5, and so the foreclosure of
Plaintiff's property would be illegal under California law and must be enjoined.
THIRD CAUSE OF ACTION - UNJUST ENRICHMENT
28. Chase has no interest in Plaintiffs mortgage, so the pending foreclosure
of Plaintiff's Property would constitute unjust enrichment.
29. The DOT states that all secured sums must be paid. Plaintiff alleges that
the obligations under the DOT were fulfilled when WaMu received funds in excess

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of the balance on the Note as a result of proceeds of sale through securitization to
private investors and insurance proceeds from Credit Default Swaps.
FOURTH CAUSE OF ACTION RESPA AND TILA VIOLATIONS
31. WaMu and its agents made material misrepresentations and omissions
with respect to the terms of Plaintiff's loan in violation of the Truth in Lending Act
('TILA"). Plaintiff is informed and believes that WaMu concealed the terms of the
loan with the intention of inducing Plaintiff to refrain from investigating and
challenging the disclosures until the period for rescinding the loan expired.
Plaintiff did not receive any documents from WaMu after his meeting to sign
documents at Chicago Title Company, including disclosures required by the Truth
in Lending Act. RESPA, and a Notice of Right to Cancel.
32. Plaintiff's loan is a mortgage loan subject to the provisions of RESPA,
12 U.S.C. 2605 et. seq., and California Financial Code 50505.
33. On October 12, 2010, Plaintiff requested a copy of his loan application
and promissory note at a Wilshire Blvd. branch of Chase in Los Angeles. A bank
officer telephoned a Chase office in Ohio and informed Plaintiff that he would
receive the loan documents in ten days. No documents have been received.
34. Defendants have engaged in a practice of non-compliance with RESPA,
including failing to respond to properly submitted QWR's. Plaintiff is informed and
believes that this practice is designed to conceal TILA and RESPA violations and
to conceal the identity of the owner and true beneficiary of the loan.
35. As a direct and proximate result of Defendants' failure to comply with
RESPA, Plaintiff has suffered and continues to suffer actual damages in that he is
unable to ascertain the basis for Defendants' claims to his property, he cannot
identify the owner of the beneficiary of the Note, he cannot determine whether his
payments to WaMu were paid to the beneficiary, and he has no evidence upon

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which to conclude that Defendants are acting in good faith with lawful authority in
their attempts to foreclose the Property. Under RESPA, Plaintiff seeks treble
damages.
FIFTH CAUSE OF ACTION - NO CONTRACT
37. Plaintiff is informed and believes that WaMu routinely approved
predatory real estate loans to unqualified buyers in 2006 and 2007 and
implemented unlawful lending practices by encouraging brokers and loan officers
to falsify borrowers' income and assets to meet underwriting guidelines when
borrowers were not qualified.
38. Plaintiff followed WaMu's instructions when he submitted a Uniform
Residential Loan Application (Exhibit 1) to WaMu that contained only his basic
identifying information, such as name, address, phone number, social security
number, and bank account number. WaMu employees filled out the application.
39. Plaintiff is informed and believes that WaMu pre-sold Plaintiff's
mortgage and immediately after he signed the Note transferred all of its interest in
the Note to an investment bank that bundled Plaintiff's Note with numerous other
residential mortgages into residential mortgage-backed securities ("RMBS") which
were structured into synthetic collateralized debt obligations ("CDOs") and sold to
investors.
40. Plaintiff is informed and believes that the portfolio of RMBS underlying
the synthetic CDOs were selected by a hedge fund with economic interests directly
adverse to borrowers and investors, and that the hedge fund and the investment
bank intended to short the portfolio it helped to select by entering into credit
default swaps to buy protection against the almost certain event that the promissory
notes would default. WaMu expected that Plaintiff would not have the ability to
repay the loan. It was not simply a matter of being unconcerned with the possible

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outcome that Plaintiff would default; WaMu expected he would default.
41. Washington Mutual Bank, the sponsor of the securitization transaction,
was a wholly owned subsidiary of Washington Mutual Inc. Securitization of
mortgage loans was an integral part of Washington Mutual Inc.'s management of
its capital. It engaged in securitizations of first lien single-family residential
mortgage loans through Washington Mutual Mortgage Securities Corporation, as
depositor, beginning in 2001. WaMu acted only as a servicer of Plaintiff's loan.
42. WaMu failed to disclose to Plaintiff that its economic interests were
adverse to Plaintiff and that WaMu expected to profit when Plaintiff found it
impossible to perform and defaulted on his mortgage.
43. A necessary element in the formation of an enforceable contract under
the common law is a meeting of the minds. Two or more parties must share an
expectation that a future event will occur. Plaintiff expected that he would borrow
money from WaMu, he would pay it back, and then he would own the Property.
WaMu expected that Plaintiff would borrow money, he would not be able to pay it
back, and then WaMu or the investors would own the Property. Since there was no
shared expectationno meeting of the mindsno contract was formed between
Plaintiff and WaMu.
44. In addition to WaMu's expectation that Plaintiff would lose title to the
Property through foreclosure, WaMu anticipated transferring the Note to investors
immediately after Plaintiff signed the Note. Plaintiff is informed and believes that
WaMu purchased credit default insurance so that WaMu would receive the balance
on the Note when Plaintiff defaulted, in addition to any money WaMu received
when it securitized the note.
45. Not only did WaMu dispense with conventional underwriting practices
in 2006, it also paid premium fees and other incentives to mortgage brokers who
signed up the riskiest borrowers. Fueled by spiraling profits to Chase, WaMu, and
other bankers, common law principles of contract formation, customary

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underwriting practices, and statutory procedures for transferring interests in real
property, including the recordation of transfers of interests in real property,
disintegrated and the system collapsed.
46. WaMu expected that Plaintiff would not perform as merely one victim
in a scheme in which:
(1) WaMu's fees as servicer would be greater as the number of loans increased;
(2) WaMu's fees as servicer would be greater as the balances of loans increased;
(3) WaMu would recover the unpaid balance of Plaintiff's loan through credit
default insurance when Plaintiff inevitably defaulted; and
(4) All risk of loss in the event of Plaintiff's default would be borne by investors,
not WaMu as the servicer.
47. Plaintiffs participation in the mortgage contract was procured by overt
and covert misrepresentations and nondisclosures. The parties did not share a
single expectation with respect to any of the terms of the mortgage contract and
therefore the contract was void ab initio.
48. No enforceable contract was formed between Plaintiff and WaMu, so his
DOT and Promissory Note were not assets of WaMu that could be acquired or
assumed by Chase from the Federal Deposit Insurance Corporation (FDIC) as
receiver after WaMu was closed by the Office of Thrift Supervision on September
25, 2008.
49. Chase Bank has no right to receive payment under Plaintiffs mortgage
loan and has no right to foreclose on his property. Plaintiff does not seek rescission
of the contract. He alleges that the contract was void ab initio.
SIXTH CAUSE OF ACTION FRAUD AND CONCEALMENT
51. WaMu concealed material facts from Plaintiff to induce Plaintiff to
consummate the loan, including:

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(1) WaMu did not follow conventional, sound underwriting practices;
(2) Plaintiff would not be able to afford the payments required by his loan;
(3) Plaintiff would not be able to refinance his loan; and
(4) Plaintiff's loan would be resold and securitized to third parties, rendering it
impossible for the lender to provide Plaintiff with a full reconveyance upon
completion of his payments on the Note.
52. Chase has concealed and continues to conceal from Plaintiff material
facts in its possession which were requested during his visit to Chase Bank on
October 12, 2010, that would enable him to ascertain whether his payments to
WaMu were received by the owner or beneficiary of the Note.
53. As a direct and proximate result of Chase's fraudulent concealment,
Plaintiff has suffered and continues to suffer damages in an amount to be proven at
trial. Plaintiff remains under the constant threat of a trustee sale of the Property,
which could happen at any time without prior notification to him, and in addition
to damages caused by his emotional distress, he will suffer irreparable injury not
compensable in damages if the Property is sold.
SEVENTH CAUSE OF ACTION - QUIET TITLE
55. Plaintiff seeks to quiet title against the claims of Defendants and all
persons claiming any legal or equitable right, title, estate, lien, or adverse interest
in the Property as of the date the Complaint was filed (Cal Code Civil Procedure
760.020)
56. Plaintiff is the titleholder of the Property according to the terms of a
Grant Deed dated December 11, 2006.
57. WaMu securitized Plaintiff's single-family residential mortgage loan
through Washington Mutual Mortgage Securities Corp. Plaintiff is informed and
believes that the lawful beneficiary has been paid in full.

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The DOT states in paragraph 23:
23. Reconveyance. Upon payment of all sums secured by this Security
Instrument, lender shall request Trustee to reconvey the Property and
shall surrender this Security Instrument and all notes evidencing debt
secured by this Security Instrument to trustee. Trustee shall reconvey the
Property without warranty to the person or persons legally entitled to it
///
The DOT does not state that Plaintiff must make full payment, only that
all secured sums must be paid. Plaintiff alleges that the obligations owed to
WaMu under the DOT were fulfilled and the loan was fully paid when WaMu
received funds in excess of the balance on the Note as proceeds of sale through
securitization(s) of the loan and insurance proceeds from Credit Default Swaps.
58. Defendants claims are adverse to Plaintiff because Plaintiff is informed
and believes that none of the defendants is the holder of the Promissory Note, none
of them can prove any interest in the Note, and none of them can prove that the
Note is secured by the DOT, as well as for the reasons set forth in the preceding
causes of action. As such, Defendants have no right, title, estate, lien, or interest in
the Property.
59. Plaintiff therefore seeks a judicial declaration that the title to the subject
property is vested solely in Plaintiff and that Defendants have no right, title, estate,
lien, or interest in the Property and that Defendants and each of them be forever
enjoined from asserting any right, title, estate, lien or interest in the Property
adverse to Plaintiff.
EIGHTH CAUSE OF ACTION - DECLARATORY & INJUNCTIVE
RELIEF
61. An actual controversy has arisen and now exists between Plaintiff and

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Defendants concerning their respective rights and duties. Plaintiff contends:
(a) that Chase is not the present holder in due course or beneficiary of a
Promissory Note executed by Plaintiff. However, Defendants contend that Chase is
the present owner and beneficiary of a Promissory Note executed by Plaintiff.
(b) that Defendants are not real parties in interest, do not have standing, and
are not entitled to accelerate the maturity of any secured obligation and sell the
Property because they are not a beneficiary or authorized agent of beneficiaries
under the purported Promissory Note. However, Defendants assert that they are
entitled to sell the Property.
(c) that the Substitution of Trustee recorded in Los Angeles County on May
3, 2010, which purports to substitute Defendant CRC in place of Chicago Title Co.
as Trustee under the Deed of Trust dated 11-14-2007, was subscribed with a forged
signature of Deborah Brignac, Vice President of Chase, and fraudulently
acknowledged, and therefore CRC is not a trustee authorized to file a Notice of
Default or a Notice of Trustee's Sale on the Property. However, Defendants
contend that CRC is a trustee duly authorized to file said Notices.
62. Plaintiff desires a judicial determination of his rights and duties as to the
validity of the Promissory Note and DOT, and Defendants' rights to proceed with
nonjudicial foreclosure on the Property. Unless restrained, Defendants will sell
Plaintiffs residence, or cause it to be sold, to Plaintiffs great and irreparable
injury, for which pecuniary compensation would not afford adequate relief.
63. Defendants wrongful conduct, unless and until restrained by order of
this court, will cause great irreparable injury to Plaintiff as the value of the
residence declines under threat of foreclosure and Plaintiff faces the prospect of
eviction from his residence. Plaintiff designed and built this home himself. It is
unique and cannot be replicated.
64. If the foreclosure sale is allowed to proceed, the burden on Plaintiff
significantly outweighs the benefit to Defendants, and each of them.

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65. By contrast, if the foreclosure sale is enjoined, the burden to any or all
Defendants is minimal and not at all outweighed by the benefit to Plaintiff.
66. Plaintiff has no adequate remedy at law for the injuries currently being
suffered and that are threatened. It will be impossible for Plaintiff to determine the
precise amount of damage that he will suffer if Defendants conduct is not
restrained and Plaintiff must file a multiplicity of suits to obtain compensation for
his injuries.
NINTH CAUSE OF ACTION SLANDER OF TITLE
68. The foreclosing defendants, and each of them, by their acts and
omissions, published matters which were untrue and disparaging to Plaintiffs right
to title in the subject property.
69. The aforementioned publications by the foreclosing defendants, and
each of them, were unjustified and without privilege.
70. It is reasonably foreseeable that the aforementioned publications by the
foreclosing defendants, and each of them, casts doubt on Plaintiffs right to title in
his property, which has caused and continues to cause damages to Plaintiff.
71. As a result of said publications from Defendants, and each of them,
Plaintiff has suffered and continues to suffer loss of money, credit, real property
value, and reputation, in an amount to be proven at trial.
TENTH CAUSE OF ACTION - INTENTIONAL INFLICTION OF
EMOTIONAL DISTRESS
73. Plaintiff contends that the acts and omissions of the Defendants, and
each of them, constitute extreme and outrageous conduct.
74. Plaintiff further contends that Defendants, and each of them, engaged in
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such conduct either intentionally or with reckless disregard as to the effect on
Plaintiff.
75. As a result of said extreme and outrageous conduct by Defendants, and
each of them, Plaintiff has suffered severe emotional distress of$5,000,000.00.
PRAYER
WHEREFORE, Plaintiff requests judgment as follows:
I. That this court issue an Order to Show Cause and, after a hearing, issue a
Temporary Restraining Order and Preliminary Injunction restraining Defendants,
and each of them, during the pendency of this action, from continuing with their
efforts to conduct a Trustee's Sale of the Property.
2. That the attempted foreclosure of the Property be declared illegal and that
Defendants be forever enjoined and restrained from selling the Property or
attempting to sell it or causing it to be sold, either under power of sale pursuant to
trust deed or by foreclosure action, and from posting, publishing, or recording any
notice of default or notice of trustee's sale contrary to state or federal law.
3. That the underlying loan transaction be declared void as a result of
Defendants' and WaMu's misrepresentations, fraud, concealment, and predatory
loan practices.
4. That Defendants make restitution to Plaintiff according to proof.
5. For a judgment determining that Plaintiff is the owner in fee simple of the
Property against the adverse claims of Defendants and that Defendants have no
interest in the property adverse to Plaintiff.
6. For damages in an amount of$5,000,000.00.
6. For costs of suit and reasonable attorney fees.
7. For any and all other and further relief that may be just in this matter.
- - - ~ u ~ ~
Date: October 29,2010
Douglas Gillies, attorney for Plaintiff
Complaint - 18
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VERIFICATION
Daryoush lavaheri declares:
I am the plaintiff in the above-entitled action. I have read the foregoing
Complaint and know its contents. The same is true of my own knowledge, except
as to those matters that are alleged on information and belief, and as to those
matters, I believe them to be true. I declare under penalty of perjury that the
foregoing is true and correct, and that this declaration was executed in Los
Angeles, California on October 29, 2010.
Complaint - 19

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PLAINTIFF'S EXHIBITS

Exhibit Description Date

1 Uniform Residential Loan Application 9/8/2006

2 Notice of Default 5/14/2010

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DOUGLAS GILLIES, ESQ. (53602)
douglasgillies@gmail.com
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UNITED STATES DISTRICT COURT
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CVIO 8185;- 1l.j
DARYOUSHJAVAHERI, ) Case No. __
)
Plaintiff,
jPLAINTIFF'S EX PARTE
v.
) APPLICATION ,
JP MORGAN CHASE BANK N.A., ) FOR TEMPORARY
CALIFORNIA RECONVEYANCE ) RESTRAINING ORDER AND
CO., and DOES 1-150, inclusive, ) ORDER TO SHOW CAUSE RE:
Defendants.
)) PRELIMINARY INJUNCTION
) IMMEDIATE RELIEF SOUGHT
)
)
)
PlaintiffDARYOUSH JAVAHERI hereby applies for a temporary restraining order
and order to show cause restraining Defendants JPMORGAN CHASE, N.A., a New
York corporation, and CALIFORNIA RECONVEYANCE CO., a California
corporation ("Defendants"), from selling, transferring, conveying, foreclosing upon,
evicting or any other conduct adverse to Plaintiff regarding the real property located
10809 Wellworth Avenue, Los Angeles, CA 90024 ("Property"). Defendants have
noticed a Trustee's Sale of Plaintifrs Property to take place on November 8,2010
and immediate injunctive relief is requested.
Application for TRO and OSC
1

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Plaintiff respectfully requests that the Court temporarily restrain and enjoin
defendants from selling, transferring, conveying or foreclosing upon Plaintiff's
Property, including but not limited to restraining and enjoining defendants from
proceeding with any Trustees Sale of Plaintiff's Property. Plaintiff also requests an
Order to Show Cause why a preliminary injunction should not be granted enjoining
Defendants and their agents, servants and employees from conducting any sale or
taking any other action to effect an assignment of rents or hinder Plaintiff's ability to
enjoy his Property during the pendency of this action.
This application is made on the grounds that Plaintiff's complaint demonstrates that
he is entitled to the relief demanded, in that Plaintiff has raised serious issues as to
whether Defendants may lawfully foreclose on the Property, that Plaintiff is likely to
prevail on the merits, and that the balance of hardships tips firmly in Plaintiff's favor.
Any sale, auction, transfer of ownership, further encumbering or assignment of rents of
Plaintiff's Property will cause great and irreparable injury and harm to Plaintiff before
the matter can be decided without the imposition of a restraining order. A declaratory
judgment in Plaintiff's favor will be rendered ineffectual and meaningless if there is a
sale, auction, transfer of ownership, or further encumbering of Plaintiff's Property.
Pecuniary compensation will not afford adequate relief, particularly in light of the fact
that it would be extremely difficult to ascertain the amount of compensation which
would afford adequate relief and because Plaintiff's Property is unique. He designed
and built the residence himself, and resides there with his wife and young child.
Restraint of defendants action is necessary if a declaratory judgment is to have any
effect and accomplish its purpose of avoiding a multiplicity of litigation.
Plaintiff has not previously applied to any court for similar relief.
This application is based upon the complaint in this case, memorandum of points
and authorities, declarations and other documentary evidence, as well as the argument
of counsel, if such be permitted.
///

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Respectfully submitted,

Date: October 29, 2010
/s/
_____________________________
Douglas Gillies, attorney for Plaintiff

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Memorandum in Support of TRO/OSC
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County on or about October 15, 2010, stating that the Property will be sold on
November 8, 2010. The Notice of Trustee's Sale names Washington Mutual Bank FA
as Beneficiary.
Plaintiff examined the Los Angeles County Records on October 26, 2010, and
found no record indicating that a beneficial interest in the Promissory Note had been
assigned or transferred after he borrowed the money from WaMu.
Plaintiff's search of the county records turned up a Substitution of Trustee recorded
on May 3, 2010, that purported to substitute CRC as trustee in place of Chicago Title,
but the signature of Deborah Brignac, Vice President of Chase, appeared to be forged
and therefore the Acknowledgment of the Notary Public was fraudulent.
Plaintiff met with an officer of Chase Bank on Wilshire Blvd. to request a copy of
his loan application and promissory note on October 12, 2010. The bank officer
telephoned a Chase office in Ohio and informed Plaintiff that he would receive the
loan documents in ten days. No documents have been received.
Plaintiff's loan application is attached to the Complaint as Exhibit 1. At the request
of a loan officer at Washington Mutual, Plaintiff submitted an application that showed
only his name, address, social security number, and bank accounts. All income figures
and other information was inserted into the application by employees of WaMu, who
conducted a criminal enterprise to lure borrowers into loans in which they could not
possibly afford keep up the payments.
Plaintiff requests a TRO and Preliminary Injunction to preserve the status quo
until it can be determined whether Plaintiff entered into an enforceable contract with
WaMu in November 2006 and whether any of the defendants have a legal claim to the
Property and can demonstrate that they have standing and are a real party in interest.
II. ARGUMENT
The sole purpose of a preliminary injunction is to "preserve the status quo until a
determination of the action on the merits. Sierra Forest Legacy v Rey, 577 F.3d 1015,
2009 WL 2462216 (9th Cir 2009). "In brief, the bases for injunctive relief are

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irreparable injury and inadequacy of legal remedies. In each case, a court must balance
the competing claims of injury and must consider the effect on each party of the
granting or withholding of the requested relief." Amoco Production Co v Village of
Gambell, 480 U.S. 531, 542 (1987).
Recently, the Supreme Court clarified the proper standard for granting or denying a
preliminary injunction by stating that "[a] plaintiff seeking a preliminary injunction
must establish that he is likely to succeed on the merits, that he is likely to suffer
irreparable harm in the absence of preliminary relief, that the balance of equities tips in
his favor, and that an injunction is in the public interest." Winter v Natural Resources
Defense Council, 555 U.S. ____, 129 S. Ct. 365, 374 (2008).
Granting a preliminary injunction is appropriate where "serious questions going to
the merits were raised and the balance of hardships tips sharply in [plaintiffs'] favor."
The Lands Council v McNair, 537 F.3d 981, 987 (2008). This "second prong is
relevant where irreparable injury is likely and imminent-for example, in the case of
imminent foreclosure or deportation-and the plaintiff has demonstrated a serious merits
issue but may be unable to determine a likelihood of success on the merits." Save
Strawberry Canyon v Department of Energy, 613 F. Supp. 2d 1177, 1180 n2 (N.D.
Cal. 2009).
Plaintiff will suffer irreparable injury if defendants are permitted to foreclose on
the Property before the conclusion of this action. Property is considered unique, and
therefore Plaintiff's remedy at law, damages, would be inadequate. Sundance Land
Corp v Community First Federal Sav and Loan Assn, 840 F.2d 653, 662 (9th Cir
1988). If defendants foreclose on the Property, Plaintiff's injury will be irreparable
because he might be unable to reacquire it. See Taylor v Westly, 488 F.3d 1197, 1202
(9th Cir 2007). This fact weighs heavily in favor of Plaintiff. Additionally, Defendants
will not suffer a high degree of harm if a preliminary injunction is ordered. While it is
true that Defendants will not be able to sell the property immediately and may expend
costs in further litigating this action, when balanced against Plaintiff's potential loss,

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Defendants' harm is outweighed.
Plaintiff is likely to succeed on the merits. Plaintiff contends that the promissory
note and deed of trust naming Washington Mutual as beneficiary are void or voidable
on the grounds that WaMu expected and intended for Plaintiff to default and expected
to be unjustly enriched by the foreclosure of Plaintiff's home due to increased servicing
fees, credit default insurance, and full recovery of the principal of the loan due to sale
of the loan to investors soon after Plaintiff signed the Promissory Note.
A meeting of the minds is essential, for without a shared expectation between the
parties, there is nothing but an inchoate effort. This simple maxim reaches back to the
origin of enforceable contracts.
A meeting of minds on the material terms is essential to the formation of a
contract. Kruse v. Bank of America, 202 Cal. App. 3d 38, 60 (1988). The Kruse court
held that no contract was formed between the plaintiff borrower and the defendant
bank when there was "a complete lacuna in the proof of essential terms of the claimed
load agreement. Recently in Terry v. Conlan, 131 Cal. App 4
th
1445, 1459 (2005) the
court reversed an order enforcing a settlement agreement, concluding "Thus there was
no meeting of the minds, and no enforceable settlement agreement.
"A contract is an agreement to do or not to do a certain thing" (Civ. Code 1549);
and in order to constitute a valid contract, the minds of the contracting parties must
meet and agree to the same thing." Breckinridge v. Crocker, 78 Cal. 529, 536 (1889).
"It is essential to the validity of a contract that the parties should have consented to
the same subject-matter in the same sense. They must have contracted ad idem." Utley
v. Donaldson, 94 U. S. 29, 48 (1876).
"Where there is a misunderstanding as to the terms of a contract, neither party is
liable in law or equity. Where a contract is a unit, and left uncertain in one particular,
the whole will be regarded as only inchoate, because the parties have not been ad idem,
and therefore neither is bound." National Bank v. Hall, 101 U. S. 43, 49 (1879).
Consent of the parties is one of the requisites of a valid contract for the sale of

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realty. It is essential to the creation of such a contract that there be a meeting of the
minds of the parties and a mutual agreement on the terms of the contract. Holland v.
McCarthy, 173 Cal. 597, 602, 160 P. 1069 (1916). The writing must evince a free and
mutual understanding of the parties and show that they both agreed on the same thing
in the same sense. Estes v. Hardesty, 66 Cal. App. 2d 747, 749, 152 P.2d 772 (2d Dist.
1944) or the writing has no binding effect on either. Patterson v. Clifford F. Reid, 132
Cal. App. 454, 456, 23 P.2d 35 (3d Dist. 1933), where the court found, "From the
foregoing it is clear that the essential element of a valid contract, a meeting of minds
on all essential elements, was lacking and therefore the writing has no binding effect
upon either party. Although plaintiff signed the documents, it was distinctly agreed
that they were not to be effective until she gave her approval at some later date, when
the 'blanks' were to be filled in. 'A writing is incomplete as an agreement where blanks
as to essential matters are left in it.' (13 C.J., pl 308, par. 133.)" 132 Cal. App. at 456.
"It is indispensible to a valid memorandum of an agreement to sell and convey land
that it be complete evidence of the terms to which the parties have assented. If it
establishes there was in fact no contract, if it discloses that upon essential and material
terms the minds of the parties did not meet and that such terms were left open for
future settlement, then there is no binding obligation upon the seller to convey or the
buyer to accept and pay for the land. It will be regarded as merely an inchoate effort.
Implications will not be indulged." Salomon v. Cooper, 98 Cal.App.2d. 521, 523, 220
P.2d 774, 775 (1950) (emphasis added).
If the evidence does not establish the indispensable meeting of the minds
regarding the material terms of a transaction there is not an enforceable contract.
Martin Deli v. Schumacher, 52 N.Y.2d 105, 109, 417 N.E.2d 541 (1981); Brause v.
Goldman, 10 A.D.2d 328, 333, affirmed, 9 N.Y.2d 620, 172 N.E.2d 78 (1961).
If no meeting of the minds has occurred on the material terms of a contract, basic
contract law provides that no contract formation has occurred. If no contract formation
has occurred, there is no settlement agreement to enforce. Weddington Productions,

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Inc. v. Flick, 60 Cal.App.4th 793, 797, 71 Cal.Rptr.2d 265, 268 (1998). Weddington
continues, "The parties neither reached, nor objectively manifested, a meeting of the
minds on the material terms of a settlement" (p 802). "...the record summarized and
highlighted above graphically shows that there was never any meeting of the minds,
either subjectively or objectively, as to exactly what these words meant" (p. 808).
Law Professor Kurt Eggert, in a May 2009 article published in the Connecticut
Law Review, wrote, Securitization took exotic subprime loans that are too unstable
and complex for many borrowers to understand or use safely, and packaged these loans
into securities that are, by their structure, excessively unstable and complex for most
investors, multiplying the risk at both ends.
"Investors, like the borrowers, found that the disclosures given to them were
inadequate to disclose those risks. (p. 51).
Real property ownership in the U.S. underwent the equivalent of a meltdown in the
past decade. It started with repeal of the Glass-Steagall Act, followed by securitization
of mortgages, abolition of traditional underwriting practices, and introduction of Credit
Default Swaps. Main Street banks bet against their borrowers and Wall Street banks
bet against their investors. Loan brokers inserted fraudulent figures in loan
applications, encouraged by a growing appetite for toxic assets throughout the
financial system.
It is incumbent upon the courts to restore order to the system, turning to Common
Law principles to find principles marking the road to recovery unjust enrichment,
standing, real party in interest, fraud, oppression, mutual assent, and meeting of the
minds. This is not a routine controversy. It cannot be resolved through summary
procedures. Until the problem is solved with reasoned deliberation, fifteen million
families will face foreclosure.
Borrowers thought they were going to pay back the loans and own their houses.
Banks expected borrowers to default, to profit from the default, and then to sell the
house. There was no contract because there was no shared expectation in this case,

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where the lender knew or should have known that the borrower could not pay back the
loan.
If Defendants are allowed to foreclose, Plaintiff will lose the family home. A
harsher outcome could scarcely be imagined. In contrast, Defendants suffer nothing by
preserving the status quo and allowing Plaintiff to remain in the home until this matter
is determined on the merits. The home's value will be preserved by allowing Plaintiff
to remain living there. In contrast, if the Property is foreclosed upon and left vacant, it
will likely fall into disrepair and decline in value.
No bond should be required. District courts have broad discretion in determining
the amount of a bond. See Connecticut Gen. Life Ins. Co. v. New Images of Beverly
Hills, 321 F.3d 878, 882 (9
th
Cir.2003). "The district court may dispense with the filing
of a bond when it concludes there is no realistic likelihood of harm to the defendant
from enjoining his or her conduct. Jorgensen, v. Cassidy, 320 R.3d 906, 919 (9
th

Cir.2003).
There is no realistic harm to defendants from a restraint of the foreclosure
proceedings and trustee's sale. If defendants prevail, the loan is adequately secured by
the property in question and so additional security is neither appropriate nor warranted.
Phleger v. Countrywide Home Loans, Inc., 2007 WL 4105672 at 6 (N.D. Cal. 2007)
Plaintiff prays this Court grant the temporary restraining order and order to show
cause and set the matter for a hearing for a preliminary injunction pending trial.

/s/
Date: October 29, 2010 _______________________
Douglas Gillies
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FtL
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DOUGLAS GILLIES, ESQ.
63602)
douglas gillies@gmai1. com
3756 Torino Drive
(80s) 682-7033
DARYOUSH JAVAHERI
DARYOUSH JAVAHEzu,
Plaintiff,
V.
CO., and DOES 1-150, inclusive,
Defendants.
LINITED STATES DISTzuCT COURT
CENTRAL DISTzuCT OF CALIFORNIA
ffiw?* *,1
$%
Case No.
Douglas Gillies declares:
I am plaintiffs attorney and I have made the following efforts to notifu counsel for
defendants of plaintiff s Ex Parte Application for Order to Show Cause and Temporary
Restraining Order to enjoin a foreclosure sale of Plaintiffs residence on November 8,
2010.
Defendant California Reconveyance Company ("CRC'') is named as Trustee on
Plaintiff s Deed of Trust and has filed a Notice of Default and Notice of Trustee's Sale
naming Defendant JPMorgan Chase as Loan Servicer. On Octob er 29,20I0,Ln;
l/
del:er{to CRC a copy of the Complaint, Application for OSC, Memorandum of
Points & Authorities, Proposed Order, and other Initiating Documents on both
Cerrificate of Good Faith Effort
-1-
ffiw\$$
CBRTIFICATE OF GOOD FAITH
EFFORT
ffir;,*
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defendants by personally delivering a copy to the to the registered Agent for Service of
Process for Defendants JPMorgan Chase NA and California Reconveyance at the
following address:
CT Corporation System
818 W t
h
Street
Los Angeles, CA 90017
On July 12, I telephoned an attorney representing Chase in another matter and
asked ifhis firm handled all of Chase's lawsuits in Los Angeles. He said that their firm
would have to fill a 1 OO-story building to handle all of Chase's litigation.
October 29,2010
v . ~ ~
Douglas illies, attorney
Cerrificate of Good Faith Effort
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II
1 DOUGLAS GILLIES, ESQ. (CA 53602)
2 douglasgillies@gmail.com
3756 Torino Drive
3 Santa Barbara, CA 93105
4 (805)682"7033
5 Attorney for Plaintiff
6 DARYOUSHJAVAHERI
7
FILED
CLERK, U .3. DISTRICT C
COpy
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Plaintiff,
13 v.
14 JP MORGAN CHASE BANK N.A.,
15 and DOES 1"50, inclusive,
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Defendants.
First Amended Complaint
) No. CVI0 8185 ODW (FFMx)
) FIRST AMENDED COMPLAINT
) 1) Wrongful Foreclosure
) 2) Violation of Cal Civ. Code 2923.5
) 3) Restitution
) 4) No Contract
) 5) Quiet Title
) 6) Declaratory and Injunctive Relief
) 7) Intentional Infliction of Emotional
) Distress
)
) Jury Trial Requested
)
)
)
- 1 -

First Amended Complaint - 2 -

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INDEX
INTRODUCTION 3
JURYTRIALDEMAND 4
CLAIMFORRELIEF 4
BACKGROUNDFACTS 5
FIRSTCAUSEOFACTIONWRONGFULFORECLOSURE 6
SECONDCAUSEOFACTIONVIOLATIONOFCALCIVCODE2923.5 9
THIRDCAUSEOFACTIONRESTITUTION 11
FOURTHCAUSEOFACTIONNOCONTRACT 12
FIFTHCAUSEOFACTIONQUIETTITLE 14
SIXTHCAUSEOFACTIONDECLARATORY&INJUNCTIVERELIEF 16
SEVENTHCAUSEOFACTIONINTENTIONALINFLICTIONOFEMOTIONALDISTRESS 17
PRAYER 18
VERIFICATION 19


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INTRODUCTION
" The legal principles and requirements we set forth are well established in
our case law and our statutes. All that has changed is the plaintiffs' apparent
failure to abide by those principles and requirements in the rush to sell
mortgage-backed securities...(T)he plaintiffs did not demonstrate that they
were the holders of the Ibanez and LaRace mortgages at the time that they
foreclosed these properties, and therefore failed to demonstrate that they
acquired fee simple title to these properties by purchasing them at the
foreclosure sale." Massachusetts Supreme Court in U.S. Bank National
Association vs. Ibanez Case No. SJC-10694 (January 6, 2011).

During the past decade, big banks abandoned traditional underwriting practices
and ignited a frenzy of real estate speculation by issuing predatory loans that
ultimately lowered property values in the United States by 30-50%. Banks reaped
an unprecedented harvest. Kerry Killinger, CEO of Washington Mutual, took home
more than $100 million during the seven years he steered WaMu into bankruptcy.
Banks issued millions of predatory loans knowing that the borrowers would default
and lose their homes, and then committed perjury and fraud to fabricate documents
to speed up the foreclosure process. As a direct, foreseeable result, twelve million
families are predicted to lose their homes.
Plaintiff DARYOUSH JAVAHERI is facing illegal foreclosure of his home at
a Trustee's Sale, currently scheduled for February 24, 2011. The loan application
he submitted to Washington Mutual is attached as Exhibit 1. It consists of his
name and address.
1. Plaintiff DARYOUSH JAVAHERI is a resident of California and owner
of a single-family residence located at 10809 Wellworth Avenue, Los Angeles,


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California 90024, APN 4325-005-014 (the Wellworth Property) acquired by
Grant Deed recorded on December 11, 2006. The legal description is:
County.
(Chase), a New York corporation licensed to do business in California, is an
acquirer of certain assets and liabilities of WAMU from the Federal Deposit
Insurance Corporation (FDIC) acting as receiver. Chase claims to be the note
holder, beneficiary, or servicer for investment trusts of a note secured by the
Wellworth Property.
their true names and capacities are known, Plaintiff will amend this Complaint and
alleges that each of these fictitiously named defendants claims some right, title,
estate, lien, or interest in the residence adverse to Plaintiffs title and their claims
constitute a cloud on Plaintiffs title to the property, or participated in unlawful or
fraudulent acts that resulted in injury to Plaintiff's person or property.
Declaratory relief is authorized under 28 U.S.C. 2210.
JURY TRIAL DEMAND
5. Plaintiff requests a jury trial on all issues.
CLAIM FOR RELIEF
6. Plaintiff brings this action against JPMorgan Chase Bank, NA ("Chase"),
and Does 1 through 50 for attempting to sell Plaintiff's Wellworth Property at a


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trustee's sale and deprive Plaintiff of his residence without any lawful claim to the
Property.
BACKGROUND FACTS
7. Plaintiff is the owner of the Wellworth Property according to the terms of
a Grant Deed. Plaintiff financed purchase of the Property in 2006. His loan
application was submitted to Washington Mutual Bank ("WaMu") in September
2006. A copy of Plaintiff's Uniform Residential Loan Application, furnished to
him by WaMu with instructions to leave most of the items blank, is attached hereto
as Exhibit 1.
8. Plaintiff signed the mortgage documents in November 2006 at Chicago
Title Company. He was not given an opportunity to review the documents, other
than to quickly initial or sign various pages. After he signed, a Chicago Title
Company employee told Plaintiff that WaMu would forward the finalized
documents to him. Plaintiff did not receive any documents from WaMu.
9. Plaintiff is named as Borrower on a Deed of Trust describing the
Wellworth Property dated November 14, 2007 ("DOT"). The DOT is attached
hereto as Exhibit 7. Washington Mutual Bank, FA is identified on the DOT as
"Lender" and "the beneficiary under this security agreement." Chicago Title
Company is named as Trustee.
10. Plaintiff is informed and believes that WaMu securitized Plaintiff's
single-family residential mortgage loan through Washington Mutual Mortgage
Securities Corporation. Thereafter, WaMu acted only as servicer of the loan, and
was not the Lender or a Beneficiary of the Note.
11. Plaintiff is informed and believes that California Reconveyance Co.
(CRC) is a wholly owned subsidiary of Chase. CRC is named as Trustee on a
Substitution of Trustee describing the Wellworth Property recorded in Los Angeles
County on May 3, 2010, attached hereto as Exhibit 8. The Substitution is allegedly
signed by Deborah Brignac, Vice President, JPMorgan Chase Bank, National


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Association successor in interest to Washington Mutual Bank, FA. Deborah
Brignac's name and markedly differing signatures appear on a multitude of
recorded documents describing her variously as a Vice President of CRC or Vice
President of Chase. Her signature on the Substitution of Trustee is a probably a
forgery.
12. On May 14, 2010, CRC recorded a Notice of Default ("NOD"), attached
hereto as Exhibit 2, describing the Wellworth Property with instructions that
Plaintiff contact JPMORGAN CHASE BANK, NATIONAL ASSOCIATION to
stop the foreclosure. The NOD was signed by Silvia Freeberg, Assistant Secretary.
A "Declaration of Compliance (Cal Civil Code Section 2923.5(b)" attached to the
NOD was signed under penalty of perjury by Renee Daniels on behalf of
JPMorgan Chase Bank, National Association. Chase is described in the
Declaration of Compliance as "The undersigned mortgagee, beneficiary or
authorized agent." Washington Mutual is described in the body of the NOD as
beneficiary. However, Chase's interest, if any, was acquired from WaMu under a
Purchase and Assumption Agreement in September 2008, and WaMu's beneficial
interest had terminated when WaMu sold the Note to investors in 2006.
13. On or about October 15, 2010, CRC recorded a Notice of Trustee's Sale
("NOTS") stating that the Wellworth Property would be sold at public auction on
November 8, 2010. The NOTS included a declaration pursuant to California Civil
Code Section 2923.54 bearing the name of Ann Thorn, First Vice President,
JPMorgan Chase National Association. Chase was identified as a servicer on the
NOTS.
FIRST CAUSE OF ACTION WRONGFUL FORECLOSURE
15. Soon after WaMu originated the loan, Plaintiff is informed and believes
that WaMu transferred all beneficial interest in the loan to a private investor.


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16. Neither WaMu, Chicago Title, CRC, nor Chase has recorded a transfer
of beneficial interest in the Note to Chase. Paragraph 24 of the DOT (Plaintiff's
Exhibit 7) states:
office of the Recorder of the county in which the property is located.
The instrument shall contain the name of the original Lender, Trustee
and Borrower, the book and page where this Security Instrument is
recorded and the name and address of the successor trustee. Without
reconveyance of the property, the successor trustee shall succeed to all
the title, powers and duties conferred upon the Trustee herein and by
Applicable Law. This procedure for substitution of trustee shall govern
to the exclusion of all other provisions for substitution.
beneficiary under the Note. Chase does not have capacity to appoint a successor
trustee. Chase does not claim to be a holder of the note or a beneficiary. Chase
describes itself as a loan servicer in the Notice of Trustee's Sale. If Chase can
prove that it is a servicer, Chase cannot foreclose on Plaintiff's property without
authorization from the Lender under the terms of the Deed of Trust.
18. Plaintiff is informed and believes that Chase cannot produce an original
promissory note. Chase does not own the loan and cannot identify the owner of the
loan. Chase did not purchase the loan when it took over WaMu in September 2008
because WaMu had sold its beneficial interest in the loan two years earlier.
19. A power of sale is conferred on the mortgagee, trustee, or other person
by the mortgage under California law. Cal. Civ. Code 2924. The Adjustable Rate
Note attached as Exhibit 6 identifies Washington Mutual Bank as the Lender in


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Paragraph 1, which then says, "Lender or anyone who takes this Note by transfer
and who is entitled to receive payments under this Note is called the "Note
Holder."
The Note states in paragraph 7(C):
Notice of Default. If I am in default, the Note Holder may send me
a written notice telling me that if I do not pay the overdue amount by a
certain date, the Note Holder may require me to pay immediately the full
amount."
So the Note gives the right to collect, if timely payments are not made, to the
Lender and anyone who takes the Note by transfer. This does not include a servicer
who is not the Note Holder.
20. Plaintiff's Deed of Trust, dated 11/14/2007, ("DOT") is attached hereto
as Exhibit 7. The "Lender" identified in the DOT is WASHINGTON MUTUAL
BANK, FA (page 1, paragraph C). The "Trustee" is Chicago Title Company. (page
2, paragraph D).
In keeping with the language of the Note, only the Lender is authorized
under paragraph 22 of the DOT to accelerate the loan:
"Lender shall give notice to Borrower prior to acceleration
following Borrower's breach of any covenant of agreement in this
Security Instrument
"If Lender invokes the power of sale, Lender shall execute or
cause Trustee to execute a written notice of the occurrence of an event
of default and of Lender's election to cause the Property to be sold.
Trustee shall cause this notice to be recorded in each county in which
any part of the Property is located." (DOT page 13, paragraph 22).
21. Washington Mutual Bank remained the Lender for no more than a few
days until it sold the loan. Thereafter, it was a servicer of the loan. The Note
Holder was presumably the investment trust that put up the money.


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"Lender, at its option, may from time to time appoint a successor
Trustee to any Trustee appointed hereunder by an instrument executed and
acknowledged by Lender and recorded in the office of the Recorder of the
county in which the Property is located." (DOT page 13, paragraph 24).
Defendants ask for the Court's blessing to proceed with foreclosure of
Plaintiff's property even if they cannot inform the Court who the Lender might
possibly be.
22. On May 3, 2010, CRC recorded a Substitution of Trustee (Exhibit 8,
attached hereto) signed by Deborah Brignac, Vice President of JPMorgan Chase
Bank, as successor in interest to Washington Mutual FA. Brignac's signature is a
forgery. The document describes Chase as the present Beneficiary under the Deed
of Trust and then purports to substitute California Reconveyance Company, of
which Brignac is a Vice President, as a new Trustee in place of Chicago Title.
23. Chase was not the beneficiary, never was, and Brignac had no authority
to assert the role of beneficiary. The substitution was unauthorized, so CRC was
not authorized to initiate foreclosure against Plaintiff on May 14, 2010, when it
recorded the Notice of Default (Plaintiff's Exhibit 2), and it was not acting for the
Lender when it filed the Notice of Trustee's Sale on August 16, 2010 (Exhibit 9).
SECOND CAUSE OF ACTION VIOLATION OF CAL CIV CODE 2923.5
25. Chase and CRC commenced foreclosure of the Wellworth Property
when CRC recorded a Notice of Default in the Los Angeles County Recorder's
Office on May 14, 2010 (Exhibit 2). Attached to the NOD was a Declaration of
Compliance with Cal. Civil Code 2923.5 signed under penalty of perjury by
Renee Daniels on behalf of Chase.
26. Plaintiff is informed and believes that declarant Renee Daniels did not
have personal knowledge of the matters described in her declaration, which


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purported to describe attempts by Chase to contact Plaintiff as required by
2923.5. The NOD must include a declaration from one of three entities showing
that it contacted the borrower or tried with due diligence to contact the borrower.
27. On October 1, 2010, California Attorney General Jerry Brown sent a
letter to Chase and ordered Chase to halt all foreclosures in California. A copy of
the letter is posted on the Attorney General's website at ag.ca.gov/newsalerts and
attached hereto as Exhibit 3. Mr. Brown wrote:
The Office of the Attorney General writes to demand that JP Morgan
Chase demonstrate immediately that it conducts foreclosures in
compliance with California Civil Code, section 2923.5 or, if it cannot,
halt all foreclosures in California until it can.
Section 2923.5, subdivision (b) provides that a lender may not record
a notice of default in California for a California mortgage originated
between January 1, 2003 and December 31, 2007, unless it can declare
that it "has contacted the borrower, has tried with due diligence to
contact the borrower as required by this section, or that no contact was
required pursuant to subdivision (h)."
JP Morgan Chase has now admitted that employees assigned to
handling foreclosures signed affidavits without first personally
reviewing the contents of borrowers' loan files. Thus, borrowers suffered
the foreclosure of their homes based on affidavits that JP Morgan Chase
had not confirmed to be accurate. This admission strongly suggests that
any purported verification by JP Morgan Chase that it complied with
section 2923.5 before commencing a foreclosure in California is
similarly suspect.
///
28. On October 8, 2010, the Attorney General, now Governor of California,
called upon all lenders in California to halt foreclosing on California homes until
Case 2:10-cv-08185-ODW -FFM Document 22 Filed 01/03/11 Page 10 of 19 Page ID
#:387


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they can demonstrate that compliance with state law and posted a copy on the
Attorney General's website.
29. Foreclosures have been suspended by state attorneys general in various
states based on testimony of employees of Chase, Ally (GMAC), Bank of America,
and other banks that declarations and affidavits were manufactured to commence
foreclosures that were not based on the personal knowledge of the robo-signers
whose names and signatures appeared on the foreclosure documents without the
declarants possessing personal knowledge of the matters stated therein.
30. The declaration of Renee Daniels attached to the NOD (Exhibit 2) does
not meet the requirements of Civil Code 2923.5, and so foreclosure of Plaintiff's
Wellworth Property would be illegal under California law and must be enjoined.
THIRD CAUSE OF ACTION - RESTITUTION
32. Whether termed unjust enrichment, quasi-contract, or quantum meruit,
the equitable remedy of restitution when unjust enrichment has occurred is an
obligation created by the law without regard to the intention of the parties, and is
designed to restore the aggrieved party to his or her former position by return of
the thing or its equivalent in money.
33. WaMu received the balance on Plaintiff's Note when it securitized the
loan within days of its inception. Chase describes itself on the NOTS as a servicer,
not the Lender. Chase has no beneficial interest in Plaintiffs mortgage, so the
pending foreclosure of Plaintiff's Wellworth Property would constitute unjust
enrichment.
34. The DOT states that all secured sums must be paid. Plaintiff alleges that
the obligations under the DOT were fulfilled when WaMu received funds in excess
of the balance on the Note as a result of proceeds of sale through securitization to
private investors and insurance proceeds from Credit Default Swaps. The investors
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have also been paid in full, and so Chase has been unjustly enriched by demanding
monthly payments from Plaintiff.
35. Plaintiff is entitled to restitution for any payments he made to Chase that
were not paid to the beneficiary, if any.
FOURTH CAUSE OF ACTION - NO CONTRACT
Residential Loan Application (Exhibit 1) to WaMu that contained only his basic
identifying information, such as name, address, phone number, social security
number, and bank account number. WaMu employees filled out the application.
mortgage and immediately after he signed the Note transferred all of its interest in
the Note to an investment bank that bundled Plaintiff's Note with numerous other
residential mortgages into residential mortgage-backed securities ("RMBS") which
were structured into synthetic collateralized debt obligations ("CDOs") and sold to
investors.
40. Plaintiff is informed and believes that the portfolio of RMBS underlying
the synthetic CDOs were selected by a hedge fund with economic interests directly
adverse to borrowers and investors, and that the hedge fund and the investment
bank intended to short the portfolio it helped to select by entering into credit
default swaps to buy protection against the almost certain event that the promissory
notes would default. WaMu expected that Plaintiff would not have the ability to
#:389


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repay the loan. It was not simply a matter of being unconcerned with the possible
outcome that Plaintiff would default; WaMu expected he would default.
the common law is a meeting of the minds. Two or more parties must share an
Plaintiff and WaMu.
Wellworth Property through foreclosure, WaMu anticipated transferring the Note
to investors immediately after Plaintiff signed the Note. Plaintiff is informed and
believes that WaMu purchased credit default insurance so that WaMu would
receive the balance on the Note when Plaintiff defaulted, in addition to any money
WaMu received when it securitized the note.
#:390


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25, 2008.
loan and has no right to foreclose on his Wellworth Property. Plaintiff does not
seek rescission of the contract. He alleges that the contract was void ab initio.
FIFTH CAUSE OF ACTION - QUIET TITLE
#:391


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in the Wellworth Property as of the date the Complaint was filed (Cal Code Civil
Procedure 760.020)
51. Plaintiff is the titleholder of the Wellworth Property according to the
terms of a Grant Deed recorded on December 11, 2006.
///
The DOT does not state that Plaintiff must make full payment, only that
all secured sums must be paid. Plaintiff alleges that the obligations owed to
WaMu under the DOT were fulfilled and the loan was fully paid when WaMu
received funds in excess of the balance on the Note as proceeds of sale through
and believes that none of the defendants is the holder of the Promissory Note, none
of them can prove any interest in the Note, and none of them can prove that the
Note is secured by the DOT, as well as for the reasons set forth in the preceding
causes of action. As such, Defendants have no right, title, estate, lien, or interest in
the Wellworth Property.
54. Plaintiff therefore seeks a judicial declaration that the title to the
Wellworth Property is vested solely in Plaintiff and that Defendants have no right,
#:392


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title, estate, lien, or interest in the Property and that Defendants and each of them
be forever enjoined from asserting any right, title, estate, lien or interest in the
Property adverse to Plaintiff.
SIXTH CAUSE OF ACTION - DECLARATORY & INJUNCTIVE RELIEF
Wellworth Property because they are not a beneficiary or authorized agent of
beneficiaries under the purported Promissory Note. However, Defendants assert
that they are entitled to sell the Property.
3, 2010, which purports to substitute CRC in place of Chicago Title Co. as Trustee
under the Deed of Trust dated 11-14-2007, was subscribed with a forged signature
of Deborah Brignac, Vice President of Chase, and fraudulently acknowledged, and
therefore CRC is not a trustee authorized to file a Notice of Default or a Notice of
Trustee's Sale on the Wellworth Property. However, Defendants contend that CRC
is a trustee duly authorized to file said Notices.
validity of the Promissory Note and DOT, and Defendants' rights to proceed with
nonjudicial foreclosure on the Wellworth Property. Unless restrained, Defendants
will sell Plaintiffs residence, or cause it to be sold, to Plaintiffs great and
irreparable injury, for which pecuniary compensation would not afford adequate
#:393


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relief.
significantly outweighs the benefit to Defendants, and each of them.
60. By contrast, if the foreclosure sale is enjoined, the burden to defendants
is minimal and is not outweighed by the benefit to Plaintiff.
his injuries.
SEVENTH CAUSE OF ACTION - INTENTIONAL INFLICTION OF
EMOTIONAL DISTRESS
Plaintiff.
each of them, Plaintiff has suffered severe emotional distress in the amount of
$5,000,000.00.
///
#:394
#:395
#:396
#:560

1 DOUGLAS GILLIES, ESQ. (CA 53602)
2 douglasgillies@gmail.com
3756 Torino Drive
3 Santa Barbara, CA 93105
4 (805) 682-7033
5 Attorney for Plaintiff
6 DARYOUSHJAVAHERI
7
"--0 ----;-;ri
l
:7rED;-----,
rill!K, us, DISTRICT COURT
APR' 22011
~ ~ N T R A l DISTlllCT or CALIfORNIA
. '" DEPUTY
8
9
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11 DARYOUSH JAV AHERI,
12
Plaintiff,
13 v.
14 JP MORGAN CHASE BANK N.A.,
15 and DOES 1-50, inclusive,
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Defendants.
Second Amended Complaint
- 1 -
) No. CV10 8185 ODW (FFMx)
) SECOND AMENDED COMPLAINT
) 1) Violation of Cal Civ. Code 2923.5
) 2) Wrongful Foreclosure
) 3) Quasi Contract
) 4) No Contract
) 5) Quiet Title
) 6) Declaratory and Injunctive Relief
) 7) Intentional Infliction of Emotional
) Distress
)
) Jury Trial Demanded

Second Amended Complaint - 2 -

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INDEX
INTRODUCTION 3
JURYTRIALDEMAND 5
CLAIMFORRELIEF 5
BACKGROUNDFACTS 5
FIRSTCAUSEOFACTIONVIOLATIONOFCALCIVCODE2923.5 7
SECONDCAUSEOFACTIONWRONGFULFORECLOSURE 10
THIRDCAUSEOFACTIONQUASICONTRACT 14
FOURTHCAUSEOFACTION-NOCONTRACT 15
FIFTHCAUSEOFACTION-QUIETTITLE 18
SIXTHCAUSEOFACTION-DECLARATORY&INJUNCTIVERELIEF 19
SEVENTHCAUSEOFACTION-INTENTIONALINFLICTIONOFEMOTIONALDISTRESS 21
PRAYER 22
VERIFICATION 23
#:561


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INTRODUCTION
1. During the past decade, Washington Mutual Bank (WaMu) and JPMorgan
Chase Bank (Chase) abandoned traditional underwriting practices and contributed
to a frenzy of real estate speculation by issuing predatory loans that ultimately
lowered property values in the United States by 30-60%. Kerry Killinger, CEO of
Washington Mutual, took home more than $100 million during the seven years he
steered WaMu into bankruptcy. In March 2011, the FDIC filed a sixty-page
complaint against Killinger and Stephen Rotella, a former WaMU COO, alleging
gross negligence, breach of fiduciary duty, and fraudulent conveyance. FDIC v.
Kerry Killinger, Stephen Rotella, et. al., Case No. 2:11-cv-00459 USDC (WD WA
Mar. 16, 2011) .
2. WaMu issued millions of predatory loans between 2001 and 2008 with the
knowledge that borrowers, including Plaintiff, would default and lose their homes.
WaMu filled in fictitious figures on Plaintiff's loan application so that it would
meet underwriting standards and WaMu could earn fees when it sold the loan to
investors and then acted as serviver without any risk of loss when the borrower
defaulted. Such blatant, systematic, and inexcusable acts of fraud constituted a
criminal enterprise. As a direct, foreseeable result of WaMu's illegal behavior, over
a million families will lose their homes if the courts do not intervene and permit
the borrowers to conduct discovery in order to determine who owns their loans.
3. Plaintiff DARYOUSH JAVAHERI is facing illegal foreclosure of his
home at a Trustee's Sale, currently scheduled for April 26, 2011. The loan
application he submitted to Washington Mutual, attached as Exhibit 1, shows that
his loan application consisted only of his name and address and three account
numbers. The rest of the application was filled in by unknown employees of
WaMu on or about September 8, 2006, to meet underwriting standards so that
WaMu would collect fees when it sold the loan to unsuspecting investors in
mortgage-backed securities and collateralized debt obligations.
#:562


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4. Plaintiff DARYOUSH JAVAHERI is the owner of the single-family
residence located at 10809 Wellworth Avenue, Los Angeles, California 90024,
APN 4325-005-014 (the Wellworth Property). He acquired it by a Grant Deed
recorded on December 11, 2006. The legal description is:
County.
(Chase), a New York corporation licensed to do business in California, claims to
be a note holder, beneficiary, or servicer for investment trusts of a Note secured by
the Wellworth Property.
their true names and capacities are known, Plaintiff will amend this Complaint and
alleges that each of these fictitiously named defendants is legally responsible,
negligently or in some other actionable manner, for the events and happenings
hereinafter referred to and proximately thereby caused the injuries and damages to
plaintiff as hereinafter alleged, or claims some right, title, estate, lien, or interest in
the residence adverse to Plaintiffs title and their claims constitute a cloud on
Plaintiffs title to the property, or participated in unlawful or fraudulent acts that
resulted in injury to Plaintiff's person or property. Upon information and belief,
Does 1-30 claim to have become successors in interest to the Subject Mortgage by
virtue of Plaintiff's loan having been made a part of a securitization process
wherein certain residential mortgages and the promissory notes based thereon were
securitized by aggregating a large number of promissory notes into a mortgage
loan pool, then selling security interests in that pool of mortgages to investors by
#:563


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way of items called Secondary Vehicles.
Declaratory relief is authorized under 28 U.S.C. 2210.

JURY TRIAL DEMAND
8. Plaintiff demands a jury trial on all issues.

CLAIM FOR RELIEF
9. Plaintiff brings this action against JPMorgan Chase Bank, NA ("Chase")
and Does 1 through 50 for attempting to sell Plaintiff's Wellworth Property at a
trustee's sale and deprive Plaintiff of his residence without a lawful claim to the
Property. Plaintiff seeks to clear his title of Chase's claim.

BACKGROUND FACTS
10. Plaintiff is the owner of the Wellworth Property under the terms of a
Grant Deed executed by Helene Caron in favor of Daryoush Javaheri dated
October 19, 2006 (Exhibit 1).
11. To finance his purchase of the Wellworth Property, Plaintiff submitted a
loan application to Washington Mutual Bank ("WaMu") on September 8, 2006. A
copy of Plaintiff's Uniform Residential Loan Application, furnished to him by
WaMu with instructions to leave virtually all of the items blank, is attached hereto
as Exhibit 2.
12. Plaintiff purportedly signed an Adjustable Rate Note (Exhibit 3)
(hereinafter "Note") and a Deed of Trust (Exhibit 4) on November 14, 2006, at
Chicago Title Company. He was not given an opportunity to review the
documents, other than to quickly initial or sign some pages. After he signed, a
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Chicago Title Company employee informed Plaintiff that WaMu would forward
the final documents to him. Plaintiff did not receive any documents from Chicago
Title or WaMu.
13. Plaintiff is named as Borrower on the Note and on the Deed of Trust
dated November 14, 2007 ("DOT"). Washington Mutual Bank, FA is identified on
the DOT as "Lender" as well as "the beneficiary under this security agreement."
Chicago Title Company is named as Trustee.
14. Plaintiff is informed and believes that between November 15 and
November 30, 2007, WaMu transferred Plaintiff's Note to Washington Mutual
Mortgage Securities Corporation. The Note was then sold to an investment trust
and became a part of, or was subject to, a Loan Pool, a Pooling and Servicing
Agreement, a Collateralized Debt Obligation, a Mortgage-Backed Security, a
Mortgage Pass-Through Certificate, a Credit Default Swap, an Investment Trust,
and/or a Special Purpose Vehicle. The security is identified as Standard & Poor
CUSIP # 31379XQC2, Pool Number 432551. Thereafter, WaMu acted solely as a
servicer of the loan, and was neither Lender nor Beneficiary after November 2007.
15. CHASE claims to be the note holder, lender, beneficiary, and servicer
for investment trusts of the Subject Mortgage. Chase has not recorded its claim of
ownership of the purported mortgage.
16. Plaintiff is informed and believes that California Reconveyance
Company (CRC) is a wholly owned subsidiary of Chase.
17. On August 16, 2010, CRC recorded a Notice of Trustee's Sale ("NOTS")
stating that the Wellworth Property would be sold at public auction on September
7, 2010. The NOTS bears the purported signature of Deborah Brignac, Vice
President of California Reconveyance Company, as Trustee. The NOTS included
an unsigned "declaration" pursuant to Cal. Civil Code Section 2923.54 bearing the
name of Ann Thorn, First Vice President, JPMorgan Chase Bank, National
Association. Chase is identified as a servicer on the NOTS.
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FIRST CAUSE OF ACTION VIOLATION OF CAL CIV CODE 2923.5
19. On or about March 22, 2010, Chase Home Finance LLC in Jacksonville
FL mailed to Plaintiff a Notice of Collection Activity, attached hereto as Exhibit 5,
stating that Plaintiff had not made his monthly payments since November 2009. It
stated, "You may cure this default within thirty (30) days from date of letter" (sic)
and "your home loan may be eligible for a loan modification program."
20. Within 30 days, Plaintiff's lawyer, Fariba Banayan, faxed a letter to
Chase offices in Jacksonville FL, Columbus OH, and Glendale CO requesting the
bank's assistance to rectify the account. It stated, in part, "This office has been
retained to represent Daryoush Javaheri in reference to the above stated loan. All
future communications with Mr. Javaheri in this regard should be conducted
through this office. Please provide my client with the alternatives available to
him at this time regarding this loan." The letter is attached as Exhibit 6. Chase did
not respond to Mr. Banayan's timely request for assistance.
21. California Civil Code 2923.5 provides that a borrower may designate
an attorney to discuss options with the mortgagee, beneficiary, or authorized agent,
on the borrower's behalf, to avoid foreclosure. 2923.5 (a) states:
(1) A mortgagee, trustee, beneficiary, or authorized agent may not file a
notice of default pursuant to Section 2924 until 30 days after contact is
made as required by paragraph (2) or 30 days after satisfying the due
diligence requirements as described in subdivision (g).
(2) A mortgagee, beneficiary, or authorized agent shall contact the
borrower in person or by telephone in order to assess the borrower's
financial situation and explore options for the borrower to avoid
foreclosure. During the initial contact, the mortgagee, beneficiary, or
authorized agent shall advise the borrower that he or she has the right to
request a subsequent meeting and, if requested, the mortgagee, beneficiary,
or authorized agent shall schedule the meeting to occur within 14 days. The
assessment of the borrower's financial situation and discussion of options
may occur during the first contact, or at the subsequent meeting scheduled
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for that purpose. In either case, the borrower shall be provided the toll-free
telephone number made available by the United States Department of
Housing and Urban Development (HUD) to find a HUD-certified housing
counseling agency. Any meeting may occur telephonically.

22. Chase did not contact Plaintiff or Mr. Banayan, either in person or by
telephone, to discuss Plaintiff's financial condition and the impending foreclosure.
Chase did not call, it did not write, and it did not provide a toll-free HUD number
to Plaintiff or his lawyer. Chase did not offer to meet with Plaintiff or his lawyer
and did not advise them that Plaintiff had a right to request a subsequent meeting
within 14 days.
23. California Civil Code 2923.5(g) states that a notice of default may be
filed pursuant to 2924 when a mortgagee, beneficiary, or authorized agent has
not contacted a borrower provided that the failure to contact the borrower occurred
despite the due diligence of the mortgagee, beneficiary, or authorized agent. Due
diligence is defined in (g) as:
(1) A mortgagee, beneficiary, or authorized agent shall first attempt to
contact a borrower by sending a first-class letter that includes the toll-free
telephone number made available by HUD to find a HUD-certified housing
counseling agency.
(2) (A) After the letter has been sent, the mortgagee, beneficiary, or
authorized agent shall attempt to contact the borrower by telephone at least
three times at different hours and on different days. Telephone calls shall be
made to the primary telephone number on file.
(B) A mortgagee, beneficiary, or authorized agent may attempt to
contact a borrower using an automated system to dial borrowers, provided
that, if the telephone call is answered, the call is connected to a live
representative of the mortgagee, beneficiary, or authorized agent.
(C) A mortgagee, beneficiary, or authorized agent satisfies the
telephone contact requirements of this paragraph if it determines, after
attempting contact pursuant to this paragraph, that the borrower's primary
telephone number and secondary telephone number or numbers on file, if
any, have been disconnected.
(3) If the borrower does not respond within two weeks after the
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telephone call requirements of paragraph (2) have been satisfied, the
mortgagee, beneficiary, or authorized agent shall then send a certified letter,
with return receipt requested.
(4) The mortgagee, beneficiary, or authorized agent shall provide a
means for the borrower to contact it in a timely manner, including a toll-free
telephone number that will provide access to a live representative during
business hours.
(5) The mortgagee, beneficiary, or authorized agent has posted a
prominent link on the homepage of its Internet Web site, if any, to the
following information:
(A) Options that may be available to borrowers who are unable to
afford their mortgage payments and who wish to avoid foreclosure, and
instructions to borrowers advising them on steps to take to explore those
options.
(B) A list of financial documents borrowers should collect and be
prepared to present to the mortgagee, beneficiary, or authorized agent when
discussing options for avoiding foreclosure.
(C) A toll-free telephone number for borrowers who wish to discuss
options for avoiding foreclosure with their mortgagee, beneficiary, or
authorized agent.
(D) The toll-free telephone number made available by HUD to find a
HUD-certified housing counseling agency.

24. Chase did none of the above. Chase Fulfillment Center sent Plaintiff a
"Request Disqualification" on September 1, 2010, attached as Exhibit 7. It said,
"Unfortunately, because your initial request was less than seven (7) business days
from the date of the scheduled foreclosure sale on your home, you are no longer
eligible under Making Home Affordable ("MHA") Program guidelines." A second
copy was sent on September 7.
25. Chase and CRC recorded a Notice of Default against the Wellworth
Property in the Los Angeles County Recorder's Office on May 14, 2010 (Exhibit
9). Attached to the NOD was a Declaration of Compliance with Cal. Civil Code
2923.5 certified under penalty of perjury by Renee Daniels on behalf of Chase.
She checked off a box that read, "The mortgagee, beneficiary or authorized agent
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tried with due diligence but was unable to contact the borrower to discuss the
borrower's financial situation and to explore options for the borrower to avoid
foreclosure as required by Cal. Civ. Code Section 2923.5. Thirty days or more
have elapsed since these due diligence efforts were completed."
26. Renee Daniels either misrepresented the facts, if and when she signed
the declaration, or she did not have personal knowledge of the matters described in
her declaration when she asserted that Chase attempted to contact Plaintiff as
required by 2923.5. Since the contacts required by 2923.5 did not occur, the
foreclosure is illegal.

SECOND CAUSE OF ACTION WRONGFUL FORECLOSURE
28. Soon after WaMu originated the loan, Plaintiff is informed and believes
that WaMu transferred all beneficial interest in the loan to a private investor.
29. Neither WaMu, Chicago Title, CRC, nor Chase has recorded a transfer
of beneficial interest in the Note to Chase.
beneficiary under the Note. Chase does not claim to be a holder of the Note or a
beneficiary. Chase describes itself as a loan servicer in the Notice of Trustee's Sale.
If Chase can prove that it is a servicer, Chase cannot foreclose on Plaintiff's
property without authorization from the Lender under the terms of the Deed of
Trust.
31. Plaintiff is informed and believes that Chase cannot produce an original
Note. Chase does not own the loan and cannot identify the owner of the loan.
Chase did not purchase the loan when it took over WaMu in September 2008
because WaMu had sold its beneficial interest in the loan two years earlier.
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32. A power of sale is conferred by the mortgage under Cal. Civ. Code
2924. The Adjustable Rate Note attached as Exhibit 3 states, "Lender or anyone
who takes this Note by transfer and who is entitled to receive payments under this
Note is called the "Note Holder." The Note states in paragraph 7(C): "Notice of
Default. If I am in default, the Note Holder may send me a written notice telling
me that if I do not pay the overdue amount by a certain date, the Note Holder may
require me to pay immediately the full amount." The Note gives the right to
collect, if timely payments are not made, to the Lender and anyone who takes the
Note by transfer. This does not include a servicer who is not the Note Holder.
33. According to Plaintiff's Deed of Trust, the "Lender" is WASHINGTON
MUTUAL BANK, FA, and the "Trustee" is Chicago Title Company.
Consistent with the language of the Note, only the Lender is authorized
under paragraph 22 of the DOT to accelerate the loan:
"Lender shall give notice to Borrower prior to acceleration
following Borrower's breach of any covenant of agreement in this
Security Instrument
"If Lender invokes the power of sale, Lender shall execute or
cause Trustee to execute a written notice of the occurrence of an event
of default and of Lender's election to cause the Property to be sold.
Trustee shall cause this notice to be recorded in each county in which
any part of the Property is located." (DOT page 13, paragraph 22).
34. Washington Mutual Bank remained the Lender for no more than a few
days until it sold the loan. Thereafter, it was a servicer of the loan. The Note
Holder or Lender was the Investment Trust or that funded the loan.
35. Paragraph 24 of the DOT (Plaintiff's Exhibit 4) states:
office of the Recorder of the county in which the property is located.
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The instrument shall contain the name of the original Lender, Trustee
and Borrower, the book and page where this Security Instrument is
recorded and the name and address of the successor trustee. Without
reconveyance of the property, the successor trustee shall succeed to all
the title, powers and duties conferred upon the Trustee herein and by
Applicable Law. This procedure for substitution of trustee shall govern
to the exclusion of all other provisions for substitution.
Chase seeks to proceed with foreclosure of Plaintiff's property even though
it cannot identify the Lender and therefore is incapable of substituting the Trustee.
36. On May 3, 2010, eRC recorded a Substitution of Trustee (Exhibit 8)
signed by Deborah Brignac, Vice President of JPMorgan Chase Bank. The
signature of Deborah Brignac on the Substitution of Trustee does not resemble the
signature of Deborah Brignac, Vice President of California Reconveyance
Company on the Notice of Trustee's Sale (Exhibit 10). It is a forgery.
37. The Substitution of Trustee purports to substitute CRC as Trustee in
14 place of Chicago Title. Brignac's forged signature is acknowledged by Loren
15 Lopez, a California Notary Public. It is not remotely similar to the Deborah
16 Brignac signatures appearing on the recorded documents attached hereto as
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Exhibits 11, 12, 13, and 14.
Association successor in interest to Wasbington Mutual Bank, FA
Deborah Brignac, Vice Pt t
I I
/
STATE OF CAUFORNtA
COUNTY OF LOS ANGELES
Substitution of Trustee,
08-16-2010

Exhibit 8 - recorded on May 3, 2010)
. .. .
SEE EXHIBIT
CALIFORNIA RECONVEYANCE COMPANY
- 12 -
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Courts are putting a stop to the epidemic of forgery and robo-signing that
infected the banking industry during the past ten years. Deborah Brignac's diverse
signatures and Loren Lopez's acknowledgment of them are fraudulent and illegal.
38. On May 14, 2010, CRC recorded a Notice of Default ("NOD"), attached
hereto as Exhibit 9, describing the Wellworth Property with instructions that
Plaintiff contact JPMORGAN CHASE BANK, NATIONAL ASSOCIATION to
stop the foreclosure. The NOD was signed by Silvia Freeberg, Assistant Secretary.
The "Declaration of Compliance (Cal Civil Code Section 2923.5(b)" attached to
the NOD was signed under penalty of perjury by Renee Daniels on behalf of
JPMorgan Chase Bank, National Association. Chase is described in the
Declaration of Compliance as "The undersigned mortgagee, beneficiary or
authorized agent." Washington Mutual is described in the body of the NOD as
beneficiary. However, Chase's interest, if any, was acquired from WaMu in
September 2008, and WaMu's beneficial interest had terminated when WaMu sold
the Note to investors in 2006.
39. Chase was not the beneficiary and Brignac had no authority to act on
behalf of the beneficiary when someone forged her signature to the Substitution of
Trustee. The Substitution of Trustee was unauthorized and fraudulent, so CRC was
not authorized to initiate foreclosure against Plaintiff on May 14, 2010, when it
recorded the Notice of Default, and it was not acting for the Lender when it filed
the Notice of Trustee's Sale on August 16, 2010.

THIRD CAUSE OF ACTION QUASI CONTRACT
41. Chase demanded monthly mortgage payments from Plaintiff starting in
October 2008, and continued to collect payments from Plaintiff for twelve months.
Plaintiff reasonably relied upon Chase's assertion that it was entitled to payments
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for the reason that it had acquired certain assets from WaMu under an agreement
with the FDIC.
42. Chase knowingly accepted the payments and retained them for its own
use knowing that WaMu was not a beneficiary under Plaintiff's Note on the date
that its assets were transferred to Chase and therefore Chase did not acquire any
right from WaMu to accept or keep Plaintiff's payments. It would be inequitable
for Chase to retain the payments it received from Plaintiff. The equitable remedy
of restitution when unjust enrichment has occurred is an obligation created by the
law without regard to the intention of the parties, and is designed to restore the
aggrieved party to his or her former position by return of the thing or its equivalent
in money.
43. The DOT states in Paragraph 23: "Upon payment of all sums secured
by this Security Instrument, Lender shall request Trustee to reconvey the Property
and shall surrender this Security Instrument and all notes evidencing debt secured
by this Security Instrument to Trustee." The obligations to WaMu under the DOT
were fulfilled when WaMu received the balance on the Note as proceeds of sale
through securitization to private investors. Chase has been unjustly enriched by
collecting monthly payments from Plaintiff.
44. Plaintiff seeks restitution for any payments he made to Chase that were
not paid to the lender or beneficiary, if any.

FOURTH CAUSE OF ACTION - NO CONTRACT
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Residential Loan Application to WaMu that contained only his basic identifying
information, such as name, address, phone number, social security number, and
bank account number. WaMu employees filled out the application.
mortgage. Immediately after he signed the Note, WaMu transferred all of its
interest in the Note to an investment bank that bundled Plaintiff's Note with
numerous other residential mortgages into residential mortgage-backed securities
("RMBS") which were structured into synthetic collateralized debt obligations
("CDOs") and sold to investors in Pool Number 432551 identified in Standard &
Poor's registry as CUSIP # 31379XQC2.
49. Plaintiff is informed and believes that the investment bank intended to
short the portfolio it helped to select by entering into credit default swaps to buy
protection against the certain event that the promissory notes would default. WaMu
expected that Plaintiff would not have the ability to repay the loan. It was not a
matter of being unconcerned with the possible outcome that Plaintiff would
default; WaMu expected he would default.
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the common law is a meeting of the minds. Two or more parties must share some
Plaintiff and WaMu.
Wellworth Property through foreclosure, WaMu anticipated transferring the Note
to investors immediately after Plaintiff signed the Note. Plaintiff is informed and
believes that WaMu purchased credit default insurance so that WaMu would
receive the balance on the Note when Plaintiff defaulted, in addition to any money
WaMu received when it securitized the Note.
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25, 2008.
loan and has no right to foreclose on his Wellworth Property. Plaintiff does not
seek rescission of the contract. He alleges that the contract was void ab initio.

FIFTH CAUSE OF ACTION - QUIET TITLE
in the Wellworth Property as of the date the Complaint was filed (Cal Code Civil
Procedure 760.020)
61. Plaintiff is the titleholder of the Wellworth Property according to the
terms of the Grant Deed recorded on December 11, 2006.
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///
63. The DOT does not state that Plaintiff must pay all sums, only that all
secured sums must be paid. Plaintiff alleges that the obligations owed to WaMu
under the DOT were fulfilled and the loan was fully paid when WaMu received
funds in excess of the balance on the Note as proceeds of sale through
and believes that none of the defendants is a holder of the Note, none of them can
prove any interest in the Note, and none of them can prove that the Note is secured
by the DOT, as well as for the reasons set forth in the preceding causes of action.
As such, Defendants have no right, title, lien, or interest in the Wellworth Property.
65. Plaintiff therefore seeks a judicial declaration that the title to the
Wellworth Property is vested solely in Plaintiff and that Defendants have no right,
title, estate, lien, or interest in the Property and that Defendants and each of them
be forever enjoined from asserting any right, title, lien or interest in the Property
adverse to Plaintiff.

SIXTH CAUSE OF ACTION - DECLARATORY & INJUNCTIVE RELIEF
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Wellworth Property because they are not a beneficiary or authorized agent of
beneficiaries under the purported Note. However, Defendants assert that they are
entitled to sell the Property.
3, 2010, which purports to substitute CRC in place of Chicago Title Co. as Trustee
under the Deed of Trust dated 11-14-2007, was subscribed with a forged signature
of Deborah Brignac and fraudulently acknowledged, and therefore CRC is not a
trustee authorized to file a Notice of Default or a Notice of Trustee's Sale on the
Wellworth Property. However, Defendants contend that CRC is a trustee duly
authorized to file said Notices.
validity of the Note and DOT, and Defendants' rights to proceed with nonjudicial
foreclosure on the Wellworth Property. Unless restrained, Defendants will sell
Plaintiffs residence, or cause it to be sold, to Plaintiffs great and irreparable
injury, for which pecuniary compensation would not afford adequate relief.
significantly outweighs the benefit to Defendants, and each of them. By contrast,
if the foreclosure sale is enjoined, the burden to defendants is minimal and is not
outweighed by the benefit to Plaintiff.
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his injuries.

SEVENTH CAUSE OF ACTION - INTENTIONAL INFLICTION OF
EMOTIONAL DISTRESS
73. Between October 2008 and November 2009 Chase cashed Plaintiff's
monthly checks and kept the money when a cursory review of WaMu's records,
under Chase's control, would have revealed that Chase had no right to keep the
money. When Plaintiff stopped paying, Chase notified Plaintiff in 2010 that it
would take his family homea house that he had built himself. There was no
signature or name on Chase's correspondence, so Plaintiff cannot identify the
authors prior to commencement of discovery.
74. In March 2010, Plaintiff hired a lawyer to negotiate with Chase and
explore options to foreclosure. Chase ignored his lawyer's letters, which were
faxed to Chase's offices in three states.
75. Knowing that it was a servicer, not a beneficiary or lender of Plaintiff's
loan, Chase pretended to transfer the deed of trust to its subsidiary, CRC, on April
30, 2010, so CRC could record a fraudulent Notice of Default on May 14, 2010.
Plaintiff.
each of them, Plaintiff has suffered severe emotional distress in the amount of
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$5,000,000.00.
///
PRAYER
WHEREFORE, Plaintiff requests judgment as follows:
1. That this court issue an Order to Show Cause and, after a hearing, issue a
Temporary Restraining Order and Preliminary Injunction restraining Defendants,
and each of them, during the pendency of this action, from continuing with their
efforts to conduct a Trustee's Sale of the Wellworth Property.
2. That the attempted foreclosure of the Wellworth Property be declared illegal
and that Defendants be forever enjoined and restrained from selling the Property or
attempting to sell it or causing it to be sold, either under power of sale pursuant to
trust deed or by foreclosure action, and from posting, publishing, or recording any
notice of default or notice of trustee's sale contrary to state or federal law.
3. That the underlying loan transaction be declared void as a result of
Defendants' and WaMu's misrepresentations, fraud, concealment, and predatory
loan practices.
4. That Defendants make restitution to Plaintiff according to proof.
5. For a judgment determining that Plaintiff is the owner in fee simple of the
Wellworth Property against the adverse claims of Defendants and that Defendants
have no interest in the subject property adverse to Plaintiff.
6. For damages in an amount of $5,000,000.00.
6. For costs of suit and reasonable attorney fees.
7. For any and all other and further relief that may be just in this matter.

Date: April 11, 2011 ______________________________
Douglas Gillies, Attorney for Plaintiff

#:581
#:582
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4 Daryoush lavaheri declares:
VERIFICATION
5 I am the plaintiff in the above-entitled action. I have read the foregoing Second
6 Amended Complaint and know its contents. The same is true of my own
7 knowledge, except as to those matters that are alleged on information and belief,
8 and as to those matters, I believe them to be true. I declare under penalty of perjury
9 that the foregoing is true and correct, and that this declaration was executed in Los
10 Angeles, California, on Apri112, 2011.
11 /// /:1'" t /.
12 ~ ~ n / ~ ~ .....
13 D a r y ~ ~
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PLAINTIFF'S EXHIBITS

Exhibit Description

1 Grant Deed recorded 12/11/2006

2 Uniform Residential Loan Application 9/8/2006

3 Adjustable Rate Note 11/14/2007

4 Deed of Trust 11/14/2007

5 Notice of Collection Activity 3/22/2010

6 Attorney Fariba Banayan's fax to Chase 4/19/2010

7 Request Disqualification (Chase) 9/1/2010 and 9/7/2010

8 Substitution of Trustee 4/30/2010

9 Notice of Default 5/14/2010

10 Notice of Trustee's Sale 8/16/2010

11-14 Deborah Brignac's signatures 10/2/2009 9/29/2010

#:583

EXHIBIT 1
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EXHIBIT 2
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EXHIBIT 3
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#:600
#:601

EXHIBIT 4
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#:603
#:604
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#:609
#:610
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#:612
#:613
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#:615
#:616
#:617
#:618

EXHIBIT 5
#:619
#:620
#:621

EXHIBIT 6
#:622
#:623
#:624

EXHIBIT 7
#:625
#:626
#:627

EXHIBIT 8
#:628
#:629
#:630

EXHIBIT 9
#:631
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#:633
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#:635

EXHIBIT 10
#:636
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EXHIBIT 11
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#:645

EXHIBIT 12
#:646
#:647
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#:650

EXHIBIT 13
#:651
#:652
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#:654
#:655

EXHIBIT 14
#:656
#:657
#:658
#:659
#:660
#:660

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A
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THEODORE E. BACON (CA Bar No. 115395)
tbacon@AlvaradoSmith.com
SCOTT J. STILMAN (CA Bar No. 120239)
sstilman@AlvaradoSmith.com
FRANCES Q. JETT (CA Bar No. 175612)
fjett@AlvaradoSmith.com
ALVARADOSMITH
A Professional Corporation
633 W. 5
th
Street, Suite 1100
Los Angeles, California 90071
Tel: (213) 229-2400
Fax: (213) 229-2499

Attorneys for Defendant
JPMORGAN CHASE BANK, N.A.,


CENTRAL DISTRICT OF CALIFORNIA, WESTERN DIVISION

DARYOUSH JAVAHERI,

Plaintiff,

v.

COMPANY and DOES 1-150, inclusive,

Defendant.

CASE NO.: CV-10-8185 ODW (FFMx)

JUDGE: Hon. Otis D. Wright II

NOTICE OF MOTION AND
MOTION BY DEFENDANT
JPMORGAN BANK, N.A.,
TO DISMISS PLAINTIFFS SECOND
AMENDED COMPLAINT

{Request for Judicial Notice Efiled and
Proposed Order Submitted Concurrently
Herewith}

Courtroom: 11
DATE: June 6, 2011
TIME: 1:30 P.M.

Trial Date: None Set
Action Filed: October 29, 2010

TO ALL PARTIES AND THEIR RESPECTIVE ATTORNEYS OF RECORD:
NOTICE IS GIVEN that on June 6, 2011, at 1:30 P.M., in Courtroom 11, of
the above-entitled court located at 312 N. Spring Street, Los Angeles, California
90012, Defendant JPMorgan Chase Bank, N.A., (JPMorgan) will move the Court to
dismiss the action without leave to amend, pursuant to Federal Rule of Civil

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Procedure (FRCP) 12(b)(6) on the grounds that the Second Amended Complaint of
plaintiff Daryoush Javaheri (Plaintiff) fails to state a claim upon which relief can be
granted. This motion is based on the following grounds:
1. The first cause of action for Violation of California Civil Code 2923.5
fails to state facts sufficient to constitute a claim for relief pursuant to FRCP 12(b)(6).
2. The second cause of action for Wrongful Foreclosure fails to state
facts sufficient to constitute a claim for relief pursuant to FRCP 12(b)(6).
3. The third cause of action for Quasi Contract fails to state facts sufficient
to constitute a claim for relief pursuant to FRCP 12(b)(6).
4. The fourth cause of action for No Contract fails to state facts sufficient
to constitute a claim for relief pursuant to FRCP 12(b)(6).
5. The fifth cause of action for Quiet Title fails to state facts sufficient to
constitute a claim for relief pursuant to FRCP 12(b)(6).
6. The sixth cause of action for Declaratory and Injunctive Relief fails to
state facts sufficient to constitute a claim for relief pursuant to FRCP 12(b)(6).
7. The seventh cause of action for Intentional Infliction of Emotional
Distress fails to state facts sufficient to constitute a claim for relief pursuant to FRCP
12(b)(6).
The motion will be based on this Notice of Motion, the Memorandum of Points
and Authorities, the Request for Judicial Notice, and the pleadings and papers filed.
///
///
///
///
///
///
///
///

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Counsel for JPMorgan met and conferred with Plaintiffs counsel on April
21, 2011, via letter. Therefore, Defendant has met the requirements of Local Rule 7-
3. See, Local Rule 7-3.

DATED: April 28, 2011

ALVARADOSMITH

By: /s/ Frances Q. Jett
THEODORE E. BACON
SCOTT J. STILMAN
FRANCES Q. JETT
JPMORGAN CHASE BANK, N.A.

TABLE OF CONTENTS
Page

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MEMORANDUM OF POINTS AND AUTHORITIES ............................................ 1
I. SUMMARY OF ARGUMENT ....................................................................... 1
II. SUMMARY OF FACTS ................................................................................. 2
III. STANDARD FOR A MOTION TO DISMISS .............................................. 3
IV. PLAINTIFFS FIRST, SECOND, AND FIFTH CLAIMS FAIL SINCE
JPMORGAN HAD THE RIGHT TO FORECLOSE AND COMPLIED
WITH STATE LAW ....................................................................................... 4
A. JPMorgan Acquired the Loan from the FDIC ...................................... 4
B. JPMorgan Complied with State Law .................................................... 5
V. THERE IS NO LEGAL BASIS FOR THE THIRD CLAIM OF QUASI
CONTRACT .................................................................................................. 7
VI. THERE IS NO CLAIM ALLEGED FOR NO CONTRACT ...................... 8
VII. THERE IS NO BASIS FOR EQUITABLE RELIEF...................................... 9
VIII. PLAINTIFF FAILS TO PLEAD OUTRAGEOUS CONDUCT .................. 10
IX. CONCLUSION ............................................................................................. 11

TABLE OF AUTHORITIES
Page

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Federal Cases
Bell Atlantic Corp. v. Twombly,
127 S.Ct. 1955 (2007) ................................................................................................. 3
Bustamante v. First Fed. Sav. & Loan Assn,
619 F.2d 360, 365 (5th Cir. 1980)............................................................................... 8
In re Wepsic,
231 B.R. 768 (S.D. Cal. 1998) .................................................................................... 8
Lee v. City of Los Angeles,
250 F.3d 668 (9th Cir. 2001) ....................................................................................... 3
MGIC Indem. Corp. v. Weisman,
803 F. 2d 500 (9th Cir. 1986) ...................................................................................... 3
Molina v. Wash. Mut. Bank,
2010 U.S. Dis. LEXIS 8056 (W.D. Cal. Jan. 29, 2010) ............................................. 3
Wietschner v. Monterey Pasta Co.,
294 F. Supp. 2d 1117 (N.D. Cal. 2003) ...................................................................... 3
Yamamoto v. Bank of New York,
329 F.3d 1167 (9th Cir. 2003) ................................................................................. 8, 9
Federal Rules
Federal Rule Civil Procedure 12(b)(6) ................................................................... 1, 2, 3
Federal Rule of Civil Procedure 9(b) .............................................................................. 8
Federal Rule of Evidence 201(d) .................................................................................... 3
State Cases
Adler v. Sargent
109 Cal. 42 (1895) ....................................................................................................... 6
Alturas v. Gloster,
16 Cal.2d 46 (1940)..................................................................................................... 9
Bachis v. State Farm Mutual Auto. Ins. Co.,
265 Cal.App.2d 722 (1968) ........................................................................................ 9
Cardellini v. Casey,
181 Cal.App.3d 389 (1986) ......................................................................................... 9
Christensen v. Superior Court,
54 Cal.3d 868 (1991) ................................................................................................ 10
Davidson v. City of Westminster,
32 Cal.3d 197 (1982) ................................................................................................ 10

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Jogani v. Superior Court of Los Angeles County,
165 Cal. App. 4
th
901 (2008) ....................................................................................... 7
KORV-TV, Inc. v. Sup. Ct.,
31 Cal.App.4th 1023 (1995) ..................................................................................... 10
Kruse v. Bank of America,
202 Cal.App.3d 38 (1988) ......................................................................................... 11
Mabry v. Superior Court,
185 Cal.App.4th 208 (2010) ....................................................................................... 5
Melchior v. New Line Productions, Inc.,
206 Cal. App. 4th, 779 (2003) .................................................................................... 8
Ricard v. Pacific Indemnity Co.,
132 Cal.App.3d 886 (1982) ....................................................................................... 10
Santens v. Los Angeles Finance Co.
91 Cal.App.2d 197 (1949) ........................................................................................... 6
Tiburon v. Northwestern Pacific Railroad Co.,
4 Cal.App.3d 160 (1970) ............................................................................................. 9
Trerice v. Blue Cross of California,
209 Cal.App.3d 878 (1989) ....................................................................................... 11
State Statutes
Civil Code 1216 ........................................................................................................... 7
Civil Code 2924(a)(1) .................................................................................................. 5
Civil Code 2924b(b)(4) ................................................................................................ 5
Civil Code 2934 ........................................................................................................... 6
Civil Code 2923.5 .......................................................................................................... 5

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MEMORANDUM OF POINTS AND AUTHORITIES
I. SUMMARY OF ARGUMENT
On March 24, 2011, this Court granted defendant JPMorgan Chase Bank,
N.A.s (JPMorgan or Defendant) Motion to Dismiss Plaintiff Daryoush Javaheris
First Amended Complaint (FAC) as to all claims with leave to amend. In so doing,
the Court specifically addressed the deficiencies in each and every of Plaintiffs
claims.
Plaintiff has now filed a Second Amended Complaint (SAC) which not only
fails to cure any of the deficiencies in the FAC, but also succeeds in creating a whole
new set of deficiencies.
Plaintiffs SAC against defendant JPMorgan Chase Bank, N.A., fails primarily
because JPMorgan is not the same entity as Washington Mutual Bank (WaMu) and
did not assume its liabilities when it acquired WaMus assets from the Federal Deposit
Insurance Corporation (FDIC).
The crux of Plaintiffs entire SAC remains that he believes he is entitled to
rescind a $2.6 million loan he received from WaMu on or about November 14, 2007,
to refinance a house located at 10809 Wellworth, Los Angeles California, (Subject
Property) without having to tender anything back to the lender because of the alleged
bad acts of the WaMu at the loan origination, because of alleged discrepancies in the
acquisition of the loan by JPMorgan from the FDIC, and due to alleged improprieties
in the non-judicial foreclosure process. Plaintiffs SAC fails simply because it does
not establish any facts to support his claims and is not supported by the law.
In particular, Plaintiffs first and second claim for wrongful foreclosure, as well
as the fifth claim for quiet title, allege that Defendants have no right to foreclose,
because they do not own the note, but as the SAC itself alleges and the documents
attached to Defendants Request for Judicial Notice (RJN) confirm, JPMorgan
acquired the Loan from the FDIC when the FDIC was appointed receiver for WaMu.
///

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Exhibit 2 to the FAC also shows full compliance by Defendants with California Civil
Code 2923.5.
The third claim for quasi contract is not a legal claim. The fourth claim of
No Contract claim is essentially a rescission claim which fails, because there is no
mistake or fraud alleged and no offer to restore the consideration Plaintiff obtained.
The sixth claim for declaratory and injunctive relief mirrors the prior claims and fails
for the reasons set forth above. The seventh claim for intentional infliction of
emotional distress fails to allege virtually all the elements of that claim.
Accordingly, as none of Plaintiffs claims against JPMorgan are properly pled
and cannot be amended, the SAC must be dismissed.
II. SUMMARY OF FACTS
Plaintiff obtained a mortgage loan in the amount of $2,660.000.00 (Loan)
secured by a Deed of Trust (DOT) encumbering the Subject Property. SAC, 12,
13, Exhibits 3, 4. The DOT was recorded on or about November 30, 2007, with the
Los Angeles County Recorders Office as instrument number 20072634177. The
DOT identifies Washington Mutual Bank, FA (WaMu) as the lender beneficiary,
and the FAC confirms California Reconveyance Company (CRC) is the current
trustee of the DOT. SAC, 13, Exhibit 4.
The Office of Thrift Supervision (OTS) assumed control of WaMu on
September 25, 2008. RJN, Exhibit A. On that same day, JPMorgan acquired
WaMus banking operations from the FDIC, including the interest in the Loan on the
Subject Property, under the Purchase and Assumption Agreement (P&A
Agreement) between the FDIC and JPMorgan dated September 25, 2008. See RJN,
Exhibit B.
Plaintiff failed to comply with the Loan obligations and Notice of Default was
recorded May 14, 2010, and confirms that $141,558.18 is in arrears. Exhibit 9. The
SAC does not deny this amount is due and owing as of May 13, 2010. On August 16,
///

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2010, a Notice of Trustees sale was recorded with the Los Angeles County
Recorders Office. SAC, 17, Exhibit 10.
III. STANDARD FOR A MOTION TO DISMISS
A motion to dismiss under FRCP 12(b)(6) may be brought when a plaintiff fails
to state a claim upon which relief can be granted. While a complaint attacked by a
FRCP 12(b)(6) motion to dismiss does not need detailed factual allegations, a
plaintiffs obligation to provide the grounds of his entitlement to relief requires more
than labels and conclusions, and a formulaic recitation of a cause of actions elements
will not do. Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1959 (2007). Factual
allegations must be enough to raise a right to relief above the speculative level on the
assumption that all of the complaints allegations are true. Id.
On a motion to dismiss, a court may take judicial notice of matters of public
record in accordance with Federal Rules of Evidence (FRE) 201 without converting
the motion to dismiss to a motion for summary judgment. Lee v. City of Los Angeles,
250 F.3d 668, 688-689 (9th Cir. 2001) (citing Mack v. South Bay Beer Distributors,
Inc., 798 F.2d 1279, 1282 (9th Cir. 1986)). Courts may take judicial notice of
documents outside of the complaint that are capable of accurate and ready
determination by resort to sources whose accuracy cannot reasonably be questioned.
FRE 201(d); Wietschner v. Monterey Pasta Co., 294 F. Supp. 2d 1117, 1109 (N.D.
Cal. 2003). Courts can take judicial notice of such matters when considering a motion
to dismiss. Id.; MGIC Indem. Corp. v. Weisman, 803 F. 2d 500, 504 (9th Cir. 1986).
The Court may take judicial notice of a matter that is data stored on-line at a federal
agencys website. See Molina v. Wash. Mut. Bank, 2010 U.S. Dis. LEXIS 8056
(W.D. Cal. Jan. 29, 2010) (taking judicial notice of data on web sites of federal
agencies).
///
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IV. PLAINTIFFS FIRST, SECOND, AND FIFTH CLAIMS FAIL SINCE
WITH STATE LAW
A. JPMorgan Acquired the Loan from the FDIC
JPMorgan obtained its rights under the Loan from the FDIC. See RJN, Exhibit
B, Complaint 2. In his SAC Plaintiff continues to assert that JPMorgan has not
recorded its claim of ownership of the purported mortgage and does not have
standing to enforce the Note because Chase is not the owner of the Note, Chase is not
the holder of the Note, and Chase is not a beneficiary under the Note. SAC, 15,
30. However, this is contrary to the Courts specific ruling on the Motion to the
Dismiss the FAC whereby the Court specifically noted that the transfer of interest to
JPMorgan, however, is evidenced in documents of which the Court has already taken
judicial notice namely, the OTS Order and P&A Agreement. RJN, Exhibit C, p. 3.
Further this Court has already found that Plaintiffs claims based on the allegation
that JPMorgan does not own he note are without merit. RJN, Exhibit C, p. 4. This
confirms that JPMorgan had the right to foreclose on default and had the right to
appoint CRC as the trustee in commencing foreclosure.
The facts alleged in this case and those subject to judicial notice establish that
the Loan was an asset of WaMu when the P&A Agreement went into effect on
September 25, 2008. See, e.g., RJN, Exhibit B. Consequently, the Loan was one of
the deeds and mortgages that was assigned, transferred, conveyed and delivered
to JPMorgan pursuant to the P&A Agreement. JPMorgans rights under the DOT
derives from the terms and conditions of the P&A Agreement with the FDIC, which
transferred to JPMorgan the ownership of the beneficial and servicing rights, and all
other interests that WaMu owned and possessed on September 25, 2008. Id. Thus,
JPMorgans power to exercise the power of sale under the DOT derives from the P&A
Agreement with the FDIC acting as receiver and pursuant to its federal powers.
///
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Accordingly, JPMorgan properly acquired the rights to the DOT from the FDIC
when WaMu was placed into receivership, so the claim that Defendant does not have
the right to foreclose is without merit.
B. JPMorgan Complied with State Law
As to the alleged violations of California Civil Code 2923.5, the law is clear
that foreclosure can be commenced by the trustee, mortgagee or beneficiary or any of
their authorized agents and a person authorized to record the notice of default or the
notice of sale. (See California Civil Code 2924(a)(1) and 2924b(b)(4).)
Plaintiff continues to claim that JPMorgan violated 2923.5, because the person
who signed the declaration attesting to compliance with 2923.5 did not have personal
knowledge of the facts. SAC, 26. However, again, the Court has already addressed
this allegation and found that nothing in this statute requires that a declaration be
signed by a person with personal knowledge. RJN, Exhibit C, pp.4-5. Moreover,
Mabry v. Superior Court, 185 Cal.App.4th 208 (2010) makes it clear that 2923.5 does
not require one individual having personal knowledge of all facts in the declaration:
And, finally-back to our point about the inherent individual operation
of the statute-the very structure of subdivision (b) belies any insertion
of a penalty of perjury requirement. The way section 2923.5 is set up;
too many people are necessarily involved in the process for any one
person to likely be in the position where he or she could swear that all
three requirements of the declaration required by subdivision (b) were
met. We note, for example, that subdivision (a)(2) requires any one of
three entities (a mortgagee, beneficiary, or authorized agent) to
contact the borrower, and such entities may employ different people
for that purpose. And the option under the statute of no contact being
required (per subdivision (h)
FN18
) further involves individuals who
would, in any commercial operation, probably be different from the
people employed to do the contacting. For example, the person who
would know that the borrower had surrendered the keys would in all
likelihood be a different person than the legal officer who would
know that the borrower had filed for bankruptcy. Id, 234, 110 Cal.
Rptr. 3d 201, 220.

In an obvious last ditch effort to salvage his claims of wrongful foreclosure,
Plaintiff tries something new in his SAC by asserting that the Substitution of Trustee
was forged and therefore cannot be used to facilitate the subject foreclosure. SAC,
36-39.
#:671

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First and foremost, the so-called exhibits Plaintiff has attached to his SAC as
evidence that Ms. Brignacs signature is forged have nothing whatsoever to do with
Plaintiff or the subject Loan. See, Exhibits 11, 12, 13 to SAC. These exhibits clearly
concern entirely different properties and loans and have no relevance whatsoever to
the claims at issue. Moreover, the signatures which Plaintiff has cited examples of the
so-called forgery each clearly have initials of someone other than Ms. Brignac after
the signature indicating that there was no actual forgery involved, but rather as
clearly indicated, that these (irrelevant) documents were signed with Ms. Brignacs
authority.
Accordingly, Plaintiffs effort to salvage his claim clearly fails.
Finally, Plaintiffs insistence that JPMorgan does not have standing to enforce
the DOT, because there is no recorded assignment, is without any legal support. Any
assignment of a deed of trust may be recorded, but it is not required to be recorded in
order to provide constructive notice of the contents of the deed of trust. See California
Civil Code 2934 and Santens v. Los Angeles Finance Co., 91 Cal.App.2d 197, 201-
202 (1949) :
Defendant argues that since the assignment of the note and trust deed to
Graham was not recorded that defendant was a bona fide purchaser at the
execution sale and is not bound by the assignment. He relies on the
provision of section 2934 of the Civil Code that any assignment of the
beneficial interest under a deed of trust may be recorded, and from the
time the same is filed for record operates as constructive notice of the
contents thereof to all persons. We see nothing in the wording of the
section which would operate to defeat the title to Graham of the note
and trust deed as the transfer of the note carried with it the security
and the trust deed is a mere incident of the debt and could only be
foreclosed by the owner of the note. Santens, supra 91 Cal.App.2d at
201-202.

(Emphasis added.) See also Adler v. Sargent, 109 Cal. 42 (1895) .
///
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#:672

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(In a case where neither the note nor deed of trust had been recorded by the true
assignee, California Supreme Court held that a mortgage, being a mere incident to the
debt, belongs to the holder of the collateral note, and can be foreclosed only by him.)
1

Accordingly, even in the absence of a recorded assignment and/or substitution
of trustee, Plaintiffs wrongful foreclosure claims fail.
In short, the first, second and fifth claims have no merit and should be
dismissed.
V. THERE IS NO LEGAL BASIS FOR THE THIRD CLAIM OF QUASI
CONTRACT
Plaintiff has amended his FAC in part by replacing his previously dismissed
claim for restitution with a claim for quasi contract. However, the end result
sought by Plaintiff in this new claim remains the same restitution. SAC, 44.
In fact, Plaintiff asserts that the equitable remedy of restitution when unjust
enrichment has occurred in an obligation created by the law without regard to the
intention of the parties. SAC, 42. Plaintiffs third claim for quasi contract is
essentially a claim for unjust enrichment and as such it fails because unjust
enrichment is not a cause of action. Jogani v. Superior Court of Los Angeles County,
165 Cal. App. 4
th
901, 911(2008), citing Melchior v. New Line Productions, Inc., 106
Cal. App. 4
th
779, 793 (2003) ([T]here is no cause of action in California for unjust
enrichment.). Unjust enrichment is a general principle, underlying various legal
doctrines and remedies, rather than a remedy itself. Melchior v. New Line

1
Generally, only certain documents have no legal effect until recorded. See, for
example, California Civil Code 1216, which requires that revocation of a power of
attorney to convey or execute instruments must be recorded to be effective: No
power contained in an instrument to convey or execute instruments affecting real
property which has been recorded is revoked by any act of the party by whom it was
executed, unless the instrument containing such revocation is also acknowledged or
proved, certified and recorded, in the same office in which the instrument containing
the power was recorded.

#:673

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Productions, Inc., 206 Cal. App. 4
th
779, 793 (2003) , citing Dinosaur Development,
Inc. v. White, 216 Cal. App. 3d 1310, 1315 (1989) (internal citations omitted). Even if
it were a claim, Plaintiff pleads no facts indicating how JPMorgans mere receipt of
payments from Plaintiff on the Subject Loan a debt he voluntarily incurred is
somehow unjust. Additionally, Plaintiff does not and cannot plead that CRC as
trustee under the DOT, respectively, were unjustly enriched in any way.
VI. THERE IS NO CLAIM ALLEGED FOR NO CONTRACT
In support of his claim for No Contract, which is essentially a claim for fraud,
Plaintiff continues to assert conclusory allegations with regard to WaMus alleged
fraudulent scheme. SAC, 47, 51, 56. In fact, Plaintiff specifically alleges that his
participation is the mortgage contract was procured by overt and covert
misrepresentations and nondisclosures. SAC, 56. This Court has already ruled
that Plaintiff must meet the standards for pleading fraud found in Federal Rule of
Civil Procedure Rule 9(b). See, RJN Exhibit C, p. 6. Plaintiff has not cured this
deficiency in his SAC. Accordingly, this claim is subject to dismissal.
Plaintiff also continues to allege that he is not seeking rescission (SAC, 58),
but he cannot escape the fact that he received $2.6 million dollars and, in order to void
the agreement, must still offer tender in the FAC. A borrower is required to make a
tender offer to pay the lender what he or she received in the original mortgage
transaction (minus interest, finance charges, etc). See, Yamamoto v. Bank of New
York, 329 F.3d 1167, 1172 (9th Cir. 2003); see, e.g., Bustamante v. First Fed. Sav. &
Loan Assn, 619 F.2d 360, 365 (5th Cir. 1980) (creditors TILA obligations were not
triggered until obligor tendered repayment); In re Wepsic, 231 B.R. 768, 776 (S.D.
Cal. 1998) (conditioning rescission on borrowers tender of her duty of repayment
under the statute.). Moreover, as was held by the Yamamoto court, rescission may
not be enforced unless there is a determination that a borrower can also comply with
his rescission obligations. See, Yamamoto, 329 F.3d at 1173. That is, the borrower
///
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must show that he or she has the capacity to pay back what he received from the
lender, because rescission is a remedy that restores the status quo ante. Id.
The obligation to rescind has not been triggered, because Plaintiff has failed to
make a tender offer in the FAC. Plaintiff has made no claim that he can pay the
amount borrowed pursuant to the mortgage transactions. See generally, FAC. The
statutory obligation to rescind will only be triggered when, and only when, this Court
renders a decision that Plaintiff is entitled to rescission, and Plaintiff proves that he
has the capacity to pay back what he received under the Loan. For the foregoing
reasons, the motion to dismiss Plaintiffs no contract claim must be granted.
VII. THERE IS NO BASIS FOR EQUITABLE RELIEF
In pleading the sixth cause of action for declaratory relief, the Plaintiff must
specifically allege (1) whatever rights or duties the parties have with respect to the
property and (2) the existence of an actual and present controversy. General statements
about a controversy are unavailing. Alturas v. Gloster, 16 Cal.2d 46, 48 (1940). An
actual controversy involving justiciable questions relating to the rights or obligations
of a party must exist. See Tiburon v. Northwestern Pacific Railroad Co., 4
Cal.App.3d 160, 170 (1970). Thus, it is axiomatic that a cause of action for declaratory
relief serves the purpose of adjudicating future rights and liabilities between parties
who have some sort of relationship, either contractual or otherwise. See Cardellini v.
Casey, 181 Cal.App.3d 389 (1986); Bachis v. State Farm Mutual Auto. Ins. Co., 265
Cal.App.2d 722 (1968). The sixth claim also seeks injunctive relief based on the
allegations of improper foreclosure.
The sixth claim simply incorporates the prior causes of action and seeks equitable
relief on the same flawed claims. Consequently, for the same reasons set forth in regard
to the prior causes of action, Defendants request that the sixth claim be dismissed
without leave to amend.
///
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VIII. PLAINTIFF FAILS TO PLEAD OUTRAGEOUS CONDUCT
Plaintiff fails to state a claim for Intentional Infliction of Emotional Distress
against JPMorgan. The elements of the tort of intentional infliction of emotional
distress are: (1) extreme and outrageous conduct by the defendant with the intention
of causing, or reckless disregard of the probability of causing, emotional distress; (2)
the Plaintiffs suffering severe or extreme emotional distress; and (3) actual and
proximate causation of the emotional distress by the defendants outrageous conduct.
Christensen v. Superior Court, 54 Cal.3d 868, 903 (1991).
A claim for intentional infliction of emotion distress requires a showing of
outrageous conduct which is so extreme as to exceed all bounds of that usually
tolerated in a civilized community. Davidson v. City of Westminster, 32 Cal.3d 197,
209 (1982). A plaintiff must plead and prove with great specificity acts that are
outrageous. Outrageous conduct has been defined as conduct so extreme as to
exceed all bounds of that usually tolerated in a civilized community. Ricard v.
Pacific Indemnity Co., 132 Cal.App.3d 886, 894 (1982) (emphasis added). Conduct
will be found to be actionable only where the recitation of the facts to an average
member of the community would arouse his resentment against the actor, and leave
him to exclaim, Outrageous! KORV-TV, Inc. v. Sup. Ct., 31 Cal.App.4th 1023, 1028
(1995).
In the SAC, Plaintiff seeks recovery for emotional distress; however, he fails to
plead any of the elements of the emotional distress claim. Instead, Plaintiff pleads
conclusions of law and damages. Indeed, there are absolutely no allegations of
outrageous conduct anywhere in the FAC with respect to JPMorgan.
Moreover, the only conduct that can be asserted against JPMorgan is the
enforcement of the payment of the Loan and foreclosure for Plaintiffs failure to comply
with his payment obligation under the Loan, and his failure to make all required
payments. See generally, SAC. An assertion of legal rights in pursuit of ones own
economic interests does not qualify as outrageous under this standard. Trerice v. Blue
#:676

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Cross of California, 209 Cal.App.3d 878, 883 (1989); Kruse v. Bank of America, 202
Cal.App.3d 38, 67 (1988). Assuming that the outrageous conduct Plaintiff refers to
against JPMorgan is the foreclosure of the Subject Property, such activities were simply
done in the pursuit of the economic interests of the lender in enforcing the security
instrument encumbering the Subject Property. See Kruse, 202 Cal.App.3d at 67 (no
claim for intentional infliction of emotional distress where lender simply attempted to
collect debt due under security interest). Thus, a foreclosure sale cannot be considered
outrageous and cannot support an action for intentional infliction of emotional
distress.
Because Plaintiff fails to plead any of the elements of the claim for intentional
infliction of emotional distress, and activities in the pursuit of ones own economic
interest do not qualify as outrageous, the seventh claim must be dismissed without
leave to amend.
IX. CONCLUSION
Based on the foregoing reasons, JPMorgan respectfully requests that the Court
grant this motion to dismiss in its entirety.

DATED: April 28, 2011

ALVARADOSMITH

THEODORE E. BACON
SCOTT J. STILMAN
FRANCES Q. JETT
JPMORGAN CHASE BANK, N.A

#:677

Plaintiff's Opposition to Motion to Dismiss Second Amended Complaint
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DOUGLAS GILLIES, ESQ. (CA Bar No. 53602)
3756 Torino Drive
(805) 682-7033

DARYOUSH JAVAHERI


DARYOUSH JAVAHERI,
Plaintiff,
v.
and DOES 1-50, inclusive,
Defendants.
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Case No. CV 10-8185-ODW (FFMx)
JUDGE: HON. OTIS D. WRIGHT II

OPPOSITION TO DEFENDANT'S
MOTION TO DISMISS SECOND
AMENDED COMPLAINT

DATE: June 6, 2011
TIME: 1:30 PM
COURTROOM: 11

Plaintiff DARYOUSH JAVAHERI opposes Defendant's Motion to Dismiss Plaintiff's
Second Amended Complaint on the grounds that the SAC contains sufficient facts to
state plausible claims for relief.

///
///

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Table of Contents

TABLE OF AUTHORITIES iii
THE FACTS 1
1. CAL CIVIL CODE 2923.5 FIRST CAUSE OF ACTION 9
2. WRONGFUL FORECLOSURE SECOND CAUSE OF ACTION 14
3. QUASI CONTRACT THIRD CAUSE OF ACTION 18
4. NO CONTRACT FOURTH CAUSE OF ACTION 21
5. QUIET TITLE FIFTH CAUSE OF ACTION 24
6. DECLARATORY/INJUNCTIVE RELIEF SIXTH CAUSE OF ACTION 28
7. INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS SEVENTH
CAUSE OF ACTION 28
8. CONCLUSION 29

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Cases
Barker v. Riverside County Office of Education, 584 F.3d 821, 824 (9
th
Cir. 2009)..............................9
Burgess v. Rodom, 121 Cal. App. 2d 71 (1953) ...................................................................................23
Caravantes v. California Reconveyance Co., 2010 WL 4055560, 9 (S.D.Cal. 2010)..........................16
Carpenter v. Longan, 83 U.S. 271, 274 (1872) ....................................................................................18
Cook v. Mielke, 3 Cal. App. 2d 736 (1935) ..........................................................................................23
Das v. WMC Mortgage Corp., 2010 U.S. Dist. LEXIS 122042, 10-25 (N.D. Cal. Oct. 28, 2010) ..9, 13
Dillingham v. Dahlgren, 52 Cal.App. 322, 326-327 (1921).................................................................24
Dunkin v. Boskey, 82 Cal. App. 4th 171, 195 (2000) ...........................................................................19
Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003)....................................29
Estes v. Hardesty, 66 Cal. App. 2d 747 (1944).....................................................................................23
German Sav. & Loan Soc. v. McLellan, 154 Cal. 710 (1908) ..............................................................23
Gompper v. VISX, Inc., 298 F.3d 893, 895 (9th Cir. 2002) ....................................................................9
Halperin v. Raville, 176 Cal. App. 3d 765, 774, 222 Cal. Rptr. 350 (1986) ........................................19
Hirsch v. Bank of America, 107 Cal.App.4th 708 (2003).....................................................................20
Holland v. McCarthy, 173 Cal. 597 (1916) ..........................................................................................23
Iusi v. Chase, 169 Cal. App. 2d 83, 87, 337 P.2d 79 (1959) ................................................................19
Kruse v. Bank of America, 202 Cal.App.3d 38, 67 (1988) ...................................................................29
Lectrodryer v. SeoulBank, 77 Cal.App.4th 723, 726 (2000) ................................................................20
Lonergan v. Scolnick, 129 Cal. App. 2d 179 (1954).............................................................................23
Mabry v. Aurora Loan Services, 185 Cal.App.4
th
208 (2010)..........................................................9, 25
Martin Deli v. Schumacher, 52 N.Y.2d 105, 109, 436 N.Y.S.2d 247, 417 N.E.2d 541 (1981) ...........24
Melchior v. New Line Productions, 106 Cal.App.4th 779 (2003) ........................................................20
MERSCORP, Inc. v. Romaine, 861 N.E. 2d 81 (N.Y. 2006) ................................................................16
Morongo Band of Mission Indians v. Rose, 893 F.2d 1074, 1079 (9th Cir. 1990)...............................29
Morton v. Foss, 48 Cal. App. 2d 117 (1941) ........................................................................................23
North Star Int'l v. Arizona Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983) ......................................9

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Patterson v. Clifford F. Reid, Inc., 132 Cal. App. 454 (1933)..............................................................23
Salomon v. Cooper, 98 Cal.App.2d 521, 522-523 (1950) ....................................................................24
Santa Clara County v. Robbiano, 180 Cal. App. 2d 845, 848, 5 Cal. Rptr. 19 (1960) ........................19
Santens v. Los Angeles Finance Co., 91 Cal.Ap.2d 197, 201 (1949) ...................................................27
Saxon Mortgage v. Hillery, Case No. C-08-4357 (N.D. Cal. 2008).....................................................17
Scott v. Los Angeles Mountain Park Co., 92 Cal. App. 258 (1928) .....................................................23
Trerice v. Blue Cross, 209 Cal.App3d 878 (1989) ...............................................................................28
Ussery v. Jackson, 78 Cal. App. 2d 355 (1947)....................................................................................23
Walleri v. Fed. Home Loan Bank of Seattle, 83 F.3d 1575, 1580 (9th Cir. 1996) .................................9
Wells Fargo v. Jordan, 914 N.E.2d 204 (Ohio 2009)...........................................................................16

Statutes
Cal. Civ. Code 1428............................................................................................................................25
Cal. Civ. Code 2920..............................................................................................................................1
Cal. Civ. Code 2920(a) .......................................................................................................................25
Cal. Civ. Code 2923.5.........................................................................................................................13
Cal. Civ. Code 2923.5(g) ....................................................................................................................12
Cal. Civ. Code 2924............................................................................................................................25
Cal. Civ. Code 2934............................................................................................................................26
Cal. Civ. Code 2934a..........................................................................................................................27

Other Authorities
CEB Mortgages, Deeds of Trust, and Foreclosure Litigation, (4th ed. 2011) .....................................11
Congressional Oversight Panel November Oversight Report, Examining the Consequences of
Mortgage Irregularities for Financial Stability and Foreclosure Mitigation (November 16, 2010) 7
David Horton, "The Shadow Terms: Contract Procedure and Unilateral Amendments," 57 UCLA
Law Review 605 (February, 2010) ..................................................................................................24

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Wall Street and the Financial Crisis - Anatomy of a Financial Collapse, the U.S. Senate Permanent
Subcommittee on Investigations (April 13, 2011) .....................................................................14, 23
William Hubbard, "Efficient Definition and Communication of Patent Rights: the Importance of Ex
Post, Santa Clara Computer and High Technology Law Journal (January, 2009)...........................24


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THE FACTS
The facts recited in Plaintiff's Second Amended Complaint ("SAC") show that
Chase is not the Lender. Only the Lender can invoke the power of sale under
paragraph 22 of the Deed of Trust (Exhibit 4).
If Chase is not the Lender, Chase has no right to initiate foreclosure under
paragraph 22 of the Deed of Trust unless it can show that it is acting as an
authorized agent of the Lender, and this they must prove. According to Cal. Civ.
Code 2920, a mortgage is a contract. The contract is the controlling authority. The
Civil Code does not invalidate the Deed of Trust so that anybody can take a home.
Chase asserts on the first page of its Memorandum of Points & Authorities that
the SAC "fails primarily because JPMorgan Chase is not the same entity as
Washington Mutual Bank." Plaintiff does not make such an allegation, but that is
actually a primary reason that the SAC succeeds. Chase is not WaMu. Chase does
not have privity with Plaintiff. Chase is a third party purchaser of certain assets.
Plaintiff alleges that WaMu was not the Lender in September 2008, so Chase did not
become the Lender when it assumed certain assets and liabilities of WaMu.
Contrary to defendants' assertion, the SAC does not allege that Chase acquired
Plaintiff's loan from the FDIC. The SAC states that Chase asserted that it acquired
certain assets, and Plaintiff relied on Chase's assertion when he made payments to
Chase. Paragraph 41 of the SAC states: "Chase demanded monthly mortgage
payments from Plaintiff starting in October 2008, and continued to collect payments
from Plaintiff for twelve months. Plaintiff reasonably relied upon Chase's assertion
that it was entitled to payments for the reason that it had acquired certain assets from
WaMu under an agreement with the FDIC." Now Plaintiff wants his money back,
since Chase is not the Lender and apparently was keeping his payments.
Plaintiff does not seek to rescind his loan. He seeks to ascertain the identity of

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the Lender, if indeed the court rules or a jury finds that he entered into a contract
with WaMu.
Defendants argue that the SAC does not deny that Plaintiff is in arrears in a
certain amount. Denials are customary in Answers rather than Complaints. Plaintiff
cannot know if the amount generated by Defendant in its memorandum has any
basis in fact until discovery commences. It is a figure posed by Defendant as it seeks
to take Plaintiff's property with no substantiation.
Plaintiff alleges plainly and unequivocally that Chase is not the Lender, and
therefore Chase cannot foreclose according to the express terms of the Deed of Trust
and the Promissory Note. This is not a legal conclusion. Taking something that isn't
yours is stealing. Chase is not the Lender, a fact that is alleged in the SAC. When a
plaintiff alleges that defendant is attempting to take plaintiff's property, the courts
provide a forum for the plaintiff to challenge the thief and get the property back, or
otherwise be compensated. In recent years, banks got into the business of taking
property without offering valid documentary evidence to support their claims. If
documents can prove that Chase is the Lender and that WaMu was the Lender on
September 25, 2008, those documents are in Chase's possession and can be
disclosed. Chase holds its cards tight, but that won't gain it clear title.
Plaintiff alleges in 14 of the SAC specifically that between November 15 and
November 30, 2007, WaMu transferred Plaintiff's Note to Washington Mutual
Mortgage Securities Corporation. The Note was then sold to an investment trust and
became a part of, or was subject to a Loan Pool, a Pooling and Servicing Agreement,
a Collateralized Debt Obligation, a Mortgage-Backed Security, a Mortgage Pass-
Through Certificate, a Credit Default Swap, an Investment Trust, and/or a Special
Purpose Vehicle. The security that started as Plaintiff's Note is listed in Standard &
Poor's registry as CUSIP # 31379XQC2, Pool Number 432551. Thereafter, WaMu
acted solely as a servicer of the loan, and was neither a Lender nor Beneficiary after
November 2007. These are facts, not legal conclusions.

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The acronym CUSIP refers to the Committee on Uniform Security Identification
Procedures, which was founded in 1964. The 9-character alphanumeric code
identifies any North American security for the purposes of facilitating clearing and
settlement of trades. The CUSIP distribution system is owned by the American
Bankers Association and is operated by Standard & Poor's. The CUSIP Service
Bureau acts as the National Numbering Association (NNA) for North America, and
the CUSIP number serves as the National Securities Identification Number for
products issued from both the United States and Canada. Plaintiff's Note could not
have been assigned a CUSIP number unless and until it was converted into a
security. Of course, these are matters readily ascertainable at trial.
Chase's counsel appears before this Court as a handwriting expert to testify to
the authenticity of the diverse signatures of "Deborah Brignac." Chase's P&A offers
testimony describing office practices of California Reconveyance Company. The
many varied signatures attached to the SAC "clearly have initials of someone other
than Ms. Brignac after the signature indicating that there was no actual forgery
involved, but rather as clearly indicated" (Defendant's P&A 6:6-8). Mr. Jett may
make a fine witness at a later stage in the proceedings, but Plaintiff objects to the
testimony and expert opinions offered in Defendants' Motion to Dismisslacks
foundation, and isn't all that clear. There was a time when banks expressed concern
about forged documents. Now, when Plaintiff calls attention to a series of fake
signatures, Chase calls it "an obvious last ditch effort to salvage his claims" (P&A
5:25). Times have changed.
Plaintiff's factual allegations are not far-fetched. Last month, U.S. regulators
slapped the nation's largest banks with unprecedented penalties for improper home-
foreclosure practices, issuing detailed orders to revamp the way they deal with
troubled borrowers. The orders were issued on April 13, 2011, to Chase and thirteen
other financial institutions by the Federal Reserve, the Office of Thrift Supervision
(OTS), and the Comptroller of the Currency.

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Under the Consent Order, Chase has sixty days to establish plans to clean up its
mortgage-servicing processes to prevent documentation errors. The Order directs
Chase to take steps to ensure it has enough staff to handle the flood of foreclosures,
that foreclosures don't happen when a borrower is receiving a loan modification, and
that borrowers have a single point of contact throughout the loan-modification and
foreclosure process.
Chase must hire an independent consultant to conduct a "look back" of all
foreclosure proceedings from 2009 and 2010, including Plaintiff's foreclosure, to
evaluate whether Chase improperly foreclosed on any homeowners. Chase must
establish a process to consider whether to compensate borrowers who have been
harmed. The Federal Reserve has ordered Chase and other big banks to clean up
their illegal foreclosure practices. This is the context in which Plaintiff filed suit.
The New York Times reported on April 14, 2011:
Regulators said the enforcement actions were tough measures that would
make the banks accountable. "The banks are going to have to do substantial
work, bear substantial expense, to fix the problem," the Acting Comptroller of
the Currency, John Walsh, told reporters in a conference call.
JPMorgan Chase, one of the servicers signing the agreement, said that it
was adding as many as 3,000 employees to meet the new regulatory demands.
Jamie Dimon, its chief executive, called it "a lot of intensive manpower and
talent to fix the problems of the past."
http://www.nytimes.com/2011/04/14/business/14foreclose.html

Chase signed the Consent Order with the Board of Governors of the Federal
Reserve System on April 13, 2011. Plaintiff requests that the court take judicial
notice of the Federal Reserve Consent Order, BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM Docket No. 11-023-B-HC, attached as Exhibit 15,
which is summarized below and is available for download on the Fed's website at:
www.federalreserve.gov/newsevents/press/enforcement/enf20110413a5.pdf

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The Consent Order, signed by Frank Bisignano, Chief Administrative Officer of
Chase, includes the following allegations against Chase, which, according to the
Order, initiated more than a quarter of a million foreclosure actions in 2009-2010.
The Consent Order has been abbreviated (but not changed) in the following:
WHEREAS, in connection with the process leading to certain foreclosures
involving the Servicing Portfolio, the Mortgage Servicing Companies (Chase)
allegedly:
(a) Filed or caused to be filed in state courts and in connection with
bankruptcy proceedings in federal courts numerous affidavits executed by
employees making various assertions, such as the ownership of the mortgage
note and mortgage, the amount of principal and interest due, and the fees and
expenses chargeable to the borrower, in which the affiant represented that the
assertions in the affidavit were made based on personal knowledge or based on
a review by the affiant of the relevant books and records, when, in many cases,
they were not based on such knowledge or review;
(b) Filed or caused to be filed in state courts, in federal courts or in the local
land record offices, numerous affidavits and other mortgage-related documents
that were not properly notarized, including those not signed or affirmed in the
presence of a notary;
(c) Litigated foreclosure and bankruptcy proceedings and initiated non-
judicial foreclosures without always confirming that documentation of
ownership was in order at the appropriate time, including confirming that the
promissory note and mortgage document were properly endorsed or assigned
and, if necessary, in the possession of the appropriate party;

WHEREAS, the practices set forth above allegedly constitute unsafe or
unsound banking practices;

NOW, THEREFORE, Chase shall cease and desist and take affirmative
action, as follows

The forged signatures of Deborah Brignac, attached to the SAC as Exhibits 8
and 10-14 and included in 37 of the SAC, fit into a national pattern that prompted
the Federal Reserve to impose a Consent Order on our nation's biggest banks,
including Chase. Defendants' Motion to Dismiss protests that the forgeries have
nothing to do with Plaintiff's loan. Only the trier of fact can determine whether the
#:746

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very different signatures of Deborah Brignac on the Substitution of Trustee (Exhibit
8), the Notice of Trustee's Sale (Exhibit 10), and countless other recorded documents
were truly signed by Ms. Brignac based on her personal knowledge. If the signature
on the Substitution of Trustee is a forgery, the foreclosure is illegal. CRC cannot
become the Trustee based on the forged signature of its own employee.
Defendants assert that calling attention to a forged Substitution of Trustee is a
"last ditch effort" by Plaintiff. The banks dug plenty of ditches, and the Fed is not
taking them lightly. Defendants may seek to place a cloud on Plaintiff's title by
gaining a dismissal on the pleadings and then conducting an illegal foreclosure sale,
but the cloud will not go away so easily.
The presumption of infallibility where big banks are concerned no longer
applies. Chase and other banks have adopted a nationwide strategy of defeating
homeowners in foreclosure on the basis of challenging the language of the
complaints. While possessing all the evidence, the banks stonewall plaintiffs in court
and then presume they can take whatever property they fancy. This is a shortsighted
and self-destructive legal strategy that will lead to endless litigation and result in a
cascading plunge in real property values for decades in the United States.
A judgment resulting from dismissal based on alleged defects in the complaint
does not resolve the underlying issue as to who owns the property. A demurrer or
dismissal is no more that an editorial rebuke of the draftsman when it concerns title
to real property. If the bank gets a judgment, sells the property, takes the money, and
pays another billion-dollar round of bonuses to its executives, the unlucky buyer of
REO or Deed Upon Trustee's Sale will not get clear title. New facts and new theories
will support an endless succession of lawsuits as holders of grant deeds, such as
Plaintiff Daryoush Javaheri, their successors and assigns, hammer away at the
mountain of securitization documents that will continue to percolate to the surface in
lawsuits for years to come. Better to get it out in the open now, rather than plow
these controversies under a rising pile of toxic title defects that will be passed back
#:747

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and forth between banks, title companies, and the holders of grant deeds. It's a big
mess now, but it will only get bigger the longer it is perpetuated.
This may seem like the bold pronouncement of some lawyer fighting to save
his client's family home, but it is a finding of the Congressional Oversight Panel, a
body convened by Congress to keep an eye on the initial $700-billion bailout.
1

Plaintiff renews his Request for Judicial Notice of the Congressional Oversight
Panel (COP) Report, Examining the Consequences of Mortgage Irregularities for
Financial Stability and Foreclosure Mitigation (November 16, 2010). The COP
report is attached to Plaintiff's current Request for Judicial Notice as Exhibit "15." It
states on pages 4-8:
In the fall of 2010, reports began to surface alleging that companies
servicing $6.4 trillion in American mortgages may have bypassed legally
required steps to foreclose on a home. Employees or contractors of Bank of
America, GMAC Mortgage, and other major loan servicers testified that they
signed, and in some cases backdated, thousands of documents claiming
personal knowledge of facts about mortgages that they did not actually know
to be true.
Allegations of robo-signing are deeply disturbing and have given rise to
ongoing federal and state investigations. At this point the ultimate
implications remain unclear. It is possible, however, that robo-signing may
have concealed much deeper problems in the mortgage market that could
potentially threaten financial stability and undermine the government's efforts

1
In response to the escalating financial crisis, on October 3, 2008, Congress provided Treasury
with the authority to spend $700 billion to stabilize the U.S. economy, preserve home ownership,
and promote economic growth. Congress created the Office of Financial Stability (OFS) within
Treasury to implement the TARP. At the same time, Congress created the Congressional Oversight
Panel to review the current state of financial markets and the regulatory system. The Panel is
empowered to hold hearings, review official data, and write reports on actions taken by Treasury
and financial institutions and their effect on the economy (COP Report, Nov. 16, 2010, p. 124)
#:748

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to mitigate the foreclosure crisis.
If documentation problems prove to be pervasive and, more importantly,
throw into doubt the ownership of not only foreclosed properties but also
pooled mortgages, the consequences could be severe. Clear and uncontested
property rights are the foundation of the housing market. If these rights fall
into question, that foundation could collapse. Borrowers may be unable to
determine whether they are sending their monthly payments to the right
people (COP Report, Nov. 16, 2010, pp. 4-5).
If irregularities in the foreclosure process reflect deeper failures to
document properly changes of ownership as mortgage loans were securitized,
then it is possible that Treasury is dealing with the wrong parties in the course
of the Home Affordable Modification Program (HAMP). This could mean
that borrowers either received or were denied modifications improperly. Some
servicers dealing with Treasury may have no legal right to initiate
foreclosures, which may call into question their ability to grant modifications
or to demand payments from homeowners, whether they are part of a
foreclosure mitigation program or otherwise. The servicers' tendency to cut
corners may also have affected the determination to modify or foreclose upon
individual loans.
Many of the entities implicated in the recent document irregularities,
including Ally Financial, Bank of America, and JPMorgan Chase, are
current or former TARP recipients (p. 8) (emphasis added).
Chase wants to take real property without offering any real proof that will tend
to show who is the Lender or who holds a beneficial interest in the promissory note.
It stands on the hollow stump of a belated Purchase and Assumption Agreement.
Plaintiff did not contract with Chase. WaMu assigned its rights as Lender to a
third party two years before the OTS stepped in and FDIC took over. If Chase did
not forward Plaintiff's payments to the Lender, Chase has been unjustly enriched.
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The material allegations in the SAC present triable issues. A motion to dismiss
under Federal Rule of Civil Procedure 12(b)(6) tests the complaint's sufficiency.
North Star Int'l v. Arizona Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983). All
material allegations in the complaint, "even if doubtful in fact," are assumed to be
true. The court must assume the truth of all factual allegations and must "construe
them in a light most favorable to the nonmoving party." Gompper v. VISX, Inc., 298
F.3d 893, 895 (9th Cir. 2002); Walleri v. Fed. Home Loan Bank of Seattle, 83 F.3d
1575, 1580 (9th Cir. 1996). The court must accept as true all reasonable inferences
to be drawn from the material allegations in the complaint. Barker v. Riverside
County Office of Education, 584 F.3d 821, 824 (9
th
Cir. 2009).

1. CAL CIVIL CODE 2923.5 FIRST CAUSE OF ACTION
Defendant cites Mabry v. Aurora Loan Services, 185 Cal.App.4
th
208 (2010) in
support of the proposition that the NOD satisfies the requirements of Cal. Civil Code
2923.5 since it recites the form language of the statute. However, this misses the
point of the statute. Section 2923.5 requires contact with the borrower, not form
language stapled to a form. If the party sending the Notice attaches a declaration
signed by a robo-signer who has no personal knowledge whether contacts were
made, the NOD does not prove compliance with the notice requirements.
Mabry has been followed by various federal district courts in California. In Das v.
WMC Mortgage Corp., 2010 U.S. Dist. LEXIS 122042, 10-25 (N.D. Cal. Oct. 28,
2010), the magistrate found that tender was not required, in contrast to Defendant's
assertion that a borrower is required to make a tender offer (P&A 18-20).
The whole purpose of this section (Cal. Civ. Code 2923.5) is to allow a
homeowner an opportunity to at least discuss with the lender the possibility of
loan modification. Where such communication does result in loan modification,
the homeowner can avoid foreclosure even if he or she would not otherwise be
in a position to fully redeem the property at a foreclosure sale. In situations
like this, a requirement that the homeowner tender the entire amount of the
secured indebtedness would actually defeat the purpose of the statute (p. 5-6).
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In Argueta v. Chase, 2011 U.S. Dist. LEXIS 41300 (E.D. Cal. Apr. 11, 2011), the
District Court refused to grant a motion to dismiss where borrower alleged in the
Complaint that defendants did not contact him. The order states in part:
A notice of default may be filed only thirty days after the initial contact
with the borrower or satisfying the due diligence requirements. Civ. Code
2923.5(a)(1). A notice of default must be accompanied by a declaration stating
that the buyer has been contacted or could not be reached despite due
diligence. Id. 2923.5(b). The only remedy for violation of this statute is
postponement of a foreclosure sale until there has been compliance with the
statute. Paik v. Wells Fargo Bank, N.A., No. C 10-04016, 2011 U.S. Dist.
LEXIS 3979, 2011 WL 109482, at *3 (N.D. Cal. Jan. 13, 2011); Mabry v.
Super. Ct., 185 Cal. App. 4th 208, 223, 110 Cal. Rptr. 3d 201 (4th Dist. 2010)
("If section 2923.5 is not complied with, then there is no valid notice of
default, and without a valid notice of default, a foreclosure sale cannot
proceed. The available, existing remedy is . . . to postpone the sale until there
has been compliance with section 2923.5.").
Plaintiff alleges that all defendants failed "to assess the financial situation
and explore options for plaintiff to avoid foreclosure, thirty (30) days prior to
filing the Default." (Compl. 96.) Plaintiff allegedly received "no phone calls,
phone messages, or letters via first class or certified mail either before or after
the Notice of Default was recorded." (Id. 100.)
While the moving defendants' provided the Notice of Default in which
Quality Loan declares that it complied with the statute, the Complaint's
allegations to the contrary are sufficient to defeat a motion to dismiss. See
Caravantes v. Cal. Reconveyance Co., No. 10-CV-1407, 2010 U.S. Dist.
LEXIS 109842, 2010 WL 4055560, at *8 (S.D. Cal. Oct. 14, 2010).
Accordingly, the court will deny the motion to dismiss this claim.

Civ. Code 2923.5 has been narrowly construed, but where the defendants failed
to access the financial situation and explore options, didn't call and didn't write, the
Complaint will defeat a motion to dismiss.
As an example of a 2923.5 declaration that makes sense in light of the language of
the statute, California Continuing Education for the Bar (CEB) recommends the
following form for a Notice of Default in its practice guide, CEB Mortgages, Deeds of
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Trust, and Foreclosure Litigation, (4th ed. 2011):
DECLARATION UNDER CC 2923.5

I declare that:

I am _ _[the beneficiary/an authorized agent of the beneficiary]_ _ of the foregoing
deed of trust. I initially attempted to contact the borrower (trustor under the deed of
trust) by sending a first-class letter that included the toll-free telephone number made
available by the United States Department of Housing and Urban Development (HUD)
to find a HUD-certified housing counseling agency.

I contacted the borrower _ _[in person/by telephone]_ _ on _ _[date]_ _ to assess the
borrowers financial situation and explore options for the borrower to avoid foreclosure.
During the initial contact, I advised the borrower that he or she had the right to request
a subsequent meeting and, if requested, that it would be scheduled within fourteen (14)
days. The borrower _ _[did/did not]_ _ request the subsequent meeting. I also gave the
borrower the toll-free telephone number made available by HUD to find a HUD-
certified housing counseling agency.

I attempted to contact the borrower _ _[in person/by telephone]_ _ on the following
dates _ _[list all dates of attempted contact and results of each attempt]_ _. This was
done to assess the borrowers financial situation and explore options for the borrower to
avoid foreclosure. I exercised due diligence to further contact the borrower as follows:
_ _[list all actions taken to contact borrower and results as required by CC
2923.5(g)]_ _.

No contact with the borrower was required because the borrower surrendered the
property on _ _[date]_ _ to the _ _[trustee/beneficiary/authorized agent]_ _, the
borrower contracted with an organization, person, or entity whose primary business is
advising how to extend the foreclosure process, or the borrower filed a bankruptcy
petition and the bankruptcy court has not entered an order closing or dismissing the
bankruptcy case or granting stay relief.
___[Signature of declarant]___
[Declarants typed name]

Compare the above CEB form to CRC's cryptic, ambiguous, form-language
2923.5 declaration on the Notice of Default attached to the SAC as Exhibit 9:
The mortgagee, beneficiary or authorized agent tried with due diligence but was
unable to contact the borrower to discuss the borrower's financial situation and to
explore options for the borrower to avoid foreclosure as required by Cal. Civ. Code
Section 2923.5. Thirty days or more have elapsed since these due diligence efforts
were completed.
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Cal. Civ. Code 2923.5(g) defines due diligence:
(g) A notice of default may be filed pursuant to Section 2924 when a mortgagee,
beneficiary, or authorized agent has not contacted a borrower as required by
paragraph (2) of subdivision (a) provided that the failure to contact the borrower
occurred despite the due diligence of the mortgagee, beneficiary, or authorized
agent. For purposes of this section, "due diligence" shall require and mean all of the
following:
(1) A mortgagee, beneficiary, or authorized agent shall first attempt to contact
a borrower by sending a first-class letter that includes the toll-free telephone number
made available by HUD to find a HUD-certified housing counseling agency.
(2) (A) After the letter has been sent, the mortgagee, beneficiary, or authorized
agent shall attempt to contact the borrower by telephone at least three times at
different hours and on different days. Telephone calls shall be made to the primary
telephone number on file.
(B) A mortgagee, beneficiary, or authorized agent may attempt to contact a
borrower using an automated system to dial borrowers, provided that, if the
telephone call is answered, the call is connected to a live representative of the
mortgagee, beneficiary, or authorized agent.
(C) A mortgagee, beneficiary, or authorized agent satisfies the telephone
contact requirements of this paragraph if it determines, after attempting contact
pursuant to this paragraph, that the borrower's primary telephone number and
secondary telephone number or numbers on file, if any, have been disconnected.
(3) If the borrower does not respond within two weeks after the telephone call
requirements of paragraph (2) have been satisfied, the mortgagee, beneficiary, or
authorized agent shall then send a certified letter, with return receipt requested.
(4) The mortgagee, beneficiary, or authorized agent shall provide a means for
the borrower to contact it in a timely manner, including a toll-free telephone number
that will provide access to a live representative during business hours.
(5) The mortgagee, beneficiary, or authorized agent has posted a prominent
link on the homepage of its Internet Web site, if any, to the following information:
(A) Options that may be available to borrowers who are unable to afford their
mortgage payments and who wish to avoid foreclosure, and instructions to
borrowers advising them on steps to take to explore those options.
(B) A list of financial documents borrowers should collect and be prepared to
present to the mortgagee, beneficiary, or authorized agent when discussing options
for avoiding foreclosure.
(C) A toll-free telephone number for borrowers who wish to discuss options
for avoiding foreclosure with their mortgagee, beneficiary, or authorized agent.
(D) The toll-free telephone number made available by HUD to find a HUD-
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certified housing counseling agency.
No evidence has been introduced to show that Chase or CRC used due diligence
to contact Plaintiff. On the contrary, Chase ignored the request of Plaintiff's lawyer
to explore options (Exhibit 6). The SAC alleges:
22. Chase did not contact Plaintiff or Mr. Banayan, either in person or by
telephone, to discuss Plaintiff's financial condition and the impending
foreclosure. Chase did not call, it did not write, and it did not provide a toll-free
HUD number to Plaintiff or his lawyer. Chase did not offer to meet with
Plaintiff or his lawyer and did not advise them that Plaintiff had a right to
request a subsequent meeting within 14 days.
Attached to the NOD was a "Declaration of Compliance with Cal. Civ. Code
2923.5" signed under penalty of perjury by Renee Daniels for Chase. Ms. Daniels
could not have had personal knowledge of the matters described in her declaration,
which stated that the mortgagee, beneficiary or authorized agent was unable to
contact the borrower to explore options to avoid foreclosure (SAC 26).
Das v. WMC Mortgage Corp., 2010 U.S. Dist. LEXIS 122042, 10-25 (N.D.
Cal. Oct. 28, 2010) resolved a similar issue and refused to dismiss: The court may
take judicial notice of the fact that the declaration signed by Natalie McClendon on
April 18, 2009 was recorded. However, the court may not take notice of the content
of the declaration because Defendants have not shown that Ms. McClendon is a
source "whose accuracy cannot reasonably be questioned." See e.g., Reusser v.
Wachovia Bank, N.A., 525 F.3d 855, 858 n. 3 (9th Cir. 2008); and Turnacliff v.
Westly, 546 F.3d 1113, 1120 n. 5 (9th Cir. 2008). The fact that the declaration was
recorded is not indisputable proof that Defendants actually contacted Plaintiffs to
discuss their financial situation and the impending foreclosure. Further, courts may
not take notice of any matter that is in dispute. U.S. v. Ritchie, 342 F.3d 903, 908
(9th Cir. 2003); Walker v. Woodford, 454 F. Supp. 2d 1007, 1022 (S.D.Cal. 2006).
California Attorney General Edmund G. Brown was so annoyed with Chase's
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cavalier attitude towards 2923.5 that he wrote to Chase on September 30, 2010:
"JP Morgan Chase has now admitted that employees assigned to
handling foreclosures signed affidavits without first personally reviewing the
contents of borrowers' loan files. Thus, borrowers suffered the foreclosure of
their homes based on affidavits that JP Morgan Chase had not confirmed to be
accurate. This admission strongly suggests that any purported verification by
JP Morgan Chase that it complied with section 2923.5 before commencing a
foreclosure in California is similarly suspect." (SAC Exhibit 3.)
- Attorney General Brown's letter to Chase, September 30, 2010
http://ag.ca.gov/cms_attachments/press/pdfs/n1996_jp_morgan_chase_letter.pdf
2. WRONGFUL FORECLOSURE SECOND CAUSE OF ACTION
Chase offers no proof that it acquired an interest in Plaintiff's residence. In this
Motion to Dismiss, once again the only document offered to support its claim is the
P&A Agreement. Chase asks the court to leap to the conclusion that WaMu was the
Lender on September 25, 2008, when the P&A Agreement was signed, even though
the likelihood of that, given WaMu's history of securitization, is less than 50%. The
challenge facing homeowners is to prove facts to trial courts at the pleading stage.
Wall Street and the Financial Crisis - Anatomy of a Financial Collapse, the U.S.
Senate Permanent Subcommittee on Investigations (April 13, 2011) 650-page report,
was released following an 18-month investigation into the causes of the financial
crisis. WaMu was the leading case study in the report183 pages (28%) of the
report were devoted to WaMuthe worst of the worst. The report is readily
available for download at the Senate Subcommittee's website.
2

Over a four-year period, high-risk loans grew from 19% of WaMus loan
originations in 2003, to 55% in 2006, while its lower risk, fixed rate loans fell
from 64% to 25% of its originations. At the same time, WaMu increased its

2
http://levin.senate.gov/newsroom/supporting/2011/PSI_WallStreetCrisis_041311.pdf
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securitization of subprime loans six fold, primarily through its subprime
lender, Long Beach Mortgage Corporation, increasing such loans from nearly
$4.5 billion in 2003, to $29 billion in 2006. From 2000 to 2007, WaMu and
Long Beach together securitized at least $77 billion in subprime loans. WaMu
originated an increasing number of its flagship product, Option Adjustable
Rate Mortgages (Option ARMs), which created high risk, negatively
amortizing mortgages and, from 2003 to 2007, represented as much as half of
all of WaMus loan originations. In 2006 alone, Washington Mutual originated
more than $42.6 billion in Option ARM loans and sold or securitized at least
$115 billion to investors.
Wall Street and the Financial Crisis, page 2.

Chase knows whether Plaintiff's loan was on the books of WaMu on September
25, 2008, when Chase "acquired certain assets." If the property was not listed as an
asset, then Chase did not acquire a beneficial interest in Plaintiff's loan and must
show that it is acting as an authorized agent of the Lender, whomever that may be, in
initiating foreclosure. If they don't know, they misappropriated Plaintiff's payments
for an entire year and must make restitution.
Defendant alleges in its P&A, "JPMorgan obtained its rights under the loan from
the FDIC" (P&A 4:5). Whether or not the Loan was an asset of WaMu on September
25, a key issue in this case, is not mentioned. Chase asks the court to find, without
evidence, a fact that it must prove in order to take the property. Nothing in the P&A
Agreement shows whether WaMu had any beneficial interest in Plaintiff's loan on
September 25, 2008. The court is asked to guess the answer and dismiss the case.
Then Plaintiff will lose his house.
Where factual findings or the contents of the documents are in dispute, those
matters of dispute are not appropriate for judicial notice. Caravantes v. California
Reconveyance Co., 2010 WL 4055560, 9 (S.D.Cal. 2010) citing Darensburg v.
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Metropolitan Transp. Comm'n, 2006 WL 167657, at *2 (N.D.Cal. 2006).
WaMu sold its beneficial interest in Plaintiff's property to fund the loan,
receiving the balance on Plaintiff's note from the investors, and retained, if anything,
merely a duty to service the loan. Even if Chase acquired WaMu' servicing interests
on September 25, Chase acquired no beneficial interest in Plaintiff's loan.
There was a time, about ten ago, when servicers were trusted bankers. Times
have changed. Stated in the Congressional Oversight Panel's report at page 14:
Effective transfers of real estate depend on parties being able to answer
seemingly straightforward questions: who owns the property? How did they
come to own it? Can anyone make a competing claim to it? The irregularities
have the potential to make these seemingly simple questions complex. As a
threshold matter, a party seeking to enforce the rights associated with the
mortgage must have standing in court, meaning that a party must have an
interest in the property sufficient that a court will hear their claim and can
provide them with relief. See Stephen R. Buchenroth and Gretchen D. Jeffries,
Recent Foreclosure Cases: Lenders Beware (June 2007); Wells Fargo v.
Jordan, 914 N.E.2d 204 (Ohio 2009) (If plaintiff has offered no evidence
that it owned the note and mortgage when the complaint was filed, it would
not be entitled to judgment as a matter of law.); Christopher Lewis Peterson,
Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic
Registration System, University of Cincinnati Law Review, Vol. 78, No. 4, at
1368-1371 (Summer 2010); MERSCORP, Inc. v. Romaine, 861 N.E. 2d 81
(N.Y. 2006) (URL's redacted per local rule). Accordingly, a second set of
problems relates to the chain of title on mortgages and the ability of the
foreclosing party to prove that it has legal standing to foreclose. While these
problems are not limited to the securitization market, they are especially acute
for securitized loans because there are more complex chain of title issues
involved.

The investors who purchased the security identified as CUSIP # 31379XQC2 in
Pool Number 432551 can make a competing claim to Plaintiff's property and the
payments he made to Chase. Chase has offered no evidence that it owned the Note
and Deed of Trust when the NOD and NOTS were filed, so it lacks standing.
Chase argues that it obtained the right to sell Plaintiff's property when it acquired
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WaMu's assets through the P&A Agreement for $1.9 billion. Chase could only
acquire what WaMu owned. WaMu no longer owned Plaintiff' mortgage. Perhaps
the identity of the Lender can be tracked down, but it remains unknown.
Defendant argues that Chase assumed no liability for actions taken by WaMu
prior to September 25, 2008 in regard to the subject loan. This obscures the issue.
Plaintiff alleges that WaMu did not have any interest in Plaintiff's residence on
September 25, 2008. His property was not an asset of WaMu, and therefore Chase
could not acquire any interest in Plaintiff's residence. This is not a liability issue.
Chase seems to assert that it can foreclose on any property under the P&A
Agreement on the grounds that WaMu might have had a beneficial interest in the
property at some time, even though WaMu sold most of its mortgages to investors.
Plaintiff alleges in 62 of the SAC that WaMu securitized Plaintiff's single-
family residential mortgage loan through Washington Mutual Mortgage Securities
Corp. If WaMu retained no beneficial interest in the promissory note when it
brokered the deal, Chase cannot acquire what WaMu never had.
If WaMu transferred all of its beneficial interest in the note at the inception of
the loan and never entered it in its books as an asset, and entered no corresponding
reserve on its ledger as a liability in the event of Plaintiff's default, then Chase did
not acquire ownership of the note by purchasing WaMu's assets because WaMu had
nothing to sell. This is a question of fact. Plaintiff alleges in 30 of the SAC that
Chase does not have standing to enforce the Note because Chase is not the owner of
the Note, not a holder of the Note, and not a beneficiary under the Note.
If Chase has no beneficial interest in the note, Chase can only proceed if it
proves that it is the servicer and joins the owner of the note in this action. To dismiss
this lawsuit before ascertaining the truth of these allegations is unwarranted. Chase
could produce evidence in its files, but it prefers to rob Plaintiff of his day in court.
In Saxon Mortgage v. Hillery, Case No. C-08-4357 (N.D. Cal. 2008), the court
ruled that the foreclosing party must demonstrate that it is the holder of the deed of
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trust and the promissory note. The Saxon court cited In re Foreclosure Cases, 521
F.Supp.2d 650, 653 (S.D. Ohio, 2007), which held that to show standing in a
foreclosure action, the plaintiff must show that it is the holder of the note and the
mortgage at the time the complaint was filed.
For a valid assignment, there must be more than just an assignment of the deed
alone; the note must also be assigned. "The note and mortgage are inseparable; the
former as essential, the latter as an incident. An assignment of the note carries the
mortgage with it, while an assignment of the latter alone is a nullity." Carpenter v.
Longan, 83 U.S. 271, 274 (1872).
In re Foreclosure Cases involved 27 foreclosure actions filed in the Southern
District of Ohio, in which the court questioned whether the plaintiff lenders had
standing and whether the court had subject matter jurisdiction to hear the cases at the
time the foreclosure complaint was filed. Judge Thomas M. Rose wrote, "It is the
creditor's responsibility to keep a borrower and the Court informed as to who owns
the note and mortgage and is servicing the loan, not the borrower's or the Court's
responsibility to ferret out the truth." In re Foreclosure Cases, 521 F.Supp.2d 650,
652 (S.D. Ohio, 2007).

3. QUASI CONTRACT THIRD CAUSE OF ACTION
Defendant argues that Plaintiff pleads no facts indicating that JPMorgan's receipt
of payments from Plaintiff on the Subject Loan is unjust. The SAC alleges that when
WaMu originated the loan, it transferred all beneficial interest in the note to an
investment bank (SAC 28). Neither WaMu, Chicago Title, CRC, Chase, nor
anyone else has recorded a transfer of a beneficial interest in the Note (or any other
interest in the) Property to Chase. (SAC 29). Chase does not have standing to
enforce the Note because Chase is not the owner of the Note, Chase is not a holder
of the Note, and Chase is not a beneficiary under the Note. Chase does not have
capacity to exercise a power of sale. Chase does not claim to be a holder of the note
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or a beneficiary. Chase merely describes itself as a loan servicer in the Notice of
Trustee's Sale (SAC 30).
Implied contracts under Cal. Civ. Code 1619 - 1621 refer to implied-in-fact
contracts that arise from the mutual agreement of the parties. Iusi v. Chase, 169 Cal.
App. 2d 83, 87, 337 P.2d 79 (1959). Courts recognize contracts called implied-by-
law contracts or quasi-contracts to prevent the unjust enrichment of one party, who
has no intent, either express or implied, to pay or to make reimbursement for
something of value received by that party. The law imposes an obligation to pay or
reimburse because good conscience dictates that the party benefited should make the
payment reimbursement. Santa Clara County v. Robbiano, 180 Cal. App. 2d 845,
848, 5 Cal. Rptr. 19 (1960); see Halperin v. Raville, 176 Cal. App. 3d 765, 774, 222
Cal. Rptr. 350 (1986) (imposing liability to repay loan to family business on
equitable ground when no express promise was made).
The equitable doctrine of unjust enrichment applies where the plaintiff, while
having no enforceable contract, nonetheless has conferred a benefit on the defendant,
which the defendant has knowingly accepted in circumstances in which it would be
inequitable for the defendant to retain the benefit without paying for its value. The
phrase unjust enrichment does not describe a theory of recovery but describes the
effect that would result from a failure to make restitution in circumstances where it
is equitable to do so. Therefore, no particular form of pleading is necessary to invoke
the doctrine of restitution, and a well-pleaded claim for breach of contract can be
sufficient. While the measure of damages for unjust enrichment is essentially
restitution, that concept that has been expanded in modern jurisprudence to include,
not only the restoration of something, but also compensation, reimbursement,
indemnification, or reparation for benefits derived from, or for loss or injury caused
to, another. Dunkin v. Boskey, 82 Cal. App. 4th 171, 195 (2000).
It is not the receipt of payments that makes them unjust, but rather the unjust
retention of the payments coupled with repeated threats of foreclosure and eviction.
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The elements of an unjust enrichment claim are the receipt of a benefit and
[the] unjust retention of the benefit at the expense of another. Lectrodryer v. Seoul
Bank, 77 Cal.App.4th 723, 726 (2000). Hirsch v. Bank of America, 107 Cal.App.4th
708 (2003) held that the plaintiffs there stated a valid cause of action for unjust
enrichment based on [the defendants] unjustified charging and retention of
excessive fees which were passed on to the plaintiffs. (Id. at p. 722.) Hirsch
involved plaintiffs who alleged they paid overcharges in the form of excessive
fees that were unjustly retained by the defendant at the plaintiffs expense.
If Chase can show that it obtained "servicing interests" in Plaintiff's loan, then
perhaps Chase can also prove that it actually forwarded payments from Plaintiff to
the beneficial owner of the loan. If Chase kept the money, it was unjustly enriched at
Plaintiff's expense.
Defendant cites Melchior v. New Line Productions, 106 Cal.App.4th 779 (2003)
for the proposition that unjust enrichment is not a cause of action. Unjust enrichment
would be the result if Chase is not the Lender and it were to retain the payments, but
the Third Cause of Action is brought under a theory of Quasi Contract. Melchior
was a screenwriter who alleged that defendants converted his script to produce an
episode of the Columbo television series. The court wrote, The phrase Unjust
Enrichment does not describe a theory of recovery, but an effect: the result of a
failure to make restitution under circumstances where it is equitable to do so
(citation). Unjust enrichment is a general principle, underlying various legal
doctrines and remedies, rather than a remedy itself. (citing Dinosaur Development,
Inc. v. White (1989) 216 Cal.App.3d 1310, 1315, 265 Cal.Rptr. 525.) It is
synonymous with restitution. The court continues, "Melchior suggests he is entitled
to restitution under a quasi-contract theory. He did not plead this theory of recovery,
and he points to nothing in the record that suggests it was before the trial court in
ruling on the summary judgment motion. It consequently cannot serve as a basis for
reversing the summary judgment." 106 Cal.App.4th 779, 793. So the Melchior court
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recognized quasi contract as a valid theory of recovery which had not been pled.

4. NO CONTRACT FOURTH CAUSE OF ACTION
Contracts are not formed every time two people shake hands, or exchange things
of value, or talk about how they expect things to turn out. If a trader sells a diseased
camel to an unsuspecting buyer on a promise to pay over time and the camel dies the
following day, there is no contract. They buyer doesn't have to pay.
No contract was formed between WaMu and Plaintiff because there was no
meeting of the minds and no shared expectation. A contract is not simply words on
paper. WaMu did not disclose to Plaintiff that it committed underwriting fraud by
altering Plaintiff's loan application to satisfy underwriting requirements for the
loans. WaMu's intent was evidenced by WaMu's failure to provide Plaintiff with
copies of documents as required by Section 17 of the Deed of Trust and provisions
of TILA. WaMu did not inform Plaintiff that his loan had already been sold to
investors and that WaMu would not have any beneficial interest in the loan.
Chase asserts that the one-year Statute of Limitations has expired, but the failure
of WaMu to provide documents at closing, a clear violation of federal law, serves a
different evidentiary purpose. It shows motive. WaMu didnt fund the mortgage
from its own assets, but rather brokered the loan with funds provided by institutional
investors. WaMu did not provide the borrower with a copy of the loan application
because it didnt want to alert the borrower to the fact that it was pooling toxic waste
for unsuspecting investors. This is not a question of whether Chase assumed a
liability in the P&A Agreement with FDIC. It shows that Plaintiff and WaMu never
came to a mutual understanding.
Some decisions have suggested that lenders do not have a duty to ascertain the
ability of borrowers to repay home loans. If lenders have no duty to weigh the
likelihood that borrowers can demonstrate even a remote ability to repay bank loans,
then our time-tested system governing transfers of interest in real estate is
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collapsing. Title companies are beginning to refuse to guarantee title.
Evaporation of the duty of the lender to follow commonly accepted underwriting
practices resulted in the current economic crisis. It was not just that banks didn't care
if the homeowners could pay back their loans that crippled our economy. They made
loans knowing that the borrowers could never possibly pay them back. If one party
enters into an agreement knowing full well that the other party will default, there is
no contract. It is not a question of duty or liability. There is no contract because there
is no shared expectation. It is void ab initio.
At the same time that WaMu was implementing its high risk lending
strategy, WaMu and Long Beach engaged in a host of shoddy lending
practices that produced billions of dollars in high risk, poor quality mortgages
and mortgage backed securities. Those practices included qualifying high risk
borrowers for larger loans than they could afford; steering borrowers from
conventional mortgages to higher risk loan products; accepting loan
applications without verifying the borrowers income; using loans with low,
short term teaser rates that could lead to payment shock when higher
interest rates took effect later on; promoting negatively amortizing loans in
which many borrowers increased rather than paid down their debt; and
authorizing loans with multiple layers of risk. In addition, WaMu and Long
Beach failed to enforce compliance with their own lending standards; allowed
excessive loan error and exception rates; exercised weak oversight over the
third party mortgage brokers who supplied half or more of their loans; and
tolerated the issuance of loans with fraudulent or erroneous borrower
information. They also designed compensation incentives that rewarded loan
personnel for issuing a large volume of higher risk loans, valuing speed and
volume over loan quality.
As a result, WaMu, and particularly its Long Beach subsidiary, became
known by industry insiders for its failed mortgages and poorly performing
residential mortgage backed securities (RMBS). Among sophisticated
investors, its securitizations were understood to be some of the worst
performing in the marketplace.
Documents obtained by the Subcommittee reveal that WaMu launched its
high risk lending strategy primarily because higher risk loans and mortgage-
backed securities could be sold for higher prices on Wall Street. They
garnered higher prices because higher risk meant the securities paid a higher
coupon rate than other comparably rated securities, and investors paid a higher
#:763

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price to buy them. Selling or securitizing the loans also removed them from
WaMus books and appeared to insulate the bank from risk.
Wall Street and the Financial Crisis - Anatomy of a Financial Collapse, the
U.S. Senate Permanent Subcommittee on Investigations (April 13, 2011)p. 2-4

Meeting of the minds is a necessary element in the formation of a contract, a
notion that dates back to the origins of contract law. Consent of the parties is one of
the requisites of a valid contract for the sale of realty. Ussery v. Jackson, 78 Cal.
App. 2d 355 (1947). It is essential to the creation of such a contract that there be a
meeting of the minds of the parties and a mutual agreement on the terms of the
contract. Holland v. McCarthy, 173 Cal. 597 (1916); German Sav. & Loan Soc. v.
McLellan, 154 Cal. 710 (1908); Lonergan v. Scolnick, 129 Cal. App. 2d 179 (1954);
Cook v. Mielke, 3 Cal. App. 2d 736 (1935).
The writing must evince a free and mutual understanding of the parties and show
that they both agreed on the same thing in the same sense, Estes v. Hardesty, 66 Cal.
App. 2d 747 (1944), or the writing has no binding effect on either. Patterson v.
Clifford F. Reid, Inc., 132 Cal. App. 454 (1933); Scott v. Los Angeles Mountain
Park Co., 92 Cal. App. 258 (1928). When the writing shows that there was no
meeting of the minds on the material terms of the proposed agreement, no contract
exists, no obligation to convey rests on the vendor, and the purchaser is under no
duty to accept the property or pay for it. Burgess v. Rodom, 121 Cal. App. 2d 71
(1953); Salomon v. Cooper, 98 Cal. App. 2d 521 (1950). In such a case it is
immaterial that the signature of the party charged, or of both parties, is affixed.
Patterson v. Clifford F. Reid, Inc., 132 Cal. App. 454 (1933); Morton v. Foss, 48
Cal. App. 2d 117 (1941).
It is indispensable to a valid memorandum of an agreement to sell and convey
land that it be complete evidence of the terms to which the parties have assented. If
it establishes that there was in fact no contract, if it discloses that upon essential and
material terms the minds of the parties did not meet and that such terms were left
#:764

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open for future settlement, then there is no binding obligation upon the seller to
convey or the buyer to accept and pay for the land. It will be regarded as merely an
inchoate effort. Implications will not be indulged. Salomon v. Cooper, 98
Cal.App.2d 521, 522-523 (1950).
An action for damages for breach of contract for the purchase or sale of real
property will not lie unless the writing contains the essential terms and material
elements of such an agreement without recourse to parole evidence of the intention
of the contracting parties. Dillingham v. Dahlgren, 52 Cal.App. 322, 326-327
(1921). "Plaintiff's evidence does not establish the indispensable 'meeting of the
minds' regarding the material terms of this transaction and, therefore, the existence
of an enforceable contract." Martin Deli v. Schumacher, 52 N.Y.2d 105, 109, 436
N.Y.S.2d 247, 417 N.E.2d 541 (1981).
David Horton wrote in the UCLA Law Review, "The perception that adherents
(to standard form contracts) did not read and could not understand fine-print terms
made it difficult to identify the requisite 'meeting of the minds' or 'mutual assent' of
contract formation." David Horton, "The Shadow Terms: Contract Procedure and
Unilateral Amendments," 57 UCLA Law Review 605 (February, 2010).
William R. Hubbard wrote, "(T)he core of a contract is the parties' meeting of the
minds, which both parties will want to memorialize clearly. If a dispute arises
regarding the meaning of a contract term, both parties can provide evidence
regarding the meeting of the minds. William Hubbard, "Efficient Definition and
Communication of Patent Rights: the Importance of Ex Post, Santa Clara Computer
and High Technology Law Journal (January, 2009).

5. QUIET TITLE FIFTH CAUSE OF ACTION
Defendant argues that tender of the full amount of the debt is necessary, citing
Nool, Pagtalunan, Miller, and Caravantes. However, if Chase has no enforceable
claim to the Property, and cannot produce any evidence that it acquired or possesses
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any rights to the property, then full tender would be an onerous requirement to stop
their frivolous claim. Any crook could file a Notice of Trustee's Sale and evict a
homeowner. If lack of resources prevented the homeowner from having his day in
court, how would he prove that the thief had an illegitimate claim? Mabry states that
a requirement of tender would defeat the purpose of Civ. Code 2923.5. Mabry v.
Aurora Loan Services, 185 Cal.App.4
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208 (2010). The same principle applies
where the foreclosing party can offer no evidence that it is authorized to foreclose.
The core issue in this case is to ascertain who is the Lender. Plaintiff did not
borrow money from Chase. Plaintiff's pre-discovery inquiries indicate that WaMu
did not own the loan on September 25, 2008, and therefore Chase is not the Lender.
This issue cannot be brushed aside because California is a non-judicial state.
In California, an obligation arises either from the contract of the parties or by
operation of law. Cal. Civ. Code 1428; Cal. Code Civ. Proc. 26. A mortgage is a
contract. Cal. Civ. Code 2920(a). A power of sale is conferred on the mortgagee,
trustee, or other person by the mortgage. Cal. Civ. Code 2924.
The Adjustable Rate Note attached to the SAC as Exhibit 3 identifies
Washington Mutual Bank as the Lender in 1, which then says, "Lender or anyone
who takes this Note by transfer and who is entitled to receive payments under this
Note is called the "Note Holder."
The Note states in 7(C): "Notice of Default. If I am in default, the Note Holder
may send me a written notice telling me that if I do not pay the overdue amount by a
certain date, the Note Holder may require me to pay immediately the full amount"
So the Note gives the right to collect, if timely payments are not made, to the
Lender and anyone who takes the Note by transfer. This does not include a servicer
who is not the holder of the Note.
In Plaintiff's Deed of Trust (SAC Exhibit 4) the "Lender" is WASHINGTON
MUTUAL BANK, FA (page 1, C). The "Trustee" is CHICAGO TITLE
COMPANY (page 2, D).
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Consistent with the Note, only the Lender is authorized under 22 of the DOT
to accelerate the loan:
"Lender shall give notice to Borrower prior to acceleration following
Borrower's breach of any covenant of agreement in this Security
Instrument
"If Lender invokes the power of sale, Lender shall execute or cause
Trustee to execute a written notice of the occurrence of an event of
default and of Lender's election to cause the Property to be sold. Trustee
shall cause this notice to be recorded in each county in which any part of
the Property is located." (DOT page 13, 22).
Washington Mutual Bank remained the Lender for no more than a few days until
it sold the loan. Thereafter, it was, at best, a servicer of the loan. The Lender was the
investment trust that put up the money.
Foreclosure of the Wellworth Property was commenced by CRC, having been
appointed trustee on April 30, 2010, by Chase. Chase was not the Lender. The DOT
(SAC Exhibit 4) states on page 13, paragraph 24:
"Lender, at its option, may from time to time appoint a successor Trustee
to any Trustee appointed hereunder by an instrument executed and
acknowledged by Lender and recorded in the office of the Recorder of the
county in which the Property is located." (SAC Exhibit 8, 24).
Defendant asks the Court's approval to proceed with foreclosure of Plaintiff's
property on the basis of a NOD and NOTS filed by CRC, a wholly owned subsidiary
of Chase (SAC 16) that was appointed as successor Trustee by Chase even though
Chase is not the Lender and has not revealed who the Lender might possibly be.
Defendant cites Cal. Civ. Code 2934 for the proposition that an assignment of a
deed of trust is not required to be recorded in order to provide constructive notice of
the contents of the deed of trust. (P&A 6:11-14). That section actually says: "Any
assignment of a mortgage and any assignment of the beneficial interest under a deed
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of trust may be recorded, and from the time the same is filed for record operates as
constructive notice of the contents thereof to all persons;" The case cited by
Defendant, Santens v. Los Angeles Finance Co., 91 Cal.Ap.2d 197, 201 (1949) was
concerned with whether a bona fide purchaser at an execution sale was bound by an
assignment of the note if the deed of trust was not recorded.
Cal. Civ. Code 2934a provides:
(a) (1) The trustee under a trust deed upon real property or an estate for years
therein given to secure an obligation to pay money and conferring no other duties
upon the trustee than those which are incidental to the exercise of the power of sale
therein conferred, may be substituted by the recording in the county in which the
property is located of a substitution executed and acknowledged by:
(A) all of the beneficiaries under the trust deed, or their successors in interest
Nowhere does the Civil Code allow for assignment of a Deed of Trust by the
assignee acting on its own behalf.
Since Chase is not the Lender, it would violate the terms of the Note and the
Deed of Trust to dismiss the SAC and allow Chase to foreclose as a result of a
forged Assignment of Deed of Trust signed by someone working for the Assignee.
Plaintiff holds a grant deed. Chase has a contested Purchase and Assumption
Agreement that has generated millions of dollars in lawyers' fees every month.
Plaintiff is ready, willing and able to resume monthly payments to the owner of
the note, but is Chase legally entitled to receive these funds from Plaintiff? Chase
must show that it is the beneficiary of the note, or that it is acting on behalf of the
beneficiary with the beneficiary's blessing. Plaintiff is informed and believes that
Chase cannot produce the necessary instruments. Plaintiff will show at trial that the
promissory note was bundled into a presold Trust which was then pooled and sold
to investors many times over. The note was separated from the deed of trust and
atomized. It no longer exists as an enforceable mortgage document.

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Multiple banks may attempt to foreclose upon the same property. Borrowers
who have already suffered foreclosure may seek to regain title to their homes
and force any new owners to move out. Would-be buyers and sellers could
find themselves in limbo, unable to know with any certainty whether they can
safely buy or sell a home. If such problems were to arise on a large scale, the
housing market could experience even greater disruptions than have already
occurred, resulting in significant harm to major financial institutions. For
example, if a Wall Street bank were to discover that, due to shoddily executed
paperwork, it still owns millions of defaulted mortgages that it thought it sold
off years ago, it could face billions of dollars in unexpected losses. (COP
Report, p. 4-5)

6. DECLARATORY/INJUNCTIVE RELIEF SIXTH CAUSE OF ACTION
Plaintiff's home was scheduled by CRC to be sold on the Courthouse steps on
November 8, 2010. A Trustee's Sale of Plaintiff's home is currently scheduled for
June 10, 2011. There is a significant and grueling controversy brewing between the
parties and a pressing need for a judicial determination of the parties' rights and
duties concerning the validity of the Promissory Note and Deed of Trust.
Plaintiff requests a Temporary Restraining Order and Preliminary Injunction
restraining defendant from conducting a Trustee's Sale of the Property during the
pendency of this action.

7. INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS SEVENTH
CAUSE OF ACTION
"An assertion of legal rights based on one's own economic interests does not
qualify as 'outrageous' under this standard" argues defendant, citing Trerice v. Blue
Cross, 209 Cal.App3d 878, 883 (1989).
Times have changed since 1989. The mortgage meltdown in the past decade was
outrageous, devastating, and extremely distressful for the millions of families who
lost their homes. To Chase it may seem to be business-as-usual, but Defendant's
conduct as alleged in the SAC was so outrageous that it exceeded all bounds
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tolerated in a civilized societyforged documents, systemic perjury, underwriting
fraud, selling worthless junk to unsuspecting retirement funds, and attempting to
take a family's home without any legal claim to the property.
Defendant concludes by citing Kruse v. Bank of America, 202 Cal.App.3d 38, 67
(1988), which states there is no claim for intentional infliction of emotional distress
where the lender simply attempted to collect a debt due under a security interest.
That depends on whether the interloper is the Lender, and that is why Defendant's
motion to dismiss must be denied.
Public Faith in Due Process Could Suffer. If the public gains the
impression that the government is providing concessions to large banks in
order to ensure the smooth processing of foreclosures, the people's
fundamental faith in due process could suffer (COP Report, p. 84).

8. CONCLUSION
For the foregoing reasons, Plaintiff Daryoush Javaheri respectfully requests that
the Court deny Defendant's Motion to Dismiss. If any claims are insufficiently plead,
Plaintiff requests leave to amend. Where a motion to dismiss is granted, a district
court should provide leave to amend unless it is clear that the Complaint could not
be saved by any amendment. Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048,
1052 (9th Cir. 2003). The Ninth Circuit requires that this policy favoring amendment
be applied with extreme liberality. Morongo Band of Mission Indians v. Rose, 893
F.2d 1074, 1079 (9th Cir. 1990).

Date: May 16, 2011 /s/___________________________
DOUGLAS GILLIES
DARYOUSH JAVAHERI

#:770

Request for Judicial Notice
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DOUGLAS GILLIES, ESQ. (CA Bar No. 53602)
3756 Torino Drive
(805) 682-7033

DARYOUSH JAVAHERI


DARYOUSH JAVAHERI,
Plaintiff,
v.
Defendants.
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Case No. CV 10-8185-ODW (FFMx)

JUDGE: HON. OTIS D. WRIGHT II

REQUEST FOR JUDICIAL NOTICE
IN OPPOSITION TO MOTION TO
DISMISS SECOND AMENDED
COMPLAINT

DATE: June 6, 2011
TIME: 1:30 PM
COURTROOM: 11

TO DEFENDANT JP MORGAN CHASE BANK N.A., AND ITS ATTORNEYS OF
RECORD:
Plaintiff DARYOUSH JAVAHERI hereby requests that the Court take judicial
notice pursuant to Federal Rules of Evidence section 201(b), 201(c), and 201(d) of the
following documents:
1. Congressional Oversight Panel November Oversight Report released on
#:771

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November 16, 2010, stored and available to the public for retrieval and review at
http://cop.senate.gov/documents/cop-111610-report.pdf. A true and correct copy is
attached hereto as Exhibit 15.
2. Federal Reserve System Consent Order in the Matter of JPMORGAN CHASE
& CO. and EMC MORTGAGE CORPORATION, Docket No. 11-023-B-HC and 11-
023-B-DEO, dated April 13, 2011, stored and available to the public for retrieval and
review at www.federalreserve.gov/newsevents/press/enforcement/enf20110413a5.pdf.
A true and correct copy is attached hereto as Exhibit 16.

Date: May 16, 2011 /s/_______________________
Douglas Gillies
DARYOUSH JAVAHERI

#:772
Plaintiff's Exhibits

Exhibit Description

15 Congressional Oversight Panel Report 11/16/2010

16 Fed Reserve Consent Order re JPMorgan Chase 4/13/2011

#:773

EXHIBIT 15
#:774
#:775
November 16,
2010
Congressional Oversight Panel
NOVEMBER
OVERSIGHT REPORT
Examining the Consequences of Mortgage
Irregularities for Financial Stability and Foreclosure
Mitigation
'Submitted under Section 12S(b)(1) of Title 1 of the Emergency Economic
Stabilization Act of 2008, Pub. L. No. 110-343
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*
#:776
Table of Contents
Executive Summary ............................................................................................................ .4
Section One:
A. Overview .................................................................................................................. 7
B. Background .............................................................................................................. 9
C. Timeline ................................................................................................................. 10
D. Legal Consequences of Document Irregularities ................................................... 14
I. Potential Flaws in the Recording and Transfer of Mortgages and
Violations of Pooling and Servicing Agreements ........................................... .16
2. Possible Legal Consequences of the Document Irregularities to
Various Parties ................................................................................................ .24
3. Additional Considerations ............................................................................... .33
E. Court Cases and Litigation .................................................................................... .34
I. Fraud Claims .................................................................................................... .35
2. Existing and Pending Claims under Various Fraud Theories .......................... .40
3. Other Potential Claims ..................................................................................... .42
4. Other State Legal Steps ..................................................................................... 44
5. Other Possible Implications: Potential "Front-end" Fraud and
Documentation Irregularities .......................................................................... .46
F. Assessing the Potential Impact on Bank Balance Sheets ....................................... 51
I. Introduction ....................................................................................................... 51
2. Foreclosure Irregularities: Estimating the Cost to Banks ................................ .59
3. Securitization Issues and Mortgage Put-backs ................................................. 63
2
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#:777
=
G. Effect of Irregularities and Foreclosure Freezes on Housing Market .................... 73
1. Foreclosure Freezes and their Effect on Housing ............................................. 73
2. Foreclosure Irregularities and the Crisis of Confidence ................................... 78
H. Impact on HAMP ................................................................................................... 79
I. Conclusion ............................................................................................................. 82
Section Two: Correspondence with Treasury .................................................................... 85
Section Three: T ARP Updates Since Last Report ............................................................. 86
Section Four: Oversight Activities ................................................................................... 122
Section Five: About the Congressional Oversight Panel ................................................. l24
Appendices:
APPENDIX I: LETTER FROM CHAIRMAN TED KAUFMAN TO
SPECIAL MASTER PATRICIA GEOGHEGAN, RE: FOLLOW UP TO
EXECUTIVE COMPENSATION HEARING, DATED NOVEMBER 1, 2010 ...... 125
3
#:778
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Executive Summary *
In the fall of 201 0, reports began to surface alleging that companies servicing $6.4 trillion
in American mortgages may have bypassed legally required steps to foreclose on a home.
Employees or contractors of Bank of America, GMAC Mortgage, and other major loan servicers
testified that they signed, and in some cases backdated, thousands of documents claiming
personal knowledge of facts about mortgages that they did not actually know to be true.
Allegations of "robo-signing" are deeply disturbing and have given rise to ongoing
federal and state investigations. At this point the ultimate implications remain unclear. It is
possible, however, that "robo-signing" may have concealed much deeper problems in the
mortgage market that could potentially threaten fmancial stability and undermine the
government's efforts to mitigate the foreclosure crisis. Although it is not yet possible to
determine whether such threats will materialize, the Panel urges Treasury and bank regulators to
take immediate steps to understand and prepare for the potential risks.
In the best-case scenario, concerns about mortgage documentation irregularities may
prove overblown. In this view, which has been embraced by the financial industry, a handful of
employees failed to follow procedures in signing foreclosure-related affidavits, but the facts
underlying the affidavits are demonstrably accurate. Foreclosures could proceed as soon as the
invalid affidavits are replaced with properly executed paperwork.
The worst-case scenario is considerably grimmer. In this view, which has been
articulated by academics and homeowner advocates, the "robo-signing" of affidavits served to
cover up the fact that loan servicers cannot demonstrate the facts required to conduct a lawful
foreclosure. In essence, banks may be unable to prove that they own the mortgage loans they
claim to own.
The risk stems from the possibility that the rapid growth of mortgage securitization
outpaced the ability of the legal and financial system to track mortgage loan ownership. In
earlier years, under the traditional mortgage model, a homeowner borrowed money from a single
bank and then paid back the same bank. In the rare instances when a bank transferred its rights,
the sale was recorded by hand in the borrower's county property office. Thus, the ownership of
any individual mortgage could be easily demonstrated.
Nowadays, a single mortgage loan may be sold dozens of times between various banks
across the country. In the view of some market participants, the sheer speed of the modern
mortgage market has rendered obsolete the traditional ink-and-paper recordation process, so the
fmancial industry developed an electrouic transfer process that bypasses county property offices.
'The Panel adopted this report with. 5-0 vote on November 15, 2010.
4
#:779
This electronic process has, however, faced legal challenges that could, in an extreme scenario,
call into question the validity of 33 million mortgage loans.
Further, the financial industry now commonly bundles the rights to thousands of
individual loans into a mortgage-backed security (MBS). The securitization process is
complicated and requires several properly executed transfers. If at any point the required legal
steps are not followed to the letter, then the ownership of the mortgage loan could fall into
question. Homeowner advocates have alleged that frequent "robo-signing" of ownership
affidavits may have concealed extensive industry failures to document mortgage loan transfers
properly.
If documentation problems prove to be pervasive and, more importantly, throw into doubt
the ownership of not only foreclosed properties but also pooled mortgages, the consequences
could be severe. Clear and uncontested property rights are the foundation of the housing market.
If these rights fall into question, that foundation could collapse. Borrowers may be unable to
determine whether they are sending their monthly payments to the right people. Judges may
block any effort to foreclose, even in cases where borrowers have failed to make regular
payments. Multiple banks may attempt to foreclose upon the same property. Borrowers who
have already suffered foreclosure may seek to regain title to their homes and force any new
owners to move out. Would-be buyers and sellers could find themselves in limbo, unable to
know with any certainty whether they can safely buy or sell a home. If such problems were to
arise on a large scale, the housing market could experience even greater disruptions than have
already occurred, resulting in significant harm to major financial institutions. For example, if a
Wall Street bank were to discover that, due to shoddily executed paperwork, it still owns
millions of defaulted mortgages that it thought it sold off years ago, it could face billions of
dollars in unexpected losses.
Documentation irregularities could also have major effects on Treasury's main
foreclosure prevention effort, the Home Affordable Modification Program (RAMP). Some
servicers dealing with Treasury may have no legal right to initiate foreclosures, which may call
into question their ability to grant modifications or to demand payments from homeowners. The
servicers' use of "robo-signing" may also have affected determinations about individual loans;
servicers may have been more willing to foreclose if they were not bearing the full costs of a
properly executed foreclosure. Treasury has so far not provided reports of any investigation as to
whether documentation problems could undermine RAMP. It should engage in active efforts to
monitor the impact of foreclosure irregularities, and it should report its findings to Congress and
the public.
In addition to documentation concerns, another problem has arisen with securitized
mortgage loans that could also threaten financial stability. Investors in mortgage-backed
securities typically demanded certain assurances about the quality of the loans they purchased:
for instance, that the borrowers had certain minimum credit ratings and income, or that their
----- - -- ---
5
#:780
homes had appraised for at least a minimum value. Allegations have surfaced that banks may
have misrepresented the quality of many loans sold for securitization. Banks found to have
provided misrepresentations could be required to repurchase any affected mortgages. Because
millions of these mortgages are in default or foreclosure, the result could be extensive capital
losses if such repurchase risk is not adequately reserved.
To put in perspective the potential problem, one investor action alone could seek to force
Bank of America to repurchase and absorb partial losses on up to $47 billion in troubled loans
due to alleged misrepresentations of loan quality. Bank of America currently has $230 billion in
shareholders' equity, so if several similar-sized actions - whether motivated by concerns about
underwriting or loan ownership - were to succeed, the company could suffer disabling damage
to its regulatory capital. It is possible that widespread challenges along these lines could pose
risks to the very financial stability that the Troubled Asset Relief Program was designed to
protect. Treasury has claimed that based on evidence to date, mortgage-related problems
currently pose no danger to the fmancial system, but in light of the extensive uncertainties in the
market today, Treasury's assertions appear premature. Treasury should explain why it sees no
danger. Bank regulators should also conduct new stress tests on Wall Street banks to measure
their ability to deal with a potential crisis.
The Panel emphasizes that mortgage lenders and securitization servicers should not
undertake to foreclose on any homeowner unless they are able to do so in full compliance with
applicable laws and their contractual agreements with the homeowner.
The American financial system is in a precarious place. Treasury's authority to support
the financial system through the Troubled Asset Relief Program has expired, and the resolution
authority created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of2010
remains untested. The 2009 stress tests that evaluated the health of the fmancial system looked
only to the end of 20 I 0, providing little assurance that banks could withstand sharp losses in the
years to come. The housing market and the broader economy remain troubled and thus
vulnerable to future shocks. In short, even as the government's response to the fmancial crisis is
drawing to a close, severe threats remain that have the potential to damage fmancial stability.
6
#:781
Section One:
A. Overview
In the fall of2010, with the Troubled Asset Relief Program's (TARP) authority expiring,
reports began to surface of problems with foreclosure docwnentation, particularly in states where
foreclosures happen through the courts. GMAC Mortgage, a subsidiary of current T ARP
recipient Ally Financial, announced on September 24, 2010 that it had identified irregularities in
its foreclosure docwnent procedures that raised questions about the validity of foreclosures on
mortgages that it serviced. Similar revelations soon followed from Bank of America, a former
T ARP recipient, and others. Employees of these companies or their contractors have testified
that they signed, and in some cases backdated, thousands of docwnents attesting to personal
knowledge of facts about the mortgage and the property that they did not actually know to be
true. Mortgage servicers also appeared to be cutting corners in other ways. According to these
banks, their employees were having trouble keeping up with the crush of foreclosures, but
additional training and employees would generally suffice to get the process in order again.
At present, the reach of these irregularities is unknown. The irregularities may be limited
to paperwork errors among certain servicers in certain states; alternatively, they may call into
question aspects of the securitization process that pooled and sold interests in innwnerable
mortgages during the housing boom. Depending on their extent, the irregularities may affect
both Treasury's ongoing foreclosure programs and the financial stability that Treasury, under the
Emergency Economic Stabilization Act of 2008 (EESA), was tasked with restoring. Further, the
mortgage market faces ongoing risks related to the right of mortgage-backed securities to force
banks to repurchase any loans. Losses stemming from these repurchases would compound any
risks associated with docwnentation irregularities.
Under EESA, the Congressional Oversight Panel is charged with reviewing the current
state of the financial markets and the regulatory system. The Panel's oversight interest in
foreclosure docwnentation irregularities stems from several distinct concerns:
If Severe Disruptions in the Housing Market Materialize, Financial Stability and Taxpayer
Funds Could Be Imperiled. If document irregularities prove to be pervasive and, more
importantly, throw into question ownership of not only foreclosed properties but also pooled
mortgages, the result could be significant harm to fmancial stability - the very stability that the
T ARP was designed to protect. In the worst case scenario, a clear chain of title - an essential
element of a functioning housing market - may be difficult to establish for properties subject to
mortgage loans that were pooled and securitized. Rating agencies are already cautious in their
outlook for the banking sector, and further blows could have a significant effect. The
implications could also be dire for taxpayers' recovery of their T ARP investments. Treasury still
7
#:782
po
has $66.8 billion invested in the banking sector generally, and as the Panel discussed in its July
report, "Small Banks in the Capital Purchase Program," the prospects for repayment from
smaller banks are still uncertain and dependent, in great part, on a sector healthy enough to
attract private investment. I
RAMP May Rely on Uncertain Legal Authority and Inaccurate Foreclosure Cost
Estimates, PotentiaUy Posing a Risk to Foreclosure Mitigation Efforts. If irregularities in the
foreclosure process reflect deeper failures to document properly changes of ownership as
mortgage loans were securitized, then it is possible that Treasury is dealing with the wrong
parties in the course of the Home Affordable Modification Program (HAMP). This could mean
that borrowers either received or were denied modifications improperly. Some servicers dealing
with Treasury may have no legal right to initiate foreclosures, which may call into question their
ability to grant modifications or to demand payments from homeowners, whether they are part of
a foreclosure mitigation program or otherwise. The servicers' tendency to cut comers may also
have affected the determination to modify or foreclose upon individual loans. Because the net
present value (NPV) model compares the net present value of the modification to a foreclosure,
improper procedures that cut comers might have affected the foreclosure cost calculation and
thus might have affected the outcome of the NPV test.
T ARP-Recipient Banks May Have Failed to Meet Legal Obligations. Many of the entities
implicated in the recent document irregularities, including Ally Financial, Bank of America, and
JPMorgan Chase, are current or former TARP recipients. Ally Financial, notably, remains in
TARP and is in possession of$17.2 billion in taxpayer funds. Bank of America received funds
not only from TARP's Capital Purchase Program (CPP) but also what Treasury deemed
"exceptional assistance" from T ARP's Targeted Investment Program (TIP). Some of the banks
involved were also subject to the Supervisory Capital Assessment Program (SCAP), also known
as the stress tests: Treasury's and the Board of Governors of the Federal Reserve's (Federal
Reserve) efforts to determine the health of the largest banks under a variety of stressed scenarios.
The Congressional Oversight Panel will continue to monitor Treasury's engagement with
these ongoing events, not only to protect the taxpayers' existing T ARP investments and to
oversee its foreclosure mitigation programs, but also to meet the Panel's statutory mandate to
"review the current state of the fmancial markets and the regulatory system."
1 Taxpayers may also be at risk for losses related to Treasury's investmenl in AIG. The Maiden Lane II
and Maiden Lane III vehicles, which lhe Federal Reserve Bank of New York (FRBNY) created to hold assets
purchased from AIG, hold substantial amounts ofresideotial mortgage-backed securities (RMBSs), most of which
are either sub-prime or Alt-A mortgages originated during the housing boom. Treasury's ability to recover the funds
it has put into AIG depends in significant part on FRBNY's ability to collect on these investments, and uncertainty
associated with the investments could hinder that process.
8
#:783
B. Background
In the fall of 20 I 0, a series of revelations about foreclosure documentation irregularities
hit the housing markets. The transfer of a property's title from the mortgagor (the homeowner)
to the mortgagee (typically a bank or a trust) necessary for a successful foreclosure requires a
series of steps established by state law.
2
As further described below, depositions taken in a
variety of cases in which homeowners were fighting foreclosure actions indicated that mortgage
servicer employees - who were required to have personal knowledge of the matters to which
they were attesting in their affidavits - were signing hundreds of these documents a day. Other
documents appeared to have been backdated improperly and ineffectively or incorrectly
notarized. While these documentation irregularities may sound minor, they have the potential to
throw the foreclosure system - and possibly the mortgage loan system and housing market itself
- into turmoil. At a minimum, in certain cases, signers of affidavits appear to have signed
documents attesting to information that they did not verify and without a notary present. If this
is the extent of the irregularities, then the issue may be limited to these signers and the
foreclosure proceedings they were involved in, and in many cases, the irregularities may
potentially be remedied by reviewing the documents more thoroughly and then resubmitting
them. If, however, the problem is related not simply to a limited number of foreclosure
documents but also to irregularities in the mortgage origination and pooling process, then the
impact of the irregularities could be far broader, affecting a vast number of investors in the
mortgage-backed securities (MBS) market, already completed foreclosures, and current
homeowners. This latter scenario could result in extensive litigation, an extended freeze in the
foreclosure market, and significant stress on bank balance sheets arising from the substantial
repurchase liability that can arise from mistakes or misrepresentations in mortgage documents.
3
2 These steps depend on whether a state is a judicial foreclosure state or a non-judicial foreclosure state, as
further described below, in footnote 17.
3 If mortgage documentation has errors or misrepresentations, buyers of the mortgage paper can "put-back"
the mortgage to its originator and require them to repurchase the mortgage. For a more complete discussion of this
possibility, see Sections D.I.b and D.2.
Several analysts and experts have speculated on the potential for widespread impact. Morgao Stanley,
HOUSing Market Insights: Washington. We Have a Problem (Oct. 12,2010); Antherst Mortgage Insight, The
Affidavit Fiasco -Implications for Investors in Private Label Securities (Oct. 12, 2010); FBR Capital Markets,
Conference Call: Foreclosure Mania: Big Deal or Not? (Oct. 15,2010) (hereinafter "FBR Foreclosure Mania
Conference Call"). In a conference call with investors, Jamie Dimon, CEO of JPMorgao Chase, speculated that the
issue could either be a "blip" or a more extended problem with "a lot of consequences. most of which will be
adverse on everybody." Cardiff Garcia, JPM on Foreclosures. MERS, Finaocial Times Alphaville Blog (Oct. 13,
2010) (online at ftalphaville.ft.comiblogl2010/10/13/369406/jpm-on-foreclosures-mersJ) (hereinafter "JPM on
Foreclosures, MERS") ("If you talk about three or four weeks it will be a blip in the housing market. If it went on
for a long period of time, it will have a lot of consequences, most of which will be adverse on everybody.").
9
#:784
c. TimeUne
After the housing market started to collapse in 2006, the effects rippled through the
financial sector and led to disruptions in the credit markets in 2008 and 2009. In an economy
that had been hit hard by the financial crisis and soon settled into a deep recession, the housing
market declined, dragging down housing prices and increasing the likelihood of default. This put
pressure on a variety of parties involved in the mortgage market. During the boom, there were
many players involved in the process of lending, securitizing, and servicing mortgages, and
many of these players took on multiple roles.
4
The initial role of servicers was largely administrative.
5
They were hired by the MBS
investors to handle all back-office functions for existing loans, and generally acted as
intermediaries between borrowers and MBS investors.
6
However, when the housing bubble
burst, and the number of delinquencies began to rise, the role of servicers evolved
correspondingly.
7
Servicer focus shifted from performing purely administrative tasks to
engaging in active loss mitigation efforts.
8
Servicers found themselves responsible for
processing all defaults, modifications, short sales, and foreclosures.
9
The servicers themselves
have admitted that they were simply not prepared for the volume of work that the crisis
generated. IO Thus, many servicers began subcontracting out much of their duties to so-called
"foreclosure mills," contractors that had significant incentives to move foreclosures along
quickly.
4 For example, it was not uncommon for a commercial bank to perfonn both lending and servicing
functions, and to have established separate lending and servicing anns of its organization. As discussed later in this
report, the securitization process begins with a lender/originator, often but not always a commercial bank. Next, the
mortgage is securitized by an investment bank. Finally, the mortgage is serviced. often also by a commercial bank
or its subsidiary. Even where the same banks are listed as doing both lending and servicing, they did not necessarily
service only the mortgages they originated. Source: Inside Mortgage Finance.
S See Office of the Special Inspector General for the Troubled Asset ReliefPrognrm, Quarterly Report to
Congress, at 157 (Oct. 26, 2010) (online at
www.sigtarp.gov/reports/congressl2010/0ctober2010_Quarterly_Report_to _ Congress.pdf) (hereinafter "October
2010 SIGTARP Report").
6 Servicer duties included fielding borrower inquiries, collecting mortgage payments from the borrowers,
and remitting mortgage payments to the trust. See !d. at 157, 164. See also Congressional Oversight Panel, March
Oversight Report: Foreclosure Crisis: Working Toward a Solution, at 4042 (Mar. 6, 2009) (online at
cop.senate.gov/documentslcop-030609-report.pdi) (hereinafter "March 2009 Oversight Report").
7 See March 2009 Oversight Report, supra note 6, at 40.
8 See March 2009 Oversight Report, supra note 6, at 40-42. See also October 2010 SIGT ARP Report,
supra note 5, at 158.
9 See October 2010 SIGTARP Report, supra note 5, at 157-158. In the spring of 2009, when Treasury
announced its Making Home Affordable program, the centerpiece of which was HAMP, servicers took on the
additional responsibility of processing all RAMP modifications.
- - ~ - - - - - - - - -
10
c. TimeUne
After the housing market started to collapse in 2006, the effects rippled through the
financial sector and led to disruptions in the credit markets in 2008 and 2009. In an economy
that had been hit hard by the financial crisis and soon settled into a deep recession, the housing
market declined, dragging down housing prices and increasing the likelihood of default. This put
pressure on a variety of parties involved in the mortgage market. During the boom, there were
many players involved in the process of lending, securitizing, and servicing mortgages, and
many of these players took on multiple roles.
4
The initial role of servicers was largely administrative.
5
They were hired by the MBS
investors to handle all back-office functions for existing loans, and generally acted as
intermediaries between borrowers and MBS investors.
6
However, when the housing bubble
burst, and the number of delinquencies began to rise, the role of servicers evolved
correspondingly.
7
Servicer focus shifted from performing purely administrative tasks to
engaging in active loss mitigation efforts.
8
Servicers found themselves responsible for
processing all defaults, modifications, short sales, and foreclosures.
9
The servicers themselves
have admitted that they were simply not prepared for the volume of work that the crisis
generated. IO Thus, many servicers began subcontracting out much of their duties to so-called
"foreclosure mills," contractors that had significant incentives to move foreclosures along
quickly.
4 For example, it was not uncommon for a commercial bank to perfonn both lending and servicing
functions, and to have established separate lending and servicing anns of its organization. As discussed later in this
report, the securitization process begins with a lender/originator, often but not always a commercial bank. Next, the
mortgage is securitized by an investment bank. Finally, the mortgage is serviced. often also by a commercial bank
or its subsidiary. Even where the same banks are listed as doing both lending and servicing, they did not necessarily
service only the mortgages they originated. Source: Inside Mortgage Finance.
S See Office of the Special Inspector General for the Troubled Asset ReliefPrognrm, Quarterly Report to
Congress, at 157 (Oct. 26, 2010) (online at
www.sigtarp.gov/reports/congressl2010/0ctober2010_Quarterly_Report_to _ Congress.pdf) (hereinafter "October
2010 SIGTARP Report").
6 Servicer duties included fielding borrower inquiries, collecting mortgage payments from the borrowers,
and remitting mortgage payments to the trust. See !d. at 157, 164. See also Congressional Oversight Panel, March
Oversight Report: Foreclosure Crisis: Working Toward a Solution, at 4042 (Mar. 6, 2009) (online at
cop.senate.gov/documentslcop-030609-report.pdi) (hereinafter "March 2009 Oversight Report").
8 See March 2009 Oversight Report, supra note 6, at 40-42. See also October 2010 SIGT ARP Report,
supra note 5, at 158.
9 See October 2010 SIGTARP Report, supra note 5, at 157-158. In the spring of 2009, when Treasury
announced its Making Home Affordable program, the centerpiece of which was HAMP, servicers took on the
additional responsibility of processing all RAMP modifications.
- - ~ - - - - - - - - -
10
#:785
Thus, as the boom in the housing market mutated into a boom in foreclosures, II banks
rushed to move delinquent borrowers out of their homes as quickly as possible, leading,
apparently, to procedures of which the best that can be said is that they were sloppy and cursory.
Concerns with foreclosure irregularities first arose when depositions of so-called "robo-signers"
came to light. 12 In a June 7, 2010, deposition, Jeffrey Stephan, who worked for GMAC
Mortgage
13
as a "limited signing officer," testified that he signed 400 documents each day. In at
least some cases, he signed affidavits without reading them and without a notary present. 14 He
11 Mortgages that are more than 90 days past due are concentrated in certain regions and states of the
country, including California, Nevada, Arimna, Florida, and Georgia. See Federal Reserve Bank of New York, Q3
Credit Conditions (Nov. 8, 2010) (online at www.newyorkfed.orglcreditconditionsf). Similarly, foreclosures are
concentrated in certain states, inclnding the so-called "sand states": Arizona, California, Nevada, and Florida. U.S.
Department of Housing and Urban Development, Report to Congress on the Root Causes o/the Foreclosure Crisis,
at vi (Jan. 2010) (online at www.huduser.orglPublicationsIPDFlForeclosure_09.pdf). The Panel's field hearings in
Clark County, Nevada, Prince George's County, Maryland, and Philadelphia, Pennsylvania, also touched on the
subject of high concentrations of foreclosures in those regions. See Congressional Oversight Panel, Clark County,
NV: Ground Zero of the Housing and Financial Crises (Dec. 16, 2008) (online at
cop.senate.govihearingsllibraryihearing-121608-firsthearing.cfm); Congressional Oversight Panel, COP Hearing:
Coping with the Foreclosure Crisis in Prince George's County, Maryland (Feb. 27, 2009) (online at
cop.senate.govihearingsllibraryihearing-022709-housing.cfm); Congressional Oversight Panel, Philadelphia Field
Hearing on Mortgage Foreclosures (Sept. 24, 2009) (online at cop.senate.govihearings/libraryihearing-092409-
philadelphia.cfm).
12 The details of "robo-signers" actions surfaced on the Internet in September 2010, including video and
transcriptions of depositions filed by robo-signers. See, e.g., The Florida Foreclosure Fraud Weblog, Jeffrey
Stephan Affidavits 'Withdrawn' by Florida Default Law Group (Sept. 15,2010) (online at
floridaforeclosurefraud.coml201 0/09/jeffrey-stephan-affidavits-withdrawn-by-florida-default-Iaw-groupf). Some of
this information was made public in court documents. For instance, in an order issued by a state court in Maine on
September 24, 2010, the judge noted that it was undisputed that Jeffrey Stephan had signed an affidavit without
reading it and that he had Dot been in the presence ofa notary when he signed it. Order on Four Pending Motions at
3, Federal National Mortgage Assoc. v. Nicolle Bradbury, No. BRI-RE-09-65 (Me. Bridgton D. Ct. Sept. 24, 2010)
(online at www.molleurlaw.comlthemedlmolleurlaw/filesluploadsl9_24 _I O%20Four''1020Motions%200rder.pdf)
(hereinafter "Federal National Mortgage Assoc. v. Nicolle Bradbury").
13 GMAC Mortgage is a subsidiary of Ally Financial. The Panel examined Ally Financial, then named
GMAC, in detail in its March 2010 report. See Congressional Oversight Panel, March Oversight Report: The
Unique Treatment of GMA C Under TARP (Mar. II, 20 I 0) (online at cop.senate.gov/documents/cop-03111 0-
report.pdf).
14 Federal National Mortgage Assoc. v. Nicolle Bradbury, supra note 12. There are two primary concerns
with affidavits. First: are the affidavits accurate? For example. even iftbe homeo\Wer is indebted, the amount of
the indebtedness is a part of the attestation. The amount of the indebtedness must be accurate because there might
be a subsequent deficiency judgment against the homeowner, which would require the homeowner to cover the
remaining amount owed to the lender. And even if there was no deficiency judgment, an inflated claim would
increase the recovery of the mortgage servicer from the foreclosure sale proceeds to the detriment of other parties in
the process. Second, even if the information in the affidavit is correct, it must be sworn out by someone with
personal knowledge of the indebtedness; otherwise it is hearsay and generally not admissible as evidence. See, e.g.,
Transcript of Court Proceedings, GMAC Mortgage, LLC v. Debbie Viscaro, et al., No. 07013084CI (Fla. Cir. Ct.
Apr. 7, 2010) (online at floridaforeclosurefraud.comlwp-contentiuploadsl2010/04/040710.pdl) (discussing whether
affected affidavits were admissible). See generally Congressional Oversight Panel, Written Testimony of Katherine
Porter. professor of law, University of Iowa College of Law, COP Hearing on TARP Foreclosure Mitigation
Programs (Oct. 27, 2010) (online at cop.senate.gov/documentsitestimony-10271 O-porter.pdf) (hereinafter "Written
Testimony of Katherine Porter'').
11
#:786
also testified that in doing so, he acted consistently with GMAC Mortgage's policies. 15
Similarly, faced with revelations that roho-signers had signed tens of thousands of foreclosure
documents without actually verifying the infonnation in them, Bank of America announced on
October 8, 20 I 0, that it would freeze foreclosure sales in all 50 states until it could investigate
and address the irregularities.
16
GMAC Mortgage took similar action, announcing that while it
would not suspend foreclosures, it had "temporarily suspended evictions and post-foreclosure
closings" in 23 states.
17
In a statement, it referred to the issue as a "procedural error ... in certain
affidavits" and stated that "we are confident that the processing errors did not result in any
inappropriate foreclosures." GMAC also announced that the company had taken three remedial
steps to address the problem: additional education and training for employees, the release of a
"more robust policy" to govern the process, and the hiring of additional staff to assist with
foreclosure processing. I g
15 Federal National Mortgage Assoc. v. Nicolle Bradbury, supra note 12. In addition, a Florida court
admonished GMAC for similar problems in 2006. Plainriff's Notice of Compliance with this Court's Order Dated
May I, 2006, TCIF RE02 v. Leibowitz, No. 162004CA004835XXXXMA (JWle 14,2006) (detailing GMAC's
policies on affidavits filed in foreclosure cases). These actions, if true. would be inconsistent with the usual
documentation requirements necessary for proper processing of a foreclosure, giving rise to concerns that the
foreclosure was not legally sufficient. See generally Written Testimony of Katherine Porter, supra note 14.
16 Bank of America Corporation, Statement from Bank of America Home Loans (Oct. 8, 2010) (online at
mediaroom.bankofamerica.comiphoenix.zhtmlk=234503&JFirol-newsArticle&1I}=1480657&highlight=)
(hereinafter "Statement from Bank of America Home Loans"). At the same time, Bank of America agreed to
indemnify Fidelity National Financial, a title insurer. for losses directly incurred by "failure to comply with state law
or local practice on both transactions in which foreclosure has already occurred or been initiated and those to be
initiated in the future." See Fidelity National Financial, Fidelity National Financial. Inc . Reports EPS of $0.36
(Oct. 20,2010) (online at files.shareholder.comidownloadslFNT/105 I 799 I I 7xOx4 I 10891209d6Ia9-8a05-454c-
90dl-4a78eOa7c4aeIFNF _News_201 0_1 0_20_Earnings.pdf). As ftn1her described below in Section 0.2, title
insurance is a critical piece of the mortgage market. Generally, title insurance insures against the possibility that
title is encumbered or unclear, and thereby provides crucial certainty in transactions involving real estate. The
insurance is retrospective - covering the history of the property until, but not after the sale, and is issued after a
review of the land title records. For a buyer, title insurance therefore insures against the possibility that a defect in
the title that is not apparent from the public records will affect their ownership. Industry sources conversations with
Panel staff (Nov. 9,2010). A title insurer's refusal to issue insurance can sigoificanUy hamper the orderly transfer
of real estate and interests collateralized by real estate. Bank of America's indemnity agreement with Fidelity
National Financial shifts the risk of covered losses arising from the foreclosure irregularities from Fidelity National
to Bank of America.
I? Twenty-two states require judicial oversight of foreclosure proceedings. In these judicial foreclosure
states the mortgagee must establish its claim - show that a borrower is in default - before a judge. In non-judicial
states a foreclosure can proceed upon adequate and timely notice to the borrower. as defined by statute. In
judicial states, a power of sale clause included in a deed of trust allows a trustee to conduct a non-judicial
foreclosure. Non-judicial foreclosures can proceed more quickly since they do not require adjudication. Mortgage
Bankers Association, Judicial Versus Non-Judicial Foreclosure (Oct. 26, 2010) (online at
Typically,
states that rely on mortgages are judicial foreclosure states, while states that rely on deeds of trust are non-judicial
foreclosure states. Standard & Poor's, Structured Finance Research Week: How Will the Foreclosure Crisis Affect
US. Home Prices? (Oct. 21,2010) (hereinafter "S&P on Foreclosure Crisis").
18 Ally Financial, inc., GMAC Mortgage Provides Update on Mortgage Servicing Process (Sept. 24,2010)
(online at media.aUy.comiindex.php?s=43&item=417).
12
#:787
These voluntary, privately determined suspensions were brier.I
9
On October 12,2010,
GMAC Mortgage released a statement indicating that in cases in which it had initiated a review
process for its foreclosure procedures, it would resume foreclosure proceedings once any
problems had been identified and, where necessary, addressed. It also noted that it "found no
evidence to date of any inappropriate foreclosures.,,2o On October 18, Bank of America
announced that it had completed its review of irregularities in the 23 states that require judicial
review of foreclosure proceedings and that it would begin processing foreclosure affidavits for
102,000 foreclosure proceedings in those states. It stated that it would review proceedings in the
remaining 27 states on a case-by-case basis and that foreclosure sales in those states would be
delayed until those reviews are complete. It further stated that in all states, it appeared that the
"basis of our foreclosure decisions is accurate.,,2l Various commentators, however, have
questioned Bank of America's ability to make such determinations in such a short timeframe.
22
Then, on October 27, another large bank entered the fray when Wells Fargo announced that it
had uncovered irregularities in its foreclosure processes and stated that it would submit
supplemental affidavits in 55,000 foreclosure actions.
23
Meanwhile, as the revelations of irregularities quickly multiplied, some argued that over
and above the banks' and servicers' voluntary actions, the federal government should impose a
nationwide moratorium on foreclosures.
24
Housing and Urban Development Secretary Shaun
Donovan rejected the idea, arguing that "a national, blanket moratorium on all foreclosure sales
would do far more harm than good.,,25 At the same time, on October 13, attorneys general from
19 To date, GMAC Mortgage and Bank of America have only resumed foreclosures in judicial foreclosure
states and are still reviewing their procedures in non-judicial foreclosure states.
20 Ally Financial, Inc., GMAC Mortgage Statement on Independent Review and Foreclosure Sales (Oct. 12,
2010) (online at media.ally.comlindex.php?s=l3&item=l21) (hereinafter "GMAC Mortgage Statement on
Independent Review and Foreclosure Sales'').
21 Bank of America Corporation, Statementfrom Banko! America Home Loans (Oct. 18,2010) (online at
mediaroom.bankofamerica.comlphoenix.zhlml?c='234503&p9rol-newsArticle&lD=14S3909&highlight=)
(hereinafter "Statement from Bank of America Home Loans'').
n See Written Testimony of Katherine Porter, supra note 14, at 10 ("In the wake of these parties'
longstanding allegations and fmdings of inappropriate and illegal practices, I am unable to give weight to recent
statements by banks such as Bank of America that only 10 to 25 of the first several hundred loans that it has
reviewed have problems.").
23 Wells Fargo & Company, Wells Fargo Provides Update on Foreclosure Affulavits and Mortgage
Securitizations (Oct. 27, 2010) (online at www.wellsfargo.comlpress/2010/20101027_Mortgage)(hereinafter .. Wells
Fargo Update on Affidavits and Mortgage Securitizations").
24 See. e.g., Office of Senator Harry Reid, Reid Welcomes Bank of America Decision. Calls On Others To
Follow Suit (Oct. S, 20 I 0) (online at reid.senate.gov/newsroomlpr _101 OOS _ hankofamerica.cfm) (hereinafter "Reid
Welcomes Bank of America Decision"); Dean Baker, Foreclosure Moratorium: Cracking Down on Liar Liens,
Center for Economic and Policy Research (Oct. IS, 2010) (online at www.cepr.netlindex.php/op-eds-&-columnslop-
e<1s-&-columns/foreclosure-momtorium-cracking-<lown-on-liar-liens) (hereinafter "Foreclosure Moratorium:
Cmcking Down on Liar Liens").
25 Shaun Donovan, secretary, U.S. Department of Housing and Urban Development, How We Can Really
Help Families (Oct. IS, 2010) (online at portal.hud.gov/portal/page/portal/HUD/presslhlog/2010Iblog201O-1O-IS).
13
#:788
I
aliSO states
26
announced a bipartisan effort to look into the possibility that documents or
affidavits were improperly submitted in their jurisdictions.
Although the public focus today lies generally on foreclosures, the possibility of
document irregularities in mortgage transactions has expanded beyond their significance to
foreclosure proceedings. Recently, investors have begun to claim that similar irregniarities in
origination and pooling ofloans should trigger actions against entities in the mortgage
origination, securitization, and servicing industries.
27
D. Legal Consequences oCDocument Irregularities
The possible legal consequences of the documentation irregularities described above
range from minor, curable title defects for certain foreclosed homes in certain states to more
serious consequences such as the unenforceability of foreclosure claims and other ownership
rights that rely on the ability to establish clear title to real property, forced put-backs of defective
mortgages to originators, and market upheaval. The severity and likelihood of these various
possible consequences depend on whether the irregularities are pervasive and when in the
process they occurred.
Effective transfers of real estate depend on parties' being able to answer seemingly
straightforward questions: who owns the property? how did they come to own it? can anyone
make a competing claim to it? The irregniarities have the potential to make these seemingly
simple questions complex. As a threshold matter, a party seeking to enforce the rights associated
with the mortgage must have standing in court, meaning that a party must have an interest in the
property sufficient that a court will hear their claim and can provide them with relief.
28
For a
mortgage, "[a] mortgage may be enforced only by, or in behalf of, a person who is entitled to
26 National Association of Attorneys General, 50 States Sign MJJrtgage Foreclooure Joint Statement (Oct.
13, 2010) (online at www.naag.orgljoint-statement-of-the-mortgage-fotecloswe-multistate-group.pbp) {heteinafter
"50 States Sign Mortgage Foteelosute Joint Statement"}.
r1 Cases involved suits against Bank of America (as the parent ofloan originator Countrywide) claiming
violations of tepteSentations and warranties and sought to enforce put-back provisions. Greenwich Financial
Services Distressed Fund 3 L.L.C. vs. Countrywide Financial Corp, et al., I:08-<:v-11343-RJH (S.D.N.Y. Oct. IS.
2010); Footbridge Limited Trust and OHP Opportunity Trust vs. Bank of America, CV00367 (S.D.N.Y. Oct I,
2010).
,. See Stephen R. Buchenroth and Gtetchen D. Jeffiies, Recent Foreclooure Cases: Lenders Beware (June
2007) (online at www.ahanelorg/rppt/publications/etep0rt!2007/6/0hioFOteClosuteCases.pdi); Wells Fargo v.
Jordan, 914 N.E.2d204 (Ohio 2009) ("Ifp1aintiffhas offered no evidence that it owned the note and mortgage
when the complaint was filed, it would not be entitled to judgment as a matter of law.',); Christopher Lewis
Peterson, Foreclosure, Sub prime Mortgage Lending, and the Mortgage Electronic Registration System, University
of Cincinnati Law Review, Vol. 78, No.4, at 1368-1371 (Summer 2010)(online at
papers.ssm.comlsoI3/papers.cfin?ahsl!l1cUd=I469749) (heteinafter "Cincinnati Law Review Paper on
FOteClosute"); MERSCORP, Inc. v. Romaine, 861 N.E. 2d 81 (N.Y. 2006). Accordingly, a second set of problems
telates to the chain of title on mortgages and the ability of the foreclosing party to prove that it has legal standing to
foteelose. While these problems ate not limited to the securitization market, they ate especially acute for securitized
loans because thete ate mote complex chain of title issues involved.
14
#:789
enforce the obligation the mortgage secures.,,29 Thus, the only party that may enforce the rights
associated with the mortgage, with standing to take action on a mortgage in a court, must be
legally able to act on the mortgage.
30
Accordingly, standing is critical for a successful
foreclosure, because if the party bringing the foreclosure does not have standing to enforce the
rights attached to the mortgage and the note, that party may not be able to take the property with
clear title that can be passed on to another buyer.
31
Thus, if prior transfers of the mortgage were
unsuccessful or improper, subsequent transfers of the property, such as a foreclosure or even an
ordinary sale, could be affected. Further, failure to foreclose properly - whether because the
foreclosing party did not actually hold the mortgage and the note, or because robo-signing
affected the homeowner's due process rights - means that the prior homeowner may be able to
assert claims against a subsequent owner of the property.32 In this way, documentation
irregularities can affect title to a property at a number of stages, as further described below.
29 Restatement (Third) of Prop. (Mortgages) 5.4(c) (1997). Only the proven mortgagee may maintain a
foreclosure action. The requirement that a foreclosure action be brought only by the actual mortgagee is at the heart
of the issues with foreclosure irregularities. If the homeowner or the court challenges the claim of the party bringing
a foreclosure action that it is the mortgagee (and was when the foreclosure was filed), then evidentiary issues arise
as to whether the party bringing the foreclosure can in fact prove that it is the mortgagee. The issues involved are
highly complex areas oflaw, but despite the complexity ofthese issues, they should not be dismissed as mere
technicalities. Rather, they are legal requirements that must be observed both as part of due process and as part of
the contractual bargain made between borrowers and lenders.
30 That party must either own the mortgage and the note or be legally empowered to act on the owner's
behalf. Servicers acting on behalf of a trust or an originator do not own the mortgage, but by contract are granted
the ability to act on behalf of the trust or the originator. See Federal Trade Commission, Facts for Consumers
(online at www.ftc.govlbcp/eduipubs/consurnerihomesJrealO.shtm)(accessed Nov. 12,2010) ("In today's market,
loans and the rights to service them often are bought and sold. In many cases, the company that you send your
payment to is not the company that owns your loan,"). See also October 2010 SIGTARP Report, supra note 5, at
160 (describing clients of servicers).
31 Laws governing the remedies available to a lender foreclosing on a property vary considerably. States
also differ markedly in how long it takes the lender to foreclose depending on the available procedures. In general,
claimants can seek to recover loan amounts by foreclosing on the property securing the debt. If the loan is ''non-
recourse," the lender only may foreclose upon the property, but if the loan is "recourse," the lender may foreclose
upon the property and other borrower assets. Most states are recourse states. A loan in a recourse state allows a
mortgagee to foreclose upon property securing a promissory note and, if that property is insufficient to discharge the
debt, move against the borrower's other assets. In non-recourse states, recovery of the loan amount is limited to the
loan collateral. Put another way, the lender cannot go after the borrower's other assets in a non-recourse state if the
property is insufficient to discharge the debt. It is worth noting that even in recourse states, given the current
economic climate, the mortgagees' recourse to the borrower's personal assets may be somewhat illusory since they
may be minimal relative to the costs and delay in pursuing and collecting on a deficiency judgments. See Andra C.
Ghent and Marianna Kudlyak, Recourse and Residential Mortgage Default: Theory and Evidence from U.S. States,
Federal Reserve Bank of Richmond Working Paper, No. 09-10, at 1-2 (July 7, 2009) (online at
www.thfa.gov/webfilesJI5051/website_ghent.pdf).
32 Christopher Lewis Peterson, associate dean for academic affairs and professor of law, SJ. Quinney
College of Law, University of Utah, conversations with Panel staff (Nov. 8, 2010).
15
#:790
1. Potential Flaws in the Recording and Transfer of Mortgages and Violations of
Pooling and Servicing Agreements
a. Mortgage Recordation, Perfecting Title, and Transferring Title
1. Title
The U.S. real property market depends on a seller's ability to convey "clear title": an
assurance that the purchaser owns the property free of encumbrances or competing claims.
33
Laws governing the transfer of real property in the United States were designed to create a
public, transparent recordation system that supplies reliable information on ownership interests
in property. Each of the 50 states has laws governing title to land within its legal boundaries.
Every county in the country maintains records of who owns land there, of transfers of ownership,
and of related mortgages or deeds ofttus!. While each state's laws have unique features, their
basic requirements are the same, consistent with the notion that the purpose of the recording
system is to establish certainty regarding property ownership. In order to protect ownership
interests, fully executed, original (commonly referred to as ''wet ink") documents must be
recorded in a grantor/grantee index at a county recording office.
34
In the case of a purchaser or
transferee, a properly recorded deed describing both the property and the parties to the transfer
establishes property ownership.
11. Transfer
In a purchase of a home using a mortgage loan, required documents include (a) a
promissory note establishing the mortgagor's personal liability, (b) a mortgage evidencing the
security interest in the underlying collateral, and (c) if the mortgage is transferred, proper
assignments of the mortgage and the note.
35
There are a number of ways for a mortgage
33 Black's Law Dictionary, at 1522 (2004).
34 See Cincinnati Law Review Paper on Foreclosure, supra note 28.
35 There are two documents that need to he transferred as part of the securitization process - a promissory
note and the security instrument (the mortgage or deed of trust). The promissory note embodies the debt obligation,
while the security instrument provides that if the debt is not repaid, the creditor may sell the designated collateral
(the house). Both the note and the mortgage need to be properly transferred. Without the note, a mortgage is
unenforceable, while without the mortgage, a note is simply an unsecured debt obligation., no different from credit
card debt. See FBR Foreclosure Mania Conference Call. supra note 3. The rules for these transfers are generally
governed by the Uniform Commercial Code (VCC), although one author states that the application of the UCC to
the transfer of the note is not certain. See Dale A. Whitman, How Negotiability Has Fouled Up the Secondary
Mortgage Market. and What to Do About it, Pepperdine Law Review, Vol. 37, at 758759 (2010).
States adopt articles of and revisions to the uec individually, and so there can be variation among states in
the application of the UCc. This report does not attempt to identifY all of the possible iterations. Rather, it
describes general and common applications of the uec to such transactions.
There are two methods by which a promissory note may be transferred. First, it may be transferred by
"negotiation," the signing over of individual promissory notes through indorsement, in the same way that a check
can be transferred via indorsement. See UCC 3201, 3203. The pooling and servicing agreements (PSAs) for
securitized loans generally contemplate tmnsfer through negotiation. Typical1anguage in PSAs requires the
16
#:791
originator to proceed upon entering into a loan secured by real property. They may keep the loan
on their own books; these are so-called "whole loans." However, if the loan is sold in a
secondary market - either as a whole loan or in a securitization process - the loan must be
properly transferred to the purchaser. To be transferred properly, both the loan and
accompanying documentation must be transferred to the purchaser, and the transfer must be
recorded.
delivery to the securitization trust of the notes and the mortgages, indorsed in blank. Alternatively, a promissory
note may be transferred by a sale contract, also governed by whether a state has adopted particular revisions to the
vee. In many states, io order for a transfer to take place under the relevant portion of the vee, there are only three
requirements: the buyer of the promissory note must give value, there must be an authenticated document of sale
that describes the promissory note, and the seller must have rights in the promissory note beiog sold. vee 9-
203(a)-(1.
The first two requirements should be easily met in most securitizations; the transfer of the mortgage loans
at each stage of the securitization involves the buyer giving the seller value and a document of sale (a mortgage
purchase and sale agreement or a PSA) that should ioclude a schedule identit'yiog the promissory notes iovolved.
The third requirement, however, that the seller must have rights in the promissory note being sold, is more
complicated, as it requires an unbroken chain of title back to the loan's originator. While the loan sale documents
plus their schedules are evidence of such a chaio of title, they cannot establish that the loan was not previously sold
to another party.
Further, this discussion only addresses the validity of transfers between sellers and buyers of mortgage
loans. It does not address the enforceability of those loans against homeowners, which requires physical possession
of the original note. Thus, for both securitized and non-securitized loans, it is necessary for a party to show that it is
entitled to enforce the promissory note (and therefore generally that it is a holder of the physical original note) in
order to complete a foreclosure successfully.
Perhaps more critically, parties are free to contract around the vec. vee 1-302. This raises the
question of whether PSAs for MBS provide for a variance from the uee by agreement of the parties. The PSA is
the document that provides for the transfer of the mortgage and notes from the securitization sponsor to the
depositor and thence to the trust. The PSA is also the document that creates the trust. The transfer from the
originator to the sponsor is typically governed by a separate document, although sections of it may be incorporated
by reference in the PSA.
Ifa PSA is considered a variation by agreement from the vee, then there is a question of what the PSA
itself requires to transfer the mortgage loans and whether those requirements have been met. In some cases, PSAs
appear to require a complete chain of indorsements on the notes from originator up to the depositor, with a final
indorsement in blank to the trust. A complete chain of indorsements, rather than a single indorsement in blank with
the notes transferted thereafter as bearer paper, is important for establishiog the ''bankruptcy remoteness" of the trust
assets. A critical part of securitization is to establish that the trust's assets are bankruptcy remote, meaning that they
could not be claimed by the bankruptcy estate of an upstream transferor of the assets. Without a complete chain of
indorsements, it is difficult, ifnot impossible, to establish that the loans were in fact transferred from originator to
sponsor to depositor to trust, rather than directly from originator or sponsor to the trust. If the transfer were directly
from the originator or sponsor to the trust, the loans could possibly be claimed as part of the originator's or
sponsor's bankruptcy estate. The questions about what the transfers required, therefore, involve both the question as
to whether the required transfers actually happened, as well as whether, if they happened, they were legally
sufficient.
17
._-_ .... - ----.. -----.---- - ----_.- .. ----
#:792
iii. Mortgage Securitization Process
Figure 1: Transfer of Relevant Paperwork in Securitization Process
36
Mortgage
Originator
..
Securitization
Sponsor
..
Depositor
(subordinate of 1-... ..
sponsor)
Securitization
Trust
-- II
sells MBS to
U d
MBS to ..
n erwnter :'
for public sale I Depositor .
L ___ """,
Securitizations of mortgages require multiple transfers, and, accordingly, multiple
assignments. Mortgages that were securitized were originated through banks and mortgage
brokers - mortgage originators. Next they were securitized by investment banks - the sponsors -
through the use of special purpose vehicles, trusts that qualifY for Real Estate Mortgage
Investment Conduit (REMlC) status. These trusts are bankruptcy-remote, tax-exempt vehicles
that pooled the mortgages transferred to them and sold interests in the income from those
mortgages to investors in the form of shares. The pools were collateralized by the underlying
real property, because a mortgage represents a first-lien security interest on an asset in the pool-
a house.
37
A governing document for securitizations called a pooling and servicing agreement
(PSA) includes various representations and warranties for the underlying mortgages. It also
describes the responsibilities of the trustee, who is responsible for holding the recorded mortgage
36 FBR Foreclosure Mania Conference Call, supra note 3.
37 For an overview ofREMICs, see Federal National Mortgage Association, Basics ofREMICs (JWle 16,
2009) (online at www.fanniernae.comlmbs/mbsbasicslremic/index.jhtml). See also Internal Revenue Service. Final
RegulatiOns Relating to Real Estate Mortgage Investment Conduits, 26 CFR I (Aug. 17, I 995)(online at
www.irs.govlpublirs-regsltd8614.txt). Only the MBS investors are taxed on their income from the trusts' payments
on the MBS. REMICs are supposed to be passive entities. Accordingly, with few exceptions, a REMIC may not
receive new assets after 90 days have passed since its creation, or there will be adverse tax consequences. Thus, if a
transfer of a loan was not done correctly in the first place, proper tnmsfer now could endanger the REMIC status.
For an overview of residential mortgage-backed securities in general, see American Securitization Forum, ASF
Securitization Institute: Residential Mortgage-Backed Securities (2006) (online at
www.americansecuritization.comluploadedFilesIRMBS%200utline.pdi).
18
#:793
documents, and of the servicer, who plays an administrative role, collecting and disbursing
mortgage and related payments on behalf of the investors in the MBS.
As described above, in order to convey good title into the trust and provide the trust with
both good title to the collateral and the income from the mortgages, each transfer in this process
required particular steps.38 Most PSAs are governed by New York law and create trusts
governed by New York law.
39
New York trust law requires strict compliance with the trust
documents; any transaction by the trust that is in contravention of the trust documents is void,
meaning that the transfer cannot actually take place as a matter oflaw.
40
Therefore, if the
transfer for the notes and mortgages did not comply with the PSA, the transfer would be void,
and the assets would not have been transferred to the trust. Moreover, in many cases the assets
could not now be transferred to the truSt.
41
PSAs generally require that the loans transferred to
the trust not be in default, which would prevent the transfer of any non-performing loans to the
trust now.
42
Furthermore, PSAs frequently have timeliness requirements regarding the transfer
in order to ensure that the trusts qualify for favored tax treatment. 43
Various commentators have begun to ask whether the poor recordkeeping and error-filled
work exhibited in foreclosure proceedings, described above, is likely to have marked earlier
stages of the process as well. If so, the effect could be that rights were not properly transferred
during the securitization process such that title to the mortgage and the note might rest with
another party in the process other than the trust. 44
iv. MERS
In addition to the concerns with the securitization process described above, a method
adopted by the mortgage securitization industry to track transfers of mortgage servicing rights
has come under question. A mortgage does not need to be recorded to be enforceable as between
the mortgagor and the mortgagee or subsequent transferee, but uuless a mortgage is recorded, it
does not provide the mortgagee or its subsequent transferee with priority over subsequent
mortgagees or lien holders.
45
38 See Section D.I.a.ii, supra.
40 N.Y. Est. Powers & Trusts Law 7-2.4; FBR Foreclosure Mania Confereoee Call, supra note 3.
41 FBR ForecloSW'e Mania Conference Call, supra note 3.
42 Amended Complaint at Exhibit 5, page 13, Deutsche Bank National Trust Company v. Federal Deposit
Insurance Corporation, No. 09-CV-\656 (D.D.C. Sept. 8,2010) (hereinafter "Deutsche Bank v. Federal Deposit
Insurance Corporation").
43 See FBR Foreclosure Mania Conference Call, supra note 3.
44 See, e.g., FBR Foreclosure Mania Conference Call, supra note 3.
45 Restatement (Third) of Prop. (Mortgages) 5.4 emt. B (1997).
19
#:794
During the housing boom, multiple rapid transfers of mortgages to facilitate securitization
made recordation of mortgages a more time-consuming, and expensive process than in the past.
46
To alleviate the burden of recording every mortgage assignment, the mortgage securitization
industry created the Mortgage Electronic Registration Systems, Inc. (MERS), a company that
serves as the mortgagee of record in the county land records and runs a database that tracks
ownership and servicing rights of mortgage loans.
47
MERS created a proxy or online registry
that would serve as the mortgagee of record, eliminating the need to prepare and record
subsequent transfers of servicing interests when they were transferred from one MERS member
to another.
48
In essence, it attempted to create a paperless mortgage recording process overlying
the traditional, paper-intense mortgage tracking system, in which MERS would have standing to
initiate foreclosures.
49
MERS experienced rapid growth during the housing boom. Since its inception in 1995,
66 million mortgages have been registered in the MERS system and 33 million MERS-registered
loans remain outstanding. so During the summer of 2010, one expert estimated that MERS was
involved in 60 percent of mortgage loans originated in the United States. 51
Widespread questions about the efficacy of the MERS model did not arise during the
boom, when home prices were escalating and the incidence of foreclosures was minimal.
52
But
as foreclosures began to increase, and documentation irregularities surfaced in some cases and
raised questions about a wide range of legal issues, including the legality of foreclosure
proceedings in general,s3 some litigants raised questions about the validity ofMERS.54 There is
46 Christopher Lewis Peterson, associate dean for academic affairs and professor of law, SJ. Quinney
College of Law, University of Utah, conversations with Panel staff (Nov. 8,2010).
47 MERS conversations with Panel staff(Nov. 10,2010). See Christopher Lewis Peterson, Two Faces:
Demystifying the Mortgage Electronic Registration System's Land Title Theory. Real Property, Probate, and Trust
Law Journal (forthcoming) (onlioe at
48 MERS conversations with Panel staff (Nov. 10,2010); John R. Hodge and Laurie Williams, Mortgage
Electronic Registration Systems, Inc.: A Survey of Cases Discussing MERS' Authority to Act. Norton Bankruptcy
Law Adviser, at 2 (Aug 2010) (hereinafter "A Survey of Cases Discussing MERS' Authority to Act").
49 Members pay an annual membership fee and $6.95 for every loan registered, versus approximately $30
in fees for filiog a mortgage assignment at a local county land office. MERSCORP, Inc .. Membership Kit (Oct.
2009) (ouline at www.mersinc.orgimembershiplWinZipIMERSeRegistryMembershipKit.pdf); Ciocionati Law
Review Paper on Foreclosure, supra note 28, at 1368-1371. See a/so MERSCORP, Inc. v. Romaine, 861 N.E. 2d 81
(N.Y. 2006).
50 MERS conversations with Panel staff (Nov. 10,2010).
51 Cincinnati Law Review Paper on Foreclosure. supra note 28, at 1362.
52 See A Survey oreases Discussing MERS' Authority to Act, supra note 48, at 3.
53 For instance, in a question-and-answer session during a recent earnings call with investors, Jamie Dimon,
CEO and chainnan of JPMorgan Chase, said that the finn had stopped using MERS "a while back." JPMorgsn
Chase & Co., Q3 2010 Earnings Call Transcript (Oct. 13,2010) (onlioe at www.morningstar.comieam..()/eamings-
I 8244835-jp-morgan-chase.co-q3-20lO.aspx.shtml) (hereinafter "Q3 2010 Eamiogs Call Transcript"). See a/so
20
#:795
limited case law to provide direction, but some state courts have rendered verdicts on the issue.
In Florida, for example, appellate courts have determined that MERS had standing to bring a
foreclosure proceeding. 55 On the other hand, in Vermont, a court determined that MERS did not
have standing. 56
In the absence of more guidance from state courts, it is difficult to ascertain the impact of
the use ofMERS on the foreclosure process. The uncertainty is compounded by the fact that the
issue is rooted in state law and lies in the hands of 50 states' judges and legislatures. If states
adopt the Florida model, then the issue is likely to have a limited effect. However, if more states
adopt the Vermont model, then the issue may complicate the ability of various players in the
securitization process to enforce foreclosure liens.
57
If sufficiently widespread, these
complications could have a substantial effect on the mortgage market, inasmuch as it would
destabilize or delegitimize a system that has been embedded in the mortgage market and used by
multiple participants, both government and private. Although it is impossible to say at present
what the ultimate result of litigation on MERS will be, holdings adverse to MERS could have
significant consequences to the market.
If courts do adopt the Vermont view, it is possible that the impact may be mitigated if
market participants devise a viable workaround. For example, according to a report released by
Standard & Poor's, "most" market participants believe that it may be possible to solve any
MERS-related problems by taking the mortgage out ofMERS and putting it in the mortgage
JPM on Foreclosures, MERS, supra note 3. This, however, related only to the use ofMERS to foreclose. MERS
conversations with Panel staff (Nov. 10,2010).
54 See generally Cincinnati Law Review Paper on Foreclosure. supra note 28. Cases addressed questions as
to standing and as to whether, by separating the mortgage and the note, the mortgage had been rendered invalid (thus
invalidating the security interest in the property). See A Survey of Cases Discussing MERS' Authority to Act, supra
note 48. at 20-21 ("These interpretive problems and inconsistencies have provoked some courts to determine the
worst possible fate for secured loan buyers - that their mortgages were not effectively transferred or even that the
mortgages have been separated from the note and are no longer enforceable .... Whether the MERS construct holds
water is being robustly tested in a variety of contexts. Given the pervasiveness of MERS. if the construct is not
viable. if MERS cannot file foreclosures, and, perhaps most importantly. cannot even record or execute an
assigmnent of a mortgage, what then?").
55 See, e.g., Mang. Elec. Registry Sys. v. Azize, 965 So. 2d 151 (Fla. Disl Cl App. 2007). See also A
Survey of Cases Discussing MERS' Authority to Act, supra note 48, at 9.
" Martg. Elec. Registry Sys. v. Johnston, No. 420-6-09 Rdcv (Rutland Superior Ct., Vt., Oct. 28, 2009)
(determining that MERS did not have standing to initiate the foreclosure because the note and mortgage had been
separated).
57 MERS was used by the most active participants in the securitization market including the largest banks
(for example, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Fannie Mae and Freddie Mac), and
processed 60 percent of all MBS. See MERSCORP, inc., Sun Trust Becomes Third Major Mortgage Provider in
Recent Months to Require MERS System (Mar. 18,2010) (online at
www.mersinc.orglnewsroomlpress_details.aspx?id=235). According to MERS, it has acted as the party foreclosing
for one in five of the delinquent mortgages on its system. MERS conversations with Panel staff (Nov. 10, 2010).
21
#:796
F
owner's name prior to initiating a foreclosure proceeding.
58
According to one expert, the odds
that the status ofMERS will be settled quickly are low.
59
b. Violations of Representations and Warranties in the PSA 60
Residential mortgage-backed securities' PSAs typically contain or incorporate a variety
of representations and warranties. These representations and warranties cover such topics as the
organization of the sponsor and depositor, the quality and status of the mortgage loans, and the
validity of their transfers.
More particularly, PSAs, whose terms are unique to each MBS, include representations
and warranties by the originator or seller relating to the conveyance of good title,61
documentation for the loan, 62 underwriting standards,63 compliance with applicable law,64 and
58 See S&P on Foreclosure Crisis, supra note 17.
59 Christopher Lewis Peterson, associate dean for academic affairs and professor of law at the S.]. Quinney
College of Law at the University of Utah, conversations with Panel staff (Nov. 8,2010).
60 This section attempts to provide a general description of put-backs. Put-backs have been an issue
throughout the financial crisis, typically in the context of questions about underwriting standards. See, e.g., Federal
National Mortgage Association, Form lO-Kfor Ihe Fiscal Year Ended December 31, 2009, at 9 (Feb. 26, 2010)
(online at www.sec.gov/Archives/edgar/datal310522/0ooo95012310018235/w77413eIOvk.htm) ("As delinquencies
have increased, we have accordingly increased our reviews of delinquent loans to uncover loans that do not meet our
underwriting and eligibility requirements. As a result. we have increased the number of demands we make for
lenders to repurcbase these loans or compensate us for losses sustained on the loans, as well as requests for
repurchase or compensation for loans for which the mortgage insurer rescinds coverage."). Documentation
irregularities may provide an additional basis for put-backs, although the viability of these put-back claims will
depend on a variety of deal-specific issues, such as the particular representations and warranties that were
incorpomted into the PSA, which in tum often are related to whether the MBSs are agency or private-label
securities. Although private-label MBS PSAs typically included weaker representations regarding the quality of the
loans and underwriting, they still contain representations regarding proper transfer of the documents to the trust.
61 Failure to transfer the loans properly would create two sources ofliability: one would be in rendering the
owner of the mortgage and the note lUlcertain, and the other would be a breach of contract claim under the PSA. For
an example of typical language in representations and warranties contained in PSAs or incorporated by reference
from mortgage loan purchase agreements executed by the-mortgage originator, see Deutsche Bank v. Federal
Deposit Insurance Corporation, supra note 42 ( ..... and that immediately prior to the transfer and assignment of the
Mortgage Loans to the Trustee, the Depositor was the sole owner and had good title to each Mortgage Loan, and had
full right to transfer and sell each Mortgage Loan to the Trustee free and clear.").
62 See Deutsche Bank v. Federal Deposit Insurance Corporation, supra note 42 ("Each Mortgage Note, each
Mortgage, each Assignment and any other document required to be delivered by or on behalf of the Seller Wlder this
Agreement or the Pooling and Servicing Agreement to the Purchaser or any assignee, transferee or designee of the
Purchaser for each Mortgage Loan has been or will be ... delivered to the Purchaser or any such assignee. transferee
or designee. With respect to each Mortgage Loan, the Seller is in possession of a complete Mortgage File in
compliance with the Pooling and Servicing Agreement ... The Mortgage Note and the related Mortgage are genuine.
and each is the legal, valid and binding obligation of the Mortgagor enforceable against the Mortgagor by the
mortgagee or its representative in accordance with its terms, except only as such enforcement may be limited by
bankruptcy, insolvency .... "). These representations and warranties generally state that the documents submitted for
loan underwriting were not falsified and contain no untrue statement of material fact or omit to state a material fact
required to be stated therein and are not misleading and that no error, omission, misrepresentation, negligence, or
fraud occurred in the loan's origination or insurance.
22
#:797
delivery of mortgage files,65 among other thingS.
66
In addition, the mortgage files must contain
specific loan and mortgage documents and notification of material breaches of any
representations and warranties.'
If any of the representations or warranties are breached, and the breach materially and
adversely affects the value of a loan, which can be as simple as reducing its market value, the
offending loan is to be ''put-back'' to the sponsor, meaning that the sponsor is required to
repurchase the loan for the outstanding principal balance plus any accrued interest. 67
If successfully exercised, these put-back clauses have enormous value for investors,
because they permit the holder of a security with (at present) little value to attempt to recoup
some of the lost value from the originator (or, if the originator is out of business, the sponsor or a
successor). Put-backs shift credit risk from MBS investors to MBS sponsors (typically, as noted
above, investment banks): the sponsor now has the defective loan on its balance sheet, and the
trust has cash for the full unpaid principal balance of the loan plus accrued interest on its balance
sheet.6l! This means that the sponsor may have to increase its risk-based capital and will bear the
63 See Deutsche Bank v. Federal Deposit Insurance Corporation, supra note 42 ("Each Mortgage Loan was
underwritten in accordance with the Seller's underwriting guidelines as described in the Prospectus Supplement as
applicable to its credit grade in all material respects:'). Many concerns over underwriting standards have surfaced in
the wake of the housing boom. such as lack of adequate documentation, lack of income verification.
misrepresentation of income and job status, and haphazard appraisals. Even before the more recent emergence of
the issue of document irregularities, institutions were pursuing put-back actions to address concerns over
underwriting quality. See Federal National Mortgage Association, Form IO-Qfor the Quarterly Period Ended June
30.2010, at 95 (Aug. 5,2010) (online at
www.sec.gov/Archives/edgar/datal310522/ooo0950123Ioo73427/w79360eIOvq.htm) ("Our mortgage
sellerlservicers are obligated to repurchase loans or foreclosed properties, or reimburse us for losses if the foreclosed
property has been sold, if it is determined that the mortgage loan did not meet our underwriting or eligibility
requirements or if mortgage insurers rescind coverage.").
64 See Deutsche Bank v. Federal Deposit Insurance Corporation, supra note 42 ("Each Mortgage Loan at
origination complied in all material respects with applicable local. state and federal laws. including, without
limitation, predatory and abusive lending, usury, equal credit opportunity, real estate settlement procedures, truth-in-
lending and disclosure laws, and conswnmation of the transactions contemplated hereby, including without
limitation the receipt of interest does not involve the violation of any such laws.").
65 See Deutsche Bank v. Federal Deposit Insurance Corporation, supra note 42.
66 For examples of representations and warranties, see New Century Home Equity Loan Trust, Form 8-K
for the Period Ending February 16. 2005, at Ex. 99.2 (Mar. 11,2005) (online at
www.secinfo.comldqTm6.zEy.a.htm#hm88).
67 See. e.g., Citigroup, Inc., Form IO-Kfor the Fiscal Year Ended December 31.2009. at 131 (Feb. 26,
2010) (online at www.sec.gov/Archives/edgar/datal831001l000120677410000406/citi_lOk.htm) (hereinafter
"Citigroup Fonn IO-K"). However, since every deal is different, there are a number of different methods for
extinguishing a repurchase claim that may not necessarily require the actual repurchasing of the loan. Industry
experts conversations with Panel staff (Nov. 9, 2010).
68 See Citigroup Form 10-K, supra note 67, at 131.
23
#:798
risk of future losses on the loan, while the trust receives 100 cents on the dollar for the loan. 69
Not surprisingly, put-back actions are very fact-specific and can be hotly contested.
70
Servicers do not often pursue representation and warranties violations. A 2010 study by
Amherst Mortgage Securities showed that while private mortgage insurers were rescinding
coverage on a substantial percentage of the loans they insured because of violations of very
similar representation and warranties, there was very little put-back activity by servicers, even
though one would expect relatively similar rates.
71
One explanation for the apparent lack of
servicer put-back activity may be the possibility of servicer conflicts of interest. Servicers are
often affiliated with securitization sponsors and therefore have disincentives to pursue
representation and warranty violations. Trustees have disincentives to remove servicers because
they act as backup servicers and bear the costs of servicing if the servicer is terminated from the
deal. Finally, investors are poorly situated to monitor servicers. Whereas a securitization trustee
could gain access to individual loan files - but typically do not
72
- investors cannot review loan
files without substantial collective costS.
73
On the other hand, investor lawsuits have the
potential to be lucrative for lawyers, so it is possible that some investor groups may take action
despite their limited access to information.
74
2. Possible Legal Consequences of the Document Irregularities to Various Parties
In addition to fraud claims, discussed further below, and claims arising from whether the
loans in the pool met the underwriting standards required (which is primarily relevant to
69 Wells Fargo & Company, Together We'lI Go Far: Wells Fargo & Company Annual Report 1008, at 127
(2009) (online at www.wellifargo.comldownloads/pdflinvestJelationslwf2008aonualreport.pdf) ("In certain loan
sales or securitizations, we provide recourse to the buyer whereby we are required to repurchase loans at par value
plus accrued interest on the occurrence of certain credit-related events within a certain period of time.").
70 Compass Point Research & Trading, LLC, Mortgage Repurchases Part II: Private Label RMBS Investors
Take Aim - QuantifYing the Risks (Aug. 17,2010) (online at
api.ning.comlfiles/fiCVZyzNTkoAzUdzhSWYNuHv33Ur5ZTIJh3S08zophyT79SFiOTOpPG7klHe3h8RXKKyp
hNZqqytZrXQKbMxv4R3F6fN5dIl36431113 MortgageFinanceRepurchasesPrivateLabel08 I 720 10.pdf).
71 Amherst Mortgage Insight, PM! in Non-Agency Securitizatlons, at 4 (July 16, 2010) ("PM! companies
have become more assertive in rescinding insurance '" In fact. since early 2009, option ARM recoveries have
averaged 40%, Alt-A recoveries averaged 45%, prime recoveries averaged 58%, and subprime recoveries 67%.").
72 Securitization trustees do not examine and monitor loan files for representation and warranty violations
and generally exercise very little oversight of servicers. Securitization trustees are not general fiduciaries; so long as
there has not been an event of default for the securitization trust, the trustee has narrowly defined contractual duties,
and no others. Securitization trustees are also paid far too little to fund active monitoring; trustees generally receive
I basis point or less on the outstanding principal balance in the trust. In addition, secwitization trustees often
receive substantial amounts of business from particular sponsors, which may provide a disincentive for them to
pursue representation and warranty violations vigorously against those parties. See Nixon Peabody LLP, Caught in
the Cross-fire: Securitization Trustees and Litigation During the Subprime Crisis (Jan. 29. 2010) (online at
www.nixonpeabody.comlpublications_detai13.asp?IIF3131) (discussing the perceived role of the trustee in
mortgage securities litigation).
L-
73 See Section D.2. infra.
74 See Section 0.2, infra.
------ ---------
24
#:799
investors' rights of put-back and bank liability), the other primary concern arising out of
document irregularities is the potential failure to convey clear title to the property and ownership
of the mortgage and the note.
There are two separate but interrelated forms of conveyance that may be implicated by
documentation irregularities: conveyance of the mortgage and the note, and conveyance of the
property securing the mortgage. The foreclosure documentation irregularities affect conveyance
of the property: if the foreclosure was not done correctly, the bank or a subsequent buyer may
not have clear title to the property. But these foreclosure irregularities may also be further
compromised by a failure to convey the mortgage and the note properly earlier in the process. If,
during the securitization process, required documentation was incomplete or improper, then
ownership of the mortgage may not have been conveyed to the trust. This could have
implications for the PSA - inasmuch as it would violate any requirement that the trust own the
mortgages and the notes - as well as call into question the holdings of the trust and the collateral
underlying the pools under common law, the vee, and trust law.
75
The trust in this situation
may be unable to enforce the lien through foreclosure because only the owner of the mortgage
and the note has the right to foreclose. If the owner of the mortgage is in dispute, no one may be
able to foreclose until ownership is clearly established.
If it is unclear who owns the mortgage, clear title to the property itself cannot be
conveyed. If, for example, the trust were to enforce the lien and foreclose on the property, a
buyer could not be sure that the purchase of the foreclosed house was proper if the trust did not
have the right to foreclose on the house in the first place. Similarly, if the house is sold, but it is
unclear who owns the mortgage and the note and, thus, the debt is not properly discharged and
the lien released, a subsequent buyer may fmd that there are other claimants to the property. In
this way, the consequences of foreclosure documentation irregularities converge with the
consequences of securitization documentation irregularities: in either situation, a subsequent
buyer or lender may have unclear rights in the property.
These irregularities may have significant bearing on many of the participants in the
mortgage securitization process:
Parties to Whom a Mortgage and Note Is Transferred - If a lien was not
"perfected" - filed according to appropriate procedures - participants in the transfer
process may no longer have a first-lien interest in the property and may be unable to
enforce that against third-parties (and, where the property has little value, particularly
in non-recourse jurisdictions, may not be able to recover any money). Similarly, if
7S Most PSAs are governed by New York trust law and contain provisions that override vee Article 9
provisions on secured transactions. This report does not attempt to describe every possible legal defect that may
arise out of the irregularities, particularly given the rapidly developing nature of the problem, but addresses
arguments common to the current discussions. In addition, the Panel takes no position on whether any of these
arguments are valid or likely to succeed.
25
L-
. ---------------------------
#:800
-
the notes and mortgages were not properly transferred, then the party that can enforce
the rights attached to the note and the mortgage - right to receive payment and right
to foreclose, among others - may not be readily identifiable. If a trust does not have
proper ownership to the notes and the mortgage, it is unclear what assets are actually
in the trust, if any.76
Sponsors, Servicers, and Trustees - Failure to follow representations and warranties
found in PSAs can lead to the removal of servicers or trustees and trigger
indemnification rights between the parties.
77
Failure to record mortgages can result in
the trust losing its first-lien priority on the property. Failure to transfer mortgages and
notes properly to the trust can affect the holdings of the trust. If transfers were not
done correctly in the first place and cannot be corrected, there is a profound
implication for mortgage securitizations: it would mean that the improperly
transferred loans are not trust assets and MBS are in fact not backed by some or all of
the mortgages that are supposed to be backing them. This would mean that the trusts
would have litigation claims against the securitization sponsors for refunds of the
value given by the trusts to the sponsors (or depositors) as part of the securitization
transaction.
78
If successful, in the most extreme scenario this would mean that MBS
trusts (and thus MBS investors) could receive complete recoveries on all improperly
transferred mortgages, thereby shifting the losses to the securitization sponsors.79
76 The competing claims about MERS can also factor into these issues. IfMERS is held not to be a valid
recording system, then mortgages recorded in the name of MERS may not have first priority. Similarly, if MERS
does not have standing to foreclose, it could cast into question foreclosures done by MERS.
77 It should be noted that while no claims have been made yet based on an alleged breach of representations
and warranties related to the transfer of title, claims have been made based on allegations of poor Wlderwriting and
loan pool quality. See BUCkingham Research Group, Conference Takeaways on Mortgage Repurchase Risk, at 2
(Nov. 4, 2010) (hereinafter "Buckingham Research Group Conference Takeaways"). However, there is a possibility
that there will be demands for breaches of representations and warranties relating to mortgage transfers.
78 Because the REMIC status and avoidance of double taxation (trust level and investor level) is so critical
to the economics of securitization deals, the PSAs that govern the securitization trusts are replete with instructions to
servicers and trustees to protect the REMIC status, including provisions requiring that the transfers of the mortgage
loans occur within a limited time after the trust's creation. See, e.g . Agreement Among Deutsche Alt-A Securities.
Inc., Depositor, Wells Fargo Bank. National Association, Master Servicer and Securities Administrator, and HSBC
Bank USA, National Association. Trustee, Pooling and Servicing Agreement (Sept. 1, 2006) (online at
www.secinfo.comJdI3f2I.vIB7.dhtm#lstPage).
19 If a significant number of loan transfers failed to comply with governing PSAs, it would mean that
sizeable losses on mortgages would rest on a handful of large hanks, rather than being spread among MBS investors.
Sometimes the securitization sponsor is indemnified by the originator for any losses the sponsor incurs as a result of
the breach of representations and warranties. See Id. at section 10.03. This indemnification is only valuable,
however, to the extent that the originator has sufficient assets to cover the indemnification. Many originators are
thinly capitalized and others have ceased operating or filed for bankruptcy. Therefore, in many cases, any put-back
liability is likely to rest on the securitization sponsors. Although these put-back rights sometimes entitle the trust
only to the value of the loan less any payments already received. plus interest, the value the trust would receive is
still greater than the current value of many of these loans. As a number of originators and sponsors were acquired
by other maior financial institutions during 2008-2009, put-back liability has become even more focused on a
relatively small number of systemically important financial institutions. Financial Crisis Inquiry Commission.
26
#:801
Successful put-backs to these entities would require them to hold those loans on their
books. Even if the mortgage loans are still valid, enforceable obligations, the
sponsors would (if regulated for capital adequacy) be required to hold capital against
the mortgage loans, and might have to raise capital. If these banks were unable to
raise capital, it might, again, subject them to risks of insolvency and threaten the
system.
Borrowerslhomeowners - Borrowers may have several available causes of action.
They may seek to reclaim foreclosed properties that have been resold. They may also
refuse to pay the trustee or servicer on the grounds that these parties do not own or
legitimately act on behalf of the owner of the mortgage or the note.
80
In addition,
they may defend themselves against foreclosure proceedings on the claim that robo-
siguing irregularities deprived them of due process.
Later Purchasers - Potential home-buyers may be concerned that they are unable to
determine definitively whether the home they wish to purchase was actually
conveyed with clear title, and may be unwilling to rely on title insurance to protect
them.
81
Financial institutions that may have been interested in buying mortgages or
mortgage securities may worry that the current holder of the mortgage did not
actually receive the loan through a proper transfer.
Investors - Originators of mortgages destined for mortgage securities execute
mortgage loan purchase agreements, incorporated into PSAs, that, as mentioned
earlier, make representations and warranties the breach of which can result in put-
back rights requiring that the mortgage originator repurchase defective mortgages.
MBS investors may assert claims regarding issues that arose during the origination
and securitization process. For instance, they may assert that violations of
underwriting standards or faulty appraisals were misrepresentations and material
omissions that violate representations and warranties and may, in some cases where
the necessary elements are established, raise fraud claims.
82
They may also raise
issues about the validity of the REMIC, the bankruptcy-remote, tax-exempt conduit
that is central to the mortgage securitization process. A potential investor claim is
Preliminary StajfReport: Securitization and the Mortgage Crisis, at 13 (Apr. 7, 2010) (online at
www.fcic.gov/reportslpdfs/2010-0407-Preliminary_Staff_Report_ -_Securitization_and _ the_Mortgage _ Crisis.pdf)
(table showing that five of the top 25 sponsors in 2007 have since been acquired). Overall, recovery is likely to be
detennined on a deal-by-deal basis.
80 As noted above. the servicer does not own the mortgage and the note, but has a contractual ability to
enforce the legal rights associated with the mortgage and the note.
81 The concept of "boo a-fide purchaser for value," which exists in both common and statutory law, may
protect the later buyer. If the later buyer records an interest in the property and had no notice of the competing
claim, that interest in the property will be protected. Industry sources conversations with Panel staff (Nov. 9, 2010).
82 See Section E.l, infra.
27
-_._---_._-
#:802
that mortgage origination violations and title defects prevented a "true sale" of the
mortgages, consistent with Internal Revenue Service (IRS) regulations and as
required by the New York State trust law, invalidating the REMIC. Some
commentators believe that inquiries by investors could uncover untimely attempts to
cure the problem by substituting complying property more than 90 days after
formation of the REMIC, a prohibited transaction that could cause loss of REMIC
status, resulting in the loss of pass-through taxation status and taxation of income to
the trust and to the investor.
S3
Loss ofREMIC status would provide substantial
grounds for widespread put-backs. Moreover, this type of litigation could be
extremely lucrative for the lawyers representing the investors. It may be expected
that, for this type of action, the investors' counsel would have strong incentives to
litigate forcefully.
Title Insurance Companies - In the United States, purchasers of real property (i.e.,
land and/or buildings) typically purchase title insurance, which provides a payment to
the purchaser if a defect in the title or undisclosed lien is discovered after the sale of
the property is complete. Given the potential legal issues discussed in this section,
title insurance companies could face an increase in clain3s in the near future. The
threat of such issues may also lead insurers to require additional documentation
before issuing a policy, increasing the costs associated with buying property. 84
Junior Lien Holders -Second and third liens are not as commonly securitized as first
liens; therefore, their holders may not face the same direct risk as first lien holders.
Junior lien holders may, however, face an indirect risk if the rights of the first lien
holder cannot be properly established. If the property securing the lien is sold, all
senior liens must be paid first. If the senior liens cannot be paid off because it is
83 The majority ofPSAs were created under the laws of New York state. Under New York law, there are
four requirements for creating a trust: (I) a designated beneficiary; (2) a designated trustee; (3) property sufficiently
identified; and (4) and the delivery of the property to the trustee. Joshua Rosner of Graham Fisher, an investment
research firm, has noted that there may not have always been proper delivery of the property to the trustee. "In New
Yorl< it is not enough to have an intention to deliver the property to the trust, the property must actually be delivered.
So, what defines acceptable delivery? The answer appears to lie with the 'governing instrument,' the Pooling and
Servicing Agreement (PSA). Thus, in order to have proper delivery the parties to the PSA must do that which the
PSA demands to achieve delivery." Joshua Rosner, note to Panel staff (Nov. 8, 2010). To the extent that a PSA
requires that property be conveyed to the trust within a certain timeframe, such conveyance would be void. N.Y.
Estates, Powers, and Trosts Law 7-2.4 (McKinney's 2006).
84 Although title insurers appear to be poised for potential risk. one observer has noted that title insumnce
lobbyists and trade groups have instead played down the possible effects of these legal issues. Christopher Lewis
Peterson, professor oflaw, S.J. Quinney School of Law, University of Utah, conversations with Panel staff (Nov. 8,
2010). Title insurers state that they do not presently believe that these legal issues wiU have much effect. Industry
SOurces conversations with Panel staff (Nov. 10,2010). Professor Peterson suggested that the insurers may earn
sufficient remuneration from various fees to offset any potential risk. On the other hand, title insurers could stand to
suffer significant losses if some of the matters presently discussed in the market, such as widespread invalidation of
MERS, come to pass. It is too soon to say if such events are likely, but title insurers would be one of the primary
parties damaged by such an action.
28
#:803
-
impossible to detennine who holds those liens, the junior lien holder may not be able
to claim any of the proceeds of the sale until the identity of the senior lien holder is
settled. On the other hand, document irregularities may offer a windfall for some
junior liens. If the first mortgage has not been perfected, the first lien holder loses its
priority over any other, perfected liens. Therefore, if a second lien was properly
recorded, it could take priority over a first lien that was not properly recorded. The
majority of second liens, however, were completed using the same system as first
liens and therefore face the same potential issues. Moreover, many mortgages that
were created during the housing boom were created with an 80 percentl20 percent
"piggy-back" structure in which a first and second lien were created simultaneously
and using the same system. If neither lien was perfected, there may be a question as
to which would take priority over the other. 85
Local Actions - Despite the state attorneys' general national approach to
investigating document irregularities, there may be separate state initiatives. Under
traditional mortgage recording practices, each time a mortgage is transferred from a
seller to a buyer, the transfer must be recorded and a fee paid to the local government.
Although each fee is not large - typically around $30 - the fees for the rapid transfers
inherent in the mortgage securitization process could easily add up to hundreds of
dollars per securitization. The MERS system was intended in part to bypass these
fees.
86
Local jurisdictions, deprived of mortgage recording tax revenue, may file
lawsuits against originators, servicers, and MERS.
The primary private litigation in this area is likely to come from investors in MBS. These
investors are often institutional investors, a group that has the resources and expertise to pursue
such claims.
87
A major obstacle to investor lawsuits seeking put-backs has been a provision in
PSAs that limits private investor action in the case of breaches of representations and warranties
to certificate holders with some minimum percentage of voting rights, often 25 percent. 88
Investors also suffer from a collective-action problem in trying to achieve these thresholds, not
least because they do not know who the other investors are in a partiCUlar deal, and many
"Christopher Lewis Peterson, professor oflaw, S.J. Quinney School of Law, University of Utah,
conversations with Panel staff (Nov. 8, 2010). If the mortgages were created at different times, the mortgage created
first would take precedence.
86 Cincinnati Law Review Paper on Foreclosure, supra note 28, at 1386-1371.
87 lnstitutional holders of RMBS include pension funds, hedge funds and other asset managers, mutual
funds,life insurance companies, and foreign investors. Data provided by Inside Mortgage Finance (Nov. 12,2010).
88 &e Buckingham Research Group Conference Takeaways, supra note 77, at 2.
29
#:804
investors are reluctant to share information about their holdings. Furthermore, the interests of
junior and senior tranche holders may not be aligned.
89
When investors do achieve the collective-action threshold, it is only the first step in a
complicated process. For example, if the trustee declines to declare the servicer in default, then
investors can either bring suit against the trustee to force it to remove the servicer, attempt to
remove the trustee (which often requires a 51 percent voting threshold), or remove the servicer
directly (with a two-thirds voting threshold). It bears emphasis that the collective-action
thresholds required vary from deal to deal. Two recent investor lawsuits started with a view to
enforce put-back provisions resulted in dismissals based on the plaintiffs' failure to adhere to 25-
percent threshold requirements.
9O
The practical effect of such decisions is that the hurdle of
meeting this relatively high threshold of certificate holders can limit investors' ability to examine
the documents that would support their claims.
Recently, however, investors are beginning to take collective action, suggesting that the
25 percent threshold may not be an enormous burden for organized investors. A registry created
by RMBS Clearing House is providing a confidential data bank whose purpose is to identitY and
organize certificate holders into groups that can meet threshold requirements.
9
! Using the
registry data, a lawsuit has been initiated against JPMorgan Chase and the Federal Deposit
Insurance Corporation (FDIC),92 both of which have assumed liabilities off ailed bank
Washington Mutual, seeking to enforce put-backs and document disclosure. Recently, an
investor group composed of eight institutional investors, including the Federal Reserve Bank of
New York (FRBNY), representing more than 25 percent of the voting rights in certain
Countrywide MBSs,93 made a request of securitization trustee Bank of New York to initiate an
investigation of the offerings originated by Countrywide prior to its acquisition by Bank of
89 Also, to the extent that these MBSs have been turned into collateralized debt obligations (CDOs), Ibe
collateral manager overseeing the CDOs may need to weigh actions that pose conflicts among the tranche holders
because of obligations to act in the best interests of all the securities classes. Panel staff conversations with industry
sources (Nov. 8, 2010).
90 Greenwich Fin. Serv. v. Countrywide Fin. Corp., No. 650474/08 (N.Y. Supp. Oct. 7, 2010); Footbridge
Ltd. Trust and OHP Opportunity Ltd. Trust v. Countrywide Home Loans, Inc., No. 09 CN 4050 (SD.N.Y. Sep. 28,
2010).
91 Based on conversations between Panel staff and the company, RMBS Clearing House claims to represent
more than 72 percent oflbe certificate holders of 2.300 mortgage-backed securities, more than 50 percent of holders
of900 mortgage-backed securities, and more than 66 percent of the holders of 450 mortgage-backed securities
representing, in the aggregate, a face amount of $500 billion, or approximately one-third of the private label
mortgage-backed securities market. One industry participant likened them to a dating site for investors. RMBS
Clearing House conversations with Panel staff (Oct. 24, 2010).
92 See Deutsche Bank v. Fedeml Deposit Insurance Corporation, supra note 42.
93 Gibbs & Bruns represents eight institutional investors who collectively hold more than 25 percent of the
voting rights in more than $47 billion in Countrywide mortgage-backed securities issued in 115 offerings in 2006
and 2007. On Oct 20, 2010, FRBNY became a signatory to the letter.
30
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America. After Bank of New York refused to act,94 the group petitioned Bank of America
directly in an effort to review the loan files in the pool.95 Some believe that the difficulty faced
by investors in gaining access to the loan files that support their claims of contractual breaches
and the cost of auditing them will make widespread litigation economically unrealistic.
96
Even
as put-back demands from investors are appearing, unless the investors can review loan
documents, they lack the information to know what level of put-backs should be occurring.
Moreover, at least one bank CEO has stated that his bank will challenge any determination that
underwriting standards were not met on a loan-by-loan basis, creating further hurdles.
97
At
present, it is unclear what litigation risk these proceedings are likely to pose for the banks.
98
There is good reason to assume, however, that the litigation will attract sophisticated parties
interested in the deep pockets of the sponsors.
Given the complexity of the legal issues, the numerous parties involved, and the
relationships between many of them, it is likely that any litigation will be robust, costly, and
lengthy. Nonetheless, it is possible that banks may see a financial advantage to delaying put-
backs through litigation and other procedural hurdles, if only to slow the pace at which they must
be completed and to keep the loans off of their books a little longer. In addition, as discussed
above, conflicts of interest in the industry may further complicate an assessment of litigation
risk: servicers, trustees, sponsors, and originators are often affiliated with each other, meaning
that each has a disincentive to proceed with an action against another lest it harm its own bottom
94 Under the PSA, the trustee is entitled to a satisfactory indemnity prior to allowing such a process to
continue. The trustee for the securities, Bank of New York, did not find the indemnity offered acceptable and
refused to allow the parties to proceed. The various trustees for these securities may therefore form an additional
barrier between investors and review of the loan files. For example. Fannie Mae explains in a prospectus for
mortgage-backed securities (REMIC certificates) that, "We are not required, in our capacity as trustee, to risk our
funds or incur any liability if we do not believe those funds are recoverable or if we do not believe adequate
indemnity exists against a particular risk." See Federal National Mortgage Association. REMIC
Prospectus, at 44 (May', 2010) (online at
www.efaoniemae.com/syndicatedldocuments/mbs/remicproslSF]M_May_._ 20' O.pdt).
"Letter from Gibbs & Bruns LLP on behalf of BlackRock Financial Management, Inc. et aJ. to
Countrywide Home Loans Servicing LP, The Bank of New York, and counsel, Re: Holders' Notice to Trustee and
Moster Servicer (Oct. 18, 2010) (hereinafter "Letter from Gibbs & Bruns LLP to Countrywide"). The group
including FRBNY alleges generally that the loans in the pools did not meet the quality required by the PSA and
have not been prudently sen-iced.
96 Jamie Dimon, CEO of JPMorgao Chase, commented during a recent quarterly earnings call that litigation
costs in foreclosure cases will be so large as to become a cost of doing business and that. in anticipation of such suits
JPMorgao Chase has raised its reserves by $1.3 billion. Transcript provided by SNL Financial (Nov. 3, 2010). See
also JPM on Foreclosures, MERS, supra note 3.
97 Chuck Noski, chief financial officer for Bank of America, stated during an earnings call for the third
quarter of2010: "This really gets down to a loan-by-loan determination and we have, we believe, the resources to
deploy against that kind of a review." Bank of America Corporation, Q3 2010 Earnings Call Transcript (Oct. 19,
20' 0) (online at www.momingstar.com/earningslI8372 I 76-bank-of-america-corporation-q3-20 I O.aspx?pindex= I)
(hereinafter "Bank of America Q3 2010 Earnings Call Transcript").
98 For a discussion of litigation risk, see Section F.2, infra.
31
#:806
line.
99
Moreover, there is the possibility that those who foresee favorable results from such
litigation, and who have the resources and stamina for complex litigation (such as hedge funds),
will purchase affected assets with the intent to participate as plaintiffs, intensifying the legal
battle further. TARP recipients, of course, were and are at the center of many of these
transactions, and predicting all of the possible litigation to which they might be subject as a
result of the irregularities (known and suspected) is virtually impossible. It is not unlikely that,
on the heels of highly publicized actions initiated by major fmancial institutions and the
increasing likelihood that investors can meet the 25 percent threshold requirements for filing
lawsuits, sophisticated institutional investors may become more interested in pursuing litigation
or even in investing in MBS in order to position themselves for lawsuits. 100 Some security
holders, such as large endowments and pension plans, have fiduciary duties to their own
investors that may lead them to try and enforce repurchase rights. In addition, if investors such
as hedge funds that have the resources to support protracted litigation initiate lawsuits, that could
intensify the legal battles that banks will face. 101 If litigation based on significant docnment
irregularities is successful, it may throw the large banks back into turmoil.
Similarly, Fannie Mae and Freddie Mac may become embroiled in the controversies.
Fannie and Freddie have already been actively engaged in efforts to put-back nonconforming
loans to the originators/sponsors of the loans they guarantee. But they may also fmd themselves
on the other side, as targets of litigation. In addition to being embedded in the entire
securitization process, they are part owners of MERS, 102 which is becoming a litigation target.
99 See Section D.I.b, supra.
100 See discussion of collective action thresholds in this section, supra.
101 In its latest filing with the Securities and Exchange Commission (SEC), Citigroup acknowledged that
hedge fund Cambridge Place Investment Management, The Charles Schwab Corporation, the Federal Home Loan
Bank of Chicago, and the Federal Home Loan Bank of Indianapolis have filed actions related to underwriting
irregularities in RMBS. See Citigroup, Inc., Form 1O-Q[or the Quarterly Period Ended September 30,2010, at 204
(Nov. 5, 2010) (online at www.sec.gov/ArchivesJedgar/dataJ831001l000104746910009274/a2200785zI0-q.htm)
(hereinafter "Citigroup 1O-Q for Q2 2010"). In addition, the hedge fund community has begun coalescing around
their investments in RMBS, forming a lobbying group called the Mortgage Investors Coalition. See Senate
Committee on Banking, Housing, and Urban Affairs, Written Testimony of Curtis Giovier, managing director,
Fortress Investment Group, Preserving Homeownership: Progress Needed to Prevent Foreclosures (July 16,2009)
(online at View&FileStore _ 1854212-1 b61-4486-98dO-
c02fc74ea2c5).
102 See MERSCORP, Inc., MERS Shareholders (online at www.mersinc.orgiaboutlshareholders.aspx)
(accessed Nov. 12,2010) ("Shareholders played a critical role in the development ofMERS. Through their capital
support, MERS was able to fund expenses related to development aod initial start-up."). See also Letter from R.K.
Arnold, president aod chief executive officer, MERSCORP, Inc., to Elizabeth M. Murphy, seeretary, Securities aod
Exchange Conunission. Comments on the Commission's Proposed Rule for Asset-Backed Securities, at Appendix B
(July 30, 2010) (online at www.sec.gov/commeotsls7-OS-10/s70SlO-58.pdf)(attachingasan Appendix letters from
both Fannie Mae and Freddie Mac, which include the Fannie Mae statement that "As you are aware, Fannie Mae has
been an advocate and strong supporter of the efforts of MERS since its formation in 1996. The mission of MERS to
streamline the mortgage process through paperless initiatives and data standards is clearly in the best interests of the
mortgage industry, and Fannie Mae supports this mission.").
32
#:807
L
Both Fannie and Freddie have recently ceased allowing MERS to bring foreclosure actions. 103
Further, Fannie and Freddie used at least one of the law firms implicated in the irregularities to
handle foreclosures.
I04
Given that these two government-supported firms are perceived as the
ultimate "deep pocket," it is likely that interested litigants will attempt to find a way to attach
liability to them, which, if successful, could further affect the taxpayers. \05
3. Additional Considerations
The participants described above are by no means the only parties affected by these
issues. Lenders may be reluctant to make new loans on homes that could have title issues.
Investors may likewise be reluctant to invest in mortgages and MBS that may be affected.
Uncertainty about the actions that federal and state governments may take to address the
documentation issues, how these actions will affect investment returns, and concerns that these
problems may be widespread in the mortgage industry may also discourage investors. Until
there is more clarity on the legal issues surrounding title to affected properties, as well as on the
extent of any title transfer issues, it may also become more difficult or expensive to get title
insurance, an essential part of any real estate transaction. In addition, put-backs of mortgages,
103 See Federal National Mortgage Association, Miscellaneous Servicing Policy Changes, at 3 (Mar. 30,
20 I 0) (Announcement SVC-20 I 0-05) (online 'at www.efanniemae.comisfiguidesissg/annltrsJpdfl20 1 Ofsvc I 005 .pdt)
("Effective with foreclosures referred on or after May 1,2010, MERS must not be named as a plaintiff in any
foreclosure action, whether judicial or non-judicial, on a mortgage loan owned or securitized by Fannie Mae.").
104 On November 2, 2010, Fannie Mae and Freddie Mac terminated their relationships with a Florida
foreclosure attorney David J. Stem, who had processed thousands of evictions on their behalf and faces allegations
by the Florida Attorney General's office of improper foreclosure practices including false and misleading
documents. See Office of Florida Attorney General Bill McCollum, Florida Law Firms Subpoenaed Over
Foreclosure Filing Practices (Aug. 10,2010) (online at
www.myfloridalegal.cominewsrel.nsfinewsreleasesi2BAC I AF2A61BBA398525777BOO51 BB30); Office of Florida
Attorney General Bill McCollum, Active Public Consumer-Related Investigation, No. LIO-3-1145 (online at
www.myfloridalegal.coml_85256309005085AB.nsfiOfADOFO I OA43782D96852577770067B68D?Open&Highligh
t=O,david,stem) (accessed Nov. 10,2010); Nick Timiraos, Fannie, Freddie Cut Ties to Law Firm, Wall Street
Journal (Nov. 3, 2010) (online at online.wsj.comiarticlefSBIOOOI424052748704462704575590342587988742.html)
("A spokeswoman for Freddie Mac, Sharon McHale, said it took the rare step on Monday of beginning to remove
loan files after an internal review raised 'concerns about some of the practices at the Stem firm,' She added that
Freddie Mac took possession of its files 'to protect our interest in those loans as well as those of borrowers. "'),
lOS The Federal Housing Finance Agency (FHF A) placed Fannie Mae and Freddie Mac into conservatorship
on September 7, 2008, in order to preserve each company's assets and to restore them to sound and solvent
condition. Treasury has guaranteed their debts, aod FHF A has all the powers of the management, board, aod
shareholders of the GSEs. House Financial Services, Subcommittee on Capital Markets, Insurance, and
Government-Sponsored Enterprises, Writteo Testimony of Edward J. DeMarco, acting director, Federal Housing
Finance Ageocy, The Future of Housing Finance: A Progress Update on the GSEs, at 2 (Sept. 15,2010) (online at
financialservices.house.govlMediaifilelbearingsflI IlDeMarco09151O.pdt). One of the questions that has arisen is
whether there are likely to be differences in the quality of securitization processing for government-sponsored entity
(GSE) MBS compared to private-label MBS. Some industty sources believe that the process underlying GSE
securitizations is likely to have been more rigorous, but it is presently impossible to detennine if this is correct, and,
accordingly, this report does not attempt to distinguish between GSE and private-label deals. However, ifGSE
securitizations prove to have been done improperly, it might result in additional litigation for the GSEs - either as
targets, or as the GSEs try to pursue indemnification rights.
33
#:808
damages from lawsuits, and claims against title compauies, mortgage servicers, and MBS
pooling and securitization firms have the potential to drive these firms out of business. Should
these and other compauies that provide services to the mortgage market either decide to exit the
market or go bankrupt, and no other compauies opt to take their place in the current environment,
the housing market would likely suffer. Even the mere possibility of such losses in the future
could have a chilling effect on the risk tolerance of these firms, and could dim the housing
market expectations of prospective home buyers and mortgage investors, further reducing
housing demand and raising the cost of mortgages.
106
More generally, however, and as noted below, the efficient functioning of the housing
market is highly dependent on the existence of clear property rights and a level of trust that
various market participants have in each other and in the integrity of the market system.
107
If the
current foreclosure irregularities prove to be widespread, they have the potential to undermine
trust in the legitimacy of many foreclosures and hence in the legality of title on many foreclosed
properties.
I08
In that case, it is possible that buyers will avoid purchasing properties in
foreclosure proceedings because they cannot be sure that they are purchasing a clean title.
Protections in the law, such as those for a bona-fide purchaser for value, may not ease their
anxiety if they are concerned that they will become embroiled in litigation when prior owners
appeal foreclosure rulings. These concerns would be likely to continue until the situation is
resolved, or at least until the legal issues surrounding title to foreclosed properties have been
clarified. Those buyers who remain will likely face less competition and will offer very low
bids. Even foreclosed homes that have already been sold are at risk, since homes sold before
these documentation issues came to light cannot be assumed to have a legally provable chain of
title. These homes will therefore likely be difficult to resell, except at low prices that attract risk-
tolerant buyers.
E. Court Cases and Litigation
The foreclosure documentation irregularities unquestionably show a system riddled with
errors. But the question arises: were they merely sloppy mistakes, or were they fraudulent?
Differing answers to this question may not affect certain remedies available to aggrieved parties
- put-backs, for example, are available for both mistakes and for fraud - but would affect
106 See Standard & Poor's Global Credit Portal, Ratings Direct, Mortgage Troubles Continue To Weigh On
U.S. Banks (Nov. 4, 2010) (online at www2.standardandpoors.comlspflpdf7eventsIFITconI14IOArticle5.pdt)
(hereinafter "Standard & Poor's on the Impact of Mortgage Troubles on U.S. Banks") (discussion of best and worst
case scenarios).
107 Heroando de Soto, The Mystery a/Capital: WIry Capitalism Triumphs in the West and Fails Everywhere
Else, at 5-6, 174 (2000) ("Formal property titles allowed people to move the fruits of their labor from a small range
of validation into that of an expanded market.").
108 The few foreclosed homes where a single bank originated the mortgage, serviced i ~ held it as a whole
loan, and processed the foreclosure docnments themselves are very unlikely to be affected. The effect of the
irregularities on other types of loans and homes are, as discussed in this report, presently very difficult to predict.
34
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potential damages in a lawsuit.
109
It is important to note that the various parties who may be able
to bring lawsuits may choose different causes of action for very similar sets of facts depending
on standing and a host of other factors. For example, on the same facts, an investor may try to
pursue a civil suit alleging violations of representations and warranties relating to underwriting
standards in a PSA instead of pursuing a securities fraud case where the burden of proof would
be higher. Put another way, plaintiffs will pursue as many or as few causes of action as they
believe serves their purpose, and one case does not necessarily preclude another.
1. Fraud Claims
a. Common Law Fraud
Property law is principally a state issue, and the foreclosure irregularities first surfaced in
depositions filed in state courts. Accordingly, one option for plaintiffs may be to pursue a
common law fraud claim. The bar for proving common law fraud., however, is fairly high. In
order to prove common law fraud., the plaintiff must establish five elements: (1) that the
respondent made a material statement; (2) that the statement was false; (3) that the respondent
made the statement with the intent to deceive the plaintiff; (4) that the plaintiff relied on the
statement; and (5) that the plaintiff suffered injury as a result of that reliance. I 10
Traditionally, in order to prove common law fraud under state laws, each element
detailed above has to be satisfied to the highest degree of rigor. Each state's jurisprudence has
somewhat different relevant interpretive provisions, and common law fraud is generally
109 See, e.g., Agreement Among Deutsche Alt-A Securities, Inc., Depositor, Wells Fargo Bank, National
Association, Master Servicer and Securities Administrator, and HSBe Bank USA, National Association, Trostee,
Pooling and ServiCing Agreement (Sept. 1,2006) (online at www.secinfo.comldl3t2LvIB7.d.htm) ("Section 2.03:
Repurchase or Substitution of Loans. (0) Upon discovery or receipt of notice ... of 0 breach by the Seller ofany
representation, warranty or covenant under the Mortgage Loan Purchase Agreement ... the Trustee shall enforce the
obligations of the Seller under the Mortgage Loan Purchase Agreement to repurchase such Loan"); Trust Agreement
Between GS Mortgage Securities Corp., Depositor, and Deutsche Bank National Trust Company, Trostee, Mortgage
Pass Through Certificates Series 2006-FMI (Apr. 1,2006) (online at
www.secinfo.comldRSm6.vIPy.c.htm#lstPage) ("Upon discovery or notice of any breach by the Assignor of any
representation, warranty. or covenant under this Assignment Agreement ... the Assignee may enforce the Assignor's
obligation hereunder to purchase such Mortgage Loan from the Assignee.").
1I0 See Nobelpharma AB v. Implant Innovations, Inc., 141 FJd 1059, 1069 (Fed. Cir. 1998) (citing W.
Prosser, Law of Torts, 100-05 (3d ed. 1964) and 37 C.J.S. Fraud 3 (1943)).
35
#:810
perceived as a fairly difficult claim to make. I I I In particular, the requirement of iutent has been
very difficult to show, siuce it requires more than simple negligence. II
2
b. Securities Fraud
i. Foreclosure Irregularities
In the wake of the revelations about foreclosure irregularities, a number of government
agencies have gotten iuvolved. The Securities and Exchange Commission (SEC) is reviewiug
the mortgage securitization process and market participants for possible securities law violations.
It has also provided specific disclosure guidance to public companies for their quarterly
reports.
1I3
Siuce many of the mortgages potentially affected by faulty documentation practices
were put iuto securitization pools, there is an iucreased potential for lawsuits by iuvestors,
iucluding securities law claims.
In order for MBS iuvestors to state a securities fraud claim against investment or
commercial bank sponsors under the Securities Exchange Act of 1934's Rule IOb-5, 114 the most
common private litigant cause of action, the iuvestors must prove: (1) a material
misrepresentation or omission; (2) wrongful iutent; (3) connection to the purchase or sale of the
security; (4) reliance by the purchaser on the information; (5) economic loss to the plaintiff; and
(6) causation.1I5
111 See, e.g., Lynn Y. McKernan, Strict Liability Against Homebuilders for Material Latent Defects: It's
Time. Arizona, Arizona Law Review. Vo!' 38. at 373. 382 (Spring 1996) ("Although its recovery options are
attractive, common law fraud is generally difficult to prove."); Teal E. Luthy. Assigning Common Law Claims/or
Fraud, University of Chicago Law Review, Vo!' 65, at 1001, 1002 (SuDUDer I 998)("Fraud is a difficult claim to
prove"); Jonathan M. Sobel. A Rose May Not Always Be a Rose: Some General Partnership Interests Should Be
Deemed Securities Under the Federal Securities Acts, Cardozo Law Review, Vo!' 15, at 1313, 1318 (Jan. 1994)
("Common law fraud is inadequate as a remedy because it is often extremely difficult to prove.").
112 See Seth Lipner & Lisa A. Catalano. The Tort o/Giving Negligent Investment Advice, University of
Memphis Law Review, Vo!. 39, at 697 n.181 (2009); Jack E. Karns & JerryG. Hunt, Can Porifolio Damages Be
Established in a Churning Case Where the PlaintifFs Account Garners a Profit Rather Than a Loss. Oklahoma City
University Law Review, Vo!' 24, at 214 (1999).
113 SEC conversations with P.oel staff (Nov. 15,2010). In addition, the SEC's Division of Corporation
Finance has provided disclosure guidance for the upcoming quarterly reports by affected companies. U.S. Securities
and Exchange Commission. Sample Letter Sent to Public Companies on Accounting and Disclosure Issues Related
to Potential Risks and Costs Associated with Mortgage and ForeclosureRelated Activities or Exposures (Oct. 2010)
(online at www.sec.gov/divisions/corpfinlguidance/cfoforeclosurelOlO.htm) (hereinafter "Sample SEC Letter on
Disclosure Guidelines"). If the disclosure proves misleading. it could provide the basis for another cause of action.
114 17 CFR 240.10h-5. It important to note that other causes of action are available under the Securities Act
of 1933 for registered offerings: under Section II, a claim may be made for a false or misleading statement in the
registration statement, and the issuer of the security. the special purpose vehicle. underwriters, and auditors will all
be subject to potential Section II liability (with the latter two groups having due diligence defenses). With respect
to other communications made during the registered offering process, misleading statements can give rise to Section
12(a)(2) liability. See 15 U.S.C. 77k, 77m.
115 See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005). The SEC can bring enforcement
claims under a variety of theories, but private litigants typically litigate under Rule IOb-5. See Scott J. Davis,
36
#:811
To be sure, private investor lawsuits have been ongoing since the end of 2006 without
much success."
6
Some argue that securities fraud was not at the heart of the financial crisis, and
securities fraud claims are bound to fail because of the typically extensive disclosure on risks
associated with these transactions. 117 A number of judges seem to agree: some important cases
"suggest judicial skepticism to claims arising from the mortgage and fmanciaI crises.,,118 The
main hurdle in these securities claims - beyond establishing that the misrepresentations were so
material that without them the investment would not have been made - is to establish "loss
causation," Le., that the misrepresentations caused the investor's losses directly. Any losses
caused by unforeseeable external factors such as "changed economic circumstances" or "new
industry-specific conditions" will not be recoverable. I 19 Defendants in subprime litigation cases
are likely to argue that the crash of the housing market, for example, was just such an unexpected
new industry-specific condition.
120
Losses occurring as a result of the market's crash would be
non-recoverable even if there was a material misrepresentation. It remains to be seen how
securities fraud cases would play out in the context of the current documentation irregularities.
Of course, the SEC has other tools at its disposal should it choose to pursue action against
any of the financial institutions involved in potential documentation irregularities. For example,
if a formal SEC investigation finds evidence of wrongdoing, the SEC may order an
administrative hearing to determine responsibility for the violation and impose sanctions.
Administrative proceedings can only be brought against a person or firm registered with the
Symposium: The Going-private Phenomenon: Would Changes in the Rules for Director Selection and Liability Help
Public Companies Gain Some of Private Equity'8 Advantages, University of Chicago Law Review, Vol. 76, at 104
(Winter 2009); Palmer T. Heenan, et aI., Securities Fraud, American Criminal Law Review, Vol. 47, at 1018
(Spring 2010).
116 For an extensive analysis of subprime litigation up to 2008 and potential legal issues
surrounding such litigation, see Jennifer E. Bethel, Allen FerreL and Gang Hu, Law and Economics Issues in
Sub prime Litigation, Harvard Law School John M. Olin Center For Law, Economics, and Business Discussion
Paper (Mar. 21, 2008) (online at Isr.nellco.orglharvard_olinl612) (hereinafter "Harvard Law School Discussion
Paper on Subprime Litigation"). A list of class action lawsuits filed up to February 28, 2008 is included in Table I
of the article, at 67-69.
117 See, e.g., Peter H, Hamner, The Credit Crisis and Sub prime Mortgage Litigation: How Fraud Without
Motive 'Makes Little Economic Sense', UPR Business Law Journal, Vol. I (2010) (online at
www.uprblj.comlwp/wp-contentluploads/201 0/08/1-UPRBLJ-l 03-Hamner-PH.pdf).
118 A recent update on subprime and credit crisis-related litigation summarizes a number of cases and
analyzes why many of them failed (for example, lack of standing and lack of wrongful intent). Gibson, Dunn &
Crutcher LLP, 2010 Mid-Year Securities Litigation Update (Aug. 9, 2010) (online at
gibsondunn.comlPublicationslPagesiSecuritiesLitigation20 I OMid-YearUpdate.aspx# _ toc268774214). The update
also references a report by NERA Economic Consulting on a decrease in securities law filings since 2009. See
National Economic Research Associates, Inc. Trends 2010 Mid- Year Study: Filings Decline as the Wave of Credit
Crisis Cases Subsides, Median Settlement at Record High (July 27, 2010) (online at www.nera.coml67_68l3.hlm).
119 See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 34243 (2005).
120 For a more complete discussion ofthis theory, see Harvard Law School Discussion Paper on Subprime
Litigation, supra note 116, at 42-44.
37
#:812
=
SEC, or with respect to a security registered with the SEC. Many times these actions end with a
settlement, but the SEC often seeks to publish the settlement terms.
ii. Due Diligence Firms
There is also the possibility of distinct claims against the institutions that acted as
securitization sponsors for their use of third-party due diligence firms. Specifically, before
purchasing a pool of loans to securitize, the securitization sponsors, usuaIJy banks or investment
firms, hired a third-party due diligence firm to check if the loans in the pool adhered to the
seIJer's underwriting guidelines and complied with federal, state, and local regulatory laws. 121
The sponsor would select a sample of the total loan pool, typicaIJy around 10 percent,122 for the
due diligence firm to review. The due diligence firm reviewed the sample on a loan-by-loan
basis and categorized each as not meeting the guidelines, not meeting the guidelines but having
compensating factors, or meeting the guidelines. Those specific loans that did not meet the
guidelines, called exceptions, were returned to the seIJers unless the securitization sponsors
waived their objections.
123
One due diligence firm found that, from the first quarter 2006 to
I2l Financial Crisis Inquiry Commission, Written Testimony of Vicki Beal, senior vice president, Clayton
Holdings, Impact o/the Financial Crisis - Sacramento, at 2 (Sept. 23, 2010) (online at
www.fcic.gov/hearings/pdfsl2010-0923-Beal.pdf) (hereinafter "Written Testimony of Vicki Beal before the FCIC").
122 Id at 2. A sample size of only around 10 percent of the total loans in the pool was low by historical
standards. In the past, sample sizes were between 50 percent and 100 percent. Financial Crisis Inquiry
Commission, Testimony of Keith Johnson, former president, Clayton Holdings, Transcript: Impact o/the Financial
Crisis - Sacramento, at 183 (Sept. 23, 2010) (online at fcic.gov/hearingslpdfs/2010-0923-transcript.pdf) (hereinafter
''Testimony of Keith Johnson before the FCIC"). In his letter to the FCIC after Mr. Johnson's testimony, the current
president of Clayton Holdings, Paul T. Bossidy, contested some of Mr. Johnson's testimony. Calling the testimony
"inaccurate," he corrected Mr. Johnson on three points. First, Mr. Johnson testified during the bearing about
meetings he had had with the rating agencies in which he showed them Clayton's Exception Tracking reports. Mr.
Bossidy stated that Clayton had never disclosed client data during these meetings and that Clayton had never
expressed concerns about the securitization process or the ratings being issued. Second, Mr. Bossidy cautioned that
the exception tracking data provided to the FCIC was from "beta" reports. These reports contain valid c1ient
w
level
data, but are not standardized across clients. Different clients have different standards and guidelines, leading to
different exception mtes. Thus. the aggregated results do not form a meaningful basis for comparison between
clients and the data cannot be used to draw conclusions. Finally, Mr. Johnson had stated that Clayton examined a
number of.prospectuses to determine if the information from Clayton's due diligence reports had been included Mr.
Bossidy clarified that Clayton was not actively reviewing prospectuses but had begun only in 2007 in response to
specific questions from regulators. Letter from Paul T. Bossidy. president and chief executive officer, Clayton
Holdings, LLC, to Phil Angelides, chairman, Financial Crisis Inquiry Commission, Re: September 23,2010
Sacramento Hearing (Sept. 30, 2010) (online at fcic.gov/newslpdfs/201O-1014-Clayton-Lelter-to-FCIC.pdf)
(hereinafter "Letter from Paul Bossidy to Phil Angelides").
123 This description is just a summary. For a more complete description of one due diligence finn's
process, see Financial Crisis Inquiry Commission, Testimony of Vicki Beal, senior vice president, Clayton
Holdings, Transcript: Impact o/the Financial Crisis - Sacramento, at 156-158 (Sept. 23, 201O)(online at
fcic.gov/hearingslpdfs/2010-0923-transcript.pdf) (hereinafter ''Testimony of Vicki Beal before the FCIC").
38
#:813
p
second quarter 2007, only 54 percent of the loans they sampled met all underwriting
guidelines. 124
Rejected loans from the sample were returned to the seller. The sample, though, was
only approximately 10 percent of the loans in the pool, and the low rate of compliance indicated
that there were likely other non-compliant loans in the pool. The securitization sponsors did not
then require due diligence on a larger sample to identify non-compliant loans. 125 Instead, some
assert that the sponsors used the rate of non-compliant loans to negotiate a lower price for the
pool of loans. 126 These loan pools were subsequently sold to investors but, reports claim, the
results of the due diligence were not disclosed in the prospectuses except for standard language
that there might be underwriting exceptions. 127
This behavior raises at least two potential securities fraud claims. The first is a Rule 10b-
5 violation.
128
Rule IOb-5 prohibits "omit[ting] to state any material fact necessary to make the
statements made, in the light of the circumstances under which they were made, not
misleading. ,,129 If the sponsors used the due diligence reports to negotiate a lower price, the
information may have been material. In addition, the reports were not publicly available.
130
On
the other hand, the courts may frnd the standard disclosures, that there might be underwriting
exceptions, to be sufficient disclosure. As yet, the IOb-5 claim is untested in the courts, and the
facts are still unproven.
Another potential claim is based on Section 17 of the Securities Act of 1933, which
makes it unlawful in the "offer or sale of any securities ... to obtain money or property by means
of any untrue statement of a material fact or any omission to state a material fact necessary in
order to make the statements made, in light of the circumstances under which they were made,
124 Financial Crisis Inquiry Commission, All Clayton Trending Reports: 1st Quarter 2006 - 2nd Qnarter
2007, Impact of the Financial Crisis - Sacramento (Sept. 23, 20 I 0) (online at www.fcic.gov/hearingslpdfs/2010-
0923-Clayton-All-Trending-Report.pdl). Eighteen percent of sampled loans did not meet guidelines but had
compensating factors. Eleven percent of loans were non-compliant loans. but objections were waived.. Seventeen
percent of the loans in the sample were rejected. In his letter to the FCIC noted above, Mr. Bossidy cautioned the
FCIC from relying on aggregated exception information. The exception tracking data provided to the FCIC was
from '"beta" reports which contain valid data, but are not standardized across clients. Different clients
use different standards and guidelines, leading to different exception rates. Letter from Paul Bossidy to Phil
Angelides, supra note 122.
125 Testimony of Keith Johnson before the FCIC, supra note 122, at 177-78; Testimony of Vicki Bea!
before the FCIC, supra note 123, at 177.
,,. Testimony of Keith Johnson before the FCIC, supra note 122, at 183,210-211.
127 Written Testimony of Vicki Beal before the FCIC, supra note 121, at 3.
'" 17 CFR240.lOb5.
". 17 CFR 240.lOb5.
130 Written Testimony of Vicki Bea1 before the FCIC, supra note 121, at 3 ('The work product produced by
Clayton is comprised of reports that include loan-level data reports and loan exception reports. Such reports are
'works for hire,' the property of our clients and provided exclusively to our clients."),
39
#:814
not misleading."I31 This claim also depends on unproved facts, but iftbe securitization sponsors
used tbe due diligence reports to negotiate a lower price for tbe loan pools, tbe information is
arguably material. As such, tbe sponsors may have violated Section 17 when tbey omitted tbe
results of the due diligence reports from tbe prospectuses, tbough tbe proposition has not yet
been ruled on by a court. Section 17, however, can only be enforced by tbe SEC, and not by
private litigants.
There are suggestions in tbe press tbat autborities are examining tbe issue, witb several
news reports referencing discussions with investigators or prosecutors. 132
2. Existing and Pending Claims under Various Fraud Theories
Currently, these issues are being explored at tbe state level and, as discussed above, tbe
private investor level. The recent disclosures about robo-signing may provide additional causes
of action and additional arguments for private lawsuits asking for put-backs of deficient loans.
In response to a question at tbe Panel's most recent hearing on housing issues, however, one of
tbe witnesses indicated tbat he was not aware of any successful put -backs for foreclosure
procedure problems alone.
133
According to some consumer lawyers who are significantly
involved in tbese proceedings, while it is very unlikely tbat a national class action lawsuit based
on wrongful foreclosure claims could be successfully filed, it may be possible on a state-by-state
basis.
134
The outcome in tbese cases is uncertain, and consumer lawyers said tbat at tbis point it
would be difficult to quantify potential losses arising out of tbese actions or any similar
challenges in individual foreclosure procedures.
135
Various states are proceeding under a variety oftbeories. As noted above, on October 13,
2010, all 50 state attorneys general, as well as state bank and mortgage regulators, announced
131 15 U.S.C. 77q(a).
132 Gretchen Morgenson. Raters Ignored Proof of Unsafe Loans, Panel is Told, The New York Times
(Sept. 26, 2010) (online at Gretchen
Morgenson, Seeing vs. Doing, The New York Times (July 24, 2010) (online at
www.nytimes.coml2010/07/25Ibusinessl25gret.html?reFfair _game).
133 Congressional Oversight Panel, Testimony of Guy Cecala, chief executive officer and publisher, Inside
Mortgage Finance Publications, Inc., Transcript: COP Hearing on TARP Foreclosure Mitigation Programs (Oct.
27,2010) (publication forthcoming) (online at cop.senate.govlbearingsllibrarylbearing-10271O-foreclosure.cftn)
(hereinafter "Testimony of Guy Cecala").
134 Consumer lawyers conversations with Panel staff (Nov. 9, 2010). Several state class actions have been
filed alleging wrongful foreclosures and fraud on the court, see. e.g., Defeodaot William Timothy Stacy's Answer,
Affinnative Defenses and Individual and Class Action Counterclaims, Wells Fargo Bank NA, as Trustee for
National City Mortgage Loan Trust 2005-1. Mor/gage-Backed Certificates. Series 2005-1 vs. William Timothy
Stacy, et ai., No. 08-CI-120 (Commonwealth of Kentucky Bourbon Circuit Court Division I Oct. 4, 2010) See also
Class Action Complaint, Geoffrey Huber, Beatriz D 'Amico-Souza, and Michael and Tina Unsworth. for themselves
and all persons similarly situated v. GMAC, UC, nIkIa Ally Financial, Inc., No.8: lO-cv-02458-SCB-EAJ (United
States District Court Middle District of Florida Tampa Division Nov. 4,2010).
135 Consumer lawyers conversations with Panel staff (Nov. 9, 2010).
40
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that they would pursue a "bi-partisan multistate group" to investigate foreclosure irregularities. 136
They are working together to investigate allegations of questionable and potentially fraudulent
foreclosure documentation practices, and may design rules to improve foreclosure practices.
They also may begin individual actions against some of the implicated institutions. On
October 6, 2010, Ohio Attorney General Richard Cordray filed a suit against GMAC Mortgage
and its parent Ally Financial, alleging that the companies committed common law fraud and
violated the Ohio Consumer Sales Practices Act. 137 In response, GMAC referred to the
irregularities as "procedural mistakes" and maintained that it would defend itself "vigorously.,,138
The Ohio state attorney general alleges that "GMAC and its employees committed fraud on Ohio
consumers and Ohio courts by signing and filing hundreds of false affidavits in foreclosure
cases." He argues that the defendants' actions were both against the Ohio Consumer Sales
Practices Act and constituted common law fraud.139 The attorney general has asked the court to
halt affected foreclosures until defendants remedy their faulty practices and to require them to
submit written procedures to the attorney general and the court to ensure that no employee signs
documentation without personal knowledge.
Although Ohio is the first state to take action, it would not be surprising if others
follow.
I
"" Depositions have been taken in various foreclosure cases around the country that
point to questionable practices by employees at a number ofbanks.
141
Most of the large fmancial
institutions that service mortgages maintain that documentation issues can be fixed relatively
easily by re-submitting affidavits where appropriate and that based on their internal reviews there
is no indication that the mortgage market is severely flawed. Many of the banks that temporarily
suspended foreclosures have now resumed them. However, in their most recent earnings
136 50 States Sign Mortgage Foreclosure Joint Statement, supra note 26.
137 Complaint, State a/Ohio ex rei. Richard Cordray v. GMAC Mortgage, CI0201006984 (Lucas Cnty
Ohio Ct. Common Pleas Oct. 6, 2010) (online at www.ohioattorneygeneral.gov/GMACLawsuit). The complaint
also named Jeffrey Stephan as a defendant. It was Jeffrey Stephan's testimony in a Maine foreclosure case that he
sigoed thousands of affidavits without verifYing their content that ignited the foreclosure documeotation scandal.
138 Ally Financial, Inc., GMAC Mortgage Statement on Ohio Lawsuit (Oct. 6, 2010) (online at
media.ally.comlindex.php?s=l3&item=l20).
139 The Ohio attorney general argues that the statements in the foreclosure affidavits were material and
false, and the employees making them were aware that they were false and were making them anyway to induce
Ohio courts aod opposing parties to rely upon them, which, in tum, justifiably did so. He further argoes that Ally
and GMAC financially benefitted from these frauduleot practices by completing foreclosures that should not have
beeo allowed to proceed, and the "system of justice in Ohio aod Ohio borrowers have suffered aod are suffering
irreparable injury." The Ohio attorney general also argoes that Ally and GMAC "engaged in a pattern and practice
of unfair, deceptive and unconscionable acts" in violation of the Ohio Consumer Sales Practices Act when their
employees sigoed false affidavits and when they attempted to assigo mortgage notes on behalf ofMERS.
Complaint, State o/Ohio ex rei. Richard Cordray v. GMAC Mortgage, CI020J006984 (Lucas Cnty Ohio ct.
Common Pleas Oct. 6, 2010) (online at www.ohioattorneygeneral.gov/GMACLawsuit).
14() See Section E.3.
141 See, e.g., Deposition ofXee Moua, Wells Fargo Bank v. John P. Stipek, No. 502009 CA
012434XXXXMB AW (Fla. 15th Cir. Ct. Mar. 9, 2010).
----------------- ---- --
41
#:816
statements, many of these institntions have indicated that they set aside additional funds for
repurchase reserves and potential litigation costs resulting from the foreclosure documentation
irregularities.
In addition to these potential lawsuits, the Administration's Financial Fraud Enforcement
Task Force (FFETF) is in the early stages of an investigation into whether banks and other
companies that submitted flawed paperwork in state foreclosure proceedings may also have
violated federal laws. Treasury's representative informed the Panel that through Treasury's
Financial Crimes Enforcement Network (FinCEN) they are actively participating in the work of
the FFETF led by the Department of Justice.
142
Treasury has otherwise indicated that they are
not presently engaged in any independent investigative efforts.
143
To date, little has been
disclosed about the investigation.
3. Other Potential Claims
Beyond the various fraud claims, there are also several oilier potential claims. For
example, those who signed false affidavits may be guilty of peljury. Perjury is the crime of
intentionally stating any fact the witness knows to be false while under oath, either in oral
testimony or in a written deciaration.
l44
Though the exact defInition varies from state to state,
perjury is universally prohibited. Affidavits such as ilie ones involved in the foreclosure
irregularities are statements made under oath and thus clearly fall within the scope of the perjury
statntes.
145
Moreover, there are reports ofrobo-signers admitting in depositions that they knew
142 Congressional Oversight Panel, Written Testimony of Phyllis Caldwell, chief of the Homeownership
Preservation Office, U.S. Department ofthe Treasury, COP Hearing on TARP Foreclosure Mitigation Programs, at
13 (Oct. 27, 2010) (online at cop.senate.gov/docwnentsltestimony-l027 IO-caldwell.pdf) (hereinafter ''Written
Testimony ofphyllis Caldwell"). In addition to their participation in FFETF, Treasnry is coordinating efforts with
other federal agencies and regulators, including the Department of Housing and Urban Development (HUD), the
Federal Housing Administration (FHA), the Federal Housing Finance Agency (FHF A), the Federal Reserve System,
the Office of Thrift Supervision (OTS), the Office of the Comptroller of the Currency (OCC), the FDIC, the Federal
Trade Commission (FTC), and the SEC.
143 Congressional Oversight Panel, Testimony of Phyllis Caldwell, chief of the Homeownership
Preservation Office, U.s. Department of the Treasury, Transcript; COP Hearing on TARP Foreclosure Mitigation
Programs (Oct. 27, 2010) (publication forthcoming) (online at cop.seoate.govlhearingsllibrarylhearing-102710-
foreclosure.cfm) (hereinafter "Testimony of Phyllis Caldwell").
144 For example, the federal perjnry statute states "Whoever - (I) having taken an oath before a competent
tribunal, officer, or person, in any case in which a law of the United States authorizes an oath to be administered.
that he will testify, declare, depose, or certify truly, or that any written testimony, declaration, deposition, or
certificate by him subscribed, is true. willfully and contrary to such oath states or subscribes any material matter
which he does not believe to be true; or (2) in any declaration, certificate, verification, or statement under penalty of
perjnry as permitted under section 1746 of title 28, United States Code, willfully subscribes as true any material
matter which he does not believe to be true; is guilty ofperjnry and shall, except as otherwise expressly provided by
law, be fined under this title or imprisoned not more than five years, or both." 18 U.S.C. 1621.
145 Black's Law Dictionary, at 62 (8th ed. 2004).
42
~ - - - - - - - - - ~ ~ ~ ~ - - ~ - - - - - - - -
#:817
=
they were lying when they signed the affidavits.
146
As a result, it is possible that these
individuals at least are guilty of petjury. Even without such an explicit admission, it is possible
that a court could fmd that a roho-signer was intentionally and knowingly lying by signing
hundreds of affidavits a day that attested to personal knowledge of loan documents.
147
It is
important to note, however, that petjury prosecutions are rare. For example, of the 91,835
federal cases commenced in fiscal year 2008, at most, only 342 charged petjury as the most
serious offense.
148
It is thus possible that roho-signers, though potentially guilty, will not be
charged.
By contrast, the state attorneys general are already investigating whether foreclosure
irregularities such as the use of robo-signers violated state unfair or deceptive acts or practices
(UDAP) laws. Each state has some form ofUDAP law, and most generally, they prohibit
practices in consumer transactions that are deemed to be unfair or deceptive. 149 Individual state
laws, however, can be as broad as generally prohibiting deceptive or unfair conduct or as narrow
as prohibiting only a discrete list of practices or exempting all acts by banks. 150 As a result,
whether there has been a UDAP violation will depend heavily on the particularities of each
state's law. The state attorneys general, though, are already examining the matter. In
announcing their bipartisan multistate group, the attorneys general explicitly stated that they
"believe such a process [roho-signing] may constitute a deceptive act and/or an unfair
practice."ISI
146 A Florida Law Finn, The Ticktin Law Group, P.A. has taken hundreds of depositions in which
employees or contractors of various banks admitted to not knowing what they were signing or lying regarding their
personal knowledge of information in affidavits. See. e.g., Deposition ofIsmeta Dumanjic, La Salle Bank NA as
Trusteefor Washinglon Mutual Assel-Backed Certificales WMABS Series 2007-HE2 Trusl v. Jeanelte Altelus, el al.,
No. CACE 08060378 (Fla. 17th Cir. Ct. Dec. 8, 2009).
147 For testimony attesting to signing hundreds of affidavits a day, see Deposition ofXee Moua, at 28-29.
Wells Fargo Bankv. John P. Stipek, No. 502009 CA 012434XXXXMB AW (Fla. 15th Cir. Ct. Mar. 9, 2010);
Deposition of Renee Hertzler, at 25, In re: Patricia L. Starr, No. 09-41903-ffiR (D. Mass. Feb. 19,2010).
148 Bureau of Justice Statistics, Federal Justice Statistics, 2008 - Statistical Tables, at Table 4.1 (Nov.
2008) (online at bjs.ojp.usdoj .gov/contentipub/html/fjsstl2008/tables/fjs08st40 I.pdf).
149 Shaun K. Ramey and Jennifer M. Miller, State Attorneys General Strong-Arm Mortgage Lenders, 17
Business Torts Journal I, at I (FaU2009) (online at
www.sirote.comityfoon/site/membersID161E1D101710/4/3/C/file/S%20RameylRamey-Miller_REPRINT.pdf).
150 Carolyn L. Carter, Consumer Protection in the United States: A 50-State Report on Unfair and
Deceptive Acts and Practices Statutes (Feb. 2009) (online at www.nclc.orglimages/pdfJudap/report_50_states.pdf).
1$1 50 States Sign Mortgage Foreclosure Joint Statement, supra note 26.
43
#:818
4. Other State Legal Steps
In addition to the Ohio lawsuit described above and the ongoing joint investigation, some
other state officials have taken concrete steps to address the foreclosure irregularities, including
but not limited to: 152
In New York, the court system now requires that those initiating residential
foreclosure actions must file a new affirmation to certify that an appropriate employee
has personally reviewed their documents and papers filed in the case and confirmed
both the factual accuracy of these court filings and the accuracy of the notarizations
contained therein. 153
In California, a non-judicial foreclosure state, the attorney general sent a letter to
JPMorgan Chase demanding that the firm stop all foreclosures unless it could
demonstrate that all foreclosures had been conducted in accordance with Califoruia
law.
154
The attorney general also called on all other lenders to halt foreclosures
unless they can demonstrate compliance with Califoruia law. ISS
In Arizona, which is also a non-judicial foreclosure state, the attorney general sent
letters on October 7, 20 10 to several servicers implicated in the robo-siguing scandals
to demand a description of their practices and any remedial actions taken to address
potential paperwork irregularities. The attorney general wrote that if any employees
or agents used any of the questionable practices in connection with conducting a
trustee's sale or a foreclosure in Arizona, such use would likely constitute a violation
of the Arizona Consumer Fraud Act, and the attorney general would have to take
appropriate action. 156
In Ohio, in addition to his lawsuit against GMAC, the attorney general filed an
amicus curiae brief in an individual foreclosure case asking the court to consider
152 This list is not a comprehensive list of state actions. States are becoming involved at a rapid pace, in a
variety of ways, and from a variety of levels.
153 New York State Unified Court System, Attorney Affirmation-Required in Residential Foreclosure
Actions (Oct. 20, 2010) (online at www.courts.state.ny.uslattorneys/foreclosures/affirmation.shtml); New York State
Unified Court System, Sample Affirmation Document (online at
www.courts.state.ny.us/attomeys/forec\osuresl Affirmation-Foreclosure.pdf) (accessed Nov. \2, 2010).
154 Letter from Edmund G. Brown, Jr., attorney geneml, State of California, to Steve Stein, SVP channel
director, Homeownership Preservation aod Partnerships, JPMorgan Chase (Sept. 30, 2010) (online at
ag.ca.goy/cms _ attachments/presslpdfs/n I 996jp _morgan_chase _letter _.pdf).
155 Office of California Attorney General Edmund G. Brown, Jr., Brown Calls on Banks to Halt
Foreclosures In California (Oct. 8,2010) (online at
15. Letter from Terry Goddard, attorney general, State of Arizona, to mortgage servicers, Re: "Robo-
Signing" o/Foreclosure Documents in Arizona (Oct. 7, 2010) (online at
www.azag.gov/pressJeleasesloctl20 IOlMortgage%20Loan%20Servicer''1020Letter.pdf).
----------
44
#:819
evidence that GMAC committed fraud that tainted the entire judicial process and to
consider sanctioning GMAC.157 The attorney general also sent a letter to 133 Ohio
judges asking them for information on any cases involving the robo-signer Xee
Mona.
1S8
In addition, he asked Wells Fargo Bank to vacate any foreclosure
judgments in Ohio based on documents that were signed by robo-signers and to stop
the sales of repossessed properties. 159
In The District of Columhia, Attorney General Peter Nickles announced on October
27, 2010 that foreclosures cannot proceed in the District of Columbia unless a
mortgage deed and all assignments of the deed are recorded in public land records,
and that foreclosures relying on MERS would not satisfy the requirement.
l60
MERS
responded the next day by issning a statement that their procedures conform to the
laws of the District of Columbia and encouraged their members to contact them if
they experience problems with their foreclosures. 161
In Connecticut, the attorney general started investigating GMAC/ Ally and demanded
that the company halt all foreclosures. He also asked the company to provide specific
information relating to its foreclosure practices. 162 In addition, the attorney general
asked the state Judicial Department on October 1, 2010 to freeze all home
157 Brief for Richard Cordray, Ohio attorney general, as Amici Curiae, US Bank, National Association v.
James W. Renfro, No. CV-I0-716322 (Cuyahoga Cty Ohio Ct. Common Pleas Oct. 27, 2010); Office of Ohio
Attorney General Richard Cordray, Cordray Outlines Fraud in Cleveland Foreclosure Case (Oct. 27, 2010) (online
at www.ohioattomeygeneral.govlBriefing-RoomINews-ReleasesiOctober-20 I O/Cordray-Outiines-Fraud-in-
Cleveland-Foreclosure-Ca).
158 Letter from Richard Cordray, attorney general, State of Ohio, to Judges, State of Ohio (Oct. 29, 2010).
159 Letter from Richard Cordray, attorney gooeral, State of Ohio, to David Moskowitz, deputy general
counsel, Wells Fargo (Oct. 29, 2010).
1600 ffice of District of Columbia Attorney General Peter J. Nickles, Statement of Enforcement Intent
Regarding Deceptive Foreclosure Sole Notices (Oct. 27, 2010) (online at
0&fiIFfile.aspx%2frelease%2f20
673%2fforeclosure"102520statemeot.pdt).
161 MERSCORP, Inc., MERS Response to D.C Attorney General's Oct. 28, 2010 Statement of Enforcement
(Oct 28, 2010) (online at The statement emphasizes that "[w)e will
take steps to protect the lawful right to foreclose that the borrower contractually agreed to if the borrower defaults on
their mortgage loan." The law firm K&L Gates has also published a legal analysis critical of the attorney general's
actions. See K&L Gates LLP, DC AG Seeks to Stop Home Loan Foreclosures Based on Incomplete Legal Analysis,
Mortgage Banking & Consumer Financial Products Alert (Nov. 1,2010) (online at

l62 Office of Connecticut Attorney General Richard Blumenthal, Attorney General Investigating Defective
GMACIAI/y Foreclosure Docs. Demands Halt To Its CT Foreclosures (Sept. 27, 2010) (online at

45
#:820
=
foreclosures for 60 days to allow time to institute measures to assure the integrity of
document filings. 163 The Judicial Department refused this request.
l64
5. Other Possible Implications: Potential "Front-End" Fraud and Documentation
Irregularities
Until the full scope of the problem is determined, it will be difficult to assess whether
banks, servicers, or borrowers knew of the irregularities in the market. However, there are
several signs that the problem was at least partially foreseeable. For example, numerous systems
had been developed to circumvent the slow, paper-based property system in the United States.
MERS, discussed in more detail above, represented an attempt to add speed and simplification to
the property registration process, which in turn would allow property to be transferred more
quickly and easily. MERS arose in reaction to a clash: during the boom, originations and
securitizations moved extremely quickly. But the property law system that governed the
underlying collateral moves slowly, and is heavily dependent on a variety of steps memorialized
on paper and thus inefficient at processing enormous lending volume. While systems like MERS
appeared to allow the housing market to accelerate, the legal standards underpinning the market
did not change substantially.165 In some respects, the irregularities and the mounting legal
problems in the mortgage system seem to be the consequence of the banks asking the property
law system to do something that it may be largely unequipped to do: process millions of
foreclosures within a relatively short period of time. 166 The Panel emphasizes that mortgage
lenders and securitization servicers should not undertake to foreclose on any homeowner unless
they are able to do so in foil compliance with applicable laws and their contractual agreements
with the homeowner. Iflegal uncertainty remains, foreclosure should cease with respect to that
homeowner until all matters are objectively resolved and vetted through competent counsel in
each applicable jurisdiction. Satisfaction of applicable legal standards and legal certainty is in
the best interests of homeowners as well as creditors and will enable all concerned parties to
exercise properly their legal and contractual rights and remedies.
This combination of factors - a demand for speed, the use of systems designed to
streamline a legal regime that was viewed as out-of-date, and a slow, localized legal system-
may have substantially increased the likelihood that documentation would be insufficient. As
163 Office of Connecticut Attorney General Richard Blumenthal, Attorney General Asks CT Courts To
Freeze Home Foreclosures 60 Days Because a/Defective Docs (Oct. 1,2010)

164 Letter from Judge Barbara M. Quinn, chief court administrator, State of Connecticut Judicial Branch. to
Richard Blumenthal, attorney general, State of Connecticut (Oct. 14,2010).
165 See, e.g., Federal National Mortgage Assoc. v. Nicolle Bradbwy, supra note 12 (requiring that the
plaintiff provide, among other things, the book and page number of the mortgage, as well as the street address and
stating that failure to provide a street address is sufficient to preclude summary judgment in a foreclosure
proceeding).
166 See Section C, supra, discussing strains on servicers.
46
#:821
discussed above, some authorities are taking direct aim at MERS and the validity of its
processes. Coupled with business pressure exerted on law finns
l67
and contractors
l68
to process
rapidly foreclosure documents, the system had clear risks of encouraging comer-cutting and
creating substantial legal difficulties. Furthermore, even if these problems were not foreseeable
from the vantage point of the housing boom, the downturn in the housing market and the
foreclosure crisis made them much more likely. In 2008 and 2009, a vast amount of attention
was given to the difficulty of determining liability in the securitization market because of
problems with documentation and transparency.169 At this time, servicers could have had notice
of the types of documentation problems that could affect the transfer of mortgage ownership. In
some cases, even when servicers were explicitly made aware of the shoddy documentation, they
did little to correct the problem. One judge determined that "[r]ather than being an isolated or
inadvertent instance of misconduct ... GMAC has persisted in its uulawful document sigoing
practices" even after it was ordered to correct its practices. 170
Some observers argue that current irregularities were not only foreseeable, but that they
mask a range of potential irregularities at the stage in which the mortgages were originated and
pooled. According to that view, current practices simply added to and magnified problems with
the prior practices. The legal consequences of foreclosure irregularities will be magnified if the
problems also plagued originations: after all, foreclosures are still a relatively limited portion of
the market. If all securitizations or performing whole loans were to be affected, the
consequences could be significantly greater. At this point, answers as to what exactly is the
source of the problems at the front end and how severe the consequences may be going forward
depend to a large degree on who is evaluating the problem. The Panel describes below the
perspectives of various stakeholders in the residential mortgage market.
167 Deposition of Tammie Lou Kapusta, In re: Investigation of Law Offices of David J. Stem. P.A. (Sept.
22,2010).
168 Federal National Mortgage Association, Foreclosure Time Frames and Compensatory Fees for Breach
of Servicing Obligations, at 3 (Aug. 31, 2010) (Announcement SVC-201 0-12) (online at
www.efanniemae.comlsfiguides/ssg/annltrs/pdf7201O/svcI012.pdt)(stating that Fannie Mae might pursue
compensatory fees based on '1he length of the delay, and any additional costs that are directly attributable to the
delay.").
169 See, e.g., Hernando de Soto, Toxic Assets Were Hidden Assets, Wall Street Journal (Mar. 25, 2009)
(online at online.wsj.comlarticle/SBI2379381 1398132049.html) ("The real villain is the lack of trust in the paper on
which [subprime mortgages] - and all other assets - are printed. If we don't restore trust in paper, the next default-
on credit cards or student loans - will trigger another collapse in paper and bring the world economy to its knees.").
170 Federal National Mortgage Assoc. v. Nicolle Bradbury, supra note 12 (''The Court is particularly
troubled by the fact that Stephan's deposition in this case is not the first time that GMAC's high-volume and
careless approach to affidavit signing has been exposed .... The experience of this case reveals that, despite the
Florida Court's order, GMAC's flagrant disregard apparently persists. It is well past time for such practices to
end."). See a/so Section C, supra. It is worth noting that the rights of a bona-fide purchaser for value are affected
by whether the purchaser had notice of a competing claim at the time of purchase. One possible source of conflict
will be what, WIder these circumstances, constitutes adequate notice. Panel staff conversations with industry sources
(Nov. 9,2010).
47
- - - - ~ -------------~ - - - ~ ~ - . ~
#:822
a. Academics and Advocates for Homeowners
Many lawyers and stakeholders who have worked with borrowers and servicers on a
regular basis over the past few years, primarily in bankruptcy and foreclosure cases, maintain
that documentation problems, including potentially fraudulent practices, have been pervasive and
apparent.
l7l
These actors, including academics who study the topic, argue that bankruptcy and
foreclosure procedures have been revealing major deficiencies in mortgage servicing and
documentation for quite some time. Professor Katherine M. Porter, a professor of law who
testified at the Panel's most recent hearing, wrote: "The robo-signing scandal should not have
been a surprise to anyone; these problems were being raised in litigation for years now.
Similarly, I released a study in 2007 - three years ago - that showed that mortgage companies
who filed claims to be paid in bankruptcy cases of homeowners did not attach a copy of the note
to 40% of their claims.,,172 According to this view, the servicing process was severely flawed,
and "servicers falsify court documents not just to save time and money, but because they simply
have not kept the accurate records of ownership, payments, and escrow accounts that would
enable them to proceed legally.,,!73 In 2008-2009 over 1,700 lost note affidavits were filed in
Broward County, Florida alone.!74 These affidavits claim that the original note has been lost or
destroyed and cannot be produced in court. It is important to recognize, however, that a lost
note affidavit may not actually mean that the note has been lost. In her written testimony to the
Panel, Professor Katherine Porter points out that her study of lost notes in bankruptcies "does not
prove ... whether the mortgage companies have a copy of the note and refused to produce it to
stymie the consumers' rights or to cut costs, whether the mortgage companies or their
predecessors in a securitization lost the note, or whether someone other than the mortgage
company is the holderlbearer of the note.,,!75
171 For example, in her testimony submitted to the Congressional Oversight Panel, Julia Gordon oftbe
Center for Responsible Lending writes: 'The recent media revelations about highlight just one of the
many ways in which servicers or their contractors elevate profits over customer service or duties to their clients, the
investors. Other abuses include misapplying payments, force-placing insurance improperly, disregarding
requirements to evaluate homeowners for nonforeclosure options, and fabricating documents related to the
mortgage's ownership or account status." See Congressional Oversight Panel, Written Testimony of Julia Gordon,
senior policy counsel, Center for Responsible Lending, COP Hearing on TARP Foreclosure Mitigation Programs,
at 3 (Oct. 27, 2010) (online at cop.senate.gov/documentsitestimony-102710-goroon.pdf) (hereinafter "Written
Testimony of Julia Gordon").
172 Written Testimony of Katherine Porter, supra note 14, at 9 (referencing her paper: Katherine M. Porter.
Misbehavior and Mistake in Bankrnptcy Mortgage Claims, Texas Law Review, Vol. 87 (2008) (Nov. 2008) (online
at www.mortgagestudy.orgifileslMisbehavior.pdf)). The paper gives an in-depth analysis of how mortgage servicers
frequently do not comply with bankruptcy law.
173 Written Testimony of Julia Gordon, supra note 171. at 11.
174 Legalprise Inc., Report on Lost Note Affidavits in Broward County, Florida (Oct. 2010). Legalprise is a
Florida legal research finn that uses and analyzes public foreclosure court records.
175 Written Testimony of Katherine Porter, supra note 14, at 9.
48

#:823
If the lawyers' and advocates' assertions of widespread irregularities are correct, it could
mean that potentially millions of shoddily documented mortgages have been pooled improperly
into securitization trusts. Lawyers are using a lack of standing by the servicers due to ineffective
conveyance of ownership of the mortgage as a defense in foreclosure cases. Some of these
lawyers argue that the disconnect between what was happening on the "street level," i.e., with
the origination and documentation of mortgages, and the transfer requirements in the PSAs, is so
huge that no credence can be given to the banks' argument that the issues are merely technical. 116
However, commentators who believe that the problem is widespread also believe that investors
in these securitization pools, mther than homeowners, may be the best placed to pursue the cases
on a larger scale successfully. 111
b. Servicers and Banks
Since the foreclosure irregularities have surfaced, the banks involved have maintained
that the problems are largely proceduml and technical in nature. Banks have temporarily
suspended foreclosures in judicial foreclosure states in particular and looked into their practices,
but they state that they do not view these problems as fundamental either in the foreclosure area
or in the origination and pooling of mortgages. The CEO of Bank of America, Brian Moynihan,
noted in the company's most recent earnings call that Bank of America has resumed
foreclosures, but "it's going to take us three or five weeks to get through and actually get all the
judicial states taken care of. The teams reviewing data have not found information which was
inaccurate, would affect the frame factors of the foreclosure; i.e., the customer's delinquency,
etcetera.',118 He focused on the faulty affidavits and argued that "[they] fixed the affidavit
signing problem or will be fixed in very short order.,,119 Many of the other large banks have
issued statements in the same vein. ISO Most of these banks have either not commented on the
issues around the transfer of ownership of the mortgage or maintain that alleged ownership
transfer problems are without merit or exaggerated. lSI
176 Consumer lawyers conversations with Panel staff (Oct. 28, 2010).
177 Consumer lawyers conversations with Panel staff (Nov. 9, 2010).
178 Bank of America Q3 2010 Earnings Call Transcript, supra note 97, at 6.
179 Bank of America Q3 2010 Earnings Call Transcript, supra note 97, at 6.
ISO JPMorgan Chase & Co., Financial Results 3QlO, at IS (Oct. 13,2010) (online at
files.shareholder.comldownloadsiONElIOS I 04 7839xOx409164/e27fl d82-ef74-42ge-SID-
7d670663462113QIO _Earnings ]resentation.pdl) (hereinafter "JPMorgan Q3 2010 Financial Results") (''Based on
our processes and reviews to date, we believe underlying foreclosure decisions were justified by the facts and
circumstances."); Wells Fargo Update on Affidavits and Mortgage Secwitizations, supra note 23 ("The issues the
company has identified do not relate in any way to the quality of the customer and loan data; nor does the company
believe that any of these instances led to foreclosures which should not have otherwise occurred.").
181 For example. the American Securitization Forum issued a statement questioning the legitimacy of
concerns raised about securitization practices: "In the last few days, concerns have been raised as to whether the
standard industry methods of transferring ownership of residential mortgage loans to securitization trusts are
sufficient and appropriate. These concerns are without merit and our membership is confident that these methods of
49
#:824
c. Investors
As discussed above, securitization investors have been involved in lawsuits regarding
underwriting representations and warranties for some time. Investors in MBS or collateralized
debt obligation (COO) transactions have a variety of options to pursue a claim. Claims alleging
violations of representations and warranties have typically focused on violations of underwriting
standards regarding the underlying loans pooled into the securities. Another option may be to
pursue similar claims relating to violations of representations and warranties with respect to the
transfer of mortgage ownership. In the wake of the current documentation controversies, it
appears that private investors may become more emboldened to pursue put-back requests and
potentially file lawsuits. For example, and as discussed above, a group of investors - including
FRBNY in its capacity as owner of RMBS it obtained from American International Group, Inc.
(AIG) - sent a letter to Bank of America as an initial step to be able to demand access to certain
loan files.
182
Direct contact with the bank was initiated because the securitization trustee (Bank
of New York) had refused to comply with the initial request in accordance with the PSA.
FRBNY, as an investor, is on equal footing with all the other investors, and according to
FRBNY's representatives, they view this action and any potential participation in a future
lawsuit as one way to attempt to recover funds for the taxpayers. 183
While there may be a growing appetite for pursuing such lawsuits, these lawsuits still
have to overcome a fair number of obstacles built in to the PSAs, 184 as well as problems inherent
in any legal action that requires joint action by many actors. 185 As a general matter, what
appears to be a significant problem is that the operating documents for these transactions
transfer are sound and based on a welJ-established body oflaw governing a multi-trillion dolJar secondary mortgage
market." See American Securitization Forum, ASF Says Mortgage Securitization Legal Structures & Loan
Trans/ers Are Sound (Oct. 15,2010) (online at www.arnericansecuritizarion.comlstory.aspx?id=4457)(hereinafter
"ASF Statement on Mortgage Securitization Legal Structures and Loan Transfers"). ASF will issue a white paper in
the corning weeks to elaborate further on this statement.
182 See Letter from Gibbs & Bruns LLP to Countrywide, supra note 95. As noted above, the letter
predominantly alJeges problems with loan quality and violation of prudent servicing obligations. See also Gibbs &
Bruns LLP, Institutional Holders a/Countrywide-Issued RMBS Issue Notice a/Non-Performance Identifying
Alleged Failures by Master Servicer to Per/onn Covenants and Agreements in More Than $47 Billion of
Countrywide-Issued RMBS (Oct. 18,2010) (online at
www.gibbsbruns.comlfiles/UploadslDocumentsIPress_Release_Glbbs%20&%20Bruns%20_1 0_18_1 O.pdf); Gibbs
& Bruns LLP, Countrywide RMBS Initiative (Oct. 20, 2010) (online at www.gibbsbruns.comlcountrywide-rmbs-
initiative-l 0-20-201 01).
IS) FRBNY staff conversations with Panel staff (Oct. 26, 2010).
\84 For further discussion of these obstacles, see Section D.2. In addition, see description ofPSAs in
Section D.I, supra.
l8S For example, the investors taking action have to consider costs associated with their litigation such as
indemnifications to be given to trustees when those are directed to initiate a lawsuit on the bondholders' behalf.
Another consideration is that non-participating investors may also ultimately benefit from legal actions without
contributing to the costs.
--- --.----
50
#:825
generally give significant discretion to trustees in exercising their powers,186 and these third
parties may not be truly independent and willing to look out for the investors. 187
F. Assessing the Potential Impact on Bank Balance Sheets
1. Introduction
A bank's exposure to the current turmoil in the residential real estate market stems from
its role as the originator of the initial mortgage, its role as the issuer of the packaged securities,
its role as the underwriter of the subsequent mortgage trusts to investors, and/or its role as the
servicer of the troubled loan. 188 Through these various roles in the mortgage market, the banking
sector's vulnerability to the current turmoil in the market generally encompasses improper
foreclosures, related concerns regarding title documentation, and mortgage repurchase risk
owing to breaches in representations and warranties provided to investors.
186 For example, in some PSAs, trustees are not required to investigate any report or, in many agreements,
request put-backs, lIDless it is requested by 25 percent of investors. See Pooling and Servicing Agreement by and
among J.P. Morgan Acceptance Corporation I, Depositor, et al., at 122 (Apr. 1,2006) (online at
www.scribd.comldoc/3145330 IlPooling-Servicing-Agreement-JPMAC2006-NC I-PSA). Absent that threshold
being met, the trustee has discretion to act. For further discussion. see Section D.2.
187 Amherst Securities Group LP, Conference Call: "Robosigners, MERS, And The Issues With Reps and
Warrants" (Oct. 28, 2010). If the investors wished to act againat trustees they believe are not independent, there are
some legal avenues they could pursue. For example, the investors could remove the trustee using provisions that
are typically in PSAs that allow for such a removal. Such provisions, however, often require 51 percent of investors
to act. In addition, to the extent that the trustees are found to be fiduciaries. if the trustee takes a specific action that
the investors believe not to be in their best interest, they may be able to sue the trustee. If successful, investors could
be awarded a number of possible remedies, including damages or removal of the trustee. Greenfield, Stein, &
Senior, Fiduciary Removal Proceedings (online at
Proceedings.asp) (accessed Nov. 12,2010); Gary B. Freidman, Relief Against a Fiduciary: SCPA 2I02
Proceedings, NYSBA Trusts and Estates Law Section Newsletter, at 1-2,4 (Oct. 13,2003) (online at www.gss-
law.com/CM! Articles/SCPA%202102%20Proceedings%20-%20Revised.pdf) ("The failure of the fiduciary to
comply with a court order directing that the information be supplied can be a basis for contempt under SCP A 606,
607-1 and/or suspension or removal ofthe fiduciary under SCPA 711.").
188 There are also risks for holders of second lien loans, but these loans are not as directly impacted by
foreclosure irregularities as mortgages, since most second liens were not securitized, and are held on the
balance sheets ofbanks and other market participants. As discussed above, if second liens were perfected and first
liens were not, they may actually take priority. See Section D.2 for further discussion of effects on second lien
holders.
An analyst report from January 2010, values securitized second liens only at $32.5 billion of the $1.053
trillion of the total second liens outstanding. Amherst Securities Groop LP, Amherst Mortgage Insight, 2nd Liens-
How Important, at 12 (Jan. 29, 2010).
At the end of the second quarter of2010, the four largest U.S. commercial banks - Bank of America,
Citigroup, JPMorgan Chase, and Wells Fargo - reported $433.7 billion in second lien mortgages while having total
equity capital of$548.8 billion. Amherst Securities Group LP data provided to Panel staff (Sept. 2, 2010); Federal
Deposit Insurance Corporation, Statistics o/Depository Institutions (online at www2.fdic.gov/sdil) (accessed Nov.
12, 20 I 0). This figore is based on reporting by the banks, not their holding companies, and therefore may not
include all second liens held by affiliates.
51
#:826
Many investment analysts believe that potential costs associated with bank foreclosure
irregularities are manageable, with potential liabilities representing a limited threat to earnings,
rather than bank capitaL 189 Market estimates stemming from foreclosure irregularities to a
potential prolonged foreclosure moratorium range from $1.5 to $10.0 billion for the entire
industry.l90 However, while the situation remains fluid, the emerging consensus in the market is
that the risk from mortgage put-backs is a potentially bigger source of instability for the banks.' 91
Using calculations based on current market estimates of investment analysts, the Panel calculates
a consensus exposure for the industry of $52 billion. Aside from the potential for costs to far
exceed these market estimates (or be materially lower), the wild card here is the impact of
broader title documentation concerns across the broader mortgage market. In any case, the
fallout from the foreclosure crisis and ongoing put-backs to the banks from mortgage investors
are likely to continue to weigh on bank earnings, but are, according to industry analysts, unlikely
to pose a grave threat to bank capital levels. 192
However, there are scenarios whereby wholesale title and legal documentation problems
for the bulk of outstanding mortgages could create significant instability in the marketplace,
leading to potentially significantly larger effects on the balance sheets of banks. Under
significantly more severe scenarios that would engulf the broader mortgage market -
encompassing widespread legal uncertainty regarding mortgage loan documentation as well as
the prospect of extensive put-backs impacting agency and private label mortgages - bank capital
levels could conceivably come under renewed stress, particularly for the most exposed
institutions.
193
It is unclear whether severe mortgage scenarios were modeled in the Federal
189 FBR Foreclosure Mania Conference Call. supra note 3.
190 See Section F.2 for further discussion on costs stemming from a foreclosure moratorium.
19J However, to the extent that banks hold MBSs originated/issued by non-affiliates, they may themselves
benefit from put-backs.
192 Credit Suisse, US Banks: Mortgage Put-back Losses Appear Manageable for the Large Banks, at 4 (Oct.
26,2010) (hereinafter ''Credit Suisse on Mortgage Put-back Losses"); Deutsche Bank, Revisiting Putbacks and
Securitizations, at 7 (Nov. 1,2010) (hereinafter "Deutsche Bank Revisits Putbacks and Securitizations"); FBR
Capital Markets, Repurchase-Related Losses Roughly $44B for Industry - Sensationalism Not Warranted (Sept. 20,
2010) (hereinafter "FBR on Repurchase-Related Losses"); Standard & Poor's on the Impact of Mortgage Troubles
on U.S. Banks, supra note 106.
193 There are other mortgage risks that are difficult to quantify, such as the potential effect mortgage put-
backs may have on holders of interests in CDOs and the banks that serve as counterparties for synthetic COOs. A
synthetic CDO is a privately negotiated financial instrument that is generally made up of credit default swaps on a
referenced pool of fixed-income assets, in these cases often including the mezzanine tranches ofRMBSs. Large
banks served as intermediaries for clients wishing to shift risk and therefore structure a synthetic CDO. These banks
packaged and underwrote synthetic COOs and may have retained a certain amount of liquidity risk. It is nearly
impossible, however, to measure the possible effect of this issue due to the fact that there is no reliable data that
estimates the size of the CDO market, and the fact that counterparty risk in synthetic COOs is agreed to under a
private contract and therefore no data is publicly available. Panel staff conversations with industry sources (Nov. 4,
2010).
52
#:827
Reserve's 2009 stress tests, which, in any event, did not examine potential adverse scenarios
beyond 2010.
194
While the situation is still uncertain, the worst-case scenarios would have to presuppose
at a minimum a systemic breakdown in documentation standards, the consequences of which
would likely grind the mortgage market to a halt. However, it is important to note that, so far,
many of the experts who have spoken to the question (and the banks themselves) believe that
securities documentation concerns are unlikely to trigger meaningful broad-based losses. These
experts state that although put-backs owing to breaches of representations and warranties will
continue to exert a toll on the banks, it will largely be manageable, with costs covered from
ongoing reserves and earnings. Furthermore, as noted in Section D, there are a considerable
number oflega! considerations that will likely lead to losses being spread out over time. 195
Residential u.S. mortgage debt outstanding was $10.6 trillion as ofJune 2010.
196
Of this
amount, $5.7 trillion is government-sponsored enterprise (GSE) or agency-backed paper, $1.4
trillion is private label (or non-GSE issued) securities, and $3.5 trillion is non-securitized debt
held on financial institution balance sheets.
197
For general information on the counterparty risk involved in synthetic CDOs, see Michael Gibson,
Understanding the Risk of Synthetic CDOs (July 2004) (online at www.curacao-law.comlwp-
contentluploads/2oo8/10/federal-reserve-cdo-analysis-2004.pdf).
194 Board of Governors of the Federal Reserve System, The Supervisory Capital Assessment Program:
Design and Implementation (Apr. 24, 2009) (online at
www.federalreserve.gov/newseventslpresslbcreg!bcreg20090424al.pdf).
195 See Section D for a discussion on legal considerations of foreclosure document irregularities.
196 Board of Govemors of the Federal Reserve System, Statistics & Historical Data: Mortgage Debt
Outstanding (Sept. 2010) (online at www.federalreserve.gov/econresdatalreleases/mortoutstandicnrrent.htm).
1971d.
53
#:828
Figure 2: Residential (1-4 Family) Mortgage Debt Outstanding, 1985-2009 (millions of
dollars/
98
12,000,000
10,000,000
8,000,000
6,000,000 i'
2,000,000

GSE and Agency MBS !il Private Label MBS?} Non-Securitized Mortgage Debt
Industry-wide; 4.6 perceut of mortgages are classified as in the foreclosure process. In
addition, 9.4 percent of mortgages are at least 30 days past due, approximately half of which are
more than 90 days past due. 199
198 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Flow o/Funds
Accounts of the United States: Data Duwnload Program (Instrument: Home Mortgages, Frequency: Annually,
L.2IS) (online at www.federalreserve.gov/datadownloadiChoose.aspx?rel=Z.I)(accessed Nov. 12,2010).
199 Mortgage Bankers Association, National DelifUJuency Survey, Q2 20/0 (Aug. 26, 2010) (hereinafter
"MBA National Delinquency Survey, Q2 2010"). See also Mortgage Bankers Association, Delinquencies and
Foreclosure Starts Decrease in Latest MBA National Delinquency Survey (Aug. 26, 2010) (online at
www.mbaa.orglNewsandMediaiPressCenterI73799.htm)(hereinafter "MBA Press Release on Delinquencies and
Foreclosure Starts").
------- '-- -----------
54
#:829
Figure 3: Delinquency and Foreclosure Rates (2006_2010)200
16%------.-.- ... -----.-.... - ...... - ... -- .... --.. ------.-.... -.. -.... -.-... -.-.-.-.--
14% .L.
12%
10% .... -.-.----.--.--.- - ... ----.---.. ---.---.. -------=
8% ---..---- ..... --.--.-... --.---... -. . ... :
6%
4%
2%
0%
Delinquency Rate
a. Leading Market Participants
" Foreclosure Inventory at End of Quarter
Troubled mortgages were largely originated in 2005-2007, when underwriting standards
were most suspect, particularly for subprime, Alt-A and other loans to low-credit or poorly
documented borrowers. Figure 4 below outlines the largest mortgage originators during this
period, ranked by volume and market share.
200 Delinquency rates include loans that are 30 days, 60 days, and 90 days or more past due. Foreclosure
rates include loans in the foreclosure process at the end of each quarter. See Id.
55
#:830
Figure 4: Largest U.S. Mortgage Originators, 2005-2007 (billions of dollars/o
l
Market
Company Volume Share
Bank of America 1,880 22.1%
Countrywide Financial 1,362 16.0%
Bank of America Mortgage & AfiUiates 518 6.1%
Wells Fargo
I
1,324 15.5%
Wells Fargo Home Mortgage 1,062 12.4%
Wachovia Corporation 262 3.1%
JPMorgan Chase 1,151 13.5%
Chase Home Finance 566 6.6%
Washington Mutual 584 6.9%
Citigroup 506 5.9%
Top Four Awueeate 4861 57.0%
Total Mortgage Originations (2005-2007) 8,530
The four largest banks accounted for approximately 60 percent of all loan originations
between 2005 and 2007. Totals for Bank of America, Wells Fargo, JPMorgan Chase, and
Citigroup include volumes originated by companies that these firms subsequently acquired. As
Figure 4 indicates, a significant portion of Bank of America's mortgage loan portfolio is
comprised of loans assumed upon its acquisition of Countrywide Financial. Similarly, JPMorgan
Chase more than doubled its mortgage loan portfolio with its acquisition of Washington Mutual.
Figure 5, below, details the largest originators of both Alt-A and subpriroe loans between
2005 and 2007. The five leading originators of Alt-A and subpriroe loans represented
approximately 56 percent and 34 percent, respectively, of aggregate issuance volume for these
loan types. Alt-A and subpriroe loans represented approximately 30 percent of all mortgages
originated from 2005 to 2007.
201 Inside Mortgage Finance.
56
#:831
Figure 5: Leading Originators of Subprime and Alt-A Loans, 2005-2007 (billions of
dollars/o
2
Market
Share
Countrywide Financial (Bank of America) 172 16.2%
JndyMac 145 13.6%
JPMargan Chase 102 9.6%
Washlngton Mutual 40 3.8%
EMC Mortgage 38 3.5%
Chase Home Financial 25 2.3%
GMAC 98 9.2%
GMAC-RFC 77 7.3%
GMAC Residential Holding 21 \.9"/0
Lehman Brothers
203
79 7.4%
56.0%
SUBPRIME ORIGINATIONS
Mortgage 112 7.7%
New Century 109 7.5%
Countrywide Financial (Bank of America) 102 7.0%
JPMorgan Chase 99 6.8%
Washlngton Mutual 66 4.5%
Chase Home Finance 33 2.3%
Option One Mortgage 80 5.5%
As shown in Figure 6, below, the five leading underwriters (pro fonna for acquisitions) of
non-agency MBS between 2005 and 2007 accounted for 58 percent of the total underwriting
vohune for the period. It is of note that the three finns with the largest underwriting volumes
during this period, Lehman Brothers, Bear Stearns, and Countrywide Securities, have either
failed or been acquired by another company.
203 Includes Alt-A originations from Lehman Brothers subsidiary, Aurora Loan Services, LLC.
57
#:832
Figure 6: Leading Underwriters of Non-Agency Mortgage-Backed Securities, 2005-2007
(billions of dollars/
04
Company
i JPMorgan Chase
i JPMorgan Chase
I Bear Stearns
i Washington Mutual
-I- Bank of America
Merrill Lynch
: Countrywide Securities
I Lehman Brothers
1 RBS Greenwich Capital
, Credit Suisse
I Top Five Aggregate
: Total UnderwritiIJgV olume (2005-200'7L._
Market
Volume Share
593 19.5%
143 4.7%
298 9.8%
152\ 5.0% I
371 12.2%
94 3.1%
277 9.1%
322 10.6%
273 9.0%
203 6.7%
1,762 58.0%
_-0
3
,,,'-'4-'4--" ______ ---
As noted above, banks either retain or securitize - market conditions permitting -the
mortgage loans they originate. In terms of mortgages retained on bank balance sheets, Figure 7
below lists banks with the largest mortgage loan books, as well as the concentration of foreclosed
mortgage loans, ranked by volume and as a percentage of overall residential mortgage balance
sheet assets.
Figure 7: Bank Holding Companies with 1-4 Family Loans in Foreclosure Proceedings,
June 2010 (billions of dollars/OS
Com an
Bank of America
Wells Fargo
JPMorgan Chase
Citigroup
HSBC North America
U.S. Bancorp
PNC Financial Services Group
Sun Trust Banks I
Ally Financial (GMAC) I
Fifth Third Bancorp 1
L Total for All Bank
Total 1-4 1-4 Family , Percent of 1-4 I
Family Loans in I Family Loans i
Loans Foreclosure I in Foreclosure
427.1 18.8 4.4%
370.7 17.6 ,
4.7% I
259.91 19.5 I 7.5%
178.41
6.0 ! 3.3% i
72.9
6.61
9.0"10
58.1 ! 2.5 ! 4.4%
54.91 2.7 I 5.0%
47.91
2.4 I 5.0%
21.5 2.2 1 10.2%
21.4 I 0.7 :
3.2%
87.71 4.1%
205 SNL Financial. These data include revolving or permanent loans secured by real estate as evidenced by
mortgages (FHA, FMHA, V A, or conventional) or other liens (first or junior) secured by 14 family residential
property.
58
#:833
The leading mortgage servicers are ranked below by loan volume serviced and market
share, including the percentage of the overall portfolio in foreclosure. During the second quarter
of2010, the 10 largest servicers in the United States were responsible for servicing 67.2 percent
of all outstanding residential mortgages.
Figure 8: Largest U.S. Mortgage Servicers, .June 2010
206
r
I
Servicing
i
Portfolio Percent of Percent of
Amount Total Loans Portfolio in
Company I (billions) Serviced Foreclosure
Bank of America
I
2,135 20.1% 3.3%
Wells Fargo 1,812 17.0% 2.0%
JPMorgau 1,354 12.7% 3.6%
Citigroup 678 6.4% 2.3%
Ally Financial (GMAC)
I
349 3.3% nla
U.S. Bancorp 190 1.8% nla
SunTrust Banks 176 1.7% 4.9"10
PHH Mortgage 156 1.5% 1.8%
OneWest Bank, CA (IndyMac) 155 1.5% nla
PNC Financial Services Group
,
150 1.4% nla
10 Largest Mortgage Servicers Aggregate 7,155 67.2%
Total Residential Mortga2es Outstandine 1 0 , ~ _
- - ~ - -
..... _---,
2. Foreclosure Irregularities: Estimating the Cost to Banks
Assessing the potential financial impact offoreclosure irregularities, including a
prolonged foreclosure moratorium, on bank stability is complicated by the extremely fluid nature
of current developments. For example, after unilaterally halting foreclosure proceedings, both
Bank of America
207
and Ally Financial (GMAC) announced their intention to resume foreclosure
proceedings in the wake of internal reviews that did not uncover systemic irregularities,
206 As a point of reference, as of June 2010,63 percent of foreclosures occurred on homes where the loan
was either owned or guaranteed by government investors such as Fannie Mae and Freddie Mac, while the remaining
37 percent of foreclosures were on homes owned by private investors. Data on percentage of portfolio in
foreclosure unavailable for Ally Financial, U.S. Bancorp. OneWest Bank, and PNC Financial Services Group.
Inside Mortgage Finance.
201 Bank of America is frequently mentioned by analysts as having potentially high exposure, in part
because of its purchase of Countrywide Financial and Merrill Lynch. which was heavily involved in CDOs, and its
assumption of successor liability. During the Paners October 27, 2010 hearing, Guy Cecala ofInside Mortgage
Finance noted that Bank of America was one of the few major mortgage lenders to steer away from the subprirne
market. Upon the bank's acquisition of Countrywide in 2008, however, Bank of America became the holder of the
largest sUbprime mortgage portfolio (in the industry). See Testimony of Guy Cecala, supra note 133.
59
#:834
according to both finns.
208
Looking ahead, the chief variables are the extent and duration of
potential foreclosure disruptions or an outright moratorium, which would impact servicing and
foreclosure costs and housing market prices (and recovery values). Such scenarios would also
likely increase litigation and legal risks, including potential fines from state attorneys general, as
well as raising questions regarding the extent to which title irregularities may permeate the
system?09
During recent conference calls for third quarter 2010 earnings and subsequent investor
presentations, the five largest mortgage servicers addressed questions regarding foreclosure
irregularities and potential liabilities stemming from these issues.
2IO
Bank of America
211
- Bank of America initially suspended foreclosure sales on
October 8, 20 I 0 across all 50 states after reviewing its internal foreclosure
procedures. On October 18, 2010, the bank began amending and re-filing 102,000
foreclosure affidavits in 23 judicial foreclosure states, a process expected to take three
to five weeks to complete. While asserting that it is addressing issues surrounding
affidavit signatures, the company claims that it has not been able to identify any
. "I d 212
Improper lorec osure eClSlons.
208 Bank of America Q3 2010 Earnings Call Transcript, supra note 97, at 6 ("On the foreclosure area ... we
changed and started to reinitiate the foreclosures ... "); GMAC Mortgage Statement on Independent Review and
Foreclosure Sales, supra note 20 (<<In addition to the nationwide measures, the review and remediation activities
related to cases invoivingjudicial affidavits in the 23 states continues and has been underway for approximately two
months. As each of those files is reviewed, and rernediated when needed, the foreclosure process resumes. GMAC
Mortgage has found no evidence to date of any inappropriate foreclosures.").
2Q9 See Section F.3 for further discussion on potential bank liabilities from securitization title irregularities
and mortgage repurchases or put-backs.
210 In October 2010, the SEC sent a letter to Chief Financial Officers of certain public companies to remind
them of their disclosure obligations relating to the foreclosure documentation irregularities. See Sample SEC Letter
on Disclosure Guidelines, supra note 113. The letter noted that affected public companies should carefully consider
a variety of issues relating to foreclosure documentation irregularities, including trends, known demands.
commitments and other similar elements that might "reasonably expect to have a material favorable or unfavorable
impact on your results of operations, liquidity. and capital resources." Although the letter notes a variety of areas
that would require disclosure, the quality of disclosure will depend on what the companies in question are able to
detennine about the effect oftbe irregularities on their operations. Genuine uncertainty will result in less useful
disclosure. Once the information is provided in a report, however. companies have a duty to update it if it becomes
inaccurate or misleading.
2lI Bank of America Corporation, 3Ql0 Earnings Results, at IO-ll (Oct. 19,2010) (online at
phx.corporate-ir.netlExtemal.File?item=UGFyZW50SUQ9NjYOMDdSQ2hpbGRlRDOtMXxUeXBlPTM=&t=I);
Bank of America Q3 2010 Earnings Call Transcript, supra note 97, at 6.
212 It was recently reported that Bank of America found errors in 10 to 25 foreclosure cases out of the first
several hundred the bank has examined. Written Testimony of Katherine Porter, supra note 14, at 10); Jessica Hall
& Anand Basu, Bank of America Corp Acknowledged Some Mistakes in F orec1osure Files as it Begins to Resubmit
Documents in 102.000 Cases. the Wall Street Journal Said, Reuters (Oct. 25, 2010) (online at
www.reuters.com!article/idUSTRE69004220101025).
60
#:835
Citigroup213 - Citigroup has not announced plans to halt its foreclosure proceedings.
The bank has nonetheless initiated an internal review of its foreclosure process due to
increased industry-wide focus on foreclosure processes. It has not identified any
issues regarding its preparation and transfer of foreclosure documents thus far.
However, Citigroup noted in a recent filing that its current foreclosure processes and
fmandal condition could be affected depending on the results of its review or if any
industry-wide adverse regulatory or judicial actions are taken on foreclosures.
214
JPMorgan Chase
215
- Beginning in late September to mid-October 2010, JPMorgan
Chase delayed foreclosure sales across 40 states, suspending approximately 127,000
loan files currently in the foreclosure process.
216
While the company, similar to Bank
of America, has identified issues relating to foreclosure affidavits, it does not believe
that any foreclosure decisions were improper. On November 4, 2010, JPMorgan
Chase stated that it will begin refiling foreclosures within a few weeks.
217
The firm
also stated in a recent filing that it is developing new processes to ensure it satisfies
all procedural requirements related to foreclosures.
21S
Bank of America expects increased costs related to irregularities in its foreclosure affidavit procedures
during the fourth quarter of2010 and into 2011. Costs associated with reviewing its foreclosure procedures,
revising affidavit filings. and making other operational changes will likely result in higher noninterest expense,
including higher servicing costs and legal expenses. Furthermore, Bank of America anticipates higher servicing
cOsts over the long term ifit must make changes to its foreclosure process. Finally. the time to complete foreclosure
sales may increase temporarily. which may increase nonperfonning loans and servicing advances and may impact
the collectability of such advances, as well as the value of the bank's mortgage servicing rigbts. Bank of America
Corporation, Form IO-Qfor the Quarterly Period Ended September 30. 2010, at 95 (Nov. 5, 2010) (online at
sec.gov/ Archives/edgar/datal70858/0000950123I 01 0 1545/g24513e I Ovq.htm).
213 Citigroup, Inc., Transcript: Citi Third Quarter 2010 Earnings Review, at 6-7 (Oct. 18, 2010) (online at
www.citigroup.comicitilfinldatalqer1 128).
214 Citigroup 10..0 for Q2 2010, supra note 101, at 52.
21' JPMorgan Q3 2010 Financial Results, supra note 180, at 14-15; Q3 2010 Earnings Call Transcript,
supra note 53.
JPMorgan Chase anticipates additional costs from implementation of these new procedures, as well as
expenses associated with maintaining foreclosed properties, re-filing documents and foreclosure cases, or possible
declining home prices during foreclosure suspensions. These costs are dependent on the length of the foreclosme
suspension. JPMorgan Chase & Co., Form IO-Qfor the Quarterly Period Ended September 30.2010, at 93 (Nov. 9,
2010) (online at www.sec.gov/Archives/edgar/datalI9617/000095012310102689/y86142elOvq.htm) (hereinafter
"JPMorgao Chase Fonn 10-Q").
216 JPMorgan Chase Fonn 10-Q. supra note 215, at 93, 200.
217 JPMorgan Chase & Co., BancAnalysts Association 0/ Boston Conference, Charlie Scharf, CEO, Retail
Financial Services, at 33 (Nov. 4, 2010) (online at
files.shareholder.comidownloadsiONE/967802442x0x415409/c88f9007 -6b75-4d7c-abfo-
846b90dbcge3IBAAB _Presentation_Draft _11-03-10_ FINAL_PRINT .pdf) (hereinafter "JPM Presentation at
BancAnalysts Association of Boston Conference").
218 JPMorgan Chase Fonn IO-Q, supra note 215, at 93.
'--"'--"-----
61
#:836
,.
Wells Fargo219 - Wells Fargo expressed confidence in its foreclosure documentation
practices and reiterated that the firm has no plans to suspend foreclosures. The bank
added that an internal review identified instances where the fmal affidavit review and
some aspects of the notarization process were not properly executed. Accordingly,
Wells Fargo is submitting supplemental affidavits for approximately 55,000
foreclosures in 23 judicial foreclosure states.
220
Ally Financial (GMAC)221 -As of November 3, 2010, GMAC Mortgage reviewed
9,523 foreclosure affidavits, with review pending on an additional 15,500 files. The
company noted that its review to date has not identified any instances of improper
foreclosures. Where appropriate, GMAC re-executed and refiled affidavits with the
courts. GMAC stated that it has modified its foreclosure process, increased the size
of its staff involved in foreclosures, provided more training, and enlisted a
"specialized quality control team" to review each case. The company expects to
complete all remaining foreclosure file reviews by the end of the year. Furthermore,
GMAC recently implemented supplemental procedures for all new foreclosure cases
in order to ensure that affidavits are properly prepared.
222
While a market-wide foreclosure moratorium appears less likely following comments
from the Administration and internal reviews by the affected banks, state attorneys general have
yet to weigh in on the issue. Market estimates of possible bank losses related to a foreclosure
moratorium have varied considerably, from $1.5 billion to $10 billion.223 Industry analysts have
219 Wells Fargo & Company, 3QIO Quarterly Supplement. at 26 (Oct. 20, 2010) (online at
www.wellsfargo.com/downloads/pdf/press/3Ql 0_ Quarterly _ Supplement.pdf); Wells Fargo & Company, Q3 2010
Earnings Call Transcript (Oct. 20, 2010) (online at www.momingstar.com/earn..()23/earnings-earnings-call-
transcript.aspxlWFC/en-US.,html).
220 Wells Fargo Update on Affidavits and Mortgage Securitizations, supra note 23.
The company has stated that it could incur significant legal costs if its internal review of its foreclosure
procedures causes the bank to re-execute foreclosure documents, or if foreclosure actions are challenged by a
borrower or overturned by a court. Wells Fargo & Company, Form 10-Qfor the Quarterly Period Ended September
30, 2010, at 42-43 (Nov. 5, 2010) (online at
sec.govl Archive,/edgar/datal7297 110000950 1231 0 I 0 1484/566820 IOvq.htm).
221 Ally Financial Inc., 3QIO Earnings Review, at 10 (Nov. 3, 2010) (online at pbx.corporate-

222 Ally Financial Inc., Form IO-Qfor the Quarterly Period Ended September 30,2010. at 75-76 (Nov. 9,
2010) (online at www.sec.gov/Archives/edgar/datal40729/0001193125102524l9/dI0q.htm).
223 A Credit Suisse re,earch note estimated that Bank of America, JPMorgan Chase, and Wells Fargo could
each face $500 million-$600 million in increased servicing costs and write-downs on foreclosed homes, assuming a
three-month foreclosure delay and associated costs and write-downs approximating 1 percent per month. An FBR
Capital Markets research note estimated $6 billion-$l 0 billion in potential losses from a three-month foreclosure
moratorium across the entire banking industry. This estimate assumes that there are approximately 2 million homes
currently in the foreclosure process, and that the costs of a delay on each foreclosed property is $1,000 per month.
Credit Suisse, Mortgage Issues Mount, at 10 (Oct. 15,2010) (hereinafter "Credit Suisse on Mounting Mortgage
Issues"); FBR Foreclosure Mania Conference Call, supra note 3.
62
#:837
,.
noted that a three-month foreclosure delay could increase servicing costs and losses on
foreclosed properties. In addition, banks could also face added litigation costs associated with
resolving flawed foreclosure procedures.
224
However, these estimates can of course become
quickly outdated in the current environment. As noted, firms that previously suspended
foreclosures are now beginning to re-file and re-execute foreclosure affidavits, and market
estimates accounting for shorter foreclosure moratoriums are currently unavailable.
Although they have not been implicated in the recent news of foreclosure moratoriums,
thousands of small to mid-level banks also face some risk from foreclosure suspensions if they
act as servicers for larger banks.
225
Generally, small community banks, as well as credit unions,
are more likely to keep mortgage loans on their books as opposed to selling them in the
secondary market. They primarily use securitization to hedge risk and increase lending power. 226
Accordingly, foreclosure moratoriums would prevent small banks and credit unions from
working through nonperforming loans on their balance sheets, limiting their capacity to originate
new loans.
227
As of June 2010, residential mortgages made up 31 percent of small banks' loan
portfolios and 55 percent of credit union portfolios.
228
3. Securitization Issues and Mortgage Put-backs
Foreclosure documentation issues highlight other potential- and to some degree,
related - mortgage market risks to the banking sector. Questions regarding document standards
in the foreclosure process are tangential to broader concerns impacting bank's representations
and warranties to mortgage investors, as well as concerns regarding proper legal documentation
for securitized loans.
Given the lack of transparency into documentation procedures and questions as to the
capacity of disparate investor groups to centralize claims against the industry, market estimates
of potential bank liabilities stemming from securitization documentation issues vary widely.
m Treasury conversations with Panel staff (Oct. 21. 20 I 0).
226 Third Way staff conversations with Panel staff (Oct. 29, 2010).
227 Jason Gold and Anne Kim, The Case Against a Foreclosure Moratorium, Third Way Domestic Policy
Memo, at 3-4 (Oct. 20, 2010) (online at content.thirdway.orglpublications/342rrhird _Way_Memo _-
~ The_Case _ Against_ a_Foreclosure _ Momtorium.pdf) (hereinafter ''Third Way Domestic Policy Memo on the Case
Against a Foreclosure Moratorium").
Z28 Small banks are those with under $1 billion in total assets. Congressional Oversight Panel, July
Oversight Report: Small Banks in the Capital Purchase Program, at 74 (July 14,2010) (online at
cop.senate.gov/documents/cop-07141O-report.pdf); SNL Financial. Credit union residential mortgage loan
portfolios include first and second lien mortgages and home equity loans. Credit Union National Association, US.
Credit Union Profile: Mid-Year 20/0 Summary of Credit Union Operating Results, at 6 (Sept. 7, 2010) (online at
www.cuna.orgiresearchidownloadiuscuJlrofile_2qI0.pdf).
63
#:838
a. Securitization Title
As discussed above, documentation standards in the foreclosure process have helped
shine a light on potential questions regarding the ownership of loans sold into securitization
without the proper assignment of title to the trust that sponsors the mortgage securities. There
are at least three points at which the mortgage and the note must be transferred during the
securitization process in order for the trust to have proper ownership of the mortgage and the
note and thereby the authority to foreclose if necessary. Concerns that the proper paperwork was
not placed in the securitization trust within the 90-day window stipulated by law have created
uncertainty in MBS markets.
Any lack of clarity regarding the securitization trust's clear ownership of the underlying
mortgages creates an atmosphere of uncertainty in the market and a bevy of possible problems.
A securitization trust is not legally capable of taking action on mortgages unless it has clear
ownership of the mortgages and the notes. Therefore, possible remedies for loans that are
seriously delinquent - such as foreclosure, deed-in-lieu, or short sale - would not be available to
the trust.
229
Litigation appears likely from purchasers ofMBS who have possible standing
against the trusts that issued the MBS. Claimants will contend that the securitization trusts
created securities that were based on mortgages which they did not own. Since the nation's
largest banks often created these securitization trusts or originated the mortgages in the pool, in a
worst-case scenario it is possible that these institutions would be forced to repurchase the MBS
the trusts issued, often at a significant loss.
On October IS, 2010, the American Securitization Forum (ASF) asserted that concerns
regarding the legality ofloan transfers for securitization were without merit. The statement
asserted that the ASF's member law firms found that the "conventional process for loan transfers
embodied in standard legal documentation for mortgage securitizations is adequate and
appropriate to transfer ownership of mortgage loans to the securitization trusts in accordance
with applicable law." 230
229 A deed-in-lieu permits a borrower to transfer their interest in real property to a lender in order to settle
all indebtedness associated with that property. A short sale occurs when a servicer allows a homeowner to sell the
home with the understanding that the proceeds from the sale may be less than is owed on the mortgage. U.S.
Department of the Treasury, Home Affordable Foreclosure Allernalives (HAFA) Program (online at
makinghomeaffordable.govlhafa.html) (accessed Nov. 12,2010).
230 ASF Statement on Mortgage Securitization Legal Structures and Loan Transfers, supra note 181. Some
observers question whether, even ifthe procedures in the PSA were legally sound, they were actually accomplished.
Consumer lawyers conversations with Panel staff (Nov. 9, 2010).
64
#:839
b. Forced Mortgage Repurchases/Put-backs
In the context of the overall $7.6 trillion mortgage securitization market, approximately
$5.5 trillion io MBS were issued by the GSEs and $2.1 trillion by non-agency issuers.
231
As
discussed above, and distioct from the foreclosure irregularities and securitization documentation
concerns, banks make representations and warranties regardiog the mortgage loans pooled aod
sold ioto GSE and private-label securities. A breach of these representations or warranties
allows the purchaser to require the seller to repurchase the specific loan.
While these representations and warranties vary based on the type of security and
customer, triggers that may force put-backs ioclude undisclosed liabilities, iocome or
employment misrepresentation, property value falsification, and the mishandling of escrow
funds.
2l2
Thus far, loans origioated io 2005-2008 have the highest concentration of repurchase
demands. Repurchase volumes stemming from older vintages have not had a material effect on
the nation's largest banks, and due to tightened underwritiog standards implemented at the end of
2008, it appears unlikely that loans origioated after 2008 will have a high repurchase rate,
although the enonnous uncertaioty io the market makes it difficult to predict repurchases with
any degree of precision. 233
There are meaniogful distinctions between the capacity of GSEs and private-label
iovestors to put-back loans to the banks. This helps explain why the vast majority of put-back
requests and successful put-backs relate to loans sold to the GSEs. This also helps estimate the
size of the potential risks to the banks from non-agency put-backs. GSEs benefit from direct
access to the banks' loao files and lower hurdles for breaches of representations and warraoties
due to the relatively higher standard ofloan underwriting. Private label iovestors, on the other
hand, do not have access to loan files, and instead must aggregate claims to request a review of
loan files.
234
Moreover, and perhaps more importantly, private label securities often lack some
of the representations aod warranties common to agency securities. For example, Wells Fargo
iodicated that approximately half of its private label securities do not contain all of the
representations and warranties typical of agency securities.235 Also, given that private label
231 The non-agency figure includes both residential and commercial mortgage-backed securities. Securities
Industry and Financial Markets Association, US Mortgage-Related Outstanding (online at
www.sifma.org/uploadedFileslResearchiStatisticsiStatisticsFileslSF-US-Mortgage-Related-Outstanding-SIFMA.xls)
(accessed Nov. 12,2010).
232 Federal National Mortgage Association, Selling Guide: Fannie Mae Single Family, at Chapters AZ-2,
A2-3 (Mar. 2, 2010) (online at www.efanniemae.comlsfJguides/ssg/sg/pdfJsg03021O.pdf).
233 It is wtlikely that earlier vintages will pose a repurchase risk given the relatively more seasoned nature
of these securities.
234 For further discussion, please see Section D, supra.
235 Wells Fargo & Company, BancAnalysts Association oj Boston ConJerence, at 13 (Nov. 4, 2010) (online
at www.wellsfargo.comidownloadsipdfJinvestJelations/presentslnov201 Olbaab _1104IO.pdf) ("Repurchase risk is
mitigated because approximately half of the securitizations do not contain typical reps and warranties regarding
65
----- -------------
#:840
i
I
I
I
securities are often composed of loans to borrowers witb minimal to non-existent supporting loan
documentation, many do not contain warranties to protect investors from borrower fraud.
236
Since tbe beginning of 2009, tbe four largest banks incurred $11.4 billion in repurchase
expenses, witb tbe group's aggregate repurchase reserve increasing to $9.9 billion as oftbe tbird
quarter 2010.
237
Bank of America incurred a total of$4.5 billion in expenses relating to
representations and warranties during this period - nearly 40 percent of tbe $11.4 billion total
that tbe top four banks have reported.
238
Figure 9: Estimated Representation and Warranties Expense and Repurchase Reserves at
Largest Banks (millions of dollars/
39
Estimated Ending Repurchase
l
,
I Estimated Representation and
[--_ Warran.t: _. __ ._ Reserves
FY2009 QI2010 Q22010 I Q32010
-
FY 2009 j QI2010 Q22010
Bank of America $1,900 $526 $1,248 $872 $3,5071 $3,325 53,939 $4,339
Citigroup 526 5 351 358 482
1
450 7271 952
JPMorgan 940 432 667 1,464 1,705 1,982
2,
332
1
3,332
Wells Fargo
927 i
402 382 370 1,033 I 1,263 : 1,375 i 1,331
Total $4,293 51,365 $2,648 $3,064 $6,727 I $7,020 $8,373 $9,954
GSE Put-backs
As of June 2010, 63 percent of foreclosures occurred on homes where tbe loan was eitber
owned or guaranteed by government investors such as Fannie Mae and Freddie Mac, while tbe
remaining 37 percent offorec1osures were on homes owned by private investors.
240
A large
borrower or other third party misrepresentations related to the loan, general compliance with underwriting
guidelines, or property valuations").
236 JPM Presentation at BancAnalysts Association of Boston Conference, supra note 217, at 24 ("-70% of
loans underlying deals were low doc/no doc loans"); Bank of America Corporation, BancAnlaysts Association of
Boston. at 13 (Nov. 4, 2010) (online at phx.corporate-
IT.netlExteroaLFile?item=UGFyZWSOSUQ9NjgSMDV8Q2hpbGRJRDOtMXxUeXBlPTM=&t=l) (hereinafter
"Bank of America Presentation at BancAnlaysts Association afBoston Conference") ("Contractual representations
and warranties on these deals are less rigorous than those given to GSEs. These deals had generally higher LTV
ratios, lower FICOs and less loan documentation by program design and Disclosure").
2010).
237 Credit Suisse, Mortgage Put-back Losses Appear Manageable for the Large Banks, at 10 (Oct 26,
238 Id at 10.
239Id at 10.
240 Loans either owned or guaranteed by the GSEs have perfonned materially better than loans owned or
securitized by other investors. For example, loans owned or guaranteed by the GSEs that are classified as seriously
delinquent have increased from 3.8 percent in June 2009 to 4.5 percent in June 2010. In comparison, the percentage
ofloans owned by private investors that are classified as seriously delinquent has increased from 10.5 percent in
June 2009 to 13.1 percent in June 2010. The same dichotomy is seeD in the number of loans in the process of
66
#:841
portion of these loans were originated and sold by the nation's largest banks. As Figure 10
illustrates, the nation's four largest banks sold a total of $3.1 trillion in loans to Fannie Mae and
Freddie Mac from 2005-2008.
Figure 10: Loans Sold to Fannie Mae and Freddie Mac, 2005_2008
241
500
4 ~ ~ " " - - - - " " - - - - - " " " " - - - - - " - - - - - - - - - - - " - - - - - " ~ ~ - "
400
3 ~
300
2 ~
200
1 ~
100
~
o
2005
Bank of America
2006 2007
&ll Wells Fargo "JPMorganChase
2008
51 Citigroup
GSEs have already forced banks to repurchase $12.4 billion in mortgages?42 Bank of
America, which has the largest loan portfolio in comparison to its peers, has received a total of
$18.0 billion in representation and warranty claims from the GSEs on 2004-2008 vintages. Of
this total, Bank of America has resolved $11.4 billion, incurring $2.5 billion in associated
losses?43 However, the bank believes that it has turned the comer in terms of new repurchase
requests from the GSES.
244
Further, the passage of time is apparently on the banks' side here, as
JPMorgan Chase noted that breaches of representations and warranties generally occur within 24
foreclosure. As of June 2010, 2.3 percent ofloans owned or guaranteed by the GSEs were in the foreclosure
process, whereas 8.0 percent of loans owned by private investors were classified as such. Staff calculations derived
from Office of the Comptroller of the Currency and Office ofTbrift Supervision, OCC and OTS Mortgage Metrics
Report: Second Quarter 2010, at Tables 9, 10, II (Sept. 201O)(online.t www.ots.treas.gov/_files/490019.pdf)
(bereinafter "OCC and OTS Mortgage Metrics Report"); Foreclosure completion information provided by
OCCIOTS in response to Panel request.
241 Credit Suisse on Mounting Mortgage Issues, supra note 223.
242 Standard & Poor's on the Impact of Mortgage Troubles on U.S. Banks, supra note 106, at 2.
243 Bank of America Presentation at BancAnlaysts Association of Boston Conference. supra note 236, at
12.
244 Bank of America Presentation at BancAnlaysts Association of Boston Conference, supra note 236, at 12
("We estimate we are roughly two-thirds through with GSE claims on 2004-2008 vintages.").
67
#:842
months of the loan being originated.
245
.1PMorgan Chase noted that delinquencies or foreclosures
on loans aged more than two years generally reflect economic hardship of the borrower.
246
Private-Label Put-backs
In comparison with the GSEs, private-label investors do not benefit from the same degree
of protection through the representations and warranties common in the agency PSAS.
247
There
were, however, representations and warranties in private-label securities that, if violated, could
provide an outlet for mortgage put-backs. In theory, systemic breaches in these securities could
prove a bigger and potentially more problematic exposure, although market observers have cited
logistical impediments to centralizing claims, in addition to the higher hurdles necessary to put-
back securities successfully to the banks?48 Since the majority of subprime and Alt-A
originators folded during the crisis, the bulk of the litigation is directed at the underwriters and
any large, surviving originators. Thus far, however, subprime and Alt-A repurchase requests
have been slow to materialize. Relative to subprime and Alt-A loans, jumbo loans to higher-net
borrowers - which were in turn sold to private label investors - have performed substantially
better.
249
Bank of America offers a window into the comparatively slow rate at which private-label
securities have been put-back to banks. Between 2004 and 2008, Bank of America sold
approximately $750 billion ofloans to parties other than the GSES.
250
As of October 2010, Bank
of America received $3.9 billion in repurchase requests from private-label and whole-loan
245 JPM Presentation at BancAnalysts Association of Boston Conference, supra note 2 t 7, at 22 ("More
recent additions to 90 DPD [days past due] have Longer histories of payment; we believe loans going delinquent
after 24 months of origination are at lower risk of repurchase.").
246 JPM Presentation at BancAnalysts Association of Boston Conference, supra note 217, at 24 ("45% of
losses-l<HIate from Loans that paid for 25+ months before delinquency"); Bank of America Merrill Lyoch, R&W:
Investor hurdles mitigate impact; GSE losses peaking (Nov. 8, 2010) ("Delinquency after 2 years of timely payment
materially reduces tbe likelihood of repurchase from GSEs (or others, for that matter), since the likeLihood of default
being caused by origination problems is much lower; instead, defauLt was LikeLy triggered by loss of employment,
decline in home value, and the like.").
247 Standard & Poor's on the Impact of Mortgage Troubles on U.S. Banks, supra note 106. at 4.
248 Standard & Poor's on the Impact of Mortgage Troubles on U.S. Banks, supra note 106, at 4. ("[W]e
believe that the representation and warranties were not standard across all private-label securities and may have
provided differing levels of protection to investors. They do not appear to have the same basis on which to ask the
banks to buy back the loans because the banks did not, in our view. make similar promises in the representation and
warranties.").
249 As QfJune 2010, the OCCIOTS reports that I LA percent of the A1t-A and 1904 percent of the subprime
loans it services are classified as seriously delinquent as compared to an overall rate of 6.2 percent. DCC and OTS
Mortgage Metrics Report, supra note 240. Also, for exampLe, JPMorgan Chase noted that 41 percent and 32 percent
of its private-Label subprime and ALt-A securities, respectively, issued between 2005 and 2008 had been 90 days or
more past due at one point as compared to only 13 percent of its prime mortgages. JPM Presentation at
BancAnalysts Association of Boston Conference, supra note 217, at 24.
250 Bank of America Presentation at BancAnlaysts Association of Boston Conference. supra note 236.
68
--------------.------- ------------------
#:843
investors. To date, Bank of America has rescinded $1.9 billion in private-label and whole-loan
put-back claims and approved $1.0 billion for repurchase, with an estimated loss of $600 million.
This level of actual put-back requests highlights the difficulty in maneuvering the steps
necessary to put-back a loan, which begins with a group of investors in the same security or
tranche of a security banding together to request access to the underlying loan documents. For
example, the group of investors petitioning for paperwork relating to $47 billion in Bank of
America loans remain a number of steps away from being in a position to request formally a put-
back.
25
! Figure II, below, illustrates the dollar amount of non-agency loans originated by the
nation's four largest banks between 2005 and 2008.
251 As part of its MBS purchase program, the Federal Reserve currently owns approximately $1.1 trillion of
agency MBS. Due to the nature of the government guarantee attached to agency MBS, loans that are over 120 days
past due are automatically bought back at par by the government agencies such as Fannie Mae and Freddie Mac that
guaranteed them. Therefore the Federal Reserve's $1.1 trillion in MBS holdings do not pose a direct put-back risk
to the banking industry, however, if the loans are hought back by the agency guarantors, these agencies have the
right to take action against the entities that originally sold the loans if there were breaches or violations. The Federal
Reserve Bank of New York also owns private-label RMBS in its Maiden Lane vehicles created under its 13(3)
authority.
FRBNY's holdings of private-label RMBS are concentrated in the Maiden Lane II vehicle created as part
of the government's intervention in American International Group (AlG). As of Jooe 30, 2010, the fair value of
private-label RMBS in Maiden Lane II was $14.8 billion. The sector distribution of Maiden Lane II was 54.6
percent subprime, 30.8 percent Alt-A adjustable rate mortgage (ARM), 6.8 percent option ARM, and the remainder
was classified as "other." The $47 billion action that FRBNY joined involves only the private-label RMBS it holds
in the Maiden Lane vehicles, and is primarily localized within Maiden Lane II. FRBNY staff conversations with
Panel staff (Oct. 26, 2010); Board of Governors of the Federal Reserve System staff conversations with Panel staff
(Nov. 10, 2010); Board of Governors ofthe Federal Reserve System, Federal Reserve System Monthly Report on
Credit and Liquidity Programs and the Balance Sheet, at 19 (Oct. 2010) (online at
www.federalreserve.gov/monetarypolicy/filesimonthlyclbsreport20tolO.pdf) (hereinafter "Federal Reserve Report
on Credit and Liquidity Programs and the Balance Sheet"); Board of Governors of the Federal Reserve System,
Factors Affecting Reserve Balances (H.4.1) (Nov. 12,2010) (online at www.federalreserve.gov/releases!h411)
(hereinafter "Federal Reserve Statistical Release HA.l"). For more infonnation on the Federal Reserve's section
13(3) authority, please see 12 V.S.c. 343 (providing that the Federal Reserve Board "may authorize any Federal
reserve bank ... to discount ... notes, drafts, and bills of exchange" for "any individual, partnership, or corporation"
if three conditions are met). See also Congressional Oversight Panel, June Oversight Report: The AlG Rescue, Its
Impact on Marlrets. and the Government's Exit Strategy, at 79-83 (June 10, 2010) (online at
cop.senate.gov/documents/cop-061 0 10-report.pdt).
69
#:844
Figure 11; Non-Agency Originations, 2005_2008
252
$225
$200
$175
=0= $150
$125
'0
$100
$75
$50
$25
$0
2005
Bank of America
Putback Loss Estimates
---_._-_._ .... _ ...... _ ... _ ... _._._ .. _ .... _ .... _ ..
2006 2007 2008
C'l Wells Fargo , , ~ JPMorgan Chase 9 Citigroup
Losses stemming from mortgage putbacks are viewed as the biggest potential liability of
the banking sector from the foreclosure crisis. While it is difficult to quantify the impact this
issue may have on bank balance sheets, a number of analysts have compiled estimates on
potential risks to the sector.
The first step in estimating the industry's exposure is identifying the appropriate universe
ofioans, within the $10.6 trillion mortgage debt market. The 2005-2008 period is the starting
point for this analysis. Of the loans originated during this period, $3.7 trillion were sold by
banks to the GSEs and $1.5 trillion were sold to private label investors.
253
Accordingly, this $5.2
trillion in agency and non-agency loans and securities sold by the banks during the 2005-2008
period is the starting point for a series of assumptions - loan delinquencies, put-back requests,
successful put-backs, and loss severity - that ultimately drive estimates of potential bank losses.
The Panel has averaged published loss estimates from bank analysts in order to provide a
top-level illustration of the cost mortgage put-backs could inflict on bank balance sheets. The
estimate below represents a baseline sample oftive analyst estimates for the GSE portion and six
252 There were no sales in 2009. Credit Suisse on Mounting Mortgage Issues, supra note 223.
253 Nomura Equity Research, Private Label Put-Back Concerns are Overdone, Private Investors Face
Hurdles (Nov. 1,2010) (hereinafter "Nomura Equity Research on Private Label Put-Back Concerns"); Goldman
Sachs, Assessing the Mortgage Morass (Oct. 15,2010) (hereinafter "Goldman Sachs on Assessing the Mortgage
Morass',.
....... _._-- .... __ ._--
70
#:845
analyst estimates for the private-label approximation. Accordingly, realized losses could be
significantly higher or meaningfully lower.
As outlined below, there are numerous assumptions involved in estimating potential
losses from put_backs.
254
Projected Loan Losses - Delinquent or non-performing mortgage loans provide the
initial pipeline for potential mortgage put-backs. Accordingly, estimates of
cumulative losses on loans issued between 2005 and 2008 govern the aggregate put-
back risk of the banks. The blended estimate for GSE loans is 13 percent, and the
blended private label estimate is 30 percent.
255
Gross Put-backs - The next step is projecting what percentage of these delinquent or
nonperforming loans holders will choose to put-back to the banks. The average
estimate for gross put-backs for the GSEs is 30 percent, and private label loans is 24
percent.
Successful Put-backs - Of these put-back requests, analysts estimate that 50 percent
of GSE loans and 33 percent of private label loans are put-back successfully to the
banks.
Severity - The calculation involves the loss severity on loans that are successfully
put-back to the banks (i.e., how much the banks have to pay to make the aggrieved
investors whole). The blended average severity rate used by analysts for both GSE
and the private label loans is 50 percent.
254 Subsequent estimates _ loan delinquencies, put-back requests, successful and loss severity
are surveyed from the following research reports: Bernstein Research, Bank Stock Weekly: Return to Lender? Sizing
Rep and Warranty Exposure (Sept. 24, 2010) (hereinafter "Bernstein Research Repnrt on Sizing Rep and Warranty
Exposure"); Barclays Capital, Focus on Mortgage Repurchase Risk (Sept. 2, 2010); J.P. Morgan, Putbacks and
Foreclosures: Fact vs. Fiction (Oct. 15,2010) (hereinafter "Barclays Capital Research Report on Putbacks and
Foreclosures"); Goldman Sachs on Assessing the Mortgage Morass, supra note 253; Nomura Equity Research on
Private Label Put-Back Concerns, supra note 253; Citigroup Global Markets, R&W Losses Manageable, but
Agency May be Costly Wildcard (Sept. 26, 2010) (hereinafter "Citigroup Research Report on Non-Agency Losses");
Compass Point Research & Trading, LLC, GSE Mortgage Repurchase Risk Poses Future Headwinds: QuantifYing
Losses (Mar. 15, 2010); Deutsche Bank Revisits Putbacks and Securitizations, supra note 192; JPM Presentation at
BancAnalysts Association of Boston Conference, supra note 217, at 26.
255 Four analyst estimates were used for the blended private-label loan losses percentage of 30%: Goldman
Sachs 28%, Bernstein Research 25%, Nomura Equity Research - 25%, and Credit Suisse - 40%. Goldman
Sachs on Assessing the Mortgage Morass, supra note 253; Nomura Equity Research on Private Label Put-Back
Concerns, supra note 253; Bernstein Research Report on Sizing Rep and Warranty Exposure, supra note 254; Credit
Suisse on Mortgage Put-back Losses, supra note 192.
71
._---_._._---------------
#:846
1
I
I
Using the assumptions outlined above, the estimated loss to the industry from mortgage
put-backs is $52 billion (see Figure 12 below). This compares to industry-wide estimates of
base-case losses from mortgage put-backs of $43 billion to $65 billion.
256
Figure 12: Put-back Loss Estimates (billions of dollars/
57
I
I
Private Label
I
i AgencyMBS MBS
,
($)
($)
i
I (%)
I (%)
Total I
2005-2008 MBS Sold'
$3,651 51,358
55,
009
1
Projected Loan Losses
13%: 475 30"/0 I
407 882
1
Gross Put-backs (Requests)
30% I 142 24% 98 240
Successful Put-backs
I 50% 1
71 I 33% I
32 103
1
Put-back Severity 1 50% I
50%
i Total Put-back Losses
I
!
516 552 !
,
The estimated $52 billion would be borne predominantly by four fInns (Bank of
America, JPMorgan Chase, Wells Fargo, and Citigroup), accounting for the majority of the
industry's total exposure and projected losses?5. In the aggregate these four banks have already
reserved $9.9 billion for future representations and warranties expenses, which is in addition to
the $11.4 billion in expenses already incurred 260 Thus, of this potential liability, $21.3 billion
has either been previously expensed or reserved for by the major banks.
261
Given the timing
256 This range is comprised of a number of base-case or estimates for potential losses across the
industry from put-backs: Standard & Poor's - $43 billion, Deutsche Bank - $43 billion, FBR Capital Markets - $44
billion in potential losses, Citigroup - $50.1 billion, l.P Morgan - $55 billion, Goldman Sachs - $71 billion, Credit
Suisse - $65 billion, The Deutsche Bank estimate is for $31 billion in remaining losses, the $12 billion in realized
losses thus far was added to create a consistent metric. FBR on Repurchase-Related Losses, supra note 192; Credit
Suisse on Mortgage Put-back Losses, supra note 192; Deutsche Bank Revisits Putbacks and Securitizations, supra
note 192; Standard & Poor's on the Impact of Mortgage Troubles on U.S. Banks, supra note 106, at 4; Citigroup
Research Report on Losses, supra note 254; Barclays Capital Research Report on Putbacks and
Foreclosures, supra note 254; Goldman Sachs on Assessing the Mortgage Morass, supra note 253.
257 JPM Presentation at BancAnalysts Association of Boston Conference, supra note 217, at 26.
258 These figures represent the value of the MBS sold either to the GSEs or investors during
this period that are still currently outstanding. Nomura Equity Research on Private Label Put-Back Concerns, supra
note 253; Goldman Sachs on Assessing the Mortgage Morass, supra note 253.
259 It is worth noting, however, that Bank of America and JPMorgan Chase are the more meaningful
contributors, accounting for approximately 50 percent of the industry's total projected losses by analysts. The mid-
point of each of these estimates was used to compute the range. Deutsche Bank Revisits Putbacks and
Securitizations, supra note 192, at 7; Credit Suisse on Mounting Mortgage Issues, supra note 223; FBR on
Repurchase-Related Losses, supra note 192.
260 The $11.4 billion in estimated expenses at the top four banks has been since the first quarter 0[2009.
Credit Suisse on Mortgage Losses, supra note 192, at 10
261 Deutsche Bank Revisits Putbacks and Securitizations, supra note 192.
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associated with put-back requests and associated accounting recognition, it is not inconceivable
that the major banks could recognize future losses over a 2-3 year period.
G. Effect of Irregularities and Foreclosure Freezes on Housing Market
1. Foreclosure Freezes and their Effect on Housing
In previous reports, the Panel has noted the many undesirable consequences that
foreclosures, especially mass foreclosures, have on individuals, families, neighborhoods, local
governments, and the economy as a whole.
262
Additionally, housing experts testifying at Panel
hearings have emphasized that mass foreclosures cause damage to the economy and social fabric
of the country.263 Certainly, the injection over the past several years of millions of foreclosed-
upon homes into an already weak housing market has had a deleterious effect on home prices.
These effects are especially relevant in examining what repercussions foreclosure freezes would
have on the housing market, and the advisability of such freezes.
Questions remain as to how broadly the current foreclosure irregularities will affect the
housing market, and the scale of the losses involved. The immediate effect of the foreclosure
document irregularities has been to cause many servicers to freeze all foreclosure processings,
although some freezes have been temporary.264 Some states have encouraged these foreclosure
freezes,265 and govermnent-imposed, blanket freezes on all foreclosures have been under
discussion.
266
The housing market may not be seriously affected by the current freezes on
pending foreclosures, which may actually cause home prices of unaffected homes to rise. Any
foreclosure moratorium that is not accompanied by action to address the underlying issues
associated with mass foreclosures and the irregularities, however, will add delays but will not
provide solutions. Beyond the effects of the current freezes, mortgage documentation
irregularities may increase home buyers' and mortgage investors' perceptions of risk and damage
confidence and trust in the housing market, all of wmch may drive down home prices.
In considering the possible effects foreclosure freezes may have on the housing market, it
is important to distinguish, as the Panel has in previous reports, between the effects these
foreclosures and foreclosure freezes may have on individuals versus effects that are more
262 March 2009 Oversight Report, supra note 6, at 9-11.
263 See, e.g., Written Testimony of Julia Gordon, supra note 171, at 1-2.
264 See, e.g., Statement from Bank of America Home Loans, supra note 21.
265 See. e.g., Office of Maryland Governor Martin O'Malley, Governor Martin O'Malley, Maryland
Congressional Delegation Request Court Intervention in Halting Foreclosures (Oct. 8,2010) (online at
www.governor.maryland.gov/pressreleases/l 0 I 009b.asp).
266 See, e.g., Reid Vlelcomes Bank of America Decision, supra note 24; Foreclosure Moratorium: Cracking
Down on Liar Liens, supra note 24.
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systemic or macroeconomic, as these interests may come into conflict at times.
267
The Panel has
also repeatedly acknowledged that the circumstances surrounding some mortgages make
foreclosure simply unavoidable.
268
Additionally, the current housing market has, among other
difficult problems, a severe oversupply of housing in relation to current demand, which has
fallen substantially since the peak bubble years due to higher unemployment and other economic
hardships. This fundamental supply/demand imbalance has driven down home prices
nationwide, but especially in areas such as Nevada or Florida, where a great many new homes
were constructed.
269
There are numerous arguments both for and against foreclosure freezes at this time.
270
Freezing foreclosures may allow time for servicers, state governments, and courts to sort out the
irregularity situation and may avoid illegal or erroneous foreclosures in some cases. Voluntary,
limited freezes may be sensible for particular servicers. The costs associated with a mandatory
foreclosure freeze may also pressure servicers to resolve frozen foreclosures through
modifications.
271
Further, foreclosure freezes can temporarily reduce the number of real estate
owned by banks and pre-foreclosure homes coming to market, reducing excess supply, which
can be beneficial for home prices in the short term. The longer-term consequences of freezes
depend on the ultimate solution to the issues giving rise to the freezes.
In addition, foreclosures have many well-documented negative fmancial and social
consequences on families and neighborhoods that might be mitigated by a foreclosure freeze.
272
Vacant homes can attract thieves and vandals. lfnot maintained by the lender, properties
foreclosed upon and repossessed by the lender - properties also known as real-estate owned
(REOs), often become eyesores, detracting from the appearance of the neighborhood and
267 March 2009 Oversight Report, supra note 6, at 62-63 (Discussing foreclosure freezes: "Again, this
raises the question of whether the economic efficiency of foreclosures should be viewed in the context of individual
foreclosures Of in the context of the macroeconomic impact of widespread foreclosures. If the fonner, then caution
should be exercised about foreclosure moratoria and other fonus of delay to the extent it prevents efficient
foreclosures. But if the latter is the proper view, then it may well be that some individually efficient foreclosures
should nonetheless be prevented in order to mitigate the macroeconomic impact of mass foreclosures.").
268 March 2009 Oversight Report, supra note 6, at 37 (Discussing loan modification programs: "As an
initial matter, however, it must be recognized that some foreclosures are not avoidable and some workouts may not
be economical. This should temper expectations about the scope of any modification progmm.").
269 The oversupply of homes can be clearly seen from ""for sale" inventory statistics, which the Panel has
discussed in previous reports. See. e.g., March 2009 Oversight Report, supra note 6, at 107-108. September 2010
for-sale housing inventory stands at 4.04 million homes, a 10.7 month supply at current sales rates, up from the 3.59
million homes representing an 8.6 month supply cited in the Paners April report on foreclosures. National
Association of Realtors, September EXisting-Home Sales Show Another Strong Gain (Oct. 25, 20 I 0) (online at
www.realtor.org/pressJoominewsJeleasesl2010/10/sept_strong).
270 The Panel has discussed some of the pros and cons of foreclosure freezes in prior reports, but not in the
context of the irregularities. March 2009 Oversight Report, supra note 6, at 61-63.
271 March 2009 Oversight Report. supra note 6, at 61.
272 See, e . g . ~ March 2009 Oversight Report, supra note 6, at 9-11.
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reducing local home values. The drop in the value of neighboring homes has been corroborated
by a recent study. Although the authors found that the impact of foreclosed homes on each
individual neighboring home is relatively small, these losses can amount to a considerable total
loss in value to the neighborhood. Not surprisingly, the researchers found a more dramatic
decline in value for the foreclosed home itself. The study indicated that foreclosure lowers a
home's value by an average of27 percent, much more than other events, such as personal
bankruptcy, that also lead to forced home sales. The researchers attribute these losses primarily
to the urgency with which lenders dispose ofREOs and to damage inflicted on vacant, lender-
owned homes.
273
In addition to lowering the value of the home itself, a foreclosure affects the surrounding
neighborhood, especially if the home is clearly marked with a sale sign that says "foreclosure."
A reduction in price from a foreclosed property can affect the values of surrounding homes if the
low price is used as a comparable sale for valuation purposes. Even if foreclosure sales are
excluded as comparable sales from appraisals, as is often the case, these sale prices are readily
accessible public information. For example, considering the popularity of real estate sites such
as Zillow and Trulia that show home sale prices, buyers can easily see these low foreclosure sale
prices and are likely to reduce their offers accordingly.274 Furthermore, as Julia Gordon of the
Center for Responsible Lending and several academic studies observe,275 minority communities
are disproportionately affected by foreclosures and their consequences.
276
These negative
externalities from foreclosures are borne not by any of the parties to the mortgage, but by the
neighbors and the community, who are innocent bystanders.
One of the most common arguments against foreclosure freezes concerns the effect that
freezes could have on shadow inventory - properties likely to be sold in the near future that are
not currently on the market, and are therefore not counted in supply inventory statistics. A
273 John Campbell, Stefano Giglio, and Parag Pathak, Forced Sales and House Prices, at 10, 18,21,
Unpublished manuscript (July 2010) (online at econ-www.mit.edulfiles/5694) ( ..... the typical foreclosure during this
period lowered the price of the foreclosed house by $44,000 and the prices of neighboring houses by a total of
$477,000, for a total loss in housing value of $520,000." and "Our preferred estimate of the spillover effect suggests
that each foreclosure that takes place 0.05 miles away lowers the price of a house by about 1%.").
274 Zillow does not include foreclosure data in its home price estimates; however, a person can click on a
home. including foreclosed homes, and see its sales price.
275 See. e.g., Vicki Bean, Ingrid Gould Ellen, et aI., Kids and Foreclosures: New York City (Sept. 2010)
(online at
steinhardt.nyu.edulscmsAdmiulmediaiusersllah431IForeclosures _and_Kids _Policy _ Briee Sept_ 20 I O.pdf); Vanesa
Estrada Correa, The Housing Downturn and Racial Inequality, Policy Matters, Vol. 3, No.2 (Fall 2009) (online at
www.policymatters.ucr.edulpmatters-vo13-2-housing.pdf).
276 Congressional Oversight Panel, Testimony of Julia Gordon, senior policy council, Center for
Responsible Lending, Transcript: COP Hearing on TARP Foreclosure Mitigation Programs (Oct. 27, 2010)
(publication forthcoming) (online at cop.senate.govlhearingsllibrarylhearing-10271O-foreclosure.cfm) ("African
American and Latino families are much more likely than whites to lose their homes, and we estimate that
communities of color wiUlose over $360 billion worth of wealth.").
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prolonged freeze on foreclosures without a diminution in the number of homes in foreclosure
would add to the already substantial problem of shadow inventory. Of course, increased shadow
inventory can be addressed either by foreclosing and selling the homes, or by creating
circumstances that allow current homeowners to stay in their homes. Although there are no
reliable measures (or definitions) of shadow inventory, estimates range from 1.7 million to 7
million homes.277 These homes represent additional supply that the market will eventually have
to accommodate, so long as the homes are not removed from the shadow inventory due to
circumstances such as loan modifications or an improvement in the financial condition of
borrowers.
278
Beyond shadow inventory, foreclosure sales consist of sales of homes immediately prior
to foreclosure and sales ofREOs. In the 12 months between September 2009 and August 2010,
4.13 million existing homes were sold in the United States, approximately 30 percent of which
were foreclosure sales.279 Further, lenders are estimated to own 290,000 properties as REOS.
280
Currently, approximately 2 million homes, or 4.6 percent of all mortgaged properties, are
classified as in the foreclosure process. Another 2 million, or 4.5 percent of mortgaged
properties, are more than 90 days past due.
281
The level of foreclosures is, further, expected to
rise: more than $1 trillion in adjustable-rate mortgages are expected to experience interest rate
217 First American CoreLogic, "Shadow Housing Inventory" Put At 1.7 Million in 3Q According to First
American CoreLogic (Dec. 17,2009) (online at
www.facorelogic.comiuploadedFileslNewsroomlRES_in_the_NewsIFACL_ Shadow_Inventory _12IS09.pdf);
Laurie Goodman, Robert Hunter, et a!., Amherst Securities Group LP, Amherst Mortgage Insight: Housing
OverhanglShadow Inventory ~ Enormous Problem, at I (Sept. 23, 2009) (online at matrix.millersamuel.comlwp-
contentl3q091 Amherst%20Mortgage%20Insight%2009232009.pdf).
278 James J. S a c c a c i o ~ chief executive officer of the online foreclosure marketplace RealtyTrac, expects that
'"if the lenders can resolve the documentation issue quickly. then we would expect the temporary lull in foreclosure
activity to be followed by a parallel spike in activity as many of the delayed foreclosures move forward in the
foreclosure process. However, if the documentation issue cannot be quickly resolved and expands to more lenders
we could see a chilling effect on the overall housing market as sales of pre-foreclosure and foreclosed properties,
which account for nearly one-third of all sales, dry up and the shadow inventory of distressed properties grows-
causing more Wlcertainty about home prices." RealtyTrac, Foreclosure Activity Increases 4 Percent in Third
Quarter (Oct. 14,2010) (online at www.realtytrac.comlcontentlpress-releaseslq3-2010-and-september-2010-
foreclosure-reports-610S) (bereinafter "RealtyTrac Press Release on Foreclosure Activity").
279 National Association of Realtors, Existing-Home Sales Move Up in August (Sept. 23, 2010) (online at
www.realtor.orgipressJoominewsJeleasesl2010/09/ehs_move); HOPE Now Alliance, Appendix - Mortgage Loss
Mitigation Statistics: Industry Extrapolations (Monthly for Dec 200S to Nov 2009) (online at
www.hopenow.comlindustry-
datalHOPE%20NOW%20National%20Data%20July07%20to%20Nov09%20v2%20(2).pdf); HOPE Now Alliance,
Industry Extrapolations and Metrics (May 2010) (online at www.hopenow.comlindustry-
datalHOPE%20NOW%20Data%20Report%20(May)%2006-21-2010.pdf); HOPE Now Alliance, Industry
Extrapolations and Metrics (Aug. 2010) (online at hopenow.comlindustry-
datalHOPE%20NOW%20Data%20Report%20(August)%2010-05-2010%20v2b.pdf).
280 RealtyTrac Press Release on Foreclosure Activity, supra note 278.
281 MBA National Delinquency Survey, Q2 2010, supra note 199. See also MBA Press Release on
Delinquencies and Foreclosure Starts, supra note 199.
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resets between 20 I 0 and 2012, an event that is positively correlated with delinquency and
foreclosure.
282
Foreclosure sales therefore represent a very substantial portion of housing market
activity, with many more foreclosures either in the pipeline or likely to enter the pipeline in the
coming years.
Opponents of mandatory foreclosure freezes have also argued that a widespread freeze
would encourage defaults by eliminating the negative consequences of default; that foreclosure
freezes are bad for mortgage investors (including taxpayers, as owners of the GSEs )283 because
they reduce investment returns by delaying the payment of foreclosure sale proceeds; and that
they would disproportionately harm smaller banks and credit unions, which are heavily invested
in home mortgages.
284
Further, when smaller banks and credit unions service loans, payments to
investors on non-performing loans must come from significantly smaller cash cushions than they
do for the largest banks and servicers.
285
James Lockhart, former regulator of Fannie Mae and
Freddie Mac, has stated that freezes will also extend the time that homes in foreclosure
proceedings will be left vacant, with attendant negative effects on the surrounding
neighborhood.
286
Such cases would presumably involve already vacant, foreclosed-upon homes,
and homes with impending or ongoing foreclosure proceedings where the borrower has chosen
to vacate early, as occasionally happens.
287
282 Zach Fox, Credit Suisse: $1 Trillion worth of ARMs stillface resets, SNL Financial (Feb. 25, 2010).
The Panel addressed the impact of interest rate resets in its April 20 I 0 Report on foreclosures. Congressional
Oversight Panel, April Oversight Report: Evaluating Progress of TARP Foreclosure Mitigation Programs, at 111-
115,123 (Apr. 14,2010) (online at cop.senate.gov/documentslcop-0414 IO-report.pdt) (hereinafter "April 2010
Ovesright Report").
283 Fannie Mae and Freddie Mac would be impacted directly by a freeze because they would have to
continue advancing coupon payments to bondholders while not receiving any revenue from disposal of foreclosed
properties, upon which they are already not receiving mortgage payments. These costs would almost certainly be
borne by taxpayers, and depending on the duration of the freeze and how the housing madeet responds to it, they
could be substantial.
Press reports and Panel staff discussions with industry sources have indicated that. as part of an effort to
restart foreclosures, Fannie Mae and Freddie Mac were until recently negotiating an indemnification agreement with
servicers and title insurers. This would have been along the lines of the recent agreement between Bank of America
and Fidelity National Financial, mentioned above in Section C, in which Bank of America agreed to indemnify
Fidelity National (a title insurer) for losses incurred due to servicer errors. However, industry sources stated that the
GSEs had recently cooled to this effort. Industry sources conversations with Panel staff (Nov. 9, 2010); Nick
Tirniraos, Fannie, Freddie Seek End to Freeze, Wall Street Journal (Oct. 23, 2010) (online at
online.wsj.comiarticle/SBIOOOI424052702304354104575568621229952944.html); see also Statement from Bank
of America Home Loans, supra note 16.
284 Third Way Domestic Policy Memo on the Case Against a Foreclosure Moratorium, supra note 227.
285 See Section F .2, supra.
286 Bloomberg News, Interview with WL Ross & Co. 's James Lockhart (Oct. 27,2010) (online at
www.bloomberg.comlvideo/64040362/).
287 JPMorgan Chase estimates that approximately one-third of the homes upon which it forecloses are
already vacant by the time the foreclosure process conunences. Stephen Meister, ForecJosuregate is Quickly
Spinning Out of Control, RealClearMarkets (Oct. 22, 2010) (online at
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2. Foreclosure Irregularities and the Crisis of Confidence
The apparently widespread nature of the foreclosure irregularities that have come to light
has the potential to reduce public trust substantially in the entire real estate industry, especially in
the legitimacy of important legal documents and the good faith of other market participants,
Under these circumstances, either buying or lending on a home will appear to be substantially
more risky than before. If buyers suspect that homes, especially foreclosed homes, may have
unknown title and legal problems, they may be less likely to buy, or at least they may lower their
offers to account for the increased risks. Since foreclosure sales currently account for such a
large portion of market activity, in the absence of solutions that reduce foreclosures, a reduction
in demand for previously foreclosed-upon properties would have negative effects on the overall
housing market. David Stevens, commissioner of the Federal Housing Administration, recently
noted that the mortgage industry now faces an "enormous trust deficit" that risks "scaring" off an
entire generation of young people from homeownership,>88
Similar dynamics may impact the availability and cost of mortgages as well, as mortgage
investors, who provide the capital that ultimately supports home prices, reassess their perceptions
of risk. The exposure offoreclosure irregularities has raised a host of potential risks for
investors, such as the possibility that MBS trusts may not actually own the underlying loans they
claim to own, that servicers may not be able to foreclose upon delinquent borrowers and thus
recover invested capital, that borrowers who have already been foreclosed upon may sue, or that
other currently unknown liability issues exist. These new risks could cause some mortgage
investors to look for safer alternative investments or to increase their investment return
requirements to compensate for the increased risks. With wary investors making less capital
available for mortgages, and reevaluating the risk of residential lending, mortgage interest rates
could rise, in turn decreasing the affordability of homes and depressing home prices, as the same
monthly payment now supports a smaller mortgage.
Additionally, both the foreclosure freezes and the legal wrangling between homeowners,
servicers, title companies, and investors that appears inevitable at this point, and in the absence
of a solution to the problem of mass foreclosures could extend the time it will take for the
inventory of homes for sale to be cleared from the system, and thus could potentially delay the
recovery of the housing market.
289
Further, general uncertainty about the scope of these
www.realclearmarkets.comlarticles/20101l0/22/foreclosure-gate_is _quickly _ spinnins.. out_of _ controLhtml).
Similarly. there are reports about a type of strategic default, commonly known as "jingle mail," where the delinquent
borrower vacates the bome and mails the servicer the keys in the hope that the servicer will accept the act as a deed-
in-lieu-of-forec1osure, or simply to get the foreclosure process over with.
288 David H. Stevens, commissioner, Federal Housing Administration, Remarks at the Mortgage Bankers
Association Annual Convention, at 7, 20 (Oct. 26, 2010),
289 Cf The White House, Press Brieflng(Oct. 12,2010) (online at www.whitehouse.gov/the-press-
office/20! Oil 01 I 2/press-briefing-press-secretary-robert-gibbs-1 0 I 220 I 0) ("We also have pointed out, though, that
the idea of a national moratorium would impact the recovery in the housing sector, as anybody that wished to enter
78
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problems and how they will be addressed by market participants and governments could have a
chilling effect on both home sales and mortgage investment, as people adopt a ''wait and see"
attitude. On the other hand, some delay could be beneficial in that it would provide the time
necessary to arrive at a more comprehensive solution to the many complex issues involved in, or
underlying, this situation.
29O
The recent and developing nature of the foreclosure irregularities means that predicting
their effects, as well as those of any resulting foreclosure freezes, on the housing market
necessarily involves a high degree of speculation. Actual housing market movements will
depend on, among other things, the scope and severity of the foreclosure irregularities, the
resolution of various legal issues, government actions, and on the reactions of homeowners,
home buyers, servicers, and mortgage investors. It seems clear, however, that the many
unknowns, uncertain solutions, and potential liability for fraud greatly add to the risk inherent in
owning or lending on affected homes.z
91
H. Impact on RAMP
HAMP is a nationwide mortgage modification program established in 2009, using T ARP
funds, as an answer to the growing foreclosure problem. HAMP is designed to provide a
mortgage modification to homeowners in those cases in which modification, from the
perspective of the mortgage holder, is an economically preferable outcome to foreclosure. The
program provides financial incentives to servicers to modify mortgages for homeowners at risk
of default, and incentives for the beneficiaries of these modifications to stay current on their
mortgage payments going forward.
292
Participation in the program by servicers is on a voluntary
basis. Once a servicer is in HAMP, though, if a borrower meets certain eligibility criteria,
participating servicers must run a test, known as a net present value (NPV) test, to evaluate
whether a foreclosure or a loan modification would yield a higher value. If the value of the
modified mortgage is greater than the potential foreclosure value, then the servicer must offer the
borrower a modification.
into a contract or execute a contract to purchase a home that had previously been foreclosed on, that process stops.
That means houses and neighborhoods remain empty even if there are buyers ready, willing and able to do so:').
290 In prior reports, the Panel has acknowledged that the delays caused by foreclosure freezes create
additional costs for servicers, but also have possibly beneficial effects for borrowers. March 2009 Oversight Report,
supra note 6. at 61-63 .
291 Mortgage lenders who make loans on fonnerly foreclosed homes where the legal ownership of the
property is uncertain due to foreclosure irregularities risk the possibility that other creditors could come forward
with competing claims to the collateral.
292 Servicers of GSE mortgages are required to participate in HAMP for their GSE portfolios. Servicers of
non-GSE mortgages may elect to sign a Servicer Participation Agreement in order to participate in the program.
Once an agreement has been signed, the participating servicer must evaluate all mortgages under HAMP unless the
participation contract is terminated. See Congressional Oversight Panel. October Oversight Report: An Assessment
of Foreclosure Mitigation Efforts After Six Months, at 44-45 (Oct. 9,2009) (online at
cop.seoate.gov/documents/cop-100909-report.pdt).
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Treasury asserts that the foreclosure irregularities have no direct impact on RAMP. With
regard to false affidavits, Phyllis Caldwell, chief of Treasury's Homeownership Preservation
Office, noted that RAMP is a foreclosure-prevention program and therefore is separate from the
actual foreclosure sale process. As a result, RAMP "is not directly affected by 'robo-signers' or
false affidavits filed with state courts.,,293
With regard to the issues around the transfer of ownership of the mortgage, Ms. Caldwell
testified that ''to modify a mortgage, there is not a need to have clear title.,,294 In addition,
Treasury stated that it has not reviewed mortgage ownership transfer issues because the
modifications are private contracts between the servicer and the borrower.
295
Perhaps as a result,
Treasury is not doing anything independently to determine if the mortgages the servicers in
RAMP are modifying have been properly transferred into the trnsts the servicers represent. It is
supporting other agencies in their efforts, but is taking no action on its own.
296
According to Ms.
Caldwell, there is an "assumption that the servicer is following the laws. [ ... J If we learn
something after the fact that contradicts that, we do have the ability to go in and claw back the
incentive.,,297 Treasury echoed this opinion in conversations with Panel staff,z98
The Panel questions Treasury's position that RAMP is unaffected by the foreclosure
irregularities. Although it is difficult to assess the exact consequences ofthe foreclosure
documentation crisis on RAMP at this point, there are several strong potential links which
Treasury should carefully consider. For example, iftrnsts have not properly received ownership
of the mortgage, they may not be the legal owner of the mortgage. If the trnst does not own the
mortgage, the servicer cannot foreclose on it, and RAMP, a foreclosure prevention program, is
paying incentives to parties with no legal right to foreclose. At present, Treasury has no way to
293 Written Testimony of Phyllis Caldwell, supra note 142, at I.
294 Testimony ofPhyllili Caldwell. supra note 143.
295 Treasury conversations with Panel staff (Oct. 21, 2010).
2% Testimony of Phyllis Caldwell, supra note 143 ("KAUFMAN: So you're not sending anyone out to
actually find out whether they hold the mortgages? ... [Olr any kind of physical (ph) follow-up on the fact that there
are mortgages out there - do they actually have the mortgages and they actually have title to the land that they are
trying to foreclose on? CALDWELL: At this point, we are supporting all of the agencies that are doing
investigations of those servicers, including the aSEs, and are monitoring closely, and will take follow-up action
when there are facts that we get from those reviews. KAUFMAN: So ... Treasury's not doing anything
independently to detennine that mortgages modified under RAMP have all necessary loan documentation and a
clear chain of title? You're just taking the word of the people - oftbe folks at the hanks and financial institutions
you're dealing with that they do have a - they have loan documentation and a clear chain oflitle? ... CALDWELL:
, .. I think that ... it's an important issue and something that ... at least at this point in time ... we're looking at the
foreclosure prevention process separate from the actual foreclosure sale process. And to modify a mortgage, there is
not a need to have clear title .... you need information from the note, but you don?t need a physical note to modify a
mortgage."). See also Treasury conversations with Panel staff (Oct. 21, 2010).
297 Testimony ofphyllis Caldwell, supra note 143.
298 Treasury conversations with Panel staff(Oct. 21, 2010).
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81

determine if such payments are being made.
299
Treasury may well be paying incentives to
servicers that have no right to receive them.
Treasury has justified its relative inaction by noting that if ownership of the mortgage has
not been properly transferred, the legal owner will eventually appear, and at that time, Treasury
can claw back any incentive payments made to the wrong party.
300
Such a solution, however,
may not be feasible. It optimistically assumes that legal owners will be able to identify clearly
the mortgages they own, despite all of the potential litigation and complex transactions many
mortgages have been part of, and then navigate the bureaucracy to bring the matter before
Treasury. Inevitably, not all legal owners will manage this, in which case Treasury will be
giving money to parties that are not entitled to it. Moreover, if this is occurring, even in cases
where the legal owners do come forward, Treasury is essentially providing interest-free loans to
the wrong parties in the meantime. In addition, Treasurys inactivity may give rise to a double
standard in which borrowers must provide extensive documentation before benefiting from
HAMP, while servicers are allowed public money without having to prove their right to
foreclose.
In addition, although Treasury maintains that HAMP is unaffected by transfer of
mortgage ownership issues because modifications are private contracts between servicers and
borrowers,
301
a servicer cannot modify a loan unless it is authorized to do so by the mortgages
actual owner.
302
If legal owners then begin to come forward, as Treasury is relying on them to
do in order to clarify incentive payments, the legal owners will not be bound by the
modifications.
303
Abruptly, borrowers would no longer benefit from the reduced interest rates of
a HAMP modification. As a result, the length of time that a modification provides a borrower to
recover and become current on payment, which Treasury cites as one of HAMPs principal
successes,
304
would be cut short. Indeed, borrowers may even suffer penalties for not having
been paying the monthly payments required prior to the modification.
Another concern involves how HAMP servicers have been calculating the costs of
foreclosure under the programs NPV test. Foreclosures carry significant costs leading up to the
acquisition of a propertys title. If, by cutting corners in the foreclosure process, servicers were
able to lower the cost of foreclosure artificially, their own internal cost comparison analysis

299
Testimony of Phyllis Caldwell, supra note 143.
300
Treasury conversations with Panel staff (Oct. 21, 2010).
301
Treasury conversations with Panel staff (Oct. 21, 2010).
302
Written Testimony of Katherine Porter, supra note 14, at 8.
303
It is unclear what would happen if the true owner were also in HAMP. Under the HAMP standards, the
individual servicer should not matter, and a loan that qualified for a modification with one servicer should qualify
with another. The borrower, however, might have to reapply for a modification and enter a new trial modification.
It is also possible that Treasury could facilitate the transfer and not require a borrower to reapply.
304
Testimony of Phyllis Caldwell, supra note 143.
#:855
#:856
might have differed from the official NPV analysis. In such instances. servicers would have an
incentive to lose paperwork or otherwise deny modifications that they would be compelled to
make under the program standards.
Conversely, foreclosure irregularities could have the perverse effect of encouraging
servicers to modify more loans through HAMP. lfforeclosure irregularities lead to additional
litigation and delays in foreclosure proceedings, they will increase the costs of foreclosure.
30s
Treasury may then update the HAMP NPV model to reflect these new realities. With the costs
of foreclosure higher, the NPV model will find more modifications to be NPV -positive, resulting
in more HAMP modifications.
I. Conclusion
Allegations of documentation irregularities remain in flux, and their consequences remain
uncertain. The best-case scenario, a possibility embraced by the financial services industry, is
that current concerns over foreclosure irregularities are overblown, reflecting mere clerical errors
that can and will be resolved quickly. If this view proves correct, then the irregularities might be
fixed with little to no impact on HAMP or fmancial stability.
The worst-case scenario, a possibility predominantly articulated by homeowners and
plaintiffs' lawyers, is considerably grimmer. In this view, the irregularities reflect extensive
misbehavior on the part of banks and loan servicers that extends throughout the entire
securitization process. Such problems could throw into question the enforceability oflegal rights
related to ownership of many loans that have been pooled and securitized. Given that 4.2 million
homeowners are currently in default and facing potential foreclosure, including 729,000 who
have been rejected from HAMP, the implications for the foreclosure market alone would be
immense. Much larger, of course, would be the implications of such irregularities for the
broader market in MBS, which totals $7.6 trillion in value. Losses related to documentation
issues could be compounded by losses related to MBS investors exercising put-back rights due to
poor underwriting of securitized loans.
Several investigations of irregularities are now underway, including a review by the 50
states' attorneys general; an investigation by the Federal Fraud Enforcement Task Force; an
effort to review documentation for certain Countrywide loans led by PIMeO, BlackRock, and
FRBNY; and numerous other inquiries by private investors. These and similar efforts may
ultimately uncover the full extent of irregularities in mortgage loan originations, transfers, and
foreclosures, but the fmal picture may not emerge for some time if these actions founder in
protracted litigation.
In the meantime, the Panel raises several concerns that policymakers should carefully
consider as these issues evolve.
305 See Sections D and F, supra.
82
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Treasury Should Monitor Closely the Impact of Foreclosure Irregularities. Treasury
so far has expressed relatively little concern that foreclosure irregularities could reflect deeper
problems that would pose a threat to fmancial stability. According to Phyllis Caldwell, Chief of
the Homeownership Preservation Office for Treasury, "We're very closely monitoring any
litigation risk to see if there is any systemic threat, but at this point, there's no indication that
there is [any threat]." This statement appears premature. Potential threats are by definition those
that have not yet fully materialized, but their risks remain real. Despite assurances by banks and
Treasury to the contrary, great uncertainty remains as to whether the stability of banks and the
housing market might be at risk if the legal underpinnings of the real estate market should come
into question. Treasury should closely monitor these issues as they develop, both for the sake of
its foreclosure mitigation programs and for the overall health of the banking system, and
Treasury should report its fmdings to the public and to Congress. Further, Treasury should
develop contingency plans to prepare for the potential worst-case scenario.
Treasury and the Federal Reserve Should Stress Test Banks to Evaluate Their
Ability to Weather a Crisis Related to Mortgage Irregularities. The potential for further
instability among the largest banks raises the specter of another acute crisis like the one that hit
the markets in the autumn of 2008. If investors come to doubt the entire process underlying
securitizations, they may grow unwilling to lend money to even the largest banks without
implicit or explicit assurances that taxpayers will bear any losses. Further, banks could, in the
worst-case scenario, suffer severe direct capital losses due to put-backs. Bank of America holds
$230.5 billion in equity, yet the PIMCO and FRBNY action alone could ultimately seek up to
$47 billion in put-backs. If several similar-sized actions were to succeed, Bank of America
could suffer a major dent in its regulatory capital. ln effect, a bank forced to accept put-backs
would be required to buy back troubled mortgage loans that in many cases bad already defaulted
or had been poorly underwritten. As the Panel has noted in the past, some major banks have had
extensive exposure to troubled mortgage-related assets. Widespread put-backs could destabilize
financial institutions that remain exposed and could lead to a precarious situation for those that
were emerging from the crisis. Further, banks and loan servicers could be vulnerable to state-
based class-action lawsuits initiated by homeowners who claim to have suffered improper
foreclosures. Even the prospect of such losses could damage a bank's stock price or its ability to
raise capital.
The Panel bas recommended in the past that, when policymakers are faced with uncertain
economic or fmancial conditions, they should employ "stress tests" as part of the regular bank
supervisory process to identify possible outcomes and to measure the robustness of the fmancial
system. Treasury and the Federal Reserve last conducted comprehensive stress tests in 2009, but
because those tests predated the current concerns about documentation irregularities and
projected banks' capitalization only through the end of2010, they offer limited reassurance that
major banks could survive further shocks in the months and years to come. Federal banking
regulators should re-run stress tests on the largest banks and on at least a sampling of smaller
83
-----
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institutions, using realistic macroeconomic and housing price projections and stringent
assumptions about realistic worst-case scenario bank losses. Any assumptions about the ultimate
costs of documentation irregularities would be necessarily speculative and the contours of the
problem are still murky. Stress tests may therefore need to account for a wide range of
possibilities and acknowledge their own limitations. Such testing, however, would nonetheless
illuminate the robustuess of the financial system and help prepare for a worst-case scenario.
Policymakers Should Evaluate System-Wide Consequences of Documentation
Irregularities. As disturbing as the potential implications of documentation irregularities may
be for "too big to fail" banks, the consequences would not be limited to the largest banks in the
market. Among other concerns:
Fannie Mae and Freddie Mac Present Significant Risks. Already Fannie Mae and
Freddie Mac play an enormous role in the market for MBS. If investors develop new
concerns about the safety of the MBS market, then Fannie and Freddie - backed by
their government guarantee - could be forced to maintain or even expand their
dominant role for years to come. Because the American people ultimately stand
behind every guarantee made by these companies, the result could be greater and
prolonged financial risk to taxpayers.
Homeowners May Lose Confidence in the Housing Market. Buyers and sellers, in
foreclosure or otherwise, may find themselves unable to know with any certainty
whether they can safely buy or safely sel1 a home. Widespread loss of confidence in
clear ownership of mortgage loans would throw further sand in the gears of the
already troubled housing market - especial1y since 31 percent of the homes currently
on the market are foreclosure sales, which may already have undergone an improper
legal process.
Puhlic Faith in Due Process Could Suffer. !fthe public gains the impression that
the government is providing concessions to large banks in order to ensure the smooth
processing of foreclosures, the people's fundamental faith in due process could suffer.
In short, actions by some of the largest financial institutions may have the potential to
threaten the still-fragile economy. The risk is uncertain, but the danger is significant enough that
Treasury and all other government agencies with a role to play in the mortgage market must
focus on preventing another such shock.
84
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Section Two: Correspondence with Treasury
The Panel's Chairman, Senator Ted Kaufman, sent a letter on behalf of the Panel on
November 1, 2010 to Patricia Geoghegan, the Special Master for TARP Executive
Compensation under EESA?06 The letter presents a series of questions to the Special Master,
requesting additional information and data following the Panel's October 21,2010 hearing on
TARP and executive compensation.
306 See Appendix I of this report, infra.
85
#:860
Section Three: TARP Updates Since Last Report
A. GM to Repurchase A1FP Preferred Stock
On October 27, 2010, Treasury accepted an offer by General Motors Company (New
GM) to repurchase 83.9 million shares of New GM's Series A preferred stock at $25.50 per
share provided that the company's proposed initial public offering (IPO) is completed. These
preferred shares were issued, along with 60.8 percent of the company's common stock, in July
2009 in exchange for extinguishing the debtor-in-possession loan extended to General Motors
Corporation (Old GM). The repurchase price represents 102 percent of the liquidation
preference. After the IPO is completed, New GM will repurchase the Series A preferred shares
on the first dividend payment date of the preferred stock. Following this transaction, Treasury's
total return from New GM through debt repayments, the preferred stock repurchase, and interest
and dividends will total $9.5 billion.
B. AlG: AlA Initial Public Offering and ALICO Sale
As part of its plan to repay the federal government's outstanding investments, AIG
completed an IPO for AlA Group Limited (AlA) and sold American Life Insurance Company
(ALlCO) to MetLife, Inc. The AlA IPO raised $20.5 billion in cash proceeds and the ALICO
sale generated $16.2 billion in total proceeds. Of this amount, $7.2 billion represents cash
proceeds. The $36.7 billion in aggregate proceeds will be used to pay down the outstanding
balance on the revolving credit facility from FRBNY.
C. Sales of Citigroup Common Stock
On October 19, 2010, Treasury began a fourth period of sales for 1.5 billion shares of
Citigroup common stock. Treasury received 7.7 billion common shares in July 2009 in exchange
for its initial $25 billion investment in the company under the CPP. As of October 29, 2010,
Treasury has sold 4.1 billion shares (approximately fifty percent of its stake) for $16.4 billion in
gross proceeds. Of this amount, approximately $13.4 billion represents a repayment for
Citigroup's CPP funding, while the remaining $3 billion represents a net profit for taxpayers.
Morgan Stanley will act as Treasury's sales agent for the fourth selling period, which will end on
December 31, 2010 or upon the sale of the full allotment of 1.5 billion shares.
D. Legacy Securities Public-Private Investments Program Quarterly Report
On October 20, 2010, Treasury released its fourth quarterly report on the Legacy
Securities Public-Private Investments Program (PPIP). This program is intended to support
market functioning and facilitate price discovery in MBS markets through equity and debt capital
commitments in eight pUblic-private investment funds (PPIFs). As of September 30, 2010, the
86
#:861
purchasing power of these funds totaled $29.4 billion.
307
Of this amount, $7.4 billion represents
equity commitments from private-sector fund managers and investors and $22.1 billion
represents both debt and equity commitments from Treasury. The total market value of
securities held by participating PPIFs was approximately $19.3 billion, with 82 percent of
investments concentrated in non-agency RMBS and 18 percent in commercial mortgage-backed
securities (CMBS).
To date, cumulative gross unrealized equity gains for both Treasury and private investors
total $1.5 billion. The net internal rate of return for each PPIF is currently between 19.3 percent
and 52.0 percent.
E. Metrics
Each month, the Panel's report highlights a number ofmetrics that the Panel and others,
including Treasury, the Government Accountability Office (GAO), Special Inspector General for
the Troubled Asset Relief Program (SIGTARP), and the Financial Stability Oversight Board,
consider useful in assessing the effectiveness of the Administration's efforts to restore fmancial
stability and accomplish the goals of EESA. This section discusses changes that have occurred
in several indicators since the release of the Panel's October 2010 report.
1. Macroeconomic Indices
The post-crisis rate of real GDP growth quarter-over-quarter peaked at an annual rate of
5 percent in the fourth quarter of 2009, but the rate has decreased during 2010. Real GDP
increased at an annualized rate of2.0 percent in the third quarter of2010, increasing from 1.7
percent in the second quarter of201O.
308
The third quarter growth rate was unaffected by the
spike in employment resulting from the 2010 U.S. Census.
309
The year-over-year increase from
third quarter 2009 to third quarter 2010 was 3.1 percent, from 12.9 billion to 13.3 billion dollars.
301 The total purchasing power published in the PPIP quarterly report does not include Ibe purchasing
power wilbin USTrrCW Senior Mortgage Services Fund, L.P., which was wound up and liquidated on January 4,
2010. See endnote xlvi, infra, for details on the liquidation of Ibis fund. U.S. Department oflbe Treasury, Legacy
Securities Public-Private Investment Program, at 3 (Oct. 20, 2010) (online at
financialstability.govldocsIExtemal%20Report%20-%2009-1 0%2OvFinal. pdf).
308 Bureau of Economic Analysis, Table 1.1.6.: Real Gross Domestic Product, Chained Dollars (online at
www.bea.govlnationallnipawebrrable View.asp?SelectedTabl",,6&Freq=Qtr&FirstY ear=2008&LastYear=20 I 0)
(hereinafter "Bureau of Economic Analysis Table 1.1.6") (accessed Nov. 3, 20 I 0). Until Ibe year-over-year
decrease from 2007 to 2008, nominal GDP had not decreased on an annual basis since 1949. Bureau of Economic
Analysis, Table 1.1.5.: Gross Domestic Product (online at
www.bea.govlnationallnipawebrrable View.asp?SelectedTable=5&Freq=-Qtr&FirstY ear=2008&LastY e&=20 I 0)
(accessed Nov. 3, 2010).
309 The Economics and Statistics Administration within the U.S. Department of Commerce estimated that
Ibe spending associated wilb Ibe 2010 Census would peak in the second quarter of 20 I 0 and could boost annualized
nominal and real GDP growth by 0.1 percent in Ibe first quarter of 2010 and 0.2 percent in the second quarter of
2010. As the boost from the Census is a one-time occurrence, continuing increases in private investment and
87
#:862
Figure 13: Real GDP310
~
$13,000
.!!
"0
c
$12,500
'0
'" C
,g
iii
$12,000
$11,500
$11,000
,
,
i
~ - - ~ - - - - ~ ~ - -
i
I
+ - - - - - ~ ~
1-____
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Ql Q2 Q3
2010 2010 2010
personal consumption expenditures as well as in exports will be needed to sustain the resumption of growth that has
occurred in the U.S. economy over the past year. [t was expected that the drop in 2010 Census spending would then
reduce GDP growth by similar amounts in Q3 and Q4 2010. Economics and Statistics Administration, U.S.
Department of Commerce, The Impact of the 2010 Census Operations on Jobs and Economic Growth, at 8 (online at
www.esa.doc.gov/02182010.pdf).
310 Bureau of Economic Aoalysis Table 1.1.6, supra note 308 (accessed Nov. 3, 2010).
88
" "--"--
#:863
Since the Panel's October report, underemployment has increased from 16.7 percent to
17.1 percent, while unemployment has remained constant. Median duration of unemployment
has increased by half a week.
Figure 14: Unemployment, Underemployment, and Median Duration of Unemployment"l

16 --.-.-- -.- .... -+-'''''''---.''-+
14 i ... ------...
,
12 ... -.-.-.. - .. ----.. -.---.-- --- .- .-- ....
1
10
"" 8
6
4
2
o
_ Median Duration of Unemployment (right axis)
- Unemployment (left axis)
- - - Underemployment + Unemployment (left axis)
2. Financial Indices
a. Overview
27
24
21
18
15 1.1
12
9
6
3
o
Since the Panel's October report, the St. Louis Financial Stress Index, a proxy for
financial stress in the U. S. economy, has continued its downward trend, decreasing by a
quarter.
312
The index has fallen by over half since the post-crisis peak in June 2010. The recent
311 It is important to note that the measures of unemployment and underemployment do not include people
who have stopped actively looking for work altogether. While the Bureau of Labor Statistics (BLS) does not have a
distinct metric for "underemployment," the U-6 category of Table AIS "Alternative Measures of Labor
Underutilization" is used here as a proxy. BLS defines this measure as: "Total unemployed, plus all persons
marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the
civilian labor force plus aU persons marginally attached to the labor force." U.S. Department of Labor. International
Comparisons of Annual Labor Force Statistics (online at www.bls.gov/webapps/legacy/cpsatabI5.htm) (accessed
Nov. 3, 2010).
liZ Federal Reserve Bank orst. Louis, Series STLFSI: BusinesslFiscal: Other Economic Indicators
(Instrument: St. Louis Financial Stress Index, Frequency: Weekly) (online at
research.stiouisfed.org/fred2iserieslSTLFSI) (accessed Nov. 3, 2010). The index includes 18 weekly data series,
beginning in December 1993 to the present. The series are: effective federal funds rate, 2-year Treasury, IO-year
Treasury, 30-year-Treasury, Baa-rated corporate, Merrill Lynch High Yield Corporate Master II Index, Merrill
Lynch Asset-Backed Master BBB-rated, IO-year Treasury minus 3-month Treasury, Corporate Baa-rated bond
minus lO-year Treasury, Merrill Lynch High Yield Corporate Master II Index minus 10-year Treasury, 3-month
89
#:864
trend in the index suggests that financial stress continues moving toward its long-run nonn. The
index has decreased by more than three standard deviations since October 2008, the month when
the T ARP was initiated.
Figure 15: St. Louis Federal Reserve Financial Stress Index
6
5
4
3
2
1
o
(1)
(2) ------.- c-_------c-----__ -....
SSSSSS&&&

LIBOR-OIS spread, 3-month TED spread, 3-month commercial paper minus 3-month Treasury, the J_P. Morgan
Emerging Markets Bond Index Plus, Chicago Board Options Exchange Market Volatility Iodex, Merrill Lynch
Bond Market Volatility Index (I-month), 10-year nominal Treasury yield minus 10-year Treasury Inflation
Protected Security yield, and Vanguard Financials Exchange-Traded Fund (equities). The index is constructed using
principal components analysis after the data series are de-meaned and divided by their respective standard deviations
to make them comparable units. The standard deviation of the index is set to 1. For more details on the construction
of this index, see Federal Reserve Bank ofSt. Louis, National Economic Trends Appendix: The St. Louis Fed's
Financial Stress Index (Jan. 2010) (online at research.stlouisfed.org/publicationsinetlNETJan20IOAppendix.pdf).
90
#:865
Stock market volatility has decreased recently. The Chicago Board Options Exchaoge
Volatility Index (VIX) has fallen by more thao half since the post-crisis peak in May 20 I 0 and
has fallen 7 percent since the Panel's October report. However, volatility is still 40 percent
higher than its post-crisis low on April 12, 2010.
Figure 16: Chicago Board Options Exchange Volatility Index3\3
90
T ~ ~ - - - - ~ - - ~ - - ............. - . . . - . ~ ..... -.-... - . ~ - - -
80
..
70
. !!
. ~
60
=s
~
50
...
40
..
=a
30
.
20
10
~ ~ ! " " - - . - .. ~ - .. - . ~ . - .. -....... .. ..... -.... __ ... ~ . - - ...
0
-- --------,-- ---- - - - - - - - - ~ - - .
{;J
~
....
b. Interest Rates, Spreads, and Issuance
As of November 3,2010, the 3-month and I-month London Interbank Offer Rates
(LIBOR), the prices at which banks lend and borrow from each other, were 0.29 and 0.25,
respectively.3l4 Rates have fallen by nearly half since post-crisis highs in June 2010 and have
remained nearly constant since the Panel's October report. Over the longer term, however,
interest rates remain extremely low relative to pre-crisis levels, indicating both efforts of central
banks and institutions' perceptions of reduced risk in lending to other banks.
313 Data accessed through Bloomberg data service on November 3, 2010. The CBOE VIX is a key measure
of market expectations of near-term volatility. Chicago Board Options Exchange; The CBOE Volatility Index - VIX.
2009 (online at www.cbne.comlmicro/vixlvixwhite.pdf) (accessed Nov. 3, 2010).
314 Data accessed through Bloomberg data service on November 3, 2010.
91
-- .... --.. -.. ~ - - ~ ~ ~ ~ ~ ~ ~ ~ - - - - ~
#:866
Figure 17: 3-Month and I-Month LIBOR Rates (as of November 3, 2010)
I
I Indicator
Current Rates
(as of 11/3/2010)
Percent Change from nata
Available at Time of Last
Report (10/4/2010)
1
3-Month LIBOR'"
I-Month LIBOR
316
0.29
0.25
(1.6)% I
(1.2),,10 I
Since the Panel's October report, interest mte spreads have decreased slightly. Thirty-
year mortgage interest rates have decreased very slightly and 10-year Treasury bond yields have
increased very slightly. The conventional mortgage spread, which measures the 30-year
mortgage rate over IO-year Treasury bond yields, has decreased slightly since late September. 317
The TED spread serves as an indicator for perceived risk in the financial markets. While
it has increased by about three basis points since the Panel's October report, the spread is still
currently lower than pre-crisis levels.
318
The LIBOR-OIS spread reflects the health of the
banking system. While it increased over threefold from early April to July, it has been falling
since mid-July and is now averaging pre-crisis levels?19 LIBOR-OIS remained fairly constant
since the Panel's October report. Decreases in the LIBOR-OIS spread and the TED spread
suggest that hesitation among banks to lend to counterparties has receded.
317 Board of Governors of the Federal Reserve System. Federal Reserve Statistical Release H.15: Selected
Interest Rates: Historical Data (Instrument: Conventional Mortgages, Frequency: Weekly) (online at
www.federalreserve.gov/releasesIh15/datalWeekly-Thursday-1H15_MORTG_ NA. txt) (hereinafter "Federal
Reserve Statistical Release H.15") (accessed Nov. 3, 2010).
318 Federal Reserve Bank of Minneapolis, Measuring Perceived Risk - The TED Spread (Dec. 2008)
(online at www.minneapolisfed.org/publicationsyaperslpub_display.cfin?id=4l20).
92
#:867
Figure 18: TED Spread
320
500,--------------------
450 t-----------------
I
400 +---------------------
350
300
250
200
150
100
50
a
-l---------------------
+-
,
- - r - - - - - - - - - - ~ - - - - - ~ - - ' -----
Figure 19: LmOR-OIS Spread
321
400
i
350 ,---- ---------------
300
250
200
150
100
50
,
01----- ---------
~

....
The interest rate spread for AA asset-backed commercial paper, which is considered mid-
investment grade, has fallen by more than a tenth since the Panel's October report. The interest
321 Data accessed through Bloomberg data service on November 3,2010.
93
#:868
rate spread on A21P2 commercial paper, a lower grade investment than AA asset-backed
commercial paper, has fallen by nearly II percent since the Panel's October report. This
indicates healthier fimdraising conditions for corporations.
Figure 20: Interest Rate Spreads
I Percent Cbange
I
Current Spread Since Last Report
Indicator , (as of 11/1/2010) (9130/2010)
Conventional mortgage rate spread"''' I 1.56 (13.3)% I
TED Spread (basis points) 15.59 20.0%
Overnim
t
AA asset-backed commercial paper interest rate I 0.07 (11.2)% I
spread 3
Ovemight A21P2 nonfmancial commercial paper interest i 0.14 (11.0)% I
rate spread
324
I I
The spread between Moody's Baa Corporate Bond Yield Index and 30-year constant
maturity U.S. Treasury Bond yields doubled from late April to mid-June 2010. Spreads have
trended down since mid-June highs and have fallen over 6 percent since the Panel's October
report. This spread indicates the difference in perceived risk between corporate and government
bonds, and a declining spread could indicate waning concerns about the riskiness of corporate
bonds.
122 Federal Reserve Statistical Release H.15, supra note 317 (accessed Nov. 3, 2010); Board of Governors
of the Federal Reserve System, Federal Reserve Statistical Release H.I5: Selected Interest Rates: Historical Data
(Instrument: U.S. Government Securitiesrrreasury Constant MaturitieslNominallO-Year, Frequency: Weekly)
(online at www.federaJreserve.gov/releases/b15/data/WeeklLFriday_IHIS _TCMNOM_YIO.txt) (accessed Nov. 3,
2010).
323 Board of Govemors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial
Paper Rates and Outstandings: Data Download Program (Instrument: AA Asset-Backed Discount Rate, Frequency:
Daily) (online at www.federalreserve.govlDataDownload/Choose.aspx?rel-CP) (accessed Nov. 3,2010); Board of
Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and
Outstandings: Data Download Program (Instrument: AA Nonfinancial Discount Rate, Frequency: Daily) (online at
(accessed Nov. 3, 2010). In order to provide a more
complete comparison, this metric utilizes the average of the interest rate spread for the last five days of the month.
324 Board of Governors ofthe Federal Reserve System, Federal Reserve Statistical Release: Commercial
Paper Rates and Outstandings: Data Download Program (Instrument: A21P2 Nonfinancial Discount Rate,
Frequency: Daily) (online at www.federalreserve.govlDataDownloadiChoose.aspx?rel-CP)(accessed Nov. 3,
20 I 0). In order to provide a more complete comparison, this metric utilizes the average of the interest rate spread
for the last five days of the month.
94
#:869
L
Figure 21: Moody's Baa Corporate Bond Index and 30-Year U.S. Treasury Yield
325
- - - - - - ~ - - . 6
5
- 4
3
4 2
1
0
.-. Moody's Baa Corporate Bond Index (left axis)
- - - 30-Year U.s. Treasury Bond Yield, Constant Maturity (left axis)
-Spread (right axis)
Corporate bond market issuance data corroborate this analysis, with investment grade
issuance increasing over 50 percent between August and September 2010.
326
c. Condition of the Banks
C
fl
~
..
...
Since the Panel's last report, 10 additional banks have failed, with an approximate total
asset value of $4.2 billion. With 139 failures from January through October 2010, the year-to-
date rate has nearly reached 140, the level for all of calendar year 2009. In general, banks failing
in 2009 and 2010 have been small- and medium-sized institutions;327 while they are failing in
high numbers, their aggregate asset size has been relatively small.
325 Federal Reserve Bank of St. Louis, Series DGS30: Selected Interest Rates (Instrument: 30-Year
Treasury Constant Maturity Rate, Frequency: Daily) (online at research.stiouisfed.org/fred21) (hereinafter "Federal
Reserve Bank of St. Louis Series DGS30") (accessed Nov. 3, 2010). Corporate Baa rate data accessed through
Bloomberg data service on November 3, 2010.
326 Securities Industry and Financial Markets Association, US Corporate Bond issuance (online at
www.sifrna.orgluploadedFileslResearchiStatistics/StatisticsFilesiCorporate-US-Corporate-Issuance-SIFMA.xls)
(accessed Nov. 3, 2010).
327 For the purposes of its analysis, the Panel uses four categories based on bank asset sizes: large banks
(those with over $100 billion in assets), medium banks (those with between $10 billion and $100 billion in assets),
smaller hanks (those with between $1 billion and $\0 billion in assets), and smallest banks (those with less than $\
billion in assets).
95
#:870
Figure 22: Bank Failures as a Percentage of Total Banks and Bank Failures by Total Assets
(1990-2010)328
3.0%
2.5%
2.0%
1.5%
T
1.0%
0.5%
0.0%
_ ~ , Failures as a % of Total Institutions (left axis)
3. Housing Indices
-Total Assets (right axis)
$400
$350
$300 ~
$250 ~
$200 '0
on
$150
$100
$50
$0
~
Foreclosure actions, which consist of default notices, scheduled auctions, and bank
repossessions, increased 2.5 percent in September to 347,420. This metric is over 24 percent
above the foreclosure action level at the time of the EESA enactment.
329
While the hardest hit
states still account for 19 out of 20 of the highest metro foreclosure rates, foreclosure activity
grew less in the hardest-hit cities than in other states.
330
Sales of new homes increased to
307,000, but remain 10w.33\ The Case-Shiller Composite 20-City Composite decreased very
328 The disparity between the number of and total assets of failed banks in 2008 is driven primarily by the
failure of Washington Mutual Bank, which held $307 billion in assets. The 2010 year-to-date percentage of bank
failures includes failures through August. The total number of FDIC-insured institutions as of March 31, 20 lOis
7,932 commercial banks and savings institutions. As of November 12, 2010, there have been 143 institutions that
failed. Federal Deposit Insurance Corporation. Failures and Assistance Transactions (online at
www2.fdic.govlhsob/SelectRptasp?EntryT)"JF30) (accessed Nov. 12,2010). Asset totals have been adjusted for
deflation into 2005 dollars using the GDP implicit price deflator. The quarterly values were averaged into a yearly
value. Federal Reserve Bank o[St. Louis Series DGS30, supra note 325 (accessed Nov. 3, 2010).
329 RealtyTrac Press Release on Foreclosure Activity, supra note 278.
330 Hardest-hit cities are defined as those in California, Florida, Nevada, and Arizona. Chicago, Houston,
and Seattle posted the largest increases in foreclosure activity. RealtyTrac. Third Quarter Foreclosure Activity Up
in 65 Percent o/U.S. Metro Areas But Down in Hardest-Hit Cities (Oct. 28, 2010) (online at
www.realtytrac.com!contentJpress-releasesJthird-quarter-foreclosure-activity-up-in-65-percent-of-us-metro-areas-
but -down-in -hardest-hit -cities-6127).
331 Sales of new homes in May 2010 were 276,000, the lowest rate since 1963. It should be noted that this
number likely reflects a shifting of sales from May to April prompted by the April expiration of tax credits desigued
96
#:871
slightly, while the FHF A Housing Price Index increased very slightly in August 2010. The
Case-Shiller and FHF A indices are 6 percent and 5 percent, respectively, below their levels of
October 2008.
332
Additionally, Case-Shiller futures prices indicate a market expectation that home-price
values for the major Metropolitan Statistical Areas
333
(MSAs) will hold constant through
2011.
334
These futures are cash-settled to a weighted composite index of U.S. housing prices in
the top ten MSAs, as well as to those specific markets. They are used to hedge by businesses
whose profits and losses are related to any area of the housing industry, and to balance portfolios
by businesses seeking exposure to an uncorrelated asset class. As such, futures prices are a
composite indicator of market information known to date and can be used to indicate market
expectations for home prices.
to boost home sales. U.S. Census Bureau and U.S. Department of Housing and Urban Development, New
Residential Sales in June 2010 (July 26, 2010) (online at www.census.gov/constinewressales.pdf); U.s. Census
Bureau, New Residential Sales - New One-Family Houses Sold (online at
www.census.gov/ftp/pub/constisold_cust.xls)(accessedNov. 3,2010).
332 The most recent data available is for July 2010. See Standard and Poor's, S&P/Case-Shiller Home Price
Indices (Instrument: Case-ShilJer 20-City Composite Seasonally Adjusted, Frequency: Monthly) (online at
www.standardandpoors.comlindiceslsp-case-shiller-home-price-indicesleniusnindexId=,pusa-cashpidff-p-us---)
(hereinafter "S&P/Case-Shiller Home Price Indices") (accessed Nov. 3, 2010); Federa\ Housing Finance Agency,
u.s. and Census Division Monthly Purchase Only Index (Instrument: USA, Seasonally Adjusted) (online at
www.fhfa.govlDefault.aspx?Pageo:87)(hereinafter'U.S. and Census Division Monthly Purchase Only Index")
(accessed Nov. 3,2010). S&P has cautioned that the ,easonal adjustment is probably being distorted by irregular
factors. These factors could include distressed sales and the various government programs. See Standard and
Poor's, S&P/Case-Shiller Home Price Indices and Seasonal Adjustment, S&P Indices: Index Analysis (Apr. 2010).
For a discussion of the differences between the Case-Shiller Index and the FHF A Index, see April 2010 Ovesright
Report, supra note 282, at 98.
333 A Metropolitan Statistical Area is defined as a core area containing a substantial population nucleus,
together with adjacent communities having a high degree of economic and social integration with the core. U.S.
Census Bureau, About Metropolitan and Micropolitan Statistical Areas (online at
www.census.gov/populationiwww/metroareaslaboutmetro.html)(accessed Nov. 3, 2010).
3" Data accessed through Bloomberg data service on November 3, 2010. The Case-Shiller Futures contract
is traded on the CME and is settled to the Case-Shiller Index two months after the previous calendar quarter. For
example, the February contract will be settled against the spot value of the S&P Case-Shiller Home Price Index
values representing the fourth calendar quarter of the previous year, which is released in February one day after the
settlement of the contract. Note that most close observers believe that the accuracy of these futures contracts as
forecasts diminishes the farther out one looks.
97
,
slightly, while the FHF A Housing Price Index increased very slightly in August 2010. The
Case-Shiller and FHF A indices are 6 percent and 5 percent, respectively, below their levels of
October 2008.
332
Additionally, Case-Shiller futures prices indicate a market expectation that home-price
values for the major Metropolitan Statistical Areas
333
(MSAs) will hold constant through
2011.
334
These futures are cash-settled to a weighted composite index of U.S. housing prices in
the top ten MSAs, as well as to those specific markets. They are used to hedge by businesses
whose profits and losses are related to any area of the housing industry, and to balance portfolios
by businesses seeking exposure to an uncorrelated asset class. As such, futures prices are a
composite indicator of market information known to date and can be used to indicate market
expectations for home prices.
to boost home sales. U.S. Census Bureau and U.S. Department of Housing and Urban Development, New
Residential Sales in June 2010 (July 26, 2010) (online at www.census.gov/constinewressales.pdf); U.s. Census
Bureau, New Residential Sales - New One-Family Houses Sold (online at
www.census.gov/ftp/pub/constisold_cust.xls)(accessedNov. 3,2010).
332 The most recent data available is for July 2010. See Standard and Poor's, S&P/Case-Shiller Home Price
Indices (Instrument: Case-ShilJer 20-City Composite Seasonally Adjusted, Frequency: Monthly) (online at
www.standardandpoors.comlindiceslsp-case-shiller-home-price-indicesleniusnindexId=,pusa-cashpidff-p-us---)
(hereinafter "S&P/Case-Shiller Home Price Indices") (accessed Nov. 3, 2010); Federa\ Housing Finance Agency,
u.s. and Census Division Monthly Purchase Only Index (Instrument: USA, Seasonally Adjusted) (online at
www.fhfa.govlDefault.aspx?Pageo:87)(hereinafter'U.S. and Census Division Monthly Purchase Only Index")
(accessed Nov. 3,2010). S&P has cautioned that the ,easonal adjustment is probably being distorted by irregular
factors. These factors could include distressed sales and the various government programs. See Standard and
Poor's, S&P/Case-Shiller Home Price Indices and Seasonal Adjustment, S&P Indices: Index Analysis (Apr. 2010).
For a discussion of the differences between the Case-Shiller Index and the FHF A Index, see April 2010 Ovesright
Report, supra note 282, at 98.
333 A Metropolitan Statistical Area is defined as a core area containing a substantial population nucleus,
together with adjacent communities having a high degree of economic and social integration with the core. U.S.
Census Bureau, About Metropolitan and Micropolitan Statistical Areas (online at
www.census.gov/populationiwww/metroareaslaboutmetro.html)(accessed Nov. 3, 2010).
3" Data accessed through Bloomberg data service on November 3, 2010. The Case-Shiller Futures contract
is traded on the CME and is settled to the Case-Shiller Index two months after the previous calendar quarter. For
example, the February contract will be settled against the spot value of the S&P Case-Shiller Home Price Index
values representing the fourth calendar quarter of the previous year, which is released in February one day after the
settlement of the contract. Note that most close observers believe that the accuracy of these futures contracts as
forecasts diminishes the farther out one looks.
97
,
#:872
Figure 23: Housing Indicators
Percent Change
from Data Available Percent
!
Most Recent at Time of Last Change Since
Indicator Monthly Data Report October 2008
Monthly foreclosure actions'"
I
347,420 2.5% 24.3%
I S&P/Case-Shiller Composite 20 Index
336
146.99 (0.3)% (5.9)%
i
192.83 0.4%
(4.5)% FHFA Housing Price Index337
I
Figure 24: Case-Shiller Home Price Index and Futures VaIues
338
300
275
Actual Futures MA Boston
250
It-Chicago
225
.. DC-Washir'gton
-CO-DenVt!f
200
17';
--- Vegas
ISO
L-Mlaml
12S
--NY New York
100
CA San Oipgo
70
., .... CA San Franci'iCo
--Corrpo5,te-l0
'" RealtyTrac, Foreclosures (online at www.realtytrac.comlhomel) (accessed Nov. 3, 2010). The most
recent data available is for September 2010.
336 S&P/Case-Shiller Home Price Indices, supra note 332 (accessed Nov. 3, 2010). The most recent data
available is for August 2010.
3J7 U.S. and Census Division Monthly Purchase Only Index, supra note 332 (accessed Nov. 3, 2010). The
most recent data available is for August 2010.
338 All data normalized to 100 at January 2000. Futures data accesaed through Bloomberg data service on
November 3, 2010. S&P/Case-Shiller Home Price Indices, supra note 332 (accessed Nov. 3, 2010).
98
#:873
=
F. Financial Update
Each month, the Panel summarizes the resources that the federal government has
committed to the rescue and recovery of the financial system. The following fmancial update
provides: (I) an updated accounting of the T ARP, including a tally of dividend income,
repayments, and warrant dispositions that the program has received as of September 30, 2010;
and (2) an updated accounting of the full federal resource commitment as of October 27, 2010.
1. TheTARP
a. Program Updates
339
Treasury's spending authority under the TARP officially expired on October 3, 2010.
Though it can no longer make new funding commitments, Treasury can continue to provide
funding for programs for which it has existing contracts and previous commitments. To date,
$395.1 billion has been spent under the TARP's $475 billion ceiling.
340
Of the total amount
disbursed, $209.5 billion has been repaid. Treasury has also incurred $6.1 billion in losses
associated with its CPP and Automotive Industry Financing Program (AlFP) investments. A
significant portion of the $179.7 billion in T ARP funds currently outstanding includes Treasury's
investments in AIG and assistance provided to the automotive industry.
cpp Repayments
As of October 29, 2010, 112 of the 707 banks that participated in the CPP have fully
redeemed their preferred shares either through capital repayment or exchanges for investments
under the Community Development Capital Initiative (CDC!). During the month of October,
Treasury received a $12 million full repayment from 1st Constitution 8ancorp, and a $100
million partial repayment from Webster Financial Corporation. A total of$152.9 billion has
been repaid under the program, leaving $49.5 billion in funds currently outstanding.
339 U.S. Department ofthe Treasury, Cumulative Dividends, Interest and Distributions Report as of
September 30.1010 (Oct. 11,2010) (online at linancialstability.gov/docsldividends-interest-
reportslSeptember''102020 I 0%20Dividenda%20&%20Interest%20Report.pdi) (hereinafter ''Treasury Cumulative
Dividends, Interest and Distributions Report); U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions Reportfor the Period Ending October 29,1010 (Nov. 2, 2010) (online at
financialstability.gov/docsltransaction-reports/l 04-1 0%20Transactions%20Report%20as%200f%209-30-1 O.pdf)
(hereinafter ''Treasury Transactions Report").
340 The original $700 billion TARP ceiling was reduced by $1.26 billion as part of the Helping Families
Save Their Homes Act of2oo9. 12 U.S.C. 5225(a)-(b); Helping Families Save Their Homes Act of2oo9, Pub. L.
No. 111-22 40. On June 30, 2010, the House-Senate Conference Committee agreed to reduce the amount
authorized under the TARP from $700 billion to $475 billion as part of the Dndd-Frank Wall Street Reform and
Consumer Protection Act that was signed into law on July 21, 2010. See Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. No. 111-203 (2010); The White House, Remarks by the President at Signing of
Dodd-Frank Wall Street Reform and Consumer Protection Act (July 21, 2010) (online at www.whitehouse.gov/the-
press-office/remarkspresident-signing-dodd-frank-wall-street-refonn-and-consurner-protection-act).
99
#:874
b. Income: Dividends, Interest, and Warrant Sales
In conjunction with its preferred stock investments under the CPP and TIP, Treasury
generally received warrants to pnrchase common equity.34' As of October 29,2010,45
institutions have repnrchased their warrants from Treasury at an agreed upon price. Treasury has
also sold warrants for 15 other institutions at auction. To date, income from warrant dispositions
have totaled $8.1 billion.
In addition to warrant proceeds, Treasury also receives dividend payments on the
preferred shares that it holds under the CPP, 5 percent per annum for the first five years and 9
percent per annum thereafter.
342
For preferred shares issued under the TIP, Treasury received a
dividend of8 percent per annum.
343
In total, Treasury has received approximately $25.7 billion
in net income from warrant repnrchases, dividends, interest payments, and other proceeds
deriving from TARP investments (after deducting 10sses)?44 For further infonnation on TARP
profit and loss, see Fignre 26.
141 For its CPP investments in privately held financial institutions. Treasury also received warrants to
purchase additional shares of preferred stock, which it exercised immediately. Similarly, Treasury also received
warrants to purchase additional subordinated debt that were also inunediately exercised along with its CPP
investments in subchapter S corporations. Treasmy Transactions Report, supra note 339, at 14 .
342 U.S. Department of the Treasury, Capital Purchase Program (Oct. 3, 2010) (online at
www.financialstability.gov/roadtostability/capitalpurchaseprogram.html).
)43 U.S. Department of the Treasury, Targeted Investment Program (Oct. 3, 2010) (online at
www.financialstability.gov/roadtostability/targetedinvestmentprogram.html).
J44 Treasury Cumulative Dividends, Interest and Distributions Report, supra note 339; Treasury
Transactions Report. supra note 339. Treasury also received an additional $1.2 billion in participation fees from its
Guarantee Program for Money Market Funds. U.S. Department of the Treasury. Treasury Announces Expiration of
Guarantee Program/or Money Market Funds (Sept. 18,2009) (online at
www.ustreas.gov/press/releases/tg293.htm).
100
#:875
c. TARP Accounting
Figure 25: TARP Accounting (as of October 29, 2010) (billions ofdol/ars)'
i
I
I
Total
,
Maximum Repayments!
i
Funding
i
I
I
Amount Actual Reduced Total
!
Currently Funding
PrOl!ram Allotted Fundin2 Exposure Losses i Outstandin2 Available
Capital Purchase $204.9 $204.9 "$(152.9) '$(2.6) $49.5 $0
Program (CPP)
Targeted 40.0 40.0 (40.0)
0'
0, 0
investment Program I
i
(TIP)
Asset Guarantee 5.0 "'5.0 '(5.0) 0 0 0
Program (AGP)
AlG Investment 69.8 "'47.5 0 0 47.5 22.3
1 Program (AlGIP)
Auto Industry 81.3 81.3 (10.8) W(3.5) "'''67.1 0
Financing Program
(AlFP)
Auto Supplier 0.4 0.4 (004) 0 0,
01
I Support Program
I
!
(ASSP)"
Term Asset-Backed '4.3 "0.1 0 0 0.1 4.2
Securities Loan
Facility (T ALF)
I Public-Private I
22.4
xiii14.2
"'(004) I 0 13.8 8.2
Investment Program
,
(PPIP)"ii
1
SBA 7(a) Securities 0.4
~ 0 . 4
0 0 0.4 ''''0
Purchase
Home Affordable
I
29.9
0.6 I
0 0
0.6 I
29.3
Modification
I ! Program (HAMP)
i
I Hardest Hit Fund
I
M7.6
"""0.1 0 0 0.1 7.5
(HHF)
I FHA Refmance
I
8.1 '''0.1 0 0 0.1 1 8.0
Program
!
I
I Community
0.8 "'0.6 0 0 0.6 0
Development
Capitallnitiative
(enCI)
Total $475.0 $395.1 $(209.5) 1 J(6.1L ____ $179.7
$79.5
l ____
---- ------
101
#:876
i Figures affected by rounding. Unless otherwise noted, data in this table are from the following source:
U.s. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
October 29,2010 (Nov. 2, 2010) (online at financialstability.gov/docsitransaction-reportslll-2-
I 0%20Transactions%20Report%20as%200f''1020 I 0-29-1 O.pdf).
"Total amount repaid under CPP includes $13.4 billion Treasury received as part of its sales ofCitigroup
common stock. As of October 29,2010, Treasury bad sold 4.1 billion Citigroup common shares for $16.4 billion in
gross proceeds. Treasury has received $3 billion in net profit from the sale ofCitigroup common stock. In June
2009, Treasury exchanged $25 billion in Citigroup preferred stock for 7.7 billion shares of the company's common
stock at $3.25 per share. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for
the Period Ending October 29,2010, at 13-15 (Nov. 2, 2010) (online at financialstability.gov/docsltransaction-
reportslll-2-1 0%20Transactions%20Report%20as%200f''102010-29-10.pdf); U.S. Department of the Treasury,
Troubled Asset Relief Program: Two-Year Retrospective, at 25 (Oct. 2010) (online at
www.financialstability.gov/docs/T ARp%20Two%20Year%20Retrospective _10%2005%20 I 0_ transmittal%20letter.
pdf).
Total CPP repayments also include amounts repaid by institutions that exchanged their CPP investments
for investments under the CDCI, as well as proceeds earned from the sale of preferred stock and warrants issued by
South Financial Group, Inc. and Tffi Financial Corp.
iii On the T ARP Transactions Report, Treasury has classified the investments it made in two institutions.
CIT Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1 million), as losses. In addition, Treasury sold its
preferred ownership interests, along with warrants, in South Financial Group, Inc. and TIB Financial Corp. to non-
T ARP participating institutions. These shares were sold at prices below the value of the original CPP investment.
Therefore, Treasury's net current Cpp investment is $49.5 billion due to the $2.6 billion in losses thus far. U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29,
2010, at 13-14 (Nov. 2, 2010) (online at financialstability.gov/docsitransaction-reportslll-2-
I 0%20Transactions%20Report%20as%200f''10201 0-29-1 O.pdf).
iv The $5 billion AGP guarantee for Citigroup was unused since Treasury was not required to make any
guarantee payments during the life of the program. U.S. Department of the Treasury, Troubled Asset Relief
Program: Two-Year Retrospective, at 31 (Oct. 2010) (online at
www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective _10%2005%20 I 0 _transntittal%20letter.
pdf).
, Although this $5 billion is no longer exposed as part ofthe AGp, Treasury did not receive a repayment in
the same sense as with other investments. Treasury did receive other income as consideration for the guarantee,
which is not a repayment and is accounted for in Figw-e 26.
~ AlG has completely utilized the $40 billion that was made available on November 25, 2008, in exchange
for the company's preferred stock. It has also drawn down $7.5 billion of the $29.8 billion made available on April
17,2009. This figure does not include $1.6 billion in accumulated but unpaid dividends owed by AlG to Treasury
due to the restructuring of Treasury's investment from cumulative preferred shares to non-cumulative shares. AIG
expects to draw down up to $22 billion in outstanding funds from the T ARP as part of its plan to repay the revolving
credit facility provided by the Federal Reserve Bank of New York. American International Group, Inc., Form 10-Q
for the Fiscal Year Ended September 30,2010, at 119 (Nov. 5, 2010) (online at
sec.gov/Archives/edgar/datal5272/0ool04746910009269/a22oo724zlO-q.htm); American International Group, Inc.,
AIG Announces Plan to Repay u.s. Government (Sept. 30, 2010) (online at
www.aigcorporate.cominewsrooml2010_Septemher/AiGAunouncesPlantoRepay30Sept2010.pdf); U.S. Department
of the Treasury, Troubled Asset Relief Program Transactions Reportfor the Period Ending October 29.2010, at 21
(Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/ll-2-
I 0%20Transactions%20Report%20as%200f"!o20 I 0-29-1 O.pdf).
,ii On May 14, 2010, Treasury accepted a $1.9 billion settlement payment for its $3.5 billion loan to
Chrysler Holding. The payment represented a $1.6 billion loss from the termination of the debt obligation. U.S.
Department of the Treasury, Chrysler Financial Parent Company Repays $1.9 Billion in Settlement a/Original
Chrysler Loan (May 17, 2010)(online at www.financialstability.govllatestlpr_05172010c.html). Also, following
the bankruptcy proceedings for Old Chrysler, which extinguished the $1.9 billion debtor-in-possession (DIP) loan
102
#:877
provided to Old Chrysler, Treasury retained the right to recover the proceeds from the liquidation of specified
collateraL To date. Treasury has collected $40.2 million in proceeds from the sale of collateral, and it does not
expect a significant recovery from the liquidation proceeds. Treasury includes these proceeds as part ofthe $10.8
billion repaid under the A1FP. U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a)
Report -September 2010 (Oct. 12,2010) (online at tinancialstability.gov/docs/105CongressionalReportslSeptember
105(a) report]INAL.pdf); Treasury conversations with Panel staff(Aug. 19,2010); U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Reportfor the Period Ending October 29,2010, at 18 (Nov.
2, 2010) (online at financialstability.gov/docsltransaction-reportslll-2-
I 0%20Transactions%20Report%20as%2001"/020 I 0-29-1 0 .pdf).
viii On the TARP Transactions Report, the $1.9 billion Chrysler debtor-in-possession loan, which was
extinguished April 30, 2010, was deducted from Treasury's A1FP investment amount. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Reportfor the Period Ending October 29,2010, at 18 (Nov.
2, 2010) (online at tinancialstability.gov/docsltransaction-reportslll-2-
10%20Transactionso/020Report%20as%2001''10201O-29-IO.pdf). See note vii, supra, for details on losses from
Treasury's investment in Chrysler.
i, On AprilS, 2010, Treasury terminated its commitment to lend to the GM Spy under the ASSP. On April
7,2010, it terminated its commitment to lend to the Chrysler SPY. In total, Treasury received $413 million in
repayments from loans provided by this program ($290 million from the GM SPY and $123 million from the
Chrysler SPY). Further, Treasury received $101 million in proceeds from additional notes associated with this
program. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Reportfor the Period
Ending October 29,2010, at 19 (Nov. 2, 2010) (online at tinancialstability.gov/docsltransaction-reportslll-2-
I 0%2OTransactions%20Report''I020as%2001''1020 I 0-29-1 O.pdf).
'For the TALF program, one dollar ofTARP funds was committed for every $10 of funds obligated by the
Federal Reserve. The program was intended to be a $200 billion initiative, and the T ARP was responsible for the
first $20 billion in loan-losses, if any were incurred. The loan was incrementally funded. When the program closed
in June 2010, a total of$43 billion in loans was outstanding under the TALF program, and the TARP's
commitments constituted $4.3 billion. The Federal Reserve Board of Governors agreed that it was appropriate for
Treasury to reduce TALF credit protection from TARP to $4.3 billion. Board of Governors of the Federal Reserve
System, Federal Reserve Announces Agreement with the Treasury Department Regarding a Reduction of Credit
Protection Providedfor the Term Asset-Backed Securities Loan Facility (TALF) (July 20, 2010) (online at
www.federalreserve.gov/newseventslpresslmonetary/20100720a.htm).
,; As of October 27, 2010, Treasury bad provided $105 million to TALF LLC. This total includes accrued
payable interest. Federal Reserve Bank of New York, Factors Affecting Reserve Balances (H.4.1) (Oct. 28, 2010)
(online at www.federalreserve.gov/releasesIh411201 0 I 0281).
,;; As ofSeplember 30, 2010, the total value of securities held by the PPIP managers was $19.3 billion.
Non-agency Residential Mortgage-Backed Securities represented 82 percent of the total; CMBS represented the
balance. U.S. Department of the Treasury. Legac.v Securities Public-Private Investment Program. Program Update
- Quarter Ended September 30. 2010, at 4 (Oct. 20, 2010) (online at
financialstability.govldocslExternal%20Report''1020-%2009-10%20vFinal.pdf).
till U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a) Report - September
2010, at 6 (Oct. 12,2010) (online al tinancialstabilily.gov/docs/105CongressionalReportslSeptember IOS(a)
report]INAL.pdf).
ti. As of October 29, 2010, Treasury has received $428 million in capital repayments from two PPIP fund
managers. U.S. Department of the Treasury. Troubled Asset Relief Program Transactions Report for the Period
Ending October 29,2010, at 23 (Nov. 2,2010) (online at financialstability.gov/docsitransaction-reports/ll-2-
I 0%2OTransactions%20Report%20as%2001''1020 I 0-29-1 O.pdf).
" As of October 29, 2010, Treasury's purchases under the SBA 7(a) Securities Purchase Program totaled
$324.9 million. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Reportfor the
Period Ending October 29,2010, at 22 (Nov. 2, 2010) (online at financialstability.gov/docs/transaction-reports/ll-
2-1 0%20Transactions%20Report%20as%200f%201 0-29-1 O.pdf).
103
#:878
xvi Treasury will not make additional purchases pursuant to the expiration of its purchasing authority under
EESA. U.S. Department of the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 43 (Oct.
2010) (online at
www.financialstability.gov/docsffARP%20Two%20Y ear''1020Retrospective _10%2005%20 I 0_ transmittal%20letter.
pdf).
l!:vii As part of its revisions to TARP allocations upon enactment of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Treasury allocated an additional $2 billion in TARP funds to mortgage assistance for
unemployed borrowers through the Hardest Hit Fund (HHF). U.S. Department of the Treasury, Ohama
Administration Announces Additional Support lor Targeted Foreclosure-Prevention Programs to Help Homeowners
Struggling with Unemployment (Aug. 11,2010) (online at www.ustreas.gov/presslreleasesltg823.htm). Another
$3.5 billion was allocated among the 18 states and the District of Cohunbia currently participatiog in HHF. The
amount each state received during this round of funding is proportional to its population. U.S. Department of the
Treasury, Troubled Asset Relief Program: Two Year Retrospective, at 72 (Oct. 2010) (online at
www.financialstability.gov/docslTARP%20Two%20Year"/.20Retrospective _10%2005%20 I 0_ transmittal%20letter.
pdf).
,,"" As of November 10,2010, a total of$63.6 million has been disbursed to seven state Housing Finance
Agencies (HFAs). Data provided by Treasury staff (Nov. 10,2010).
l!:1x This figure represents the amount Treaswy disbursed to fund the advance purchase account of the letter
of credit issued under the FHA Short Refinance Program. Data provided by Treasury staff (Nov. 10, 2010).
U Seventy-three Community Development Financial Institutions (CDFIs) entered the CDCI in September.
Among these institutions, 17 banks exchanged their CPP investments for an equivalent investment amount under the
CDC!. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
October 29,2010, at 1-13, 16-17 (Nov. 2, 2010) (online at financialstability.gov/docsitransaction-reports/ll-2-
I O%20Transactions%20Report%20as%200f%20 10-29-1 O.pdf). Treasury closed the program on September 30,
2010, after investiog $570 million in 84 CDFls. U.S. Department of the Treasury, Treasury Announces Special
Financial Stabilization Initiative Investments 01$570 Million in 84 Community Development Financial Institutions
in Underserved Areas (Sept. 30, 2010) (online at financiaistability.gov/latestipr_09302010b.html).
104
------------
#:879
Figure 26: TARP Profit and Loss (millions of dollars)
Warrant
I
Disposition Other
I
Dividendsl<lIii
Proceeds
uiv
Proceeds Losses
XlIV
I
TARP (as of (as of (as of (as of (as of
I
Initiative"" 9/30/2010) 9/30/2010) 10/29/2010) 9/30/2010) 10/29/2010) Total
Total $16,721 51,052 $8,160 55,833 ($6,034) 525,732
CPP 9,859 49 6,904 u"'3,015 17,250 (2,576)
I TIP
3,004 - 1,256 - - 4,260
i AIFP
mii3,418
931
xxviii 15
(3,458) 906 -
i ASSP - 15 - ""'101 - 116
,
I AGP
I
440 - - =2,246 - 2,686
PPIP - 56 -
'-180
- 236
SBA 7(a) - 1 -
-
- I
Bank of America - - - ="276 - 276
Guaran1ee
xxi AIG is not listed on this table because no profit or loss has been recorded to date for AIG. Its missed
dividends were capitalized as part of the issuance of Series E preferred shares and are not considered to be
outstanding. Treasury currently holds non-cumulative preferred shares, meaning AIG is not penalized for non-
payment. Therefore. no profit or loss has been realized on Treasury's AlG investment to date.
:uti U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of
September 30,2010 (Oct. 12,2010) (online at financialstability,gov/docsldividends-interest-
reportsiSeptember''102020 I 0%20Dividends%20&%20Interest%20Report.pdf).
XlIiii U.S. Department of the Treasury. Cumulative Dividends. Interest and Distributions Report as of
September 30,20/0 (Oct 12,2010) (online at financialstability,gov/docs/dividends-interest-
reportsiSeptember"/.2020 I 0%20Dividends%20&%20Interest%20Report.pdf),
xxiv U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
Ending October 29,2010 (Nov, 2, 2010) (online at linancialstability,gov/docsitransaction-reports/ll-2-
I 0%20Transactions%20Report%20as%200f%201 0-29-1 O,pdf).
xxv In the T ARP Transactions Report, Treasury classified the investments it made in two institutions, CIT
Group ($2.3 billion) and Pacific Coast National Bancorp ($4, I million), as losses, Treasury has also sold its
preferred ownership interests and warrants from South Financial Group, Inc. and TIB Financial Corp. This
represents a $241.7 million loss on its CPP investments in these two banks. Two TARP recipients, UCBH
Holdings, Inc, ($298.7 million) and a banking subsidiary of Midwest Bane Holdings, Inc, ($89.4 million), are
currently in bankruptcy proceedings, U,S. Department of the Treasury. Troubled Asset Relief Program Transactions
Reportfor the Period Ending October 29,2010 (Nov. 2, 2010) (online at financialstability,gov/docsltransaction-
reports/ll-2-10%20Transactions%20Report%20as%20of%20 10-29-1 O,pdf). Finally, Sonoma Valley Bancorp,
which received $8,7 million in CPP ftmding. was placed into receivership on August 20, 2010, Federal Deposit
Insurance Corporation, Westamerica Bank, San Rafael, California, Assumes All of the Deposits of Sonoma Valley
Bank, Sonoma, California (Aug, 20, 2010) (online at www.fdic.gov/news/news/press/20IO/prlOI96.html).
lUlvi This figure represents net proceeds to Treasury from the sale ofCitigroup common stock to date. For
details on Treasury's sales ofCitigroup common stock, see note ii, supra. U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 15 (Nov, 2, 2010)
105
#:880
(online at financialstability.gov/docs/transaction-reportslll-2-1 0%20Transactions%20Report%20as%200f%20 I 0-
29-IO.pdf); U.S. Department of the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 25 (Oct.
2010) (online at
www.financialstability.gov/docsiTARP"1020Two%20Year"1020Retrospective _10%20050/020 I 0_ transmittal%20letter.
pdf).
xxvii This figure includes $815 million in dividends from GMAC preferred stock, trust preferred securities,
and mandatory convertible preferred shares. The dividend total also inclndes a $748.6 million senior onsecured note
from Treasury's investment in General Motors. Data provided by Treaswy.
xxviii Treasury received proceeds from an additional note connected with the loan made to Chrysler
Financial on January 16,2009. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
Reportfor the Period Ending October 29,2010, at 18 (Nov. 2, 2010) (online at
financialstability.gov/docsitransaction-reportslll-2-1 0%20Transactions%20Report%20as%200f%20 I 0-29-1 O.pdf).
xxix This represents the total proceeds from additional notes connected with Treasury's investments in OM
Supplier Receivables LLC and Chrysler Receivables SPY LLC. U.S. Department of the Treasury, Troubled Asset
Relief Program Transactiom Reportfor the Period Ending October 29, 2010, at 19 (Nov. 2, 2010) (online at
financialstability.gov/docs/transaction-reportslll-2-1 0%20Transactions%20Report%20as%200f%20 I 0-29-1 O.pdf).
= As a fee for taking a second-loss position of up to $5 billion on a $301 billion pool of ring-fenced
Citigroup assets as part of the AGP, Treasury received $4.03 billion in Citigroup preferred stock and warrants.
Treasury exchanged these preferred stocks for trust preferred securities in Jone 2009. Following the early
termination of the guarantee in December 2009, Treasury cancelled $1.8 billion of the trust preferred securities,
leaving Treasury with $2.23 billion in Citigroup trust preferred secutities. On September 30, 2010, Treasury sold
these securities for $2.25 billion in total proceeds. At the end ofCitigroup's participation in the FDIC's TLGP, the
FDIC may transfer $800 million of $3.02 billion in Citigroup Trust Preferred Securities it received in consideration
for its role in the AGP to Treasury. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
Reportfor the Period Ending October 29,2010, at 20 (Nov. 2, 2010) (online at
financialstability.gov/docs/transaction-reportslll-2-1 0%20Transactions%20Report%20as%200f%20 I 0-29-1 O.pdf);
U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance
Corporation, and Citigroup Inc., Termination Agreement, at I (Dec. 23, 2009) (online at
www.financialstability.gov/docsiCiti%20AGP%20Termination%20Agreement%20-
%20Fully%20Executed%20Yersion.pdf); U.S. Department of the Treasury, Treasury Announces Further Sales of
Citigroup &curities and Cumulative Return to Taxpayers of$41.6 Billion (Sept. 30, 2010) (online at
financialstability.gov!latestlpr_09302010c.htrnl); Federal Deposit Insurance Corporation, 2009 Annual Report, at 87
(June 30, 2010) (online at www.fdic.gov/aboutistrategic/reportl2009annuakeportlAR09final.pdf).
=, As of September 30, 2010, Treasury bas earned $159.1 million in membership interest disttibutions
from the PPIP. Additionally, Treasury has earned $20.6 million in total proceeds following the termination of the
TCW fund. See U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of
September 30,2010, at 14 (Oct. 12,2010) (online at financialstability.gov/docs/dividends-interest-
reports/September%202010%20Dividends%20&%20Interest%20Report.pdf); U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 23 (Nov. 2, 20 I 0)
(online at tinancialstability.gov/docs/transaction-reports/ll-2-1 0%20Transactions%20Report%20as%200f%20 I 0-
29-10.pdf).
uxi' Although Treasury, the Federal Reserve, and the FDIC negotiated with Bank of America regarding a
similar guarantee, the parties never reached an agreement. In September 2009, Bank of America agreed to pay each
of the prospective guarantors a fee as though the guarantee had been in place during the negotiations period. This
agreement resulted in payments of$276 million to Treasury, $57 million to the Federal Reserve, and $92 million to
the FDIC. U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit
Insurance Corporation, and Bank of America Corporation, Termination Agreement, at 1-2 (Sept. 21, 2009) (online at
www.financialstability.gov/docslAGPlBofA%20-%20Tennination%20Agreement%20-%20executed.pdf),
106
#:881

d. CPP Unpaid Dividend and Interest Payments
345
As of September 30,2010,120 institutions have at least one dividend payment on
preferred stock issued under CPP outstanding.
346
Among these institutions, 95 are not current on
cumulative dividends, amounting to $114.8 million in missed payments. Another 25 banks have
not paid $8 million in non-cumulative dividends. Of the $49.5 billion currently outstanding in
CPP funding, Treasury's investments in banks with non-current dividend payments total
$3.5 billion. A majority of the banks that remain delinquent on dividend payments have under
$1 billion in total assets on their balance sheets. Also, there are 21 institutions that no longer
have outstanding unpaid dividends, after previously deferring their quarterly payments.
347
Six banks have failed to make six dividend payments, while one bank has missed all
seven quarterly payments. These institutions have received a total of $207. I million in CPP
funding. Under the terms of the CPP, after a bank fails to pay dividends for six periods,
Treasury has the right to elect two individuals to the company's board ofdirectors.
348
Figure 27
below provides further details on the distribution and the number of institutions that have missed
dividend payments.
In addition, eight CPP participants have missed at least one interest payment,
representing $3.6 million in cumulative unpaid interest payments. Treasury's total investments
in these non-public institutions represent less than $1 billion in CPP funding.
345 Treasury Cumulative Dividends, Interest and Distributions Report, supra note 339, at 20.
146 Does not include banks with missed dividend payments that have either repaid all delinquent dividends,
exited T ARP. gone into receivership, Of filed for bankruptcy.
347 Includes institutions that have either (a) fully repaid their CPP investment and exited the program or
(b) entered bankruptcy or its subsidiary was placed into receivership. Treasury Cumulative Dividends. Interest and
Distributions Report, supra note 339, at 20.
348 U.S. Department of the Treasury, Frequently Asked Questions Capital Purchase Program (CPP):
Related to Missed Dividend (or Interest) Payments and Director Nomination (online at
www.financialstability.gov/docs/CPP/CPP%20Directors%20F AQs.pdf) (accessed Nov. 12, 2010).
107
#:882
Figure 27: CPP Missed Dividend Payments (as of September 30, 2010)349
,
-r

Number of Missed Pavmeuts 1 2
,
3 4 5 6 7 Total
Cumulative Dividends
Number of Banks, by asset size 29 19 17 17 10 3 0 95
Under$IB 20 15 12 11 5 1 0 64
$IB-$IOB 8 4 4 6 5 2 0 29
Over$IOB 1 0 1 0 0 0 0 2
Non-Cnmulative Dividends

Number of Banks, by asset size 6 3 5 3
t
Under$IB 5 3

3
S IB-$ lOB 1 0 1 0 0 o 2
Over SlOB o 0 0 0
01
0 o 0
Total Missed Payments 120
e. Rate of Return
As of November 4, 2010, the average internal rate of return for all public financial
institutions that participated in the CPP and fully repaid the U.S. government (including
preferred shares, dividends, and warrants) remained at 8.4 percent, as no institutions exited the
program in October.
350
The internal rate of return is the annualized effective compounded return
rate that can be earned on invested capital.
349 Treasury Cumulative Dividends, Interest and Distributions Report, supra note 339. at Data on
total bank assets compiled using SNL Financial data service. (accessed Nov. 3, 2010).
350 Calculation of the internal rate of return (IRR) also includes CPP investments in public institutions not
repaid in full (for reasons such as acquisition by another institution) in the Transaction Report, e.g., The South
Financial Group and TIB Financial Corporation. The Panel's total IRR calculation now includes CPP investments
in public institutions recorded as a loss on the T ARP Transaction Report due to bankruptcy, e.g., CIT Group Inc.
Going forward, the Panel will continue to include losses due to bankruptcy when Treasury determines any
associated contingent value rights have expired without value. When excluding CIT Group from the calculation, the
resulting IRR is 10.4 percent. Treasury Transactions Report, supra note 339.
108
-----------------------
#:883
f. Warrant Disposition
Figure 28: Warrant Repurchases/Auctions for Financial Institutions who have fully Repaid
CPP Funds (as of November 4, 2010)
I Investment
1 Institution Date
Old National
Bancorp 12112/2008
Iberiabank
Corporation I 12/5/2008
FirslInerit
Corporation 11912009
Sun Bancorp, Inc 119/2009
Independent Bank
Corp. 119/2009
Alliance Financial
Corporation 12/19/2008
I First Niagara
I Financial Group 1112112008
I Berkshire Hills
Bancorp, Inc. I 12/19/2008
Somerset Hills
Bancorp 111612009
SCBT Financial
Corporation
i 1/16/2009
HF Financial
I Corp.
1112112008
I State Street
110/28/2008
I U.S. Bancorp 11114/2008
I The Goldman
!
: Sachs Group, Inc.
110/28/2008
I BB&TCorp. 11114/2008
I American Express
I Company 1/9/2009
I
I Bank of New
I York Mellon Corp 10/2812008
i Morgan Stanley ,10/28/2008
I Northern Trust I
I Corporation 1111412008
I .
I
OdLme I
i 1215/2008
I Bancorp Rhode
I Island, Inc. 12/1912008
Paoel's Best
I I
I
Valuatioo
Warrant Warrant Estimate at
Pricel I
Repurchase Repurchasel Disposition Estimate
Date Sale Amount Date Ratio IRR
5/812009 $1,200,000 $2,150,000 0.558 9.3%
I
i
5120/2009 1,200,000 I 2,010,000 0.597 9.4% I
I
5127/2009 5,025,000 4,260,000 1.180 20.3%
5127/2009
2,100,000 I
5,580,000 0.376 15.3%
5127/2009 2,200,000 3,870,000 0.568 15.6%
i
611712009 900,000 I 1,580,000 0.570 13.8%
2,700,000 I 612412009 3,050,000 0.885 8.0"10
I
I
I
I
612412009 1,040,000 ' 1,620,000 0.642 i 11.3%
.6/2412009 275,000 580,000 0.474 16.6%
I
I
6/24/2009 1,400,000 i 2,290,000 0.611 11.7%
650,000 I 6/3012009 1,240,000 0.524 10.1%
718/2009 60,000,000 I 54,200,000 1.107 9.9%
17/15/2009
139,000,000 I 135,100,000 1.029 8.7%
I
I
' 712212009 1,100,000,000 i 1,128,400,000 0.975 22.8%
7/2212009 67,010,
402
1
68,200,000 0.983 8.7%
I
I
I
7/29/2009
I
340,000,000 i 391,200,000 0.869 29.5%
81512009 136,000,000 155,700,000 0.873 12.3%
8/12/2009 950,000,000 1,039,800,000 0.914 20.2%
8/2612009 87,000,000 89,800,000 0.969 14.5%
9130/2009
9/212009
225,000 ! 500,000 I 0.450 I 10.4% I
__
109
#:884
-------r"---
I Centerstate Banks I
I of Florida Inc. . II/2112oo8 10/28/2009
I Manhattan
Bancorp 12/512008 10114/2009
I CVB Financial
Corp 12/5/2008 10/28/2009
Bank of the
Ozarks 12/1212008 1112412009
Capital One
I II/14/2008
Financial 12/3/2009
JPMorgan Chase
& Co. 10/28/2008 12/10/2009
CIT Group Inc. 12/3112008 -
TCF Financial
Corp 1116/2009 12116/2009
LSB Corporation 12/1212008 12116/2009
Wainwright Bank
& Trust Company 12/1912008 1211612009
Wesbanco Bank,
Inc. 12/512008 12/23/2009
Union Fits! Market
Banksban;:s
Corporation (Union
Banksban::s
Corpnration) 12/19/2008 12/23/2009
Trustmark
Corpomtion 1lI2112008 12/30/2009
Flushing Financial
Corporation 12119/2008 12/30/2009
OceanFirst Finan-
cial Corpomtion 1116/2009 2/3/2010
Monarch Finan-
12/1012010 cial Holdings, Inc. 12119/2008
10/2812008
351
1 11912009
352
I
Bank of America i 111412009
353
3/3/2010
I
Washington Fed-
eral Inc.IWasbing-
ton Federal Savings
& Loan Association 11114/2008 3/912010
Signature Bank 12/1212008 3110/2010
Texas Capital
Bancsbares, Inc. 1116/2009 311112010
351 Investment date for Bank of America in CPP.
J521nvestmenl date for Merrill Lynch in CPP.
353 Investment date for Bank of America in TIP.
------"--""T--- ----"--
-----1
I
I
220,000 0.964
212,000 I
5.9% I
63,364 140,000 0.453 9.8%
1,307,000 3,522,198 0.371 6.4%
2,650,000 3,500,000 0.757 9.0"10
148,731,030 I 232,000,000 0.641 12.0%
950,318,243 1,006,587,697 0.944 10.9%
- 562,541 - (97.2)%
9,599,964 11,825,830 0.812 11.0%
560,000 535,202 1.046 9.0%
568,700 1,071,494 0.531 7.8%
950,000 I 2,387,617 0.398 6.7%
450,000 1,130,418 0.398 5.8%
10,000,000 I
11,573,699 0.864 9.4%
900,000 !
2,861,919 0.314 6.5%
430,797 i 279,359 1.542 6.2%
6.7% I
260,000 623,434 0.417
i
I
I
I
I
,
1,566,210,714 ' 1,006,416,684 1.533 6.5%
15,623,222 10,166,404 1.537 18.6%
11,320,751 i
11,458,577 0.988 32.4%
6,709,061 8,316,604 0.807 30.1%
110
#:885
I Umpqua Holdings

--.. _ ..... .. -------
0.872
1
6.6% I
Corp. 3/3112010 4,500,000 5,162,400
City National
Corporation 1112112008 41712010 18,500,000 24,376,448 0.759
8.5% I
First Litchfield
I
i
i Financial
I
I
I Corporation
,
12/12/2008 41712010 1,488,046 1,863,158 0.799 15.9%
PNCFinancial
Services Group Inc. 12/31/2008 4/29/2010 324,195,686 346,800,388 0.935 8.7%
Comerica Inc. 11114/2008 514/2010 183,673,472 276,426,071 0.664 10.8%
Valley National
Bancorp 11114/2008 5/1812010 5,571,592 5,955,884 0.935 8.3%
Wells Fargo Bank 10/28/2008 5120/2010 849,014,998 1,064,247,725 0.798 7.8%
First Financial
3,051,431 I Bancorp 1212312008 6/2/2010 3,116,284 1.021 8.2%
Sterling
I
Bancshares, Inc.!
112112/2008 Sterling Bank 6/9/2010 3,007,891 5,287,665 0.569 10.8%
SVB Financial
11211212008 Group 6/16/2010 6,820,000 7,884,633 0.865 7.7% I
I Discover I
Financial Services . 3/13/2009 71712010 172,000,000 166,182,652 1.035 17.1%
Bar Harbor
Bancshares 1116/2009 7/2812010 250,000 518,511 0.482 6.2%
I Citizens &
I
,
I Northern
I
I Corporation
I 1116/2009 8/4/2010 400,000 468,164 0.854 5.9%
Columbia Banking
7.3% I
System, Inc. 1112112008 811112010 3,301,647 3,291,329 1.003
I Hartford Financial I
,
713,687,430 I
,
I
1 Services Group, i
,
Inc. 6/26/2009 912112010 472,221,996 1.511
30.3% I
I Lincoln National I
27.1% I
Corporation 7/1012009 9/16/2010 216,620,887 181,431,183 1.194
I Fulton Financial I
I
I
I
I Corporation 12/23/2008 918/2010 10,800,000 15,616,013 0.692
6.7% I
I The Bancorp, IncJ
The Bancorp Bank 12/1212008 918/2010 4,753,985 9,947,683 0.478
12.8% I
I South Financial I
,
Group, Inc.! I
I
,
!
i Carolina First Bank i 12/5/2008
9130/2010 400,000 1,164,486 0.343 (34.2)% I
Tm
Financial I
I CorplTm Bank 1215/2008 9130/2010 40,000 235,757 0.170 (38.0)%
I Total I $8,148,332,166 $7,999,843,254 1.019 8.40/. I
111
-
#:886
Figure 29: Valuation of Current Holdings of Warrants (as of November 4, 2010)
Warrant Valuation (millions of dollars) J
1
I I
I
Financial Institutions with Low High Best
I
Warrants Outstandio!! Estimate Estimate Estimate
I Citigroup, Inc.'"
$71.57 $1,479.30 $206.88
I SunTrust Banks, Inc.
17.34 356.98 123.78
Regions Financial Corporation 5.94 172.60 63.27
I Fifth Third Bancorp 96.96 390.18 170.52
KeyCorp 20.90 158.08 64.62
AIG 419.89 2,062.45
909.
42
1
Ail Other Banks 379.97 1,210.32 812.63
Total $1,012.57 $5,829.91 $2,351.12 I
2. Federal Financial Stability Efforts
a. Federal Reserve and FDIC Programs
In addition to the direct expenditures Treasury has undertaken through the TARP, the
federal government has engaged in a much broader program directed at stabilizing the U.S.
financial system. Many of these initiatives explicitly augment funds allocated by Treasury under
specific TARP initiatives, such as FDIC and Federal Reserve asset guarantees for Citigroup, or
operate in tandem with Treasury programs, such as the interaction between PPIP and T ALF.
Other programs, like the Federal Reserve's extension of credit through its Section 13(3) facilities
and special purpose vehicles (SPVs) and the FDIC's Temporary Liquidity Guarantee Program
(TLGP), operate independently of the T ARP.
b. Total Financial Stability Resources
Beginuing in its April 2009 report, the Panel broadly classified the resources that the
federal government has devoted to stabilizing the economy through myriad new programs and
initiatives as outlays, loans, or guarantees. With the reductions in funding for certain T ARP
programs, the Panel calculates the total value of these resources to be over $2.5 trillion.
However, this would translate into the ultimate "cost" of the stabilization effort only if: (1) assets
do not appreciate; (2) no dividends are received, no warrants are exercised, and no T ARP funds
are repaid; (3) all loans default and are written off; and (4) all guarantees are exercised and
subsequently written off.
354 Includes warrants issued under CPP, AGP. and TIP.
112
#:887

With respect to the FDIC and Federal Reserve programs, the risk ofloss varies
significantly across the programs considered here, as do the mechanisms providing protection for
the taxpayer against such risk. As discussed in the Panel's November 2009 report, the FDIC
assesses a premium of up to 100 basis points on TLGP debt guarantees.
355
In contrast, the
Federal Reserve's liquidity programs are generally available only to borrowers with good credit,
and the loans are over-collateralized and with recourse to other assets of the borrower. If the
assets securing a Federal Reserve loan realize a decline in value greater than the "haircut," the
Federal Reserve is able to demand more collateral from the borrower. Similarly, should a
borrower default on a recourse loan, the Federal Reserve can tum to the borrower's other assets
to make the Federal Reserve whole. In this way, the risk to the taxpayer on recourse loans only
materializes if the borrower enters bankruptcy.
c. Credit Union Assistance
Apart from the assistance credit unions have received through the CDCI, the National
Credit Union Administration (NCUA), the federal agency charged with regulating federal credit
unions (FCUs), has also made efforts to stabilize the corporate credit union (CCU) system.
Corporate credit unions provide correspondent services, as well as liquidity and investment
services to retail (or consumer) credit unions.
356
Since March 2009, the NCUA has placed five
CCUs into conservatorship due to their exposure to underperforming private-label MBS. The
NCUA estimates that these five institutions, which have $72 billion in assets and provide
services for 4,600 retail credit unions, hold more than 90 percent of the MBS in the corporate
credit union system.
357
To assist in the NCUA's stabilization efforts, the Temporary Corporate Credit Union
Stabilization Fund ("Stabilization Fund") was created to help cover costs associated with CCU
conservatorships and liquidations. The Stabilization Fund was established on May 20, 2009, as
part of the Helping Families Save Their Homes Act of 2009, and allows the NCUA to borrow up
'ss Congressional Oversight Panel, November Oversight Report: Guarantees and Contingent Payments in
TARP and Related Programs, at 36 (Nov. 6, 2009) (online at cop.senate.gov/documents/cop-II0609-report.pdf).
'>6 National Credit Union Administration, Corporate System Resolution: Corporate Credit Unions
Frequently Asked Questions (FAQs), at I (online at
lS7 National Credit Unioo Administtation, Corporate System Resolution: National Credit Union
Adminiatration V"zrtual Town Hall, at 14 (Sept. 27, 2010) (online at
www.ncua.govlResourceslCorporateCUlCSRlIO-0927WebinatSlides.pdf); National Credit Union Administration,
Fact Sheet: Corporate Credit Union Conservatorships (Sept. 14,2010) (online at
www.ncua.govlResources/CorporateCU/CSRlCSR-14.pdf).
113
#:888
to $6 billion from Treasury on a revolving basis.
358
The NeVA had drawn a total 0[$1.5 billion
from the Stabilization Fund, and repaid the balance at the end of September.
359
d. Mortgage Purchase Programs
On September 7, 2008, Treasury announced the GSE Mortgage Backed Securities
Purchase Program. The Housing and Economic Recovery Act of2008 provided Treasury with
the authority to purchase MBS guaranteed by GSEs through December 31, 2009. Treasury
purchased approximately $225 billion in GSE MBS by the time its authority expired.
36O
As of
October 2010, there was approximately $154.6 billion in MBS still outstanding under this
program.361
In March 2009, the Federal Reserve authorized purchases 0[$1.25 trillion MBS
guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae, and $200 billion of agency debt
securities from Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
362
The intended
purchase amount for agency debt securities was subsequently decreased to $175 billion.
363
All
purchasing activity was completed on March 31, 2010. As of November 10, the Federal Reserve
held $1.05 trillion of agency MBS and $150 billion of agency debt.
364
'" National Credit Union Administration, Board Action Memorandum (June IS, 201 0) (online at
, www.ncua.gov/GenInfolBoardandActionlDraftBoardActionsl2010/JunlItem6aBAMSFAssessmentJune2010(IO/020b
illion)FINAL.pdt).
359 National Credit Union Administration, Remarks os Prepared for Delivery by Board Member Gigi
Hyland at Grand Hyatt Washington (Sept. 20, 2010) (online at
www.ncua.gov/GenInfolMemberslHylandlSpeecbeslI0-0920HylandNAFCUCongrCaucus.pdt).
"" U.S. Department of the Treasury, FY20lJ Budget in Brief, at 138 (Feb. 2010) (online at
www.treas.gov/officesimanagementlbudgetlbu<igetinbrieflfY2011IFY%20201Io/020Bffi%20(2).pdt).
361 U.S. Department of the Treasury, MBS Purchase Program: Porifolio by Month (online at
www.financialstability.govldocsiOctober..10202010..1020Portfolio%20by..1020m0nth.pdt) (accessed Nov. 12,2010).
Treasury bas received $65.7 billion in principal repayments and $14.3 billion in interest payments from these
securities. See U.S. Department of the Treasury, MBS Purchase Program Principal and Interest Received (online at
www.financialstability.gov/docsiOctober../0202010O/020MBS%20PriocipalO/02Oand%20interest..l020Monthly../02OBre
akoot.pdt) (accessed Nov. 12,2010).
362 Federal Reserve Report on Credit and Liquidity Prognuns and the Balance Sheet, supra note 251, at 5.
363 Federal Reserve Report on Credit and Liquidity Prognuns and the Balance Sheet, supra note 251, at 5.
364 Federal Reserve Statistical Release H.4.I, supra note 251.
114
#:889
p
e. Federal Reserve Treasury Securities Purehases
365
On November 3, 2010, the Federal Open Market Committee (FOMe) announced that it
has directed FRBNY to begin purchasing an additional S600 billion in longer-term Treasury
securities. In addition, FRBNY will reinvest S250 billion to S350 billion in principal payments
from agency debt and agency MBS in Treasury securities.
366
The additional purchases and
reinvestments will be condncted through the end of the second quarter 20 II, meaning the pace of
purchases will be approximately SIlO billion per month. In order to facilitate these purchases,
FRBNY will temporarily lift its System Open Market Account per-issue limit, which prohibits
the Federal Reserve's holdings of an individnal security from surpassing 35 percent of the
outstanding amount.
367
As of November 10,2010, the Federal Reserve held S853 billion in
Treasury securities.
368
365 Board of Governors of the Federal Reserve System, Press Release - FOMC Statement (Nov. 3, 2010)
(online at www.federalreserve.gov/newseventslpresslmonetary/20101103a.htm); Federal Reserve Bank of New
York, Statement Regarding Purchases a/Treasury Securities (Nov. 3, 2010) (online at
www.federalreserve.gov/newseventslpresslmonetary/monetary20101103al.pdt).
366 On August 10. 20 I 0, the Fedetal Reserve began reinvesting principal payments on agency debt and
agency MBS holdings in longer-term Treasury securities in order to keep the amount of their securities holdings in
their System Open Market Account portfolio at their then-current level. Board of Governors of the Fedetal Reserve
System, FOMC Statement (Aug. 10,2010) (online at
www.federaireserve.gov/newsevents/presslmonetaryI20Ioo810a.htm).
367 Fedetal Reserve Bank of New Yorl<, FAQs: Purchases o/Longer-term Treasury Securities (Nov. 3,
2010) (online at www.newyorkfed.orgImarketsllttreaUilq.html).
368 Federal Reserve Statistical Release H.4.I, supra note 251.
115
#:890
Figure 30: Federal Government Financial Stability Effort <as of Oetober 27, 2010)"""'
116
#:891
nxiii Unless otherwise noted, all data in this figure are as of October 27, 2010.
>OOdv The term "outlays" is used here to describe the use ofTreaswy funds under the TARP, which are
broadly classifiable as purchases of debt or equity securities (e.g., debentures, preferred stock, exercised warrants,
etc.). These values were calculated using (I) Treaswy's actual reported expenditures, and (2) Treaswy's anticipated
funding levels as estimated by a vatiety of sources, including Treaswy statements and GAO estimates. Anticipated
funding levels are set at Treaswy's discretion, have changed from initial announcements, and are subject to further
change. Outlays used here represent investment and asset purchases - as well as commitments to make investments
and asset purchases - and are not the same as budget outlays, which under section 123 ofEESA are recorded on a
"credit reform" basis.
= Although many of the guarantees may never be el\ercised or will be exercised only partially, the
guarantee figures included here represent the federal government's greatest possible financial exposure.
=" U.S. Department of the Treasury, Treasury Update onAIG Investment Valuation (Nov. 1,2010)
(online at financialstability.govllatestlpr_1101201O.html). A1G values exclude accrued dividends on preferred
interests in the AlA and ALICO SPVs and accrued interest payable to FRBNY on the Maiden Lane LLCs.
uxW This number includes investments under the AlGIP/SSFI Program: a $40 billion investment made on
November 25, 2008, and a $30 billion investment made on April 17,2009 (less a reduction ofSI65 million
representing bonuses paid to AlG Financial Products employees). As of November I, 2010, AlG had utilized $47.5
billion of the available $69.8 billion under the AlGIP/SSFI. U.S. Department of the Treaswy, Treasury Update on
AlG Investment Valuation (Nov. 1,2010) (online at www.financialstability.govllatestipr_11012010.html); U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29.
117
#:892
2010, at 13 (Nov. 2, 2010) (online at financiaistability.gov/docsitransaction-reportslll-2-
I 0''102OTransactions%20Report%20as%200f''loZO I 0-29-1 O.pdf).
"""' AI; part of the restructuring of the U.S. government's investment in AlO annoWlced on March 2, 2009,
the arnoWlt available to AlO through the Revolving Credit Facility was reduced by $25 billion in exchange for
preferred equity interests in two special purpose vehicles, AlA Aurora LLC and AUCO Holdings LLC. These
SPYs were established to hold the common stock of two AlO subsidiaries: American International Asswance
Company Ltd. (AlA) and American Life Insurance Company (ALICO). As of October 27,2010, the book value of
the Federal Reserve Bank of New Yorl<'s holdings in AlA Aurora LLC and ALICO Holdings LLC was $26.1 billion
in preferred equity (SI6.7 billion in AlA and S9.4 billion in ALICO). Federal Reserve Bank of New York, Factors
Affecting Reserve Balances (H.4.1) (Oct. 28, 2010) (online at www.federaIreserve.gov/releaseslh411201010281) .
..xix This number represents the full $29.3 billion made availsble to AlO through its Revolving Credit
Facility (RCF) with FRBNY ($18.9 billion had been drawn down as of October 27, 2010) and the outstanding
principal of the loans extended to the Maiden Lane II and III SPYs to buy AlO assets (as of October 27, 2010, S\3.5
billion and S14.3 billion, respectively). Th. ammmts outstanding under the Maiden Lane II and III facilities do not
reflect the accrued interest payable to FRBNY. locome from the purchased assets is used to pay down the loans to
the SPY .. reducing the taxpayers' exposure to losses over time. Federal Reserve Bank of New York, Factors
Affecting Reserve Balances (H.4.1) (Oct. 27, 2010) (online at www.federaJreserve.govlreleases!h411201010281).
The maximum amount available through the RCF decreased from $34.4 billion to S29.3 billion between
March and September 2010, as a result of the sale of two AlG subsidiaries, as well as the company's sale ofCME
Group, Inc. common stock. The reduced ceiling also reflects a $3.95 billion repayment to the RCF from proceeds
earned from a debt offeriug by the International Lease Finance Corporation (ILFC), an AlG subsidiary. Board of
Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity
Programs and the Balance Sheet, at 18 (Oct. 2010) (online at
www.federalreserve.gov/monetarypolicy/filesimonthlyclbsreport201010.pdf).
"This figore represents Treasury's $25 billion investment in Citigroup, minus $\3.4 billion applied as a
repayment for CPP funding. The amount repaid comes from the $16.4 billion in gross proceeds Treasury received
from the sale of 4.1 billion Citigroup common shares. See note ii, supra for a further details of the sales of
Citigroup common stock to date. U.s. Department of the Treasury, Troubled Asset Relief Program Transactions
Reportfor the Period Ending October 29,2010, at \3 (Nov. 2, 2010) (online at
financialstability.gov/docsitransaction-reports/ll-2-1 0"/oZOTransactions%20Report%20as%200f"/oZO 10-29-1 O.pdf).
ill This figore represents the S204.9 billion Treasury disbursed Wlder the CPP, minus the $2S billion
investment in Citigroup identified shove, $139.5 billion in repayments (excluding the amount repaid for the
Citigroup investment) that are in "repaid and unavailable" T ARP funds, and losses Wlder the program. This figore
does not acCOWl! for future repayments ofCPP investments and dividend payments from CPP investments. U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29,
2010, at 13 (Nov. 2, 2010) (online at financialstability.gov/docsitransaction-reportslll-2-
I 0''IoZOTransactions%20Report''loZOas%200f''1020 I 0-29-1 O.pdf).
"" On November 9,2009, Treasury announced the closing of the CAP and that only one institution,
GMAC, was in need of further eapital from Treasury. GMAC, however, received further funding through the AlFP.
Therefore, the Panel considers CAP unused. U.S. Department ofth. Treasury, Treasury Announcement Regarding
the Capital Assistance Program (Nov, 9, 2(09) (online at www.financiaistability.govllatest/ILI\092009.html).
illii This figore represents the $4.3 billion adjusted allocation to the TALF SPY. However, as of October
27,2010, TALF LLC had drawn only SI05 million of the available $4.3 billion. Board of Governors of the Federal
Reserve System, Factors Affecting Reserve Balances (H. 4. 1) (Sept. 30, 2010) (online at
www,federaireserve.gov/releaseslb4I1201009301); U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions Reportfor the Period Ending October 29,2010, at 21 (Nov. 2, 2010) (online at
financialstabiJity.govldocsilransaction-reportslll-2-10%20Transactionso/oZOReport''Io20as%200f''1020 I 0-29-1 O.pdf).
On JWle 30, 2010, the Federal Reserve ceased issuiug loans collateralized by newly issued CMBS. AI; of this date,
investors had requested a tota\ ofS73.3 billion in TALF loans ($13.2 billion in CMBS and $60.1 billion in non-
CMBS) and $71 billion in TALF loans had been settled (S12 billion in CMBS and $59 billion in non-CMBS).
118
#:893
Earlier, it ended its issues ofloans collateralized by other T ALF -eligible newly issued and legacy ABS (non-CMBS)
on March 31, 2010. Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: Terms and
Conditions (online at www.newyorkfedotgimarketsitaICterms.html)(accessedNov. 12,2010); Federal Reserve
Bank of New York, Term Asset-Backed Securities Loan Facility: CMBS (online at
www.newyorkfed.otgImarketslcmbs_operations.htrnl)(accessedNov. 12,2010); Federal Reserve Bank of New
York, Term Asset-Backed Securities Loan Facility: CMBS (online at
www.newyorkfedor:g!markets/CMBS_te<:ent_operations.html)(accessedNov. 12,2010); Federal Reserve Bank of
New York, Term Asset-Backed Securities Loan Facility: non-CMBS (online at
www.newyorkfed.or:g!marketsltalCoperations.html) (accessed Nov. 12, 20 I 0); Federal Reserve Bank of New York,
Term Asset-Backed Securities Loan Facility: non-CMBS (online at
www.newyorkfed.or:g!marketsrrALF_receDt_operations.html) (accessed Nov. 12,2010).
mv This number is derived from the unofficial I: \0 ratio of the value of Treasury loan guarantees to the
value of Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability
Plan, at 4 (Feb.10, 2009) (online at www.financialstabili1)'.gov/docslfact ... heet.pdf) (describing the initial $20
billion Treasury contribution tied to $200 billion in Federal Reserve loans and annonncing potential expansion to a
$100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Since only $43 billion in TALF
loans remsined outstanding when the program closed, Treasury is cnrrently responsible for reimbursing the Federal
Reserve Board only UP to $4.3 billion in losses from these loans. Thus, the Federal Reserve's maximum potential
exposure nnder the T ALF is $38.7 billion. See Board of Governors of tho Federal Reserve System, Factors
Affecting Reserve Balances (11.4.1) (OcL 28, 2010) (online at www.federa1reserve.gov/releaseslh411201010281).
"" It is onlikely that resources will be expended under the PPIP Legacy Loans Program in its otigioaI
design as a joint Treasury-FDIC program to purchase troubled assets from solvent banks. In several sales descn'bed
in FDIC press releases, it appears that there is no Treasury participation, and FDIC activity i. acconnted for here as a
component of the FDIC's Deposit lnsurauce Fund outlays. See, e.g., Federal Deposit lnsurauce Curporation, FDIC
Statement on the Status of the Legacy Loans Program (June 3, 2009) (online at
www.fdic.gov/news/news/pressl2OO9/pr09084.htmI).
ovi This figure represents Treasury'. finsl adjusted investment amonnt in the Legacy Securities Public-
Private Investment Program (pPIP). As of October 29,2010, Treasury reported commitments of$14.9 billion in
loans and $7.5 billion in membership interest associated with PPIP. 00 January 4,2010, Treasury and one of the
nine fund managers, USTrrcw Senior Mortgnge Securities Food, L.P. (TCW), entered into a ''Winding-Up and
Liquidation AgreemenL" Treasury's fina\ investmeot amount in TCW totaled $356 million. Following the
liquidation of the fund, Treasury's initial $3.3 billion obligation to TCW was reallocated among the eight remaining
funds on March 22, 2010. See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report
for the Period Ending October 29. 2010, at 23 (Nov. 2, 20 I 0) (online at financialstability.gov/docsltransaction-
reports/ll-2-1 OO/02OTransactionsO/020ReportO/020asO/02001"/0201 0-29-1 O.pdf).
On October 20, 2010, Treasury released its fourth quarterly report on PPIP. The report indicates that as of
September 30, 2010, all eight investment funds have realized an internal rate of return since inception (net of any
management fees or expenses owed to Treasury) above 19 percent. The highest performing fund, thua Ihr, is AG
GECC PPIF Master Fnnd, L.P., which bas a net internal rate of return of 52 percent. U.S. Department of the
Treasury. Legacy Securities Public-Private i11Vestment Program, at 7 (OcL 20,2010) (online at
financia\stabili1)' .gov/docslExternaIO/020Report%ZO-O/02009-10"/02OvFinaI.pdf).
dvii As of October 29, 2010, the total cap fur HAMP was $29.9 billion. The total amount ofTARP funds
committed to HAMP is $29.9 billion. However, as of October 30, 2010, only $597.2 million in non-GSE payments
bas beeo disbursed nnder HAMP. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
Reportfor the Period Ending October 29.2010, at 43 (Nov. 2, 2010) (online at
financiaIstabili1)'.gov/docsitransaction-reportslll-2-IOO/020TransactionsO/020ReportO/020asO/02001"/0201 0-29-1 O.pdf);
U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a) Report - September 2010, at 6
(Oct. 1,2010) (online at
financiaIstabili1)'.gov/docsil 05CongressionaIReportsiSeptember%201 05(a)o/020rep0rt ]INAL.pdf). Data provided
by Tr .... ury staff (Nov. 10,2010).
119
#:894
"Wi A substantial portion of the total $81.3 billion in loans extended under the AIFP has since been
converted to common equity and preferred shares in restructured companies, $8, I billion has been retained as first
lien debt (with $1 billion commilted to old OM and $7.1 billion to Chrysler), This figure ($67,1 billion) represents
Treasury's current obligation under the AIFP after repayments and losses. U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 18 (Nov. 2, 20 I 0)
(online at fimmcialstability.gov/docsltransaction-reports/II-2-1 0''1020Transactions%20Report''1o20as%200fo/0201 0-
29-IO.pdf).
'"" This figure represents Treasury's total adjusted investment amount in the ASSP. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 19 (Nov.
2, 2010) (online at financialstability.gov/docs/transaction-reportslll-2-
I 0''1020Transactionso/020Report''1020aso/o200f%20 I 0-29-1 O,pdf).
I U.S, Department orthe Treasury, Troubled Asset Relief Program: 7Wo Year Retrospective, at 43 (Oct.
2010) (online at
www.fimmcialstability.gov/docaITARP"/020Two%20Year%20Retrospective_100/02005%201 0_ transmittalo/o201etter,
pdf).
U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
Ending October 29,2010, at 17 (Nov. 2, 2010) (online at fimmcialstability,gov/docsltransaction-reports/II-2-
I Oo/o2OTransactions%20Report''1020as%200f''1o20 I 0-29-1 O.pdf).
Hi This figure represents the current maximum aggregate debt guarantees that could he made under the
program, which is a function of the number and size of individual fimmcial institutions participating. $286.8 billion
of debt subject to the guarantee is currently outstanding, which represents approximately 57.1 percent of the current
cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary Liquidity
Guarantee Program: Debt Issuance Under Guarantee Program (Sept. 30, 2010) (online at
www,fdic.gov/regulationsiresourcesltlgpltotal_issuance09-IO.html). The FDIC has collected $10.4 billion in fees
and surcharges from this program since its inception in the fourth quarter of 2008. Federal Deposit Insurance
Corporation, Monthly Reports Related to the Temporary Liquidity Guarantee Program: Fees Under Temporary
Liquidity Guarantee Debt Program (Sept. 30, 2010) (online at www.fdic,gov/regu\ationsiresourcesltlgplfees.btml),
Iili This figure represents the FDIC's provision for losses to its deposit insurance fund attributable to bank
failures in the third and fourth quarters of2008, the first, second, third, and fourth quarters of2009, and the first and
second qusrters of2010. Federal Deposit Insurance Corporation, Chief Financial OjJicer's (CFO) Report to the
Board: DIF Income Statement - Second Quarter 2010 (online at
www.fdic.gov/about/strategic/corporate/cfo_report_2ndqtr_IO/ineome.html). For earlier reports, see Federal
Deposit Insurance Ccrporatioo, Chief Financial OjJicer's (CFO) Report to the Board (online at
www.fdic.gov/about/strategic/corporatelindex.html)(accessedNov.12.201O).This figure includes the FDIC's
estimates of its future losses under loss-sharing agreements that it has entered into with banks acquiring assets of
insolvent banks during these eight quarters. Under aloss-sharing agreement, as a condition of an acquiring bank's
agreement to purchase the assets of an insolvent bank, the FDIC typically agrees to cover 80 percent of an acquiring
bank's future losses on an initial portion of these assets and 95 percent oflosses on another portion of assets. See,
e.g., Federal Deposit Insurance Corporation, Purchase and Assumption Agreement - Whole Bank, All Deposits-
Among FDIC, Receiver of Guaranty Bank, Austin, Texas, Federal Deposit Insurance Corporation and Compass
Bank, at 65-66 (Aug. 21,2009) (online at www.fdic.govlbtmklindividuallfailedlgoaranty-
tx..Jl _ and _ a _ w _ addendwn.pdl),
6v Outlays are comprised of the Federsl Reserve Mortgage Related Facilities. The Federal Reserve balauce
sheet accounts for these facilities under Federal agency debt securities and mortgage-backed securities held by the
Federal Reserve, Board ofGovemors of the Federal Reserve System, Factors Affecting Reserve Balances (1/.4.1)
(Oct 27,2010) (online at www.federalreserve.gov/releaseslh4I1201009301). Although the Federal Reserve does not
employ the outlays, loans, and guaranteea classification, its accounting clearly separates its mortgage-related
purchasing programs from its liquidity programs. See, e.g" Board ofGovemors of the Federsl Reserve System,
Factors Affecting Reserve Balances (1/.4.1), at 2 (Oct. 28, 2010) (onlioe at
www.federalreserve.gov/releaseslh4I120101028)(accessedNov. 3, 2010).
120
#:895
Iv Federal Reserve Liquidity Facilities classified in this table as loans include primary credit, secondary
credit, centIal bank liquidity swaps, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
Facility, loans outstanding to Commercial Paper Funding Facility LLC, seasonal credit, term auction credit, the
T enn Asset-Backed Securities Loan Facility, and loans outstanding to Best Steams (Maiden Lane LLC). Board of
Governors of the Federal Reserve System, Factors Affecting Reserve Balances (11.4.1) (Oct. 28, 2010) (online at
www.fedetaireserve.govheleaseslh4I1201010281)(accessedNov. 3, 2010).
121
#:896
Section Four: Oversight Activities
The Congressional Oversight Panel was established as part of the Emergency Economic
Stabilization Act (EESA) and fonned on November 26, 2008. Since then, the Panel has
produced 24 oversight reports, as well as a special report on regulatory reform, issued on
January 29,2009, and a special report on farm credit, issued on July 21, 2009. Since the release
of the Panel's October oversight report, the following developments pertaining to the Panel's
oversight of the TARP took place:
The Panel held a hearing in Washington on October 21,2010, discussing restrictions
on executive compensation for companies that received T ARP funds. The Panel
heard testimony from Kenneth R. Feinberg, the fonner Special Master for TARP
Executive Compensation, as well as from industry and academic experts.
The Panel held a hearing in Washington on October 27, 2010. The Panel heard
testimony from Phyllis Caldwell, chief of Treasury' s Homeownership Preservation
Office, as well as from industry and academic experts about Treasury's RAMP
program and the effects of recent foreclosure documentation irregu1arities on
Treasury's ability to maintain systemic financial stability and effective foreclosure
mitigation efforts under the T ARP.
UproJDing Reports and Hearings
The Panel will release its next oversight report in December. The report will discuss
RAMP, the most expansive of Treasury's foreclosure mitigation initiatives under the TARP,
assessing its effectiveness in meeting the TARP's legislative mandate to "protect home values"
and ''preserve homeownership." This will be the Panel's fourth report addressing Treasury's
foreclosure mitigation efforts under the T ARP.
Acknowledgements
The Panel would like to thank the following individuals for sharing their thoughts and
suggestions: Roger Ashworth, MBS Analyst, Amherst Securities; Guy Cecala, CEO and
Publisher, Inside Mortgage Finance; Chris Gamaitoni, Vice President, Compass Point Research
& Trading; Jason Gold, Senior Fellow for Housing and Financial Services Policy, Third Way;
Laurie Goodman, Senior Managing Director, Amherst Securities; Anne Kim, Domestic Policy
Program Director, Third Way; Paul Miller, Managing Director and Group Head of Financial
Services Research, FBR Capital Markets; Matthew O'Connor, Research Analyst, Deutsche Bank
122
#:897
Securities; Christopher Peterson, Associate Dean for Academic Affairs and Professor of Law,
University of Utah; Robert Placet, Associate Analyst, Deutsche Bank Securities; Joshua Rosner,
Managing Director, Graham Fisher & Co.; and, Jason Stewart, Managing Director, Compass
Point Research & Trading.
The Panel also wishes to acknowledge and thank the many individuals from the
academic, legal, consumer, analyst, and other communities who provided useful information and
views for this report.
123
#:898
.-
Section Five: About the Congressional Oversight Panel
In response to the escalating financial crisis, on October 3, 2008, Congress provided
Treasury with the authority to spend $700 billion to stabilize the U.s. economy, preserve home
ownership, and promote economic growth. Congress created the Office of Financial Stability
(OFS) within Treasury to implement the T ARP. At the same time, Congress created the
Congressional Oversight Panel to "review the current state of financial markets and the
regulatory system." The Panel is empowered to hold hearings, review official data, and write
reports on actions taken by Treasury and financial institutions and their effect on the economy.
Through regular reports, the Panel must oversee Treasury's actions, assess the imPact of
spending to stabilize the economy, evaluate market transparency, ensure effective foreclosure
mitigation efforts, and guarantee that Treasury's actions are in the best interests of the American
people. In addition, Congress instructed the Panel to produce a special report on regulatory
reform that analyzes "the current state of the regulatory system and its effectiveness at
overseeing the participants in the financial system and protecting consumers." The Panel issued
this report in January 2009. Congress subsequently expanded the Panel's mandate by directing it
to produce a special report on the availability of credit in the agricultural sector. The report was
issued on July 21, 2009.
On November 14,2008, Senate Majority Leader Harry Reid and the Speaker of the
House Nancy Pelosi appointed Richard H. Neiman, Superintendent of Banks for the State of
New York, Damon Silvers, Director of Policy and Special Counsel of the American Federation
of Labor and Congress of Industrial Organizations (AFL-CIO), and Elizabeth Warren, Leo
Gottlieb Professor of Law at Harvard Law School, to the Panel. With the appointment on
November 19,2008, of Congressman Jeb Hensarling to the Panel by House Minority Leader
John Boehner, the Panel had a quorum and met for the first time on November 26, 2008, electing
Professor Warren as its chair. On December 16, 2008, Senate Minority Leader Mitch
McConnell named Senator John E. Sununu to the Panel. Effective August 10,2009, Senator
Sununu resigned from the Panel, and on August 20, 2009, Senator McConnell announced the
appointment of Paul Atkins, former Commissioner of the U.S. Securities and Exchange
Commission, to fill the vacant seat. Effective December 9, 2009, Congressman Jeb Hensarling
resigned from the Panel and House Minority Leader John Boehner announced the appointment
of J. Mark McWatters to fill the vacant seat. Senate Minority Leader Mitch McConnell
appointed Kenneth Troske, Sturgill Professor of Economics at the University of Kentucky, to fill
the vacancy created by the resignation of Paul Atkins on May 21,2010. Effective September 17,
2010, Elizabeth Warren resigned from the Panel, and on September 30, 2010, Senate Majority
Leader Harry Reid announced the appointment of Senator Ted Kaufman to fill the vacant seat.
On October 4, 2010, the Panel elected Senator Kaufman as its chair.
124
#:899
APPENDIX I:
LETTER FROM CHAIRMAN TED KAUFMAN TO
SPECIAL MASTER PATRICIA GEOGHEGAN,
RE: FOLLOW UP TO EXECUTIVE COMPENSATION
HEARING, DATED NOVEMBER 1, 2010
125
#:900
.' .
">,-,,,,q,,.., "-f_ ''oj;',
lAW __", ;> J< "'.:0
. \1':"fll< "' .
'lo""t H; -'lCSlt"
Itongrus of the Unittd Statts
CONGRESSIONAL OVERSIGHT PANEL
November 1, 2010
'N",,-w,,_' "" ),. F:4,1'
The Honorable Patricia Geoghegan
Special Master for T ARP Executive Compensation
United States Department of the Treasury
Room 1039
1500 Pennsylvania Avenue, N.W.
Washington, D.C, 20220
Dear Ms. Geoghegan:
On behalf of the Congressional Oversight Panel, thank you very much for your
attendance at the Panel's hearing on the TARP and executive compensation on October 21, 2010.
The hearing served as an important opportunity fur the Panel to learn more about the work of the
Office of the Special Master, a subject the Panel will continue to examine in the months ahead.
In the course of the Panel's review of this issue, it has identified several data issues that
are important to its ability to conduct its oversight responsibilities. During the hearing, I
requested that the former Special Master provide this information to the Panel. He responded
that much of this information is available in the Final Report. However, some relevant details
are not included in the report. Accordingly, the Panel requests your responses to the following
questions:
Turnover: How many employees left T ARP exceptional assistance firms after the
American Recovery and Reinvestment Act was passed? After the Interim Final
Rule was passed in June 2009? After the Special Master issued his 2009
determinations? How does this data compare to expected turnover under
"normal" conditions? In total, how many employees have left exceptional
assistance firms as a result of the TARP's executive compensation restrictions?
Individual compensation comparison: How did the Special Master's 2009
determinations for individual employees compare to their 2007 and 2008 salaries?
The Special Master's determination letters provide this information in the
aggregate, but not at an individual level. Individual names are not necessary, so
long as some basis for comparison (such as employee identification numbers) is
provided.
2009 total compensation: What was the total compensation that covered
employees received between January 1, 2009 and December 31, 2009? How
much did each employee receive during the period between June 15,2009 and the
Special Master's determinations in October 2009?
#:901
2010 total compensation: What is the total compensation that you anticipate
covered employees will receive between January 1,2010 and December 31,
2010?
General Motors determinations: The Special Master's 2009 determination letter
for General Motors does not provide employee ID numbers, making it difficult to
compare individual employee compensation in 2009 and 2010. How did
compensation for individual employees at General Motors change between 2009
and 2010?
The Panel seeks written responses to these questions by November 15, 2010. I would be
happy to answer any questions about this letter that you may have. If you would prefer, a
member of your staffmay contact the Panel's Executive Director, Naomi Baum, at_
-.
Cc: Dr. Kenneth Troske
Mr. J. Mark McWatters
Mr. Richard H. Neiman
Mr. Damon A. Silvers
Senator Ted
Chairman
Congressioual Oversight Panel

EXHIBIT 16
#:902
UNITED STATES OF AMERICA
BEFORE THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C.

In the Matter of

New York, New York

and

Lewisville, Texas

Docket No. 11-023-B-HC
11-023-B-DEO

CONSENT ORDER

WHEREAS, JPMorgan Chase & Co., New York, New York (JPMC), a registered bank
holding company, owns and controls JPMorgan Chase Bank, National Association, Columbus,
Ohio (the Bank), a national bank, and numerous direct and indirect nonbank subsidiaries,
including EMC Mortgage Corporation, Lewisville, Texas (EMC) and its direct and indirect
subsidiaries;
WHEREAS, JPMC has engaged in the business of servicing residential mortgage loans
through non-bank subsidiaries, including EMC and its subsidiaries (collectively, the Mortgage
Servicing Companies), as well as through the Bank. The Mortgage Servicing Companies have
serviced residential mortgage loans that are held in the portfolios of: (a) EMC and its
subsidiaries; (b) the Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation, and the Government National Mortgage Association (collectively, the GSEs); and
(c) various investors, including securitization trusts pursuant to Pooling and Servicing
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Agreements and similar agreements (collectively, the Servicing Portfolio). The Mortgage
Servicing Companies have had substantial responsibilities with respect to the Servicing Portfolio
for the initiation and handling of foreclosure proceedings, and loss mitigation activities (Loss
Mitigation or Loss Mitigation Activities include activities related to special forbearances,
repayment plans, modifications, short refinances, short sales, cash-for-keys, and deeds-in-lieu of
foreclosure);
WHEREAS, on or about April 1, 2011, JPMC transferred all of the residential mortgage
loan servicing rights and certain related assets and liabilities of the Mortgage Servicing
Companies to the Bank (the EMC Servicing Rights Transfer). Following consummation of
that transfer, the Mortgage Servicing Companies are no longer in the business of residential
mortgage loan servicing, and only the Bank is conducting residential mortgage loan servicing
within the JPMC organization;
WHEREAS, JPMC, through the Bank and the Mortgage Servicing Companies,
collectively, is the third largest servicer of residential mortgages in the United States and services
a portfolio of 8.5 million residential mortgage loans. During the recent financial crisis, a
substantially larger number of residential mortgage loans became past due than in earlier years.
Many of the past due mortgages have resulted in foreclosure actions. From January 1, 2009, to
December 31, 2010, the Mortgage Servicing Companies initiated 256,179 foreclosure actions;
WHEREAS, in connection with the process leading to certain foreclosures involving the
Servicing Portfolio, the Mortgage Servicing Companies allegedly:
(a) Filed or caused to be filed in state courts and in connection with bankruptcy
proceedings in federal courts numerous affidavits executed by employees of the
Mortgage Servicing Companies or employees of third-party providers making various
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assertions, such as the ownership of the mortgage note and mortgage, the amount of
principal and interest due, and the fees and expenses chargeable to the borrower, in which
the affiant represented that the assertions in the affidavit were made based on personal
knowledge or based on a review by the affiant of the relevant books and records, when, in
many cases, they were not based on such knowledge or review;
(b) Filed or caused to be filed in state courts and in connection with bankruptcy
proceedings in federal courts or in the local land record offices, numerous affidavits and
other mortgage-related documents that were not properly notarized, including those not
signed or affirmed in the presence of a notary;
(c) Litigated foreclosure and bankruptcy proceedings and initiated non-judicial
foreclosures without always confirming that documentation of ownership was in order at
the appropriate time, including confirming that the promissory note and mortgage
document were properly endorsed or assigned and, if necessary, in the possession of the
appropriate party;
(d) Failed to respond in a sufficient and timely manner to the increased level of
foreclosures by increasing financial, staffing, and managerial resources to ensure that the
Mortgage Servicing Companies adequately handled the foreclosure process;
failed to respond in a sufficient and timely manner to the increased level of Loss
Mitigation Activities to ensure timely, effective and efficient communication with
borrowers with respect to Loss Mitigation Activities and foreclosure activities; and full
exploration of Loss Mitigation options or programs prior to completion of foreclosure
activities; and
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(e) Failed to have adequate internal controls, policies and procedures, compliance
risk management, internal audit, training, and oversight of the foreclosure process,
including sufficient oversight of outside counsel and other third-party providers handling
foreclosure-related services with respect to the Servicing Portfolio.
WHEREAS, the practices set forth above allegedly constitute unsafe or unsound banking
practices;
WHEREAS, as part of a horizontal review of various major residential mortgage
servicers conducted by the Board of Governors of the Federal Reserve System (the Board of
Governors), the Federal Deposit Insurance Corporation (the FDIC), the Office of the
Comptroller of the Currency (the OCC), and the Office of Thrift Supervision, examiners from
the Federal Reserve Bank of New York (the Reserve Bank) have reviewed certain residential
mortgage loan servicing and foreclosure-related processes at the Mortgage Servicing Companies,
and examiners from the OCC have reviewed certain residential mortgage loan servicing and
foreclosure-related practices at the Bank;
WHEREAS, the Bank and the OCC have entered into a consent order to address areas of
weakness identified by the OCC in residential mortgage loan servicing, Loss Mitigation,
foreclosure activities, and related functions (the OCC Consent Order). Following the EMC
Servicing Rights Transfer, the Servicing Portfolio will be subject to the terms of the OCC
Consent Order;
WHEREAS, in the OCC Consent Order, the OCC has made findings, which the Bank
neither admitted nor denied, that there were unsafe or unsound practices with respect to the
manner in which the Bank handled various foreclosure and related activities;

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WHEREAS, it is the common goal of the Board of Governors, the Reserve Bank, JPMC,
and the Mortgage Servicing Companies (to the extent that the Mortgage Loan Servicing
Companies engage in residential mortgage loan servicing in the future) ensure that the
consolidated organization operates in a safe and sound manner and in compliance with the terms
of mortgage loan documentation and related agreements with borrowers, all applicable state and
federal laws (including the U.S. Bankruptcy Code and the Servicemembers Civil Relief Act),
rules, regulations, and court orders, as well as the Membership Rules of MERSCORP, Inc. and
MERS, Inc. (collectively, MERS), servicing guides with GSEs or investors, and other
contractual obligations including those with the Federal Housing Administration and those
required by the Home Affordable Modification Program (HAMP), and loss share agreements
with the FDIC (collectively, Legal Requirements);
WHEREAS, after the conduct set forth above became known, JPMC and the Mortgage
Servicing Companies have been taking steps to remediate the filing of and reliance on inaccurate
affidavits in foreclosure and bankruptcy proceedings;
WHEREAS, the boards of directors of JPMC and EMC, at duly constituted meetings,
adopted resolutions authorizing and directing Frank J. Bisignano, and Anthony J. Horan to enter
into this Consent Order to Cease and Desist (the Order) on behalf of JPMC and EMC,
respectively, and consenting to compliance with each and every applicable provision of this
Order by JPMC and EMC, and their institution-affiliated parties, as defined in sections 3(u) and
8(b)(3) of the Federal Deposit Insurance Act, as amended (the FDI Act) (12 U.S.C. 1813(u)
and 1818(b)(3)), and waiving any and all rights that JPMC and EMC may have pursuant to
section 8 of the FDI Act (12 U.S.C. 1818), including, but not limited to: (i) the issuance of a
notice of charges; (ii) a hearing for the purpose of taking evidence on any matters set forth in this
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Order; (iii) judicial review of this Order; (iv) contest the issuance of this Order by the Board of
Governors; and (v) challenge or contest, in any manner, the basis, issuance, validity, terms,
effectiveness or enforceability of this Order or any provision hereof.
NOW, THEREFORE, before the filing of any notices, or taking of any testimony or
adjudication of or finding on any issues of fact or law herein, and without this Order constituting
an admission by JPMC, EMC or its subsidiaries, of any allegation made or implied by the Board
of Governors in connection with this matter, and solely for the purpose of settling this matter
without a formal proceeding being filed and without the necessity for protracted or extended
hearings or testimony, it is hereby ordered by the Board of Governors that, pursuant to
sections 8(b)(1) and (3) of the FDI Act (12 U.S.C. 1818(b)(1) and 1818(b)(3)), JPMC and
EMC, and their institution-affiliated parties shall cease and desist and take affirmative action, as
follows:
Source of Strength
1. The board of directors of JPMC shall take appropriate steps to fully utilize
JPMCs financial and managerial resources, pursuant to section 225.4(a) of Regulation Y of the
Board of Governors (12 C.F.R. 225.4(a)), to serve as a source of strength to the Bank,
including, but not limited to, taking steps to ensure that the Bank complies with the Consent
Order issued by the OCC regarding the Banks residential mortgage loan servicing activities.
Board Oversight
2. Within 60 days of this Order, the board of directors of JPMC shall submit to the
Reserve Bank an acceptable written plan to strengthen the boards oversight of JPMCs
enterprise-wide risk management (ERM), internal audit, and compliance programs concerning
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the residential mortgage loan servicing, Loss Mitigation, and foreclosure activities conducted
through the Bank. The plan shall, at a minimum, address, consider, and include:
(a) Policies to be adopted by the board of directors of JPMC that are designed
to ensure that the ERM program provides proper risk management oversight with respect to the
Banks residential mortgage loan servicing, Loss Mitigation, and foreclosure activities,
particularly with respect to compliance with the Legal Requirements, and supervisory standards
and guidance of the Board of Governors as they develop;
(b) policies and procedures adopted by JPMC to ensure that the ERM
program provides proper risk management of independent contractors, consulting firms, law
firms, or other third parties who are engaged to support residential mortgage loan servicing, Loss
Mitigation, or foreclosure activities or operations, including their compliance with the Legal
Requirements and JPMCs internal policies and procedures, consistent with supervisory
guidance of the Board of Governors;
(c) steps to ensure that JPMCs ERM, audit, and compliance programs have
adequate levels and types of officers and staff dedicated to overseeing the Banks residential
mortgage loan servicing, Loss Mitigation, and foreclosure activities, and that these programs
have officers and staff with the requisite qualifications, skills, and abilities to comply with the
requirements of this Order; and
(d) steps to improve the information and reports that will be regularly
reviewed by the board of directors of JPMC or authorized committee of the board of directors
regarding residential mortgage loan servicing, Loss Mitigation, and foreclosure activities and
operations, including compliance risk assessments and the status and results of measures taken,
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or to be taken, to remediate deficiencies in residential mortgage loan servicing, Loss Mitigation,
and foreclosure activities, and to comply with this Order.
Foreclosure Review
3. (a) Within 45 days of this Order, JPMC and EMC shall retain one or more
independent consultant(s) acceptable to the Reserve Bank to conduct an independent review of
certain residential mortgage loan foreclosure actions (including judicial and non-judicial
foreclosures and related bankruptcy proceedings, and other related litigation) regarding
individual borrowers with respect to the Servicing Portfolio that was serviced by EMC. The
review shall include actions or proceedings (including foreclosures that were in process or
completed) for residential mortgage loans serviced by the Mortgage Servicing Companies
whether brought in the name of the JPMC, the Mortgage Servicing Companies, the investor, or
any agent for the mortgage note holder (including MERS) that have been pending at any time
from January 1, 2009, to December 31, 2010, as well as residential foreclosure sales that
occurred during this time period (Foreclosure Review). The purpose of the Foreclosure
Review shall be to determine, at a minimum:
(i) whether, at the time the foreclosure action was initiated or the
pleading or affidavit filed (including in bankruptcy proceedings and in defending suits brought
by borrowers), the foreclosing party or agent of the party had properly documented ownership of
the promissory note and mortgage (or deed of trust) under relevant state law, or was otherwise a
proper party to the action as a result of agency or other similar status;
(ii) whether the foreclosure was in accordance with applicable federal
and state laws, including but not limited to, the Servicemembers Civil Relief Act and the U.S.
Bankruptcy Code;
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(iii) whether, with respect to non-judicial foreclosures, the procedures
followed with respect to the foreclosure sale (including the calculation of the default period, the
amounts due, and compliance with notice periods) and post-sale confirmation were in
accordance with the terms of the mortgage loan and state law requirements;
(iv) whether a foreclosure sale occurred when the borrower had
requested a loan modification or other loss mitigation and the request was under consideration,
when the loan was performing in accordance with a trial or permanent loan modification, or
when the loan had not been in default for a sufficient period to authorize foreclosure pursuant to
terms of the mortgage loan documentation and related agreements;
(v) whether any delinquent borrowers account was charged fees or
penalties that were not permissible under the terms of the borrowers loan documents, state or
federal law, or were otherwise unreasonable. For purposes of this Order, a fee or penalty is
otherwise unreasonable if it was assessed: (i) for the purpose of protecting the secured partys
interest in the mortgaged property, and the fee or penalty was assessed at a frequency or rate,
was of a type or amount, or was for a purpose that was in fact not needed to protect the secured
partys interest; (ii) for services performed and the fee charged was substantially in excess of the
fair market value of the service; (iii) for services performed, and the services were not actually
performed; or (iv) at an amount or rate that exceeds what was customarily charged in the market
for such a fee or penalty, and the mortgage instruments or other documents executed by the
borrower did not disclose the amount or rate that the lender or servicer would charge for such a
fee or penalty;
(vi) whether Loss Mitigation Activities with respect to foreclosed loans
were handled in accordance with the requirements of HAMP, if applicable, and consistent with
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the policies and procedures applicable to the Mortgage Servicing Companies proprietary loan
modifications or other Loss Mitigation programs, such that each borrower had an adequate
opportunity to apply for a Loss Mitigation option or program, any such application was handled
appropriately, and a final decision was made on a reasoned basis and was communicated to the
borrower before the foreclosure sale; and
(vii) whether any errors, misrepresentations, or other deficiencies
identified in the Foreclosure Review resulted in financial injury to the borrower or the owner of
the mortgage loan.
(b) The independent consultant(s) shall prepare a written report detailing the
findings of the Foreclosure Review (the Foreclosure Report). JPMC and EMC shall provide to
the Reserve Bank a copy of the Foreclosure Report at the same time that the report is provided to
them.
(c) Within 30 days of receipt of the Foreclosure Report, JPMC and EMC shall
submit to the Reserve Bank an acceptable plan to:
(i) remediate, as appropriate, errors, misrepresentations, or other
deficiencies in any foreclosure filing or other proceeding;
(ii) reimburse or otherwise provide appropriate remediation to the
borrower for any impermissible or otherwise unreasonable penalties, fees or expenses, or for
other financial injury identified in paragraph 3 of this Order;
(iii) make appropriate adjustments for the account of JPMC, the GSEs,
or any investor; and
(iv) take appropriate steps to remediate any foreclosure sale where the
foreclosure was not authorized as described in paragraph 3.
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(d) Within 60 days after the Reserve Bank accepts the plan described in
paragraph 3(c), the JPMC and EMC shall make all reimbursement and remediation payments and
provide all credits required by such plan, and provide the Reserve Bank with a report detailing
such payments and credits;
(e) JPMC shall take all steps necessary to ensure that the Bank provides any
cooperation needed by the independent consultant(s) to complete the independent review.
4. Within 5 days of the engagement of the independent consultant(s) described in
paragraph 3 of this Order, but prior to the commencement of the Foreclosure Review, JPMC and
EMC shall submit to the Reserve Bank for approval an engagement letter that sets forth:
(a) The methodology for conducting the Foreclosure Review, including:
(i) a description of the information systems and documents to be reviewed, including the
selection criteria for cases to be reviewed; (ii) the criteria for evaluating the reasonableness of
fees and penalties under paragraph 3(a)(v); (iii) other procedures necessary to make the required
determinations (such as through interviews of employees and third parties and a process for the
receipt and review of borrower claims and complaints); and (iv) any proposed sampling
techniques. In setting the scope and review methodology, the independent consultant may
consider any work already done by JPMC, EMC, or other third-parties on behalf of JPMC or
EMC. With respect to sampling techniques, the engagement letter shall contain a full description
of the statistical basis for the sampling methods chosen, as well as procedures to increase the size
of the sample depending on the results of initial sampling;
(b) the expertise and resources to be dedicated to the Foreclosure Review;
(c) completion of the Foreclosure Review and the Foreclosure Report within
120 days of the start of the engagement; and
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(d) a written commitment that any workpapers associated with the
Foreclosure Review will be made available to the Reserve Bank upon request.
Compliance Program
acceptable written plan to enhance its enterprise-wide compliance program (ECP) with respect
to its oversight of residential mortgage loan servicing, Loss Mitigation, and foreclosure activities
and operations. The enhanced plan shall be based on an evaluation of the effectiveness of
JPMCs current ECP in the areas of residential mortgage loan servicing, Loss Mitigation, and
foreclosure activities and operations, and recommendations to strengthen the ECP in these areas.
The plan shall, at a minimum, be designed to:
(a) Ensure that the fundamental elements of the ECP and any enhancements
or revisions thereto, including a comprehensive annual risk assessment, encompass residential
mortgage loan servicing, Loss Mitigation, and foreclosure activities;
(b) ensure compliance with the Legal Requirements and supervisory guidance
of the Board of Governors; and
(c) ensure that policies, procedures, and processes are updated on an ongoing
basis as necessary to incorporate new or changes to the Legal Requirements and supervisory
guidance of the Board of Governors.
Audit
acceptable written plan to enhance the internal audit program with respect to residential
mortgage loan servicing, Loss Mitigation, and foreclosure activities and operations. The plan
shall be based on an evaluation of the effectiveness of JPMCs current internal audit program in
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the areas of residential mortgage loan servicing, Loss Mitigation, and foreclosure activities and
operations, and shall include recommendations to strengthen the internal audit program in these
areas. The plan shall, at a minimum, be designed to:
(a) Ensure that the internal audit program encompasses residential mortgage
(b) periodically review the effectiveness of the ECP and ERM with respect to
residential mortgage loan servicing, Loss Mitigation, and foreclosure activities, and compliance
with the Legal Requirements and supervisory guidance of the Board of Governors;
(c) ensure that adequate qualified staffing of the audit function is provided for
(d) ensure timely resolution of audit findings and follow-up reviews to ensure
completion and effectiveness of corrective measures;
(e) ensure that comprehensive documentation, tracking, and reporting of the
status and resolution of audit findings are submitted to the audit committee; and
(f) establish escalation procedures for resolving any differences of opinion
between audit staff and management concerning audit exceptions and recommendations, with
any disputes to be resolved by the audit committee.
Risk Management
acceptable written plan to enhance its ERM program with respect to its oversight of residential
mortgage loan servicing, Loss Mitigation, and foreclosure activities and operations. The
enhanced plan shall be based on an evaluation of the effectiveness of JPMCs current ERM
program in the areas of residential mortgage loan servicing, Loss Mitigation, and foreclosure
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activities and operations, and recommendations to strengthen the risk management program in
these areas. The plan shall, at a minimum, be designed to:
(a) Ensure that the fundamental elements of the risk management program
and any enhancements or revisions thereto, including a comprehensive annual risk assessment,
encompass residential mortgage loan servicing, Loss Mitigation, and foreclosure activities;
(b) ensure that the risk management program complies with supervisory
guidance of the Board of Governors, including, but not limited to, the guidance entitled,
Compliance Risk Management Programs and Oversight at Large Banking Organizations with
Complex Compliance Profiles, dated October 16, 2008 (SR 08-08/CA 08-11); and
(c) establish limits for compliance, legal, and reputational risks and provide
for regular review of risk limits by appropriate senior management and the board of directors or
authorized committee of the board of directors.
Approval, Implementation, and Progress Reports
8. (a) JPMC and EMC, as applicable, shall submit written plans and an
engagement letter that are acceptable to the Reserve Bank within the applicable time periods set
forth in paragraphs 2, 3(c), 4, 5, 6, and 7 of this Order. Independent consultant(s) acceptable to
the Reserve Bank shall be retained by JPMC and EMC within the applicable period set forth in
paragraph 3(a) of this Order.
(b) Within 10 days of approval by the Reserve Bank, JPMC and EMC, as
applicable, shall adopt the approved plans. Upon adoption, JPMC and EMC, as applicable, shall
implement the approved plans, and thereafter fully comply with them.
(c) During the term of this Order, the approved plans and engagement letter
shall not be amended or rescinded without the prior written approval of the Reserve Bank.
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(d) During the term of this Order, JPMC and EMC, as applicable, shall revise
the approved plans as necessary to incorporate new or changes to the Legal Requirements and
supervisory guidance of the Board of Governors. The revised plans shall be submitted to the
Reserve Bank for approval at the same time as the progress reports described in paragraph 9 of
this Order.
9. Within 30 days after the end of each calendar quarter following the date of this
Order, JPMCs and EMCs boards of directors shall jointly submit to the Reserve Bank written
progress reports detailing the form and manner of all actions taken to secure compliance with the
provisions of this Order and the results thereof. The Reserve Bank may, in writing, discontinue
the requirement for progress reports or modify the reporting schedule.
Notices
10. All communications regarding this Order shall be sent to:
(a) Ms. Barbara Yelcich
Assistant Vice President
Federal Reserve Bank of New York
33 Liberty Street

(b) Mr. David Lowman
Chief Executive Office
Chase Home Lending
JPMorgan Chase & Co.
194 Wood Avenue South
Iselin, New Jersey 08830

(c) Mr. Anthony J. Horan
Senior Vice President and Assistant Secretary
EMC Mortgage Corporation
270 Park Avenue, 38
th
Floor

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Miscellaneous

11. The provisions of this Order shall be binding on JPMC, EMC and each of their
institution-affiliated parties in their capacities as such, and their successors and assigns.
12. Each provision of this Order shall remain effective and enforceable until stayed,
modified, terminated, or suspended in writing by the Reserve Bank.
13. Notwithstanding any provision of this Order, the Reserve Bank may, in its sole
discretion, grant written extensions of time to JPMC and EMC to comply with any provision of
this Order.
14. The provisions of this Order shall not bar, estop, or otherwise prevent the Board
of Governors, the Reserve Bank, or any other federal or state agency or department from taking
any further or other action affecting JPMC, EMC, or any of their current or former institution-
affiliated parties or their successors or assigns, or any other of JPMCs subsidiaries.

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15. Nothing in this Order, express or implied, shall give to any person or entity, other
than the parties hereto, and their successors hereunder, any benefit or any legal or equitable right,
remedy, or claim under this Order.
By Order of the Board of Governors effective this 13
th
day of April, 2011.

JPMORGAN CHASE & CO. BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM

By: /s/ Frank J. Bisignano By: /s/ Jennifer J. Johnson
Frank J. Bisignano Jennifer J. Johnson
Chief Administrative Officer Secretary of the Board


By: /s/ Anthony J. Horan
Anthony J. Horan
Senior Vice President

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THEODORE E. BACON (CA Bar No. 115395)
tbacon@AlvaradoSmith.com
FRANCES Q. JETT (CA Bar No. 175612)
fjett@AlvaradoSmith.com
ALVARADOSMITH
633 W. 5
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Street, Suite 1100
Los Angeles, California 90071
Tel: (213) 229-2400
Fax: (213) 229-2499



CENTRAL DISTRICT OF CALIFORNIA, WESTERN DIVISION

DARYOUSH JAVAHERI,

Plaintiff,

v.

CALIFORNIA RECONVEYANCE CO.,

Defendants.

CASE NO.: CV-10 8185 ODW (FFMx)

JUDGE: Hon. Otis D. Wright II

DEFENDANT JPMORGAN BANK,
N.A.S REPLY TO PLAINTIFFS
OPPOSITION TO MOTION TO
DISMISS SECOND AMENDED
COMPLAINT

Courtroom: 11
DATE: June 6, 2011
TIME: 1:30 P.M.


Defendant JPMorgan Chase Bank, N.A., (JPMorgan) hereby replies to the
Opposition (Opposition) of plaintiff Daryoush Javaheri (Plaintiff) to Defendants
Motion to Dismiss Plaintiffs Second Amended Complaint (SAC).
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I. SUMMARY OF ARGUMENT
Plaintiffs Opposition fails to resolve any of the deficiencies identified in the
Motion to Dismiss (Motion). In fact, Plaintiffs Opposition does nothing more than
demonstrate that he has not pled sufficient facts to support his claims and that his claims
are not supported by the law. Plaintiff has now had three attempts to plead his claims.
It is obvious that no matter how many attempts Plaintiff is given, he simply cannot
sufficiently plead any of his claims.
The gravamen of Plaintiffs SAC, as well as his Opposition, continues to be
based on Plaintiffs argument that Defendant has not proved that JPMorgan acquired
Washington Mutual Banks interest in the subject loan. Such argument is disingenuous
at best.
While ignoring the fact, as admitted to by Plaintiff himself, that he is in default
on his $2.6 million loan, Plaintiff unsuccessfully hinges his Opposition on his claim that
JPMorgan is not the original lender, has not produced an original promissory note,
and therefore not entitled to foreclose. Rather than addressing the actual shortcomings
of his claims, Plaintiff spends a great deal of time in his Opposition discussing entirely
irrelevant acronyms and reports. (See, Opposition generally.)
Plaintiffs lengthy recitation of what CUSIP stands for and reference to consent
orders that have no bearing on the Subject Loan, is again of no consequence to
Plaintiffs actual claims. Nor can Plaintiff escape the fact that he has defaulted on a
$2.6 million loan.
Rather than curing the defects in Plaintiffs SAC, Plaintiffs Opposition only
serves to demonstrate the weaknesses of Plaintiffs claims. As set forth below,
Plaintiffs arguments fail, and JPMorgans Motion to Dismiss should be granted in its
entirety without leave to amend.
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II. PLAINTIFFS FIRST, SECOND, AND FIFTH CLAIMS FAIL SINCE
WITH STATE LAW
A. JPMorgan Acquired the Loan from the FDIC
This Court has already clearly opined that the transfer of interest to JPMorgan,
however, is evidenced in documents of which the Court has already taken judicial
notice namely, the OTS Order and P&A Agreement. JPMorgans Request for
Judicial Notice (RJN), Exhibit C, p. 3. Despite this unequivocal ruling from the
Court, Plaintiff continues to desperately cling to his argument that JPMorgan is not the
Lender and has no right to foreclose. (Opposition, pp. 1, 2.) Nothing has changed
since the last time the Court considered and rejected this argument.
Further, this Court has already found that Plaintiffs claims based on the
allegation that JPMorgan does not own the note are without merit. RJN, Exhibit C,
p. 4. This confirms that JPMorgan had the right to foreclose on default and had the
right to appoint CRC as the trustee in commencing foreclosure.
Accordingly, the Court should disregard Plaintiffs attempts to paint JPMorgan as
a party out to steal from Plaintiff. Plaintiff borrowed $2.6 million from Washington
Mutual Bank and now seeks to avoid having to pay these monies back to the current
beneficiary under the Deed of Trust.
Plaintiff can expend pages and pages of his Opposition citing to irrelevant
acronyms and reports this will not change the basic fact that JPMorgan acquired
Washington Mutual Banks interest in the subject Loan, that Plaintiff defaulted and now
seeks to avoid the effects of that default by continuing to insist that JPMorgan is not the
holder of the Note. JPMorgan properly acquired the rights to the DOT from the FDIC
when WaMu was placed into receivership, so the claim that Defendant does not have
the right to foreclose is without merit.
///
///

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B. JPMorgan Complied with State Law
Plaintiffs attempts to salvage his claim for alleged violations of California Civil
Code 2923.5 by allegations of forgery and citations to documents which have no
relation whatsoever to the Subject Loan are entirely unpersuasive. As set forth in the
Motion to Dismiss, the Court has already addressed and dismissed Plaintiffs allegation
that JPMorgan violated 2923.5, because the person who signed the declaration
attesting to compliance with 2923.5 did not have personal knowledge of the facts.
SAC, 26. Specifically, the Court previously found that nothing in this statute
requires that a declaration be signed by a person with personal knowledge. RJN,
Exhibit C, pp.4-5.
Despite the Courts previous ruling, Plaintiff yet again spends a significant
portion of his Opposition opining on how CRCs declaration, when compared with a
form declaration from a Continuing Education of the Bar publication, is cryptic,
ambiguous, form-language. (Opposition, pp. 10-11.) Plaintiffs recitation of what
Continuing Education for the Bar recommends for a form declaration under Civil
Code 2923.5 is of no matter.
As to the alleged violations of California Civil Code 2923.5, the law is clear
that foreclosure can be commenced by the trustee, mortgagee or beneficiary or any of
their authorized agents and a person authorized to record the notice of default or the
notice of sale. (See California Civil Code 2924(a)(1) and 2924b(b)(4).)
Accordingly, Plaintiffs effort to salvage his claims clearly fails. Plaintiffs
first, second and fifth claims have no merit and should be dismissed.
III. THERE IS NO LEGAL BASIS FOR THE THIRD CLAIM OF QUASI
CONTRACT
In his Opposition, p. 18, Plaintiff erroneously claims that Chase does not have
standing to enforce the Note because Chase is not the owner of the Note, Chase is not a
holder of the Note, and Chase is not a beneficiary under the Note. This claim is
without merit because, as set forth above, JPMorgan is entitled to enforce the terms of

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the Note pursuant to Section 3.1 of Article III of the P & A Agreement. See also
Caravantes v. CRC, 2010 WL 4055560, 9 (S.D.Cal., 2010).
IV. THERE IS NO CLAIM ALLEGED FOR NO CONTRACT
In defending his claim for no contract, Plaintiff entirely ignores the arguments
raised by JPMorgan in its Motion. In fact, Plaintiffs arguments in defense of his claim
such as his argument that Chase asserts that the one-year Statute of Limitations has
expired (Opposition p. 21) are entirely nonsensical given that JPMorgan does not
make this argument in its Motion to Dismiss the SAC. Plaintiff does not even attempt
to address JPMorgans arguments regarding Plaintiffs failure to offer tender in the
FAC. Accordingly, Plaintiffs claim for no contract is insufficiently pled and subject
to dismissal.
V. THERE IS NO BASIS FOR EQUITABLE RELIEF
Plaintiffs claims for equitable belief are based on nothing more than Plaintiffs
allegations that JPMorgan is not the holder of the Note and therefore has no standing to
enforce the DOT. However, whether or not the Defendants are a holder of the original
note is irrelevant as [t]here is no requirement that the party initiating foreclosure be in
possession of the original note. Nool v. HomeEquity Servicing, 2009 U.S. Dist. LEXIS
80640, *12 (E.D. Cal. Sept. 3, 2009); Pagtalunan, supra, 2009 U.S. Dist. LEXIS
80640, *6 (N.D. Cal. Apr. 8, 2009) and Caravantes, supra.
Plaintiff is unable to state any basis for contending that declaratory relief would
be necessary or useful. See Sanchez United States Bancorp, 2009 U.S. Dist. LEXIS
87952 at *20 (S.D. Cal. Aug, 4, 2009); Ricon v. Reconstruction Trust, 2009 U.S. Dist.
LEXIS 67807 at *16 (S.D. Cal. Aug, 4, 2009); Mohammad, supra, 2009 U.S. Dist.
LEXIS 61796 at *14; Pagtalunan, 2009 U.S. Dist. LEXIS 34811 at *6 -*7.
Accordingly, this cause of action should be dismissed.
VI. PLAINTIFF FAILS TO PLEAD OUTRAGEOUS CONDUCT
The weakness of Plaintiffs defense of his emotional distress claim can be found
in one line in Plaintiffs Opposition [t]imes have changed since 1989. This is not a

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legal defense. This is merely Plaintiffs opinion and not a legitimate reason for the
denial of JPMorgans motion to dismiss which is based on actual law.
Because Plaintiff fails to plead any of the elements of the claim for intentional
infliction of emotional distress, and activities in the pursuit of ones own economic
interest do not qualify as outrageous, the seventh claim must be dismissed without
leave to amend.
VII. CONCLUSION
Based on the foregoing reasons, JPMorgan respectfully requests that the Court
grant this motion to dismiss in its entirety.

DATED: May 23, 2011

ALVARADOSMITH

THEODORE E. BACON
FRANCES Q. JETT
JPMORGAN CHASE BANK, N.A

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CIVIL MINUTES - GENERAL
Case No. CV10-08185 ODW (FFMx) Date June 2, 2011
Title Javaheri v. JPMorgan Chase Bank, N.A., et al.
Present: The Honorable Otis D. Wright II, United States District Judge
Sheila English Not Present n/a
Deputy Clerk Court Reporter Tape No.
Attorneys Present for Plaintiff(s):
Not Present
Attorneys Present for Defendant(s):
Not Present
Proceedings (In
Chambers):
Order GRANTING in Part and DENYING in Part
Defendants Motion to Dismiss Plaintiffs Second
Amended Complaint [30] (Filed 04/28/11)
I. INTRODUCTION
Pending before the Court is Defendant JPMorgan Chase Bank, N.A.s (JPMorgan)
Motion to Dismiss Plaintiff Daryoush Javaheris (Plaintiff) Second Amended Complaint
(SAC). (Dkt. No. 30.) Plaintiff filed an Opposition on May 16, 2011, to which JPMorgan
filed a Reply on May 23, 2011. (Dkt. Nos. 32, 34.) Having considered the papers filed in
support of and in opposition to the instant Motion, the Court deems the matter appropriate
for decision without oral argument. FED. R. CIV. P. 78; L.R. 7-15. For the following
reasons, JPMorgans Motion is GRANTED in Part and DENIED in Part.
II. FACTUAL AND PROCEDURAL BACKGROUND
On November 14, 2007, Plaintiff obtained a mortgage loan in the amount of
$2,660,000 from Washington Mutual Bank (WaMu) to finance his property located at
10809 Wellworth Los Angeles, California (the Subject Property). (SAC 4, 11-13.) In
conjunction therewith, Plaintiff executed a promissory note (the Note) and a deed of trust
(the DOT), which encumbered the Subject Property. The DOT identifies WaMu as the
lender and beneficiary under the Note. (SAC 13.)
CV-90 (06/04) CIVIL MINUTES - GENERAL Page 1 of 11
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Plaintiff alleges that between November 15 and November 30, 2007, WaMu
transferred Plaintiffs Note to Washington Mutual Mortgage Securities Corporation and that
the Note was subsequently sold to an investment trust and became part of, or was subject
to, a Loan Pool, a Pooling and Servicing Agreement, a Collateralized Debt Obligation, a
Mortgage-Backed Security, a Mortgage Pass-Through Certificate, a Credit Default Swap,
an Investment Trust, and/or a Special Purpose Vehicle. (SAC 14.) Plaintiff identifies this
security as Standard & Poor CUSIP # 31379XQC2, Pool Number 432551. (SAC 14.)
Because of this alleged transaction in which Plaintiffs Note was sold as an investment
security, Plaintiff claims that JPMorgan is not the owner, holder, or beneficiary of the Note,
and therefore cannot legally foreclose on the Subject Property. Plaintiff also alleges that
JPMorgan failed to properly record its claim of ownership in the Subject Property, further
evidencing its lack of ownership. (SAC 15.)
JPMorgan, however, contends that it is the rightful owner, holder, and beneficiary of
Plaintiffs Note. In support, JPMorgan points to its September 25, 2008 acquisition of
WaMus assets by virtue of a Purchase and Assumption Agreement (P & A Agreement)
executed by JPMorgan and the Federal Deposit Insurance Corporation (FDIC), who at the
time was acting as Receiver for WaMu. (Dkt. No. 10, Exhs. 1-2.) JPMorgan, therefore,
maintains that it succeeded to all of WaMus assets, including Plaintiffs Note.
On or about March 22, 2010, Plaintiff received a letter stating that he had not made
his monthly payments since November of 2009. (SAC 19.) Plaintiff alleges that, within
thirty days of receiving this letter, his attorney faxed a letter in response, but that JPMorgan
did not contact Plaintiff or [his attorney], either in person or by telephone, to
discuss Plaintiffs financial condition and the impending foreclosure.
[JPMorgan] did not call, it did not write, and it did not provide a toll-free HUD
number to Plaintiff or his lawyer. [JPMorgan] did not offer to meet with
(SAC 22.) Nevertheless, on May 14, 2010, JPMorgan and CRC recorded a Notice of
Default (NOD) and a Declaration of Compliance, which identified JPMorgan as the
undersigned mortgagee, beneficiary, or authorized agent. (SAC 25.) Subsequently, on
August 16, 2010, California Reconveyance Company (CRC) recorded a Notice of
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Trustees Sale. (SAC 17.)
As a result of the foregoing events, on October 29, 2010, Plaintiff filed a Complaint
in this Court against JPMorgan and CRC. Subsequently, on January 11, 2011, the Court
granted JPMorgan and CRCs joint Motion to Dismiss the Complaint. (Dkt. No. 20.)
Plaintiff then filed a First Amended Complaint (FAC) against JPMorgan on January 3,
2011. (Dkt. No. 22.) The Court granted JPMorgans Motion to Dismiss Plaintiffs FAC on
March 24, 2011. (Dkt. No. 28.) On April 12, 2011, Plaintiff filed a Second Amended
Complaint against JPMorgan, asserting claims for: (1) violation of California Civil Code
section 2923.5; (2) wrongful foreclosure; (3) quasi contract; (4) no contract; (5) quiet title;
(6) declaratory and injunctive relief; and (7) intentional infliction of emotional distress.
(SAC at 1.) JPMorgan now brings the instant Motion to Dismiss the SAC in its entirety.
III. LEGAL STANDARD
To survive a motion to dismiss for failure to state a claim under Rule 12(b)(6), a
complaint generally must satisfy only the minimal notice pleading requirements of Rule
8(a)(2). Porter v. Jones, 319 F.3d 483, 494 (9th Cir. 2003). Rule 8(a)(2) requires a short
and plain statement of the claim showing that the pleader is entitled to relief. FED. R. CIV.
P. 8(a)(2). For a complaint to sufficiently state a claim, its [f]actual allegations must be
enough to raise a right to relief above the speculative level. Bell Atlantic Corp. v. Twombly,
550 U.S. 544, 555 (2007). Mere labels and conclusions or a formulaic recitation of the
elements of a cause of action will not do. Id. Rather, to overcome a 12(b)(6) motion, a
complaint must contain sufficient factual matter, accepted as true, to state a claim to relief
that is plausible on its face. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (internal
quotation and citation omitted). The plausibility standard is not akin to a probability
requirement, but it asks for more than a sheer possibility that a defendant has acted
unlawfully. Where a complaint pleads facts that are merely consistent with a defendants
liability, it stops short of the line between possibility and plausibility of entitlement of
relief. Id. (internal quotation and citation omitted).
When considering a 12(b)(6) motion, a court is generally limited to considering
materials within the pleadings and must construe [a]ll factual allegations set forth in the
complaint . . . as true and . . . in the light most favorable to [the plaintiff]. See Lee v. City
of L.A., 250 F.3d 668, 688 (9th Cir. 2001) (citing Epstein v. Washington Energy Co., 83 F.3d
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1136, 1140 (9th Cir. 1996)). A court is not, however, required to accept as true allegations
that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.
Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001).
IV. DISCUSSION
The Court will discuss Plaintiffs seven claims in the following order. First, the Court
will analyze Plaintiffs fourth claim for no contract, which is predicated on events
allegedly occurring during the loan origination process. Second, the Court will address
Plaintiffs first claim for violation of California Civil Code section 2923.5, which is
predicated on JPMorgans alleged failure to contact Plaintiff before filing a notice of default.
Third, the Court will examine Plaintiffs second claim for wrongful foreclosure, fifth claim
for quiet title, third claim for quasi contract, and sixth claim for declaratory and injunctive
relief, all of which can be resolved by examining the parties dispute as to who properly
owns the Note. Finally, the Court will discuss Plaintiffs seventh claim for intentional
infliction of emotional distress.

A. Plaintiffs Fourth Claim for No Contract
Plaintiff alleges that no enforceable contract was formed between WaMu and Plaintiff
because there was no meeting of the minds. (SAC 52.) Specifically, Plaintiff contends
that he expected that he would borrow money from WaMu, . . . pay it back, and then . . .
own the Property, while WaMu expected that Plaintiff . . . would not be able to pay it back,
and then WaMu or the investors would own the Property. (SAC 52.)
When ruling on Defendants previous Motion to Dismiss Plaintiffs FAC, the Court
found that [w]hile Plaintiff frames his claim as one based on the absence of a contract, his
allegations indicate that he is, in fact, alleging fraud. (Dkt. No. 28 at 5.) In this respect,
Plaintiffs SAC is virtually identical to his FAC and indeed his no contract claim sounds
in fraud. Consequently, Plaintiff must meet the heightened pleading standards under Federal
Rule of Civil Procedure 9(b), which require him to state with particularity the circumstances
constituting fraud or mistake. FED. R. CIV. P. 9(b). Plaintiffs allegations must enable the
defendant to prepare an adequate answer[.] Schreiber Distrib. Co. v. Serv-Well Furniture
Co., 806 F.2d 1393, 1400 (9th Cir. 1986); see Bosse v. Crowell Collier & MacMillan, 565
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F.2d 602, 611 (9th Cir. 1977); Walling v. Beverly Enter., 476 F.2d 393, 397 (9th Cir. 1973).
In that regard, proper identification of the circumstances entails specif[ication of] such facts
as the times, dates, places, and benefits received, and other details of the alleged fraudulent
activity. Neubronner v. Milken, 6 F.3d 666, 672 (9th Cir. 1993). Additionally, [i]n a fraud
action against a corporation, a plaintiff must allege the names of the persons who made the
allegedly fraudulent representations, their authority to speak, to whom they spoke, what they
said or wrote, and when it was said or written. Saldate v. Wilshire Credit Corp., 686 F.
Supp. 2d 1051, 1065 (2010) (citing Tarmann v. State Farm Mut. Auto. Ins. Co., 2 Cal. App.
4th 153, 157 (1991)).
Here, Plaintiffs allegations with regard to WAMUs alleged fraudulent scheme fall
exceedingly short of the Rule 9(b) requirements. Plaintiff fails to identify any particular
facts regarding WaMus supposed expectations or misrepresentations as they relate to
Plaintiffs loan. Instead, Plaintiff generally asserts that WaMu engaged in a predatory
lending scheme with respect to unqualified borrowers in 2006 and 2007. (SAC 46, 55.)
As to Plaintiffs specific loan, Plaintiff only alleges, in a conclusory fashion, that WaMu
expected he would default, that WaMu pre-sold Plaintiffs mortgage[,] and that WaMus
economic interests were adverse to Plaintiffs interests. (See SAC 48, 49, 51.) These
allegations do not meet the requisite heightened pleading standard under Federal Rule of
Civil Procedure 9(b) because they do not set forth the times, dates, places, benefits received,
and other details of the alleged fraudulent activity nor do they allege the names of the
persons who made the allegedly fraudulent representations, their authority to speak, to whom
they spoke, what they said or wrote, and when it was said or written. See Neubronner, 6
F.3d at 672; Saldate, 686 F. Supp. at 1065. Furthermore, Plaintiffs allegation that the
investment bank intended to short the portfolio is irrelevant as the investment bank, which
Plaintiff fails to identify, is not a party to this action. (SAC 49.) Without specific
information regarding WaMus alleged fraudulent activity, under Federal Rule of Civil
Procedure 9(b), Plaintiffs claim must fail. Accordingly, the Court GRANTS Defendants
Motion to Dismiss Plaintiffs fourth claim for No Contract. Because Plaintiff has
previously been granted leave to amend this claim, has again failed to sufficiently plead his
allegations, and it appears that further leave to amend will likely prove futile, Plaintiffs
fourth claim for No Contract is hereby DISMISSED WITH PREJUDICE.
B. Plaintiffs First Claim for Violation of California Civil Code 2923.5
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California Civil Code section 2923.5 requires a declaration that the mortgagee,
beneficiary, or authorized agent has contacted the borrower, has tried with due diligence to
contact the borrower as required by this section, or that no contact was required pursuant to
subdivision (h). CAL. CIV. CODE 2923.5(b). Courts agree that nothing in this statute
requires that a declaration of compliance with section 2923.5 be signed by a person with
personal knowledge. See Pantoja v. Countrywide Home Loans, Inc., 640 F. Supp. 2d 1177,
1186 (N.D. Cal. July 9, 2009). Therefore, to the extent that Plaintiffs claim under section
2923.5 is predicated on the fact that the person who signed the Declaration of Compliance
did not have personal knowledge of the facts contained therein, it is insufficient. Indeed, the
Court previously dismissed Plaintiffs claim in his FAC on this very ground. (See Dkt. No.
28 at 4-5.) However, Plaintiffs SAC cures the remaining deficiencies with respect to this
claim. Rather than solely attacking the personal knowledge of the signer of the Declaration
of Compliance, Plaintiff alleges that JPMorgan
did not contact Plaintiff or [his attorney], either in person or by telephone, to
discuss Plaintiffs financial condition and the impending foreclosure.
[JPMorgan] did not call, it did not write, and it did not provide a toll-free HUD
number to Plaintiff or his lawyer. [JPMorgan] did not offer to meet with
(SAC 22.) JPMorgan attempts to controvert Plaintiffs assertion with the Declaration of
Compliance itself. However, Plaintiff claims that the person who signed the Declaration of
Compliance either had no personal knowledge or misrepresented the facts. Taking the facts
as alleged in Plaintiffs SAC as true, which the Court must do when deciding a motion to
dismiss, Plaintiffs first claim for violation of California Civil Code section 2923.5 is
sufficient. Accordingly, Defendants Motion is DENIED as to Plaintiffs first claim.
C. Plaintiffs Second Claim for Wrongful Foreclosure and Fifth Claim to
Quiet Title
Plaintiffs second claim for wrongful foreclosure and fifth claim to quiet title are based
on his allegations that JPMorgan does not own the note and that JPMorgan cannot produce
an original promissory note. (SAC 17, 18.) In his FAC, Plaintiff simply concluded that
WaMu transferred all beneficial interest in the loan to a private investor. (FAC 15.)
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Standing alone, the Court found that this allegation was merely a legal conclusion and did
not raise a right to relief above the speculative level. (See Dkt. No. 28 at 3 (citing
Twombly, 550 U.S. at 555).) Plaintiff, however, has cured this deficiency by alleging facts
in his SAC to support these claims. Specifically, Plaintiff alleges that between November
15 and November 30, 2007, WaMu transferred Plaintiffs Note to Washington Mutual
Mortgage Securities Corporation. (SAC 14.) Plaintiff claims that the Note was then sold
to an investment trust and became part of, or was subject to, a Loan Pool, a Pooling and
Servicing Agreement, a Collateralized Debt Obligation, a Mortgage-Backed Security, a
Mortgage Pass-Through Certificate, a Credit Default Swap, an Investment Trust, and/or a
Special Purpose Vehicle. (SAC 14.) Plaintiff identifies the security as Standard & Poor
CUSIP # 31379XQC2, Pool Number 432551. (SAC 14.) The Court must accept these
facts as true when deciding a motion to dismiss. Iqbal, 129 S. Ct. at 1949. Coupled with
Plaintiffs allegation that JPMorgan never properly recorded its claim of ownership in the
Subject Property, (SAC 16), the abovementioned facts regarding the transfer of Plaintiffs
Note prior to JPMorgans acquisition of WaMus assets raise Plaintiffs right to relief above
a speculative level. Furthermore, in the face of these specific factual allegations, JPMorgans
assertion that the P&A Agreement suffices to establish their ownership of the Note is no
longer viable. Indeed, the P&A Agreement does not specifically identify Plaintiffs Note.
(See Dkt. No. 10, Exh. 2.)
The Court finds that Plaintiff has now sufficiently alleged that JPMorgan did not
own his Note and therefore did not have the right to foreclose. Accordingly, the Court
DENIES Defendants Motion to Dismiss with respect to Plaintiffs second claim for
wrongful foreclosure and fifth claim to quiet title.
D. Plaintiffs Third Claim for Quasi Contract
Plaintiff seeks restitution by alleging that JPMorgan was unjustly enriched by any
payments he made to [JPMorgan] that were not paid to the lender or beneficiary, if any.
(SAC 44.) The Court previously dismissed Plaintiffs claim for restitution because
Plaintiffs argument [was] based on his assertion that JPMorgan is not the owner, a holder,
or a beneficiary under the note. (See Dkt. No. 28 at 5.) As the Court noted above, however,
Plaintiff has cured any deficiencies with respect to this assertion. While JPMorgan correctly
contends that unjust enrichment, restitution, or quasi contract are not independent causes of
action, (Mot. at 7), as previously discussed, Plaintiffs allegations that JPMorgan did not own
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his Note have been sufficiently alleged. Consequently, if indeed JPMorgan did not own the
Note yet received payments therefrom, those payments may have been received unjustly.
Accordingly, Defendants Motion is DENIED as to Plaintiffs third claim for quasi contract.
E. Plaintiffs Sixth Claim for Declaratory and Injunctive Relief
Plaintiffs sixth claim for declaratory and injunctive relief seeks a judicial
determination of his rights and duties as to the Note and DOT, and JPMorgans rights to
proceed with a non-judicial foreclosure on the Subject Property. (SAC 68.) Additionally,
Plaintiff seeks a Temporary Restraining Order and Preliminary Injunction restraining
JPMorgan from conducting a Trustees Sale of the Subject Property during the pendency of
this action. (SAC, Prayer 1.)
As to Plaintiffs claim for declaratory relief, the Declaratory Judgment Act states that
[i]n a case of actual controversy within its jurisdiction . . . any court of the United States .
. . may declare the rights and other legal relations of any interested party seeking such
declaration. 28 U.S.C. 2201(a). Jurisdiction to award declaratory relief exists only in
a case of actual controversy. Am. States Ins. Co. v. Kearns, 15 F.3d 142, 143 (9th Cir.
1994). Consequently, the Ninth Circuit instructs district courts to first determine whether
there is an actual controversy within its jurisdiction. Principal Life Ins. Co. v. Robinson, 394
F.3d 665, 669 (9th Cir. 2005). If the court finds that an actual controversy exists, it must
next decide whether to exercise its jurisdiction by analyzing the factors enumerated in
Brillhart v. Excess Ins. Co., 316 U.S. 491 (1942). The Brillhart factors require the Court to
(1) avoid needless determination of state law issues; (2) discourage litigants from filing
declaratory actions as a means of forum shopping; and (3) avoid duplicative litigation.
Brillhart, 316 U.S. at 495.
Here, Plaintiff contends an actual controversy has arisen in whether: (1) JPMorgan is
the present owner and beneficiary of the note; (2) JPMorgan is entitled to sell the Property;
and (3) CRC is a trustee duly authorized to file a Notice of Default or a Notice of Trustees
Sale. (SAC 67.) As the Court noted above, Plaintiff has cured the deficiencies with
respect to these allegations. Consequently, the Court finds that an actual controversy exists.
Furthermore, none of the Brillhart factors suggest that the Court should refrain from
entertaining Plaintiffs claim for declaratory relief. Accordingly, Defendants Motion to
Dismiss is DENIED as to Plaintiffs sixth claim for declaratory relief.
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As to Plaintiffs claim for injunctive relief, the Court was already presented with this
issue on October 29, 2010 and denied Plaintiffs ex parte application for temporary
restraining order and preliminary injunction. (Dkt. No. 6.) Plaintiff, however, has now
pleaded additional facts that may support such a request. Therefore, Plaintiff is not
precluded from bringing another ex parte application if he so chooses. Additionally,
Plaintiff seeks that JPMorgan be forever enjoined and restrained from selling the Subject
Property. (SAC, Prayer 2.) As a general rule, a permanent injunction will be granted
when liability has been established and there is a threat of continuing violations. MAI Sys.
Corp. v. Peak Computer, Inc., 991 F.2d 511, 520 (9th Cir. 1993). Here, Plaintiff has
properly pleaded his underlying claims and Defendant may therefore be found liable at a
later stage of the litigation. Consequently, Defendants Motion is DENIED as to Plaintiffs
sixth claim for injunctive relief.
F. Plaintiffs Seventh Claim for Intentional Infliction of Emotional Distress
To successfully plead a claim for intentional infliction of emotional distress under
California law, Plaintiff must allege (1) [JPMorgan]s extreme and outrageous conduct; (2)
that [JPMorgan] intended to cause, or recklessly disregarded the probability of causing,
emotional distress; (3) that [P]laintiff suffered severe or extreme emotional distress; and (4)
actual and proximate causation of the emotional distress by [JPMorgan]s outrageous
conduct. Davenport v. Litton Loan Servicing, LP, 725 F. Supp. 2d 862, 883-84 (N.D. Cal.
2010); see also Corales v. Bennett, 567 F.3d 554, 571 (9th Cir. 2009) (setting forth the same
elements). Outrageous conduct is that which is so extreme as to exceed all bounds of that
usually tolerated in a civilized community. Id. at 884. Moreover, [f]or emotional distress
to be severe, it must be of such substantial quantity or enduring quality that no reasonable
man in a civilized society should be expected to endure it. Grant v. WMC Mortg. Corp.,
No. CIV 2:10-1117 WBS KJN, 2010 WL 2509415 at *2 (E.D. Cal., June 17, 2010).
In support of his intentional infliction of emotional distress claim, Plaintiff alleges that
JPMorgan cashed Plaintiffs monthly checks and kept the money when it had no right to
do so. (SAC 73.) Plaintiff further alleges that JPMorgan ignored Plaintiffs letters
requesting alternative options to foreclosure and that JPMorgan fraudulently transferred the
DOT. (SAC 74, 75.) While Plaintiff concludes that these acts and omissions . . .
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constitute extreme and outrageous conduct, and that JPMorgan engaged in such conduct
either intentionally or with reckless disregard as to the effect on Plaintiff[,](SAC 76, 77),
Plaintiff fails to point the Court to any case law to support his contention that such acts
associated with foreclosure, even if wrongful, are so extreme as to exceed all bounds of that
usually tolerated in a civilized community. See Davenport, LP, 725 F. Supp. 2d at 884.
Moreover, [f]or emotional distress to be severe, it must be of such substantial quantity or
enduring quality that no reasonable man in a civilized society should be expected to endure
it. Grant v. WMC Mortg. Corp., No. CIV 2:10-1117 WBS KJN, 2010 WL 2509415 at *2
(E.D. Cal., June 17, 2010). Plaintiff makes absolutely no factual allegations with respect to
the severity of his emotional distress in terms of either quantity or quality. Rather, Plaintiff
merely states that he has suffered emotional distress in the amount of $5,000,000. (SAC
78.) Such labels and conclusions are insufficient. See Twombly, 550 U.S. at 555.
Ultimately, Plaintiffs claim for intentional infliction of emotional distress is nothing more
than a formulaic recitation of the elements[,] which simply will not do. See id.
Accordingly, Defendants Motion to Dismiss is GRANTED as to Plaintiffs seventh claim
for intentional infliction of emotional distress. Because Plaintiff has previously been granted
leave to amend this claim, has again failed to sufficiently plead his allegations, and it appears
that further leave to amend will likely prove futile, Plaintiffs seventh claim for intentional
infliction of emotional distress is hereby DISMISSED WITH PREJUDICE.
V. CONCLUSION
For the foregoing reasons, Defendants Motion to Dismiss is GRANTED in Part and
DENIED in Part. Plaintiffs second claim for wrongful foreclosure, fifth claim for quiet
title, first claim for violation of California Civil Code section 2923.5, third claim for quasi
contract, and sixth claim for declaratory and injunctive relief survive Defendants Motion
to Dismiss. Conversely, Plaintiffs fourth claim for no contract and seventh claim for
intentional infliction of emotional distress are DISMISSED WITH PREJUDICE.
IT IS SO ORDERED.

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