FILED: NEW YORK COUNTY CLERK 11/21/2011

NYSCEF DOC. NO. 1

INDEX NO. 653239/2011 RECEIVED NYSCEF: 11/21/2011

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK

BAYERISCHE LANDESBANK, NEW YORK BRANCH, Plaintiff, v. SUMMONS BEAR STEARNS & CO. INC., BEAR STEARNS ASSET BACKED SECURITIES I LLC, EMC MORTGAGE LLC (f/k/a EMC MORTGAGE CORPORATION), STRUCTURED ASSET MORTGAGE INVESTMENTS II INC., J.P. MORGAN ACCEPTANCE CORPORATION I, J.P. MORGAN MORTGAGE ACQUISITION CORPORATION, J.P. MORGAN SECURITIES LLC (f/k/a J.P. MORGAN SECURITIES INC.), CHASE HOME FINANCE, LLC, CHASE MORTGAGE FINANCE CORPORATION, WAMU ASSET ACCEPTANCE CORP., WAMU CAPITAL CORP., WASHINGTON MUTUAL MORTGAGE SECURITIES CORPORATION, LONG BEACH SECURITIES CORP., JPMORGAN CHASE & CO., and JPMORGAN CHASE BANK, N.A., Defendants. Index No.

Date Index No. Purchased: November 21, 2011

TO THE ABOVE-NAMED DEFENDANTS: Bear Stearns & Co. Inc. 383 Madison Ave, New York, NY 10179 Bear Stearns Asset Backed Securities I LLC c/o The Corporation Trust Company Corporation Trust Center 1209 Orange Street Wilmington, DE 19801 EMC Mortgage LLC (f/k/a EMC Mortgage Corporation) c/o CT Corporation System 1200 South Pine Island Road Plantation, FL 33324 Structured Asset Mortgage Investments II Inc., c/o The Corporation Trust Company Corporation Trust Center 1209 Orange Street Wilmington, DE 19801 J.P. Morgan Acceptance Corp. I Attn: Litigation Department One Chase Manhattan Plaza New York, NY 10005 J.P. Morgan Acquisition Corp. Attn: Litigation Department One Chase Manhattan Plaza New York, NY 10005 J.P. Morgan Securities LLC (f/k/a/ J.P/ Morgan Securities Inc.) 227 Park Avenue New York, New York 10017 Chase Home Finance, LLC Attn: Litigation Department One Chase Manhattan Plaza New York, NY 10005

Chase Mortgage Finance Corporation Attn: Litigation Department One Chase Manhattan Plaza New York, NY 10005 WaMu Asset Acceptance Corp. c/o The Corporation Trust Company Corporation Trust Center 1209 Orange Street Wilmington, DE 19801 WaMu Capital Corp. c/o CT Corporation System 1801 West Bay Drive NW, Suite 206 Olympia, WA 98502 Washington Mutual Mortgage Securities Corporation c/o The Corporation Trust Company Corporation Trust Center 1209 Orange Street Wilmington, DE 19801 Long Beach Securities Corporation c/o The Corporation Trust Company Corporation Trust Center 1209 Orange Street Wilmington, DE 19801 J.P. Morgan Chase & Co. Attn: Litigation Department One Chase Manhattan Plaza New York, NY 10005 J.P. Morgan Chase Bank, N.A. Attn: Litigation Department One Chase Manhattan Plaza New York, NY 10005

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK

BAYERISCHE LANDESBANK, NEW YORK BRANCH, Plaintiff, v. COMPLAINT BEAR STEARNS & CO. INC., BEAR STEARNS ASSET BACKED SECURITIES I LLC, EMC MORTGAGE LLC (f/k/a EMC MORTGAGE CORPORATION), STRUCTURED ASSET MORTGAGE INVESTMENTS II INC., J.P. MORGAN ACCEPTANCE CORPORATION I, J.P. MORGAN MORTGAGE ACQUISITION CORPORATION, J.P. MORGAN SECURITIES LLC (f/k/a J.P. MORGAN SECURITIES INC.), CHASE HOME FINANCE, LLC, CHASE MORTGAGE FINANCE CORPORATION, WAMU ASSET ACCEPTANCE CORP., WAMU CAPITAL CORP., WASHINGTON MUTUAL MORTGAGE SECURITIES CORPORATION, LONG BEACH SECURITIES CORP., JPMORGAN CHASE & CO., and JPMORGAN CHASE BANK, N.A., Defendants. Index No.

JURY TRIAL DEMANDED

TABLE OF CONTENTS

I.  II.  III. 

SUMMARY OF THE ACTION ..........................................................................................1  JURISDICTION AND VENUE ..........................................................................................3  THE PARTIES.....................................................................................................................4  A.  B.  Plaintiff ....................................................................................................................4  Defendants ...............................................................................................................4 

IV. 

FACTUAL BACKGROUND UNDERLYING BAYERNLB’S CLAIMS ......................11  A.  B.  C.  D.  The Defendants’ RMBS Purchased By BayernLB ................................................11  Defendants’ Activities In The Subprime Mortgage Arena ....................................17  Defendants’ Role Was To Ensure The Quality Of The Loans Backing The RMBS ....................................................................................................................18  Factors Impacting The Quality Of The Defendants’ RMBS .................................20 

V. 

THE OFFERING MATERIALS MISREPRESENTED THE UNDERWRITING AND QUALITY OF THE LOANS BACKING THE DEFENDANTS’ RMBS ..............24  A.  B.  C.  D.  E.  F.  G.  H.  I.  J.  EMC Violated Its Underwriting Guidelines ..........................................................26  Encore Credit Corporation Violated Its Underwriting Guidelines ........................28  Performance Credit Corporation Violated Its Underwriting Guidelines ...............30  Bear Stearns Residential Mortgage Corporation Violated Its Underwriting Guidelines ..............................................................................................................33  Countrywide Violated Its Underwriting Guidelines ..............................................34  New Century Violated Its Underwriting Guidelines .............................................36  Fremont Violated Its Underwriting Guidelines .....................................................38  Impac Funding Corporation Violated Its Underwriting Guidelines ......................40  Washington Mutual Bank Violated Its Underwriting Guidelines..........................43  Long Beach Mortgage Company Violated Its Underwriting Guidelines ..............46 

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K.  L.  M.  N.  O.  P.  Q.  R.  S.  T.  U.  V.  W.  X.  Y.  Z.  AA.  BB.  CC.  DD.  EE.  VI. 

Washington Mutual Mortgage Securities Corp. Violated Its Underwriting Guidelines ..............................................................................................................49  The Chase Originators Violated Their Underwriting Guidelines ..........................51  GreenPoint Mortgage Funding, Inc. Violated Its Underwriting Guidelines..........53  IndyMac Bank, FSB Violated Its Underwriting Guidelines ..................................55  Option One Mortgage Corporation Violated Its Underwriting Guidelines ...........57  American Home Violated Its Underwriting Guidelines ........................................59  SouthStar Funding LLC Violated Its Underwriting Guidelines ............................61  First NLC Financial Services, LLC Violated Its Underwriting Guidelines...........63  Argent Mortgage Corporation Violated Its Underwriting Guidelines ...................65  Ameriquest Mortgage Company Violated Its Underwriting Guidelines ...............67  BNC Mortgage, Inc. Violated Its Underwriting Guidelines ..................................69  Lehman Brothers Bank, FSB Violated Its Underwriting Guidelines ....................71  National City Mortgage Violated Its Underwriting Guidelines.............................73  The CIT Group/Consumer Finance, Inc. Violated Its Underwriting Guidelines ..............................................................................................................75  Flagstar Bank, FSB Violated Its Underwriting Guidelines ...................................77  NovaStar Mortgage, Inc. Violated Its Underwriting Guidelines ...........................79  Ownit Mortgage Solutions, Inc. Violated Its Underwriting Guidelines ................81  Wells Fargo Bank, N.A. Violated Its Underwriting Guidelines ............................83  Accredited Home Lenders, Inc. Violated Its Underwriting Guidelines.................85  Residential Funding Corporation Violated Its Underwriting Guidelines ..............88  Nomura Credit & Capital, Inc. Violated Its Underwriting Guidelines ..................90 

DEFENDANTS KNEW THE TRUTH ABOUT THE ORIGINATORS’ LENDING PRACTICES ...................................................................................................92  A.  Defendants’ Due Diligence Identified Defects In The Loan Pools Defendants Purchased For Securitization ..............................................................92 

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VII. 

DEFENDANTS KNEW THE CREDIT RATINGS ASSIGNED TO THE DEFENDANTS’ RMBS MATERIALLY MISREPRESENTED THE CREDIT RISK OF THE RMBS .......................................................................................................95 

VIII.  DEFENDANTS’ FALSE AND MISLEADING MISSTATEMENTS AND OMISSIONS OF MATERIAL FACT IN THE OFFERING DOCUMENTS...................97  A.  B.  C.  IX.  X.  The Offering Materials Misrepresented The Originators’ Underwriting Guidelines. .............................................................................................................98  The Offering Materials Misrepresented The Appraisals And LTV Ratios Of The Securitized Loans ....................................................................................100  Defendants Materially Misrepresented The Accuracy Of The Credit Ratings Assigned To The Certificates .................................................................101 

BAYERNLB’S INVESTMENT IN THE RMBS AND RELIANCE ON DEFENDANTS’ MISREPRESENTATIONS .................................................................103  BECAUSE OF DEFENDANTS’ FRAUDULENT CONDUCT, BAYERNLB SUFFERED LOSSES ON ITS PURCHASES OF RMBS ..............................................105 

FIRST CAUSE OF ACTION (Common Law Fraud Against Defendants) ................................106  SECOND CAUSE OF ACTION (Fraudulent Inducement Against Defendants) .......................107  THIRD CAUSE OF ACTION (Aiding And Abetting Fraud Against Defendants) ...................109  FOURTH CAUSE OF ACTION (Negligent Misrepresentation Against Defendants) ..............110  FIFTH CAUSE OF ACTION (Successor and Vicarious Liability Against JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., and J.P. Morgan Securities LLC) ..............113  PRAYER FOR RELIEF ..............................................................................................................115 

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Plaintiff Bayerische Landesbank, New York Branch, as defined below (“BayernLB” or “Plaintiff”), by its attorneys Bernstein Litowitz Berger & Grossmann LLP, for its Complaint herein against Bear Stearns & Co. Inc., Bear Stearns Asset Backed Securities I LLC, EMC Mortgage LLC (f/k/a EMC Mortgage Corporation), Structured Asset Mortgage Investments II Inc., J.P. Morgan Acceptance Corporation I, J.P. Morgan Mortgage Acquisition Corp., J.P. Morgan Securities LLC (f/k/a J.P. Morgan Securities Inc.), Chase Home Finance, LLC, Chase Mortgage Finance Corporation, WaMu Asset Acceptance Corp., WaMu Capital Corp., Washington Mutual Mortgage Securities Corporation, Long Beach Securities Corp., JPMorgan Chase & Co., and JPMorgan Chase Bank, N.A. (collectively, “Defendants”), alleges as follows: I. SUMMARY OF THE ACTION 1. This action arises from a fraud perpetrated by Defendants against BayernLB,

which invested in residential mortgage-backed securities (“RMBS”) that contained loans purchased, financed, and securitized by Defendants. BayernLB invested in highly-rated RMBS, bearing investment grade ratings, in reliance on Defendants’ representations that those mortgages were originated according to specific underwriting guidelines and collateralized by accurately appraised properties. Those representations and the investment grade ratings the RMBS carried led BayernLB to believe that the Defendants’ RMBS it purchased were safe investments. 2. BayernLB purchased almost $2.1 billion worth of Defendants’ RMBS in 57

offerings between 2005 and 2007 (the “Certificates”) in reliance on registration statements, prospectuses, draft prospectus supplements, prospectus supplements, term sheets, and other materials (the “Offering Materials”) prepared by and provided to them, directly or indirectly, by Defendants. The Offering Materials contained numerous representations about the purportedly conservative mortgage underwriting standards applied by the mortgage originators, the

appraisals of the mortgaged properties, and other facts regarding the collateral underlying the RMBS that were material to BayernLB’s investment decisions. 3. In truth, and as BayernLB and the world would only later discover, the

originators whose loans collateralized the Defendants’ RMBS purchased by BayernLB were among the worst of the worst culprits in the subprime lending industry. These infamous lenders included subsidiaries of Bear Stearns and Washington Mutual (“WaMu”) such as EMC Mortgage Company (“EMC”), and Long Beach Mortgage Company (“Long Beach”), as well as other notorious originators such as Countrywide Home Loans (“Countrywide”), New Century Mortgage Corporation (“New Century”), and Fremont Investment & Loan (“Fremont”). These originators have since folded up their operations, filed for bankruptcy or been shut down by regulators, and are the subject of numerous governmental investigations and private lawsuits alleging misconduct arising out of pervasive illegal and improper mortgage lending practices and other violations of law. 4. Defendants knew or recklessly disregarded the fact that those lenders were

issuing high-risk loans that did not conform to their respective underwriting standards. Defendants did, in fact, conduct extensive due diligence on the loans they purchased for securitization. In the course of that extensive due diligence process, which, in many instances, included an extensive re-underwriting review of the loans it purchased by an independent thirdparty due diligence provider, Clayton Holdings, Inc. (“Clayton”), Defendants learned that the originators routinely and flagrantly disregarded their own underwriting guidelines, originated loans based on wildly inflated appraisal values, and manipulated the underwriting process in order to issue to borrowers loans who had no plausible means to repay them. Indeed,

documents released by the Federal Crisis Inquiry Commission (“FCIC”) and Clayton reveal the extensive deficiencies identified through Defendants’ due diligence. Specifically, 27% of the 2

loans JPMorgan and WaMu evaluated for purchase and securitization at the height of the mortgage boom (from 2006 through mid-2007), and over 16% of such loans evaluated by Bear Stearns (together with EMC), failed to meet the originators’ own underwriting guidelines. 5. In fact, between January 2006 and June 2007, JPMorgan, WaMu and Bear

Stearns (together with EMC) purchased and securitized 51%, 29% and 42% respectively, of the sampled loans that Clayton determined failed to meet the originators’ underwriting guidelines, meaning that Defendants knew the loan pools it securitized were riddled with defective loans that were underwritten in a systematically deficient manner that flatly contradicted the representations in Defendants’ Offering Materials. 6. Defendants not only concealed from BayernLB the truth about the poor quality

of the securitized loans, Defendants also knowingly provided false information to the credit rating agencies in order to secure an investment grade blessing for its RMBS. As a result of these practices, Defendants knew that the ratings assigned to its securitizations did not reflect the true credit quality of the Certificates BayernLB purchased. 7. This misconduct has resulted in astounding rates of default on the loans

underlying the Defendants’ RMBS and massive downgrades of the Certificates, the vast majority of which are now considered “junk.” Accordingly, the Certificates are no longer marketable or salable at or near the prices BayernLB paid for them, and BayernLB has suffered significant losses as a result of the fraud perpetrated by Defendants. 8. BayernLB seeks compensatory and/or rescissory damages against Defendants for

fraud, fraud in the inducement, aiding and abetting fraud, and negligent misrepresentation. II. JURISDICTION AND VENUE 9. This Court has jurisdiction over each of the Defendants because each of them

transacts business within the State of New York within the meaning of CPLR § 302(a)(1) and 3

each of them committed a tortious act inside the State of New York or outside the State of New York causing injury within the State of New York within the meaning of CPLR §§ 302(a)(2) and 302(a)(3). The amount in controversy exceeds $150,000. 10. Venue is proper in this County pursuant to CPLR § 503(a) and Plaintiff has

designated New York County as the place of trial. III. THE PARTIES A. 11. Plaintiff Plaintiff Bayerische Landesbank, New York Branch (“BayernLB”) is a federal

branch of Bayerische Landebank licensed by the Office of the Comptroller of the Currency with an office located in New York, New York. Plaintiff BayernLB traded in the RMBS at issue here and operates as a branch of Bayerische Landesbank. B. 12. Defendants Defendant JPMorgan Chase & Co. is a financial holding company incorporated

under Delaware law. JPMorgan Chase & Co. is one of the largest banking institutions in the United States and is the ultimate owner of Defendants JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC (f/k/a J.P. Morgan Securities Inc.), J.P. Morgan Acceptance Corporation, I, and J.P. Morgan Mortgage Acquisition Corp. JPMorgan Chase & Co. is also the successor-in-interest to non-party The Bear Stearns Companies, Inc. 13. Defendant JPMorgan Chase Bank, N.A. is a national banking association, a

subsidiary of JPMorgan Chase & Co., and the sole owner of J.P. Morgan Mortgage Acquisition Corp. Its main office is located in Columbus, Ohio. JPMorgan Chase Bank, N.A. is also the successor-in-interest to Washington Mutual Bank. 14. Defendant J.P. Morgan Securities LLC (f/k/a J.P. Morgan Securities Inc.) is a

Delaware corporation with its principal place of business at 277 Park Avenue, New York, New

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York 10017. J.P Morgan Securities LLC is a SEC-registered broker-dealer that engages in investment banking activities in the U.S., and served as the underwriter for 10 of the securitizations at issue here. 15. Defendant J.P. Morgan Mortgage Acquisition Corporation is a Delaware

corporation with its principal place of business at 270 Park Avenue, New York, New York 10017. J.P. Morgan Mortgage Acquisition Corporation is a direct, wholly-owned subsidiary of JPMorgan Chase Bank, N.A, and served as the sponsor for five of the securitizations at issue here. 16. Defendant J.P. Morgan Acceptance Corporation I, is a Delaware corporation

with its principal executive offices at 270 Park Avenue, New York, New York 10017. J.P. Morgan Acceptance Corporation I is a direct, wholly-owned subsidiary of J.P. Morgan Securities Holdings LLC which, in turn, is a direct, wholly-owned subsidiary of JPMorgan Chase & Co. J.P. Morgan Acceptance Corporation I served as the depositor for five of the securitizations at issue here. 17. Defendant Chase Home Finance, LLC, a Delaware limited liability company, is

wholly-owned by and an indirect subsidiary of JPMorgan Chase Bank, N.A. Chase Home Finance, LLC served as the sponsor for one of the securitizations at issue here. 18. Defendant Chase Mortgage Finance Corporation is a Delaware corporation with

its principal office at 194 Wood Avenue South, Iselin, New Jersey 08830, and is a whollyowned, limited-purpose finance subsidiary of JPMorgan Chase & Co. Chase Mortgage Finance Corporation served as the sponsor for one of the securitizations in this case, as well as the depositor for one of the securitizations at issue here. 19. Defendants JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan

Securities LLC, J.P. Morgan Mortgage Acquisition Corporation, J.P. Morgan Acceptance 5

Corporation I, Chase Home Finance LLC, and Chase Mortgage Finance Corporation are collectively hereinafter referred to as “JPMorgan.” 20. Non-party The Bear Stearns Companies, Inc. was, at all relevant times, a holding

company that provided investment banking, securities, and derivative trading services to its clients through its subsidiaries. The Bear Stearns Companies Inc. was the sole owner, at the time of the securitizations, of Bear Stearns & Co. Inc., Bear Stearns Asset Backed Securities I LLC, EMC Mortgage LLC (f/k/a EMC Mortgage Corporation), and Structured Asset Mortgage Investments II Inc. On March 16, 2008, The Bear Sterns Companies, Inc. entered into an agreement and plan of merger (the “Merger”) with JPMorgan Chase & Co., making The Bear Sterns Companies, Inc. a wholly-owned subsidiary of JPMorgan Chase & Co. 21. Defendant Bear Stearns & Co. Inc. was, at all relevant times, an SEC-registered

broker-dealer with its principal place of business at 383 Madison Avenue, New York, New York 10179. Bear Stearns & Co. Inc. was a wholly-owned subsidiary of The Bear Stearns Companies, Inc., and served as the underwriter for 36 of the securitizations at issue here. Bear Stearns & Co. Inc. directed the activities of its affiliates EMC Mortgage LLC, Structured Asset Mortgage Investments II Inc. and Bear Stearns Asset Backed Securities I LLC. On or about October 1, 2008, following the merger effective May 30, 2008, Bear Stearns & Co. Inc. merged with J.P. Morgan Securities LLC (a subsidiary of JPMorgan Chase & Co.), and is now doing business as J.P. Morgan Securities LLC. All allegations against Bear Stearns & Co. Inc. are thus made against its successor-in-interest, J.P. Morgan Securities LLC as well. 22. Defendant EMC Mortgage LLC (f/k/a EMC Mortgage Corporation) is

incorporated in Delaware and was, at all relevant times, a wholly-owned subsidiary of The Bear Stearns Companies, Inc. EMC Mortgage LLC served as sponsor for 18 of the securitizations at issue here. As a result of the merger between The Bear Stearns Companies, Inc. and JPMorgan 6

Chase & Co., EMC Mortgage LLC became a wholly-owned subsidiary of JPMorgan Chase & Co. 23. Defendant Structured Asset Mortgage Investments II Inc. was, at all relevant

times, a Delaware corporation with its principal place of business at 383 Madison Avenue, New York., New York 10179. Structured Asset Mortgage Investments II Inc. was a wholly-owned subsidiary of The Bear Stearns Companies, Inc., and served as depositor for two of the securitizations at issue here. As a result of the merger between The Bear Stearns Companies, Inc. and JPMorgan Chase & Co., Structured Asset Mortgage Investments II Inc. became a wholly-owned subsidiary of JPMorgan Chase & Co. 24. Defendant Bear Stearns Asset Backed Securities I LLC was, at all relevant times,

a Delaware limited liability company and a limited purpose finance subsidiary of The Bear Stearns Companies, Inc., and an affiliate of Bear Stearns & Co., Inc. Bear Stearns Asset Backed Securities I LLC served as the depositor for 18 of the securitizations at issue here. As a result of the merger between The Bear Stearns Companies, Inc. and JPMorgan Chase & Co., Bear Stearns Asset Backed Securities I LLC became a wholly-owned subsidiary of JPMorgan Chase & Co. 25. Defendants Bear Stearns & Co. Inc., EMC Mortgage LLC, Structured Asset

Mortgage Investments II Inc., Bear Stearns Asset Backed Securities I LLC, J.P. Morgan Securities LLC (as successor-in-interest to Bear Stearns & Co., Inc.), and JPMorgan Chase & Co. (as successor-in-interest to The Bear Stearns Companies, Inc.), are collectively hereinafter referred to as “Bear Stearns.” 26. At all relevant times, Washington Mutual Bank was a federal savings association At the time of the

that provided financial services to consumer and commercial clients.

securitizations, Washington Mutual Bank was the sole owner of Defendants WaMu Asset 7

Acceptance Corporation and WaMu Capital Corporation. Washington Mutual Bank was also the sponsor of four of the securitizations at issue here. On September 25, 2008, JPMorgan Chase Bank, N.A. entered into a purchase and assumption agreement (the “PAA”) with the FDIC, under which JPMorgan Chase Bank, N.A. agreed to assume substantially all of Washington Mutual Bank’s liabilities and purchase substantially all of Washington Mutual Bank’s assets including WaMu Asset Acceptance Corporation, WaMu Capital Corporation, Washington Mutual securities Corporation, Long Beach Mortgage Company, and Long Beach Securities Corporation. As such, this action is brought against JPMorgan Chase Bank, N.A. as the successor to Washington Mutual Bank. 27. Defendant WaMu Capital Corporation was, at all relevant times, an SEC-

registered broker-dealer principally located at 1301 Second Avenue, WMC 3501A, Seattle, Washington 98101. WaMu Capital Corporation was a wholly-owned subsidiary of Washington Mutual Bank, and served as the underwriter for 11 of the securitizations at issue here. WaMu Capital Corporation is not currently affiliated with Washington Mutual Bank and is now a wholly-owned subsidiary of JPMorgan Chase Bank, N.A. 28. Defendant WaMu Asset Acceptance Corporation was, at all relevant times, a

wholly-owned subsidiary of Washington Mutual Bank and was principally located at 1301 Second Avenue, WMC 3501A, Seattle, Washington 98101. WaMu Asset Acceptance

Corporation served as the depositor for six of the securitizations at issue here. WaMu Asset Acceptance Corporation is not currently affiliated with Washington Mutual Bank and is now a wholly-owned subsidiary of JPMorgan Chase Bank, N.A, successor-in-interest to Washington Mutual Bank. 29. Defendant Washington Mutual Mortgage Securities Corporation is a Delaware

corporation and was, at all relevant times, a wholly-owned, special purpose vehicle of 8

Washington Mutual Bank with its principal offices located in Vernon Hills, Illinois. Washington Mutual Mortgage Securities Corporation was the sponsor for five of the securitizations, and was also the depositor for one of the securitizations at issue here. Washington Mutual Securities it not currently affiliated with Washington Mutual Bank and is now a wholly-owned subsidiary of JPMorgan Bank, N.A., successor-in-interest to Washington Mutual Bank. 30. Defendants WaMu Capital Corporation, WaMu Asset Acceptance Corporation,

Washington Mutual Mortgage Securities Corporation and JPMorgan Chase Bank, N.A. (as successor-in-interest to Washington Mutual Bank) are collectively hereinafter referred to as “WaMu.” 31. At all relevant times, Washington Mutual Bank was a federal savings association

that provided financial services to consumer and commercial clients. Washington Mutual Bank was the sole owner, at the time of the securitizations, Long Beach Securities Corporation. On September 25, 2008, JPMorgan Chase Bank, N.A. entered into the PAA with the FDIC, under which JPMorgan Chase Bank, N.A. agreed to assume substantially all of Washington Mutual Bank’s liabilities and purchase all of Washington Mutual Bank’s assets, including Long Beach Securities Corporation. Therefore, this action is brought against JPMorgan Chase Bank, N.A. as the successor to Washington Mutual Bank. Washington Mutual Bank is not a defendant in this action. 32. the country. Long Beach Mortgage Company was one of the largest subprime originators in Long Beach Mortgage Company was acquired by Washington Mutual, Inc.

(“WMI”) in 1999. At all relevant times, WMI was a savings and loan holding company incorporated in Washing State, subject to regulation by the Office of Thrift Supervision (“OTS”), and was the parent company of Washington Mutual Bank. From December 2000 to 9

march 2006, Long Beach Mortgage Company operated as a subsidiary of WMI. In March 2006, Long Beach Mortgage Company became a wholly-owned subsidiary of Washington Mutual Bank. From March 2006 to July 2006, Long Beach Mortgage operated as a subsidiary of Washington Mutual Bank and was its primary subprime originator. In July 2006, Long Beach Mortgage was wholly integrated into its parent company and became a division of Washington Mutual Bank, operating as its “Specialty Wholesale Lending” channel. Long Beach Mortgage Company served as sponsor for one of the securitizations at issue here. Washington Mutual Bank shut down Long Beach Mortgage Company in 2007. The liabilities associated with Long Beach Mortgage Company’s securitization activities were assumed by JPMorgan Chase Bank, N.A., successor-in-interest to Washington Mutual Bank and Long Beach Mortgage Company. Therefore, this action is brought against JPMorgan Chase Bank, N.A. as the successor to Washington Mutual Bank and Long Beach Mortgage. Washington Mutual Bank, and Long Beach Mortgage are not defendants in this action. 33. Defendant Long Beach Securities Corporation is a Delaware corporation and WMI,

was, at all relevant times, a wholly-owned subsidiary of Washington Mutual Bank with a principal place of business at 1100 Town & Country Road, Orange, California 92868. Long Beach Securities Corporation served as the depositor for four of the securitizations at issue here. Long Beach Securities Corporation is not currently affiliated with Washington Mutual Bank and is now a wholly-owned subsidiary of JPMorgan Chase Bank, N.A, successor-in-interest to Washington Mutual Bank. 34. Long Beach Securities Corporation and JPMorgan Chase Bank, N.A. (as

successor to Washington Mutual Bank and Long Beach Mortgage Company) are collectively referred to herein as “Long Beach.”

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IV.

FACTUAL BACKGROUND UNDERLYING BAYERNLB’S CLAIMS A. 35. The Defendants’ RMBS Purchased By BayernLB RMBS, such as the Defendants’ RMBS purchased by BayernLB, provide the

RMBS investor with an interest in income generated by a pool of mortgages. The actual securities themselves represent a participating interest in an “issuing trust” that holds the mortgage loan pool. Although the structure and underlying collateral of the mortgages varies among the 57 offerings (and 68 tranches) of RMBS that BayernLB purchased, they all function in a similar manner: The cash flows from the borrowers who make interest and principal payments on the individual mortgages comprising the mortgage pool are “passed through” to the certificate holders, like BayernLB. Accordingly, failure by those borrowers to make their mortgage payments directly impacts the returns BayernLB earns on its investment. Moreover, a default resulting in foreclosure may cause the trust to sell the subject property at a loss – a risk that increases when the appraisals utilized in underwriting the loans overstated the value of the property that serves as collateral for the mortgage. For these reasons, the proper underwriting of the mortgages underlying the RMBS – including verifying the credit quality of the borrower and the value of the real estate – is essential to ensuring that the RMBS perform according to the representations made to investors like BayernLB. 36. The first step in creating an RMBS is the acquisition by a “depositor” of an

inventory of loans from a “sponsor” or “seller,” which either originates the loans or acquires the loans from other mortgage originators, in exchange for cash. The type of loans in the inventory varies, and can include conventional, fixed-rate or adjustable-rate mortgage loans, secured by first liens, junior liens, or a combination of first and junior liens, with various lifetimes to maturity. The depositor then transfers, or deposits, the acquired pool of loans to an “issuing trust.” Although there can be more than one “sponsor” or “depositor” in a given securitization,

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in most of the Defendants’ RMBS purchased by BayernLB, affiliates and/or subsidiaries of the Defendants acted as the “depositor” and “sponsor” of the securitization. 37. The depositor then securitizes the pool of loans in the issuing trust so that the

rights to the cash flows from the pool can be sold to investors. The securitization transactions are structured such that the risk of loss is divided among different levels of investment, or “tranches,” with each having a different level of risk and reward. Typically, losses on the underlying loans—whether due to default, delinquency, or otherwise—are generally applied in reverse order of seniority. As such, relatively senior tranches of pass-through securities are rated by credit rating agencies as investment grade. Subordinated tranches, which usually obtained lower ratings, are less insulated from risk, but offer greater potential returns in the form of higher rates of interest. All of the Defendants’ RMBS purchased by BayernLB were senior, risk-averse tranches of the relevant offerings and were all rated investment grade at issuance and when purchased by BayernLB. 38. Once the tranches are established, the issuing trust passes the securities back to

the depositor, which becomes the issuer of the RMBS. The depositor then passes the RMBS to the underwriter, which offers and sells the securities to BayernLB and other investors in exchange for cash that is passed back to the depositor, less any fees collected by the underwriter. Typically, underwriters collect between 0.2% to 1.5% in discounts, concessions or commissions in serving as an underwriter of an RMBS securitization. By serving as a sponsor and depositor of the securitizations, Defendants earned even more. 39. Defendants were involved in almost every step of the process of selling the

RMBS to BayernLB. Sponsors such as EMC Mortgage Corporation, J.P. Morgan Mortgage Acquisition Corp. and Washington Mutual Bank provided warehouse financing to the originators that issued the mortgage loans, acquired the mortgage loans from the originators, 12

and initiated the securitization of the mortgage loans into RMBS by transferring the loans to the relevant depositor, such as Structured Asset Mortgage Investments II Inc. The relevant

depositor, controlled by Defendants in most of the RMBS purchased by BayernLB, obtained the mortgage loans from the relevant sponsor to place into the issuing trust for sale in privately negotiated transactions to investors like BayernLB. Importantly, Defendants provided the

information that BayernLB used to decide whether to purchase the securities. 40. Because the cash flow from the loans in the collateral pool of a securitization is

the source of funds to pay the holders of the RMBS issued by the trust, the credit quality of those securities depends upon the credit quality of the loans in the collateral pool. The most important information about the credit quality of the loans is contained in the “loan files” that the mortgage originator develops while making the loans. For residential mortgage loans, each loan file normally contains documents including: the borrower’s application for the loan; verification of the borrower’s income, assets, and employment; references; credit reports on the borrower; an appraisal of the property that will secure the loan and provide the basis for important measures of credit quality, such as loan-to-value ratios. 41. The collateral pool of loans for each securitization usually includes thousands of

loans. Instead of each potential investor reviewing thousands of loan files, Defendants, in their roles as a sponsor and underwriter of the securitization, are responsible for gathering, verifying and presenting to potential investors accurate and complete information about the credit quality and characteristics of the loans that are deposited into the trust. Indeed, the single most important factors for BayernLB—and, for any investor—in purchasing Defendants’ RMBS were: (1) the ability of the underlying borrowers to repay their mortgages; (2) the ability for the trust to recover its losses in case of default by ensuring the properties were appropriate collateral for the loans and were accurately valued; and (3) the rate of interest received on the RMBS. 13

The loan files themselves are not provided or available to RMBS investors like BayernLB, who must instead rely upon Defendants’ representations about the mortgages underlying the RMBS and the process used to select and review those loans. 42. As noted, all of the Defendants’ RMBS purchased by BayernLB were rated

investment grade at issuance, as set forth below:
#  1  2  3  4  5  6  Offering &  Original  Top  Tranche  Expenditure  Originators ARSI   $20,000,000  Argent Mortgage Company, LLC 2006‐W4 A2C  BALTA   2006‐3 23A1  BALTA   2006‐4 11A1  BSABS   2006‐AC1 1A2  BSABS   2006‐AQ1 1M1  BSABS   2006‐HE10 2M1  BSABS   2006‐HE3 A2  BSABS   2006‐HE5 1A2  BSABS   2006‐HE6 1A3  BSABS   2006‐HE6 1M1  BSABS   2006‐HE7 1A2  BSABS   2006‐HE7 2M1  BSABS   2006‐HE9 M1  BSABS   2006‐HE9 M2  BSABS   2006‐IM1 A1  BSABS   2006‐PC1 A2  $75,000,000  EMC Mortgage Company $45,500,000  EMC Mortgage Company   Countrywide Home Loans  $75,000,000  Waterfield Mortgage Company  Impac Mortgage Corporation    $5,561,000  Ameriquest Mortgage Company   Argent Mortgage Company, LLC  $8,150,000  Encore Credit Corp   EMC Mortgage Corp.    Bear Stearns Residential Mortgage Corp.   $25,000,000  Encore Credit Corp.  Opteum Financial Services LLC   $14,500,000  Fieldstone Mortgage Company  Town & Country Credit Corp.   $12,008,000  BNC Mortgage, Inc.  CIT Group/Consumer Finance, Inc.   Home Loan Corp. dba Expanded Mort.   $6,748,000  BNC Mortgage, Inc.  CIT Group/Consumer Finance, Inc.   Home Loan Corp. dba Expanded Mort.   $46,291,000  People's Choice Home Loan, Inc.  First NLC Financial Services  LLC  $8,390,000  People's Choice Home Loan, Inc.  First NLC Financial Services  LLC  $12,000,000  Encore Credit Corp   Fieldstone Mortgage Company    $8,000,000  Encore Credit Corp   Fieldstone Mortgage Company    $25,000,000  Impac Funding Corp.  $30,204,000  People's Choice Home Loan, Inc. 
Initial 
Moody's  Fitch  S&P 

Current
Moody's Fitch  S&P 

Aaa AAA  AAA  Ca Aaa Aaa Aaa Aa1 Aa1                AAA  Ca AAA  Ca AAA  Caa3 AA+  C AA+  C

C

CCC D CC CCC CC CC

7  8  9 

Aaa Aaa Aaa

        

AAA  Ba2 AAA  Caa1 AAA  C

BB+ B‐ CCC

10 

Aa1

  

AA+  C

CC

11  12  13  14  15  16 

Aaa AAA  NR  Ca Aa1 Aa1 Aa2 Aaa Aaa                AA+  C AA+  C AA  C

C

NR CC CCC CC D AAA

AAA  Ca AAA  A1

14

Offering &  Original  Top  Tranche  Expenditure  Originators 17  BSABS   $6,850,000  Bear Stearns Residential Mortgage  2007‐HE1 2M1  EMC Mortgage Company   #  18  BSABS   2007‐HE2 2A4  $11,884,000  Bear Stearns Residential Mortgage  EMC Mortgage Company   Performance Credit Corp.  

Initial 
Moody's  Fitch  S&P 

Current
Moody's Fitch  S&P 

Aa1 Aaa

     

AA+  C AAA  C

CCC CCC

19 

BSABS   $33,704,000  Bear Stearns Residential Mortgage  2007‐HE2 2M1  EMC Mortgage Company   Performance Credit Corp.   BSABS   2007‐HE3 1A3  BSSLT   2007‐1 2A  BSSLT   2007‐1 3A  CARR   2006‐NC3 M1  CARR   2006‐NC5 M1  CARR   2006‐NC5 M2  CARR   2006‐OPT1 A3  CARR   2006‐RFC1 A4  CARR   2006‐RFC1 M1  CARR   2007‐FRE1 A3  CARR   2007‐FRE1 A4  CFLX   2007‐3 2A1  CHASE   2005‐A2 1A3  $25,000,000  Fieldstone Mortgage Company  Performance Credit Corp.   $36,000,000  Bear Stearns Residential Mortgage  SouthStar Funding LLC   Alliance Bancorp   $36,000,000  Bear Stearns Residential Mortgage  SouthStar Funding LLC   Alliance Bancorp   $19,000,000  New Century Mortgage Corp.  Home123 Corp.    $10,000,000  New Century Mortgage Corp.  Home123 Corp.    $10,500,000  New Century Mortgage Corp.  Home123 Corp.    $20,000,000  Option One Mortgage Corp.  $9,274,000  People's Choice Home Loan, Inc.  EFC Holdings Corp.   FMF Capital LLC   $5,500,000  People's Choice Home Loan, Inc.  EFC Holdings Corp.   FMF Capital LLC   $40,000,000  Fremont Investment & Loan  $13,201,000  Fremont Investment & Loan  $75,000,000  JPMorgan Chase Bank  $75,000,000  JPMorgan Chase Bank 

Aa1

  

AA+  C

CCC

20  21 

Aaa Aaa

     

AAA  Ca AAA  C

CCC D

22 

Aaa

  

AAA  C

D

23  24  25  26  27 

Aa1 AA+  AA+  C Aa1 AA+  AA+  C Aa1 AA  AA  C

C C C

CC CC CC

Aaa AAA  AAA  Ba3 CCC AA Aaa AAA  AAA  Ca CCC B‐

28 

Aa1 AA+  AA+  C

CC CCC

29  30  31  32  33  34  35  36 

Aaa AAA  AAA  C Aaa AAA  AAA  C Aaa    AAA  Caa3   

CC CCC CC CCC CCC C D C CCC D CCC AA CCC

AAA  AAA 

CWALT   $75,000,000  Countrywide Home Loans  2006‐36T2 2A1  CWHL   2007‐13 A1  CWL   2005‐14 3A2  CWL   2005‐AB4 2A3  $75,000,000  Countrywide Home Loans  $25,000,000  Countrywide Home Loans  $10,000,000  Countrywide Home Loans 

NR AAA  AAA  NR NR AAA  AAA  NR Aaa Aaa       AAA  Ba2 AAA  Caa3

15

Offering &  Tranche  37  IMSA   2006‐2 1A2B  #  38  39  40  41  42  IMSA   2006‐4 A2C  IMSA   2006‐5 1A1C  IMSA   2007‐2 1A1C 

Original  Top  Expenditure  Originators $25,000,000  Impac Funding Corp.  $69,300,000  Impac Funding Corp.  $75,000,000  Impac Funding Corp.  American Home Mortgage Corp.   $65,000,000  Impac Funding Corp.  

Initial 
Moody's  Fitch  S&P 

Current
Moody's Fitch  S&P 

Aaa Aaa Aaa Aaa Aaa Aaa

                 

AAA  Caa3 AAA  Ca/* CC  Caa3 AAA  Caa2 AAA  Ca AAA  Caa3

D D CC CC D CC

INDX   $50,000,000  IndyMac Bank, FSB 2006‐AR11 4A1  JPALT   2006‐A4 A5  JPALT   2006‐A7 1A4  JPALT   2007‐A1 1A3A  JPMAC   2006‐HE2 A5  JPMAC   2006‐HE2 M1  JPMMT   2006‐A1 2A2  LBMLT   2006‐10 M2  LBMLT   2006‐11 M2  LBMLT   2006‐5 2A3  LBMLT   2006‐5 2A4  LBMLT   2006‐7 M1  LUM   2006‐7 1A1  MSST   2007‐1 A4  NAA   2007‐1 2AM  NAA   2007‐3 A3  NCMT   2007‐1 M1  $70,056,000  Chase Bank USA, N.A.  Countrywide Home Loans   PHH Mortgage Corp.   $9,239,000  Flagstar Bank, FSB  Countrywide Home Loans   JPMorgan Chase Bank   $11,050,000  Chase Bank USA, N.A.  GreenPoint Mortgage Funding, Inc.   Countrywide Home Loans   $18,125,000  NovaStar Mortgage, Inc.  Ownit Mortgage Solutions, Inc.   $19,548,000  NovaStar Mortgage, Inc.  Ownit Mortgage Solutions, Inc.   $75,000,000  Countrywide Home Loans  Wells Fargo Bank, N.A.   $3,750,000  Long Beach Mortgage Company  $6,000,000  Long Beach Securities Corp   $20,000,000  Long Beach Mortgage Company  $8,000,000  Long Beach Mortgage Company   $8,000,000  Long Beach Securities Corp.   $35,000,000  Lehman Brothers Bank, FSB  National City Mortgage Company   GreenPoint Mortgage Funding, Inc.   $25,000,000  Accredited Home Lenders, Inc.  First NLC   $33,250,000  Silver State Financial Services, Inc. Wells Fargo Bank, N.A.  $52,033,000  American Home Mortgage Corp.  Brooks America Mortgage Corp   $18,429,000  Fremont Investment & Loan 

43 

Aaa

  

AAA  Ca

CCC

44 

Aaa

  

AAA  Caa3

D

45  46  47  48  49  50  51  52  53 

Aaa AAA  AAA  Ca Aa1 AA+  AA+  C AAA  AAA  Aa2 Aa2 Aaa Aaa             AA  AA     C C

CC CCC C C CCC CC D D CCC CCC D C D CC

AAA  Ca AAA  Ca

Aa1 AA+  AA+  C NR AAA  AAA  NR

54  55  56  57 

(P)A aa  Aaa Aaa Aa1

           

AAA  C AAA  C AAA  Ca AA+  C

CCC D D CCC

16

Offering &  Tranche  58  RAMP   2006‐NC2 A2  #  59  SACO   2006‐2 1A  SAMI   2006‐AR1 1A1 

Original  Top  Expenditure  Originators $25,000,000  Home123 Corp.  New Century Mortgage Corp.   $38,650,000  American Home Mortgage Corp.  Opteum Financial Services LLC   SouthStar Funding LLC   $12,861,000  First Horizon Home Loan Corp.  SouthStar Funding LLC   Countrywide Home Loans  

Initial 
Moody's  Fitch  S&P 

Current
Moody's Fitch  S&P 

Baa3     Aaa   

AAA  Caa1 AAA  C

CCC D

60 

Aaa

  

AAA  Caa3

CCC

61  62 

WAMU   $50,000,000  Washington Mutual Bank  2005‐AR18 1A1  WMABS   2006‐HE2 A3  WMALT   2005‐10 2A8  WMALT   2006‐1 3A6  $15,000,000  Long Beach Mortgage Company  Mandalay Mortgage, LLC   Home Loan Corporation  $35,454,950  Washington Mutual Mortgage Securities  Corp.   $55,286,950  GreenPoint Mortgage Corp.  MortgageIT, Inc.   New Century Mortgage Corp.   Aaa

AAA  AAA    

  

CC CCC CCC

AAA  Ca

63  64 

Aaa Aaa

     

AAA  Ca AAA  Caa3

CCC D

65  66 

WMALT   $41,992,000  Quicken Loans, Inc. 2006‐AR10 A3A  Washington Mutual Bank   WMALT   2007‐2 1A2  WMALT   2007‐OC1 A3  WMALT   2007‐OC1 A4  $75,000,000  Washington Mutual Bank  GreenPoint Mortgage Funding, Inc.   First National Bank of Arizona   $6,403,000  Ameriquest Mortgage Company  The Mortgage Store Financial, Inc.   $13,428,000  Ameriquest Mortgage Company  The Mortgage Store Financial, Inc.  

Aaa Aaa

     

AAA  Caa3 AAA  Caa3

CCC D

67  68 

Aaa Aaa

     

AAA  Ca AAA  Ca

D D

B. 43.

Defendants’ Activities In The Subprime Mortgage Arena Defendants’ activities as a buyer, financer and securitizer of residential mortgage

loans have been the focus of numerous government investigations and prosecutions as well as private investor lawsuits. 44. Defendants’ activities were integral to the growth and proliferation of high-risk Mortgage originators generated profits

mortgages that contributed to the financial crisis.

primarily through the sale of their loans to investment banks like Defendants, and the originators were therefore driven to originate and sell as many loans as possible. Increased demand for mortgages by banks like Defendants, which, as noted above, were competing to sell 17

mortgage-backed products, led to increased volume in mortgage originations. That increased volume, in turn, led to a decrease in the gain-on-sale margins that mortgage originators received from selling pools of loans. As a result, originators began to borrow money from the same large banks that were buying their mortgages in order to fund the origination of even more mortgages. 45. One of the principal ways originators obtained such capital was by establishing a

warehouse line of credit with an investment bank. The line of credit, in turn, would be secured by the very mortgage loans that the investment bank would purchase for securitization. Investment banks, such as Defendants, earned fees and interest income on those warehouse lines of credit. C. 46. Defendants’ Role Was To Ensure The Quality Of The Loans Backing The RMBS Defendants and the mortgage originators utilized two methods to securitize

mortgages into RMBS for sale to investors. Specifically, the originators aggregated the loans into pools and would either (1) deposit them into a trust that would issue RMBS backed by the loans (referred to herein as an “originator securitization”), or (2) sell the loan pools to an investment bank, and the investment bank would then deposit the securities into a trust that would issue securities backed by the loans (“principal securitization”). Under the first

approach, Defendants profited by the fees they received by serving as an underwriter of the securities issued by the originator. Under the second approach, referred to herein as a “principal securitization” because the investment bank is securitizing the loans on its own behalf, Defendants profited off of the difference in the price it paid for the loan pools it purchased from the originator and that which it received from the sale of those loans as RMBS. 47. Most of the RMBS purchased by BayernLB at issue in this action were

securitized through principal securitization, whereby Defendants would first purchase loan

18

pools originated by third-party originators and/or loan sellers and then sell those loans into the RMBS trust as the sponsor of a mortgage securitization. Some investors prefer principal securitizations to originator securitizations because the involvement of a sophisticated investment bank throughout the securitization process indicates a higher degree of oversight and due diligence on the mortgages being selected for inclusion in the RMBS. 48. Indeed, Defendants routinely used an outside third-party due diligence provider,

Clayton Holdings, Inc. (“Clayton”), to perform due diligence on the pools of mortgages that Defendants would securitize. 49. Specifically, before purchasing loans from an originator in a principal

securitization, Defendants would perform due diligence on the mortgage loan pools by examining three areas—credit, compliance and valuation. First, credit diligence examined a sampling of the individual loans in a given loan pool to assess their quality and compliance with the underwriting guidelines of the originator. An originator’s underwriting guidelines are a critical tool for investors to evaluate the risk of default on the loans that serve as collateral for RMBS. Prudent lending standards—as articulated in an originator’s underwriting guidelines— are addressed in numerous federal guidance statements requiring that federally-regulated institutions adopt well-defined underwriting parameters such as acceptable loan-to-value ratios, debt-to-income ratios, and minimum acceptable credit scores.1 Those federal standards have been adopted by the subprime industry as a whole through substantially similar guidance published by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators. These standards are intended not only to protect borrowers to
1

See, e.g., 12 C.F.R. Part 34, subpart D (Office of the Comptroller of Currency standards); 12 C.F.R. Part 208, subpart C (Board of Governors of the Federal Reserve standards); 12 C.F.R. Part 365 (Federal Deposit Insurance Corporation standards); 12 C.F.R. 560.100 and 12 C.F.R. 560.101 (Office of Thrift Supervision standards); and 12 CFR 701.21 (National Credit Union Administration standards). 19

ensure that they can repay their loans, but also to ensure the safety and soundness of individual lending institutions and the financial system as a whole. Second, compliance diligence focused on whether the loans were originated in compliance with state, federal and local laws, including predatory lending and truth-in-lending statutes. Third, valuation diligence checked the accuracy of the originator’s reported property valuations of the collateral backing the loans. In a

principal securitization, this due diligence provides comfort to investors that Defendants has ensured that only mortgages that conform to the requirements of the RMBS at issue are being securitized. 50. In truth, Defendants routinely ignored the pervasive defects that their due

diligence identified in the loans they had purchased for securitization. Defendants deliberately concealed these defects from BayernLB and other investors in order to increase their own profits, preserve their ongoing business relationships with the RMBS originators, and move risk from their own balance sheet onto investors. As discussed in further detail below, Defendants used their asymmetrical informational advantage to reap illicit profits. D. 51. Factors Impacting The Quality Of The Defendants’ RMBS Federal regulators have long recognized the importance of sound lending and

have for years issued guidance on subprime mortgage products to ensure that borrowers are able to repay their loans. For example, the 1993 Interagency Guidelines for Real Estate Lending, issued jointly by the Board of Governors of the Federal Reserve System (Defendants’ primary federal regulator), the Office of the Comptroller of the Treasury, the Federal Depository Insurance Commission, the Office of Thrift Supervision, and the National Credit Union Administration, provided that prudently underwritten real estate loans (subprime or otherwise) “should reflect all relevant credit factors, including . . . the capacity of the borrower, or income from the underlying property, to adequately service the debt.” Federal regulators responded to

20

the growth of newer subprime products with enhanced guidance in 1999, warning that if risks associated with subprime lending were “not properly controlled, the agencies consider subprime lending a high-risk activity that is unsafe and unsound.” 52. The 1999 guidance recognized the critical role that banks such as Defendants,

which comprised the primary market for the sale of subprime loans, played in dictating and enforcing underwriting standards for subprime mortgage lending: Institutions should not accept loans from originators that do not meet their underwriting criteria, and should regularly review loans offered to ensure that loans purchased continue to meet those criteria. Deterioration in the quality of purchased loans or in the portfolio’s actual performance versus expectations requires a thorough reevaluation of the lenders or dealers who originated or sold the loans, as well as a reevaluation of the institution’s criteria for underwriting loans and selecting dealers and lenders. Any such deterioration may also highlight the need to modify or terminate the correspondent relationship or make adjustments to underwriting and dealer/lender selection criteria. 53. The guidance also required that “institutions . . . perform an ongoing analysis of

subprime loans,” “have information systems in place to segment and stratify their portfolio (e.g., by originator, loan-to-value, debt-to-income ratios, credit scores) and produce reports for management to evaluate the performance of subprime loans,” determine “whether performance meets expectations,” and “consider the source and characteristics of loans that do not meet expectations and make changes in their underwriting policies and loan administration procedures to restore performance to acceptable levels.” 54. Indeed, the fundamental basis upon which RMBS are valued is the ability of the

borrowers to repay the principal and interest on the underlying loans and the adequacy of the collateral. Thus, proper loan underwriting is critical to assessing the borrowers’ ability to repay the loans, and a necessary consideration when purchasing and pooling loans. If the loans pooled in the RMBS suffer defaults and delinquencies in excess of the assumptions built into 21

the certificate payment structure, RMBS investors suffer losses because of the diminished cash flow into the RMBS. 55. Likewise, independent and accurate appraisals of the collateralized real estate are

essential to ensure that the mortgage or home equity loan can be satisfied in the event of a default and foreclosure on a particular property. An accurate appraisal is necessary to determine the likely price at which the foreclosed property can be sold and, thus, the amount of money available to pass through to certificate holders. 56. An accurate appraisal is also critical to calculating the loan-to-value (“LTV”)

ratio, which is a financial metric commonly used to evaluate the price and risk of RMBS. The LTV ratio expresses the amount of mortgage or loan as a percentage of the appraised value of the collateral property. For example, if a borrower seeks to borrow $90,000 to purchase a home worth $100,000, the LTV ratio is equal to $90,000 divided by $100,000, or 90%. If, however, the appraised value of the house has been artificially inflated to $100,000 from $90,000, the real LTV ratio would be 100% ($90,000 divided by $90,000). The term combined loan-to-value ratio (“CLTV”) applies to the situation in which more than one loan is secured by a particular property. For example, a property valued at $100,000 with a single mortgage of $50,000 has an LTV of 50%. A similar property with a value of $100,000 with a first mortgage of $50,000 and a second lien mortgage of $25,000 has an aggregate mortgage balance of $75,000, and a CLTV of 75%. 57. From an investor’s perspective, a high LTV or CLTV ratio represents a greater

risk of default on the loan. First, borrowers with a small equity position in the underlying property have “less to lose” in the event of a default. Second, even a slight drop in housing prices might cause a loan with a high LTV ratio to exceed the value of the underlying collateral,

22

which might cause the borrower to default and would prevent the issuing trust from recouping its expected return in the case of foreclosure and subsequent sale of the property. 58. Consequently, the LTV ratios of the loans underlying the RMBS are important to

investors’ assessment of the value of such RMBS. Prospectuses typically provide information regarding the LTV ratios, and even guarantee certain LTV ratio limits for the loans that will support the RMBS, often providing for an express limit of 100%. As discussed below, this representation was false because a substantial portion of the loans purchased and securitized by Defendants had LTVs and CLTVs that exceeded 100% as calculated under independent property valuations obtained by Defendants. 59. Another important metric when considering a borrower’s ability to repay a loan is

a borrower’s debt-to-income ratio, or DTI, which reflects the increased risk that borrowers whose debt is relatively high compared to their income will default on their loans. While a borrower’s current DTI is good measure of his or her capacity to repay a fixed rate mortgage, other loan products, such as adjustable rate mortgages (“ARMs”), have initial “teaser” rates that reset at much higher index rates after a certain period. A “fully indexed rate” accounts for this interest rate reset, and represents the interest rate over the life of the loan, calculated by adding the index rate at origination and the margin that a lender adds to the index rate after the initial “teaser” period. For example, if the current index rate is 2.5%, and if the margin on a particular loan is 3%, the fully indexed rate on that loan is 5.5%. Because the fully indexed rate accounts for the current value of the interest rate index used by an ARM, it is a better measure of a borrower’s ability to repay the loan. 60. In 2006, the interagency regulators, responding to the explosive growth of non-

traditional mortgage products, provided revised guidance explicitly addressing how institutions should calculate a borrower’s DTI. Specifically, the underwriting guidelines state that “[w]hen 23

an institution offers nontraditional mortgage loan products, underwriting standards should address the effect of a substantial payment increase on the borrower’s capacity to repay when loan amortization begins.” Moreover, according to the guidance: For all nontraditional mortgage loan products, an institution’s analysis of a borrower’s repayment capacity should include an evaluation of their ability to repay the debt by final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule. In addition, for products that permit negative amortization, the repayment analysis should be based upon the initial loan amount plus any balance increase that may accrue from the negative amortization provision.2 61. The federal guidance thus served to provide assurance to investors that

investments in instruments backed by subprime mortgages could be safe and conservative products so long as the underlying loans were properly underwritten and scrutinized. Indeed, the federal guidance made clear that heightened attention to and rigorous compliance with strict underwriting standards was critical for institutions engaged in subprime lending due to the unique risks posed by that borrower population. As regulators made clear, in the context of RMBS such as those purchased by BayernLB here, representations concerning underwriting guidelines, appraisals, LTVs and DTIs were paramount. V. THE OFFERING MATERIALS MISREPRESENTED THE UNDERWRITING AND QUALITY OF THE LOANS BACKING THE DEFENDANTS’ RMBS 62. Contrary to the statements in the Offering Materials and other communications by

Defendants used to solicit BayernLB’s investment in the RMBS, the originators whose loans served as collateral for BayernLB’s investments routinely and egregiously violated their stated underwriting guidelines. As a result, the mortgages they originated and sold to Defendants for securitization presented a materially higher risk to investors than represented by Defendants in the Offering Materials.
2

All emphasis added unless otherwise indicated. 24

63.

For example, the BALTA 2006-3 prospectus supplement described EMC

Mortgage Corporation’s underwriting standards, in relevant part, as follows: The EMC mortgage loans have either been originated or purchased by an originator and were generally underwritten in accordance with the standards described herein. Exceptions to the underwriting guidelines are permitted when the seller’s performance supports such action and the variance request is approved by credit management. Such underwriting standards are applied to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. These standards are applied in accordance with the applicable federal and state laws and regulations. Exceptions to the underwriting standards are permitted where compensating factors are present and are managed through a formal exception process. 64. Further, like the other originators whose loans backed the Defendants’ RMBS

purchased by BayernLB, the Offering Materials described the documentation that EMC purportedly required prospective borrowers to produce in order to properly obtain a mortgage loan. For example, the BALTA 2006-3 prospectus supplement stated, in relevant part, as

follows: Generally, each mortgagor will have been required to complete an application designed to provide to the lender pertinent credit information concerning the mortgagor. The mortgagor will have given information with respect to its assets, liabilities, income (except as described below), credit history, employment history and personal information, and will have furnished the lender with authorization to obtain a credit report which summarizes the mortgagor’s credit history. 65. The Offering Materials also provided information regarding the appraisal For example, the BALTA 2006-3

standards and practices employed by the Defendants.

prospectus supplement described EMC Mortgage Corporation’s appraisal practices as follows: Each mortgaged property relating to an EMC mortgage loan has been appraised by a qualified independent appraiser who is approved by each lender. All appraisals are required to conform 25

to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standard Board of the Appraisal Foundation. Each appraisal must meet the requirements of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac require, among other things, that the appraiser, or its agent on its behalf, personally inspect the property inside and out, verify whether the property was in good condition and verify that construction, if new, had been substantially completed. The appraisal generally will have been based on prices obtained on recent sales of comparable properties, determined in accordance with Fannie Mae and Freddie Mac guidelines. In certain cases an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property may be used. 66. These statements of material fact, and materially similar statements appearing in

all of the Defendants’ RMBS Offering Materials, were false and misleading when made because the originators discussed below failed to adhere to their established underwriting standards. Indeed, the reckless practices of the mortgage originators whose loans backed the Defendants’ RMBS rendered numerous statements concerning the originators’ guidelines, the LTV ratios, property appraisal values, and the credit ratings assigned to the RMBS materially false and misleading. As such, the riskiness of the loans underlying the RMBS purchased by BayernLB, and thus the true risk profile of the RMBS was materially misrepresented. Through Defendants’ intimate knowledge of the originators’ underwriting practices gleaned through its warehouse lending relationships with some of the most prominent originators that provided the loans backing the RMBS, as well as their due diligence, Defendants knew of these violations, and concealed them from BayernLB. A. 67. EMC Violated Its Underwriting Guidelines EMC was one of the primary mortgage originators of the loans backing

BayernLB’s Bear Stearns-related RMBS investments. The Offering Materials relied upon by BayernLB in purchasing the RMBS backed by loans originated by EMC contained false and

26

misleading statements of material fact regarding its underwriting practices and guidelines. For example, the BALTA 2006-4 prospectus supplement described EMC’s underwriting guidelines, in relevant part, as follows: The EMC mortgage loans have either been originated or purchased by an originator and were generally underwritten in accordance with the standards described herein. Exceptions to the underwriting guidelines are permitted when the seller’s performance supports such action and the variance request is approved by credit management. Such underwriting standards are applied to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. These standards are applied in accordance with the applicable federal and state laws and regulations. Exceptions to the underwriting standards are permitted where compensating factors are present and are managed through a formal exception process. 68. The Offering Materials relied upon by BayernLB also contained misstatements

of material fact concerning the documentation that EMC’s prospective borrowers were purportedly required to submit in order to properly obtain a mortgage loan. For example, the BALTA 2006-4 prospectus supplement represented, in relevant part, as follows: Generally, each mortgagor will have been required to complete an application designed to provide to the lender pertinent credit information concerning the mortgagor. The mortgagor will have given information with respect to its assets, liabilities, income (except as described below), credit history, employment history and personal information, and will have furnished the lender with authorization to obtain a credit report which summarizes the mortgagor’s credit history. 69. These statements were false and misleading when made. In fact, EMC

systematically disregarded a borrower’s ability to pay when originating or acquiring loans, without regard to any compensating factors. 70. The Offering Materials for the BALTA 2006-4 RMBS used to solicit

BayernLB’s purchase of RMBS backed by EMC-originated loans also represented that EMC 27

ensured proper appraisals when issuing loans to borrowers. For example, the BALTA 2006-4 prospectus supplement explained that: Each mortgaged property relating to an EMC mortgage loan has been appraised by a qualified independent appraiser who is approved by each lender. All appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standard Board of the Appraisal Foundation. Each appraisal must meet the requirements of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac require, among other things, that the appraiser, or its agent on its behalf, personally inspect the property inside and out, verify whether the property was in good condition and verify that construction, if new, had been substantially completed. The appraisal generally will have been based on prices obtained on recent sales of comparable properties, determined in accordance with Fannie Mae and Freddie Mac guidelines. In certain cases an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property may be used. 71. These statements were false and misleading when made. In order to increase

loan origination volume, EMC routinely originated or acquired mortgages that were issued utilizing biased appraisers and used inflated appraisals as a matter of course to issue loans to borrowers who would not otherwise qualify for the mortgage. B. 72. Encore Credit Corporation Violated Its Underwriting Guidelines Encore Credit Corporation (“Encore”) originated a substantial percentage of the

loans for several of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Encore’s underwriting standards and practices. For example, the prospectus supplement for the BSABS 2006-HE3 RMBS described Encore’s underwriting guidelines, in relevant part, as follows: Encore has developed internal underwriting processes and criteria that they believe generate quality loans and give it the ability to approve and fund loans quickly. Encore’s internal underwriting guidelines are designed to help it evaluate a borrower’s credit

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history, capacity, willingness and ability to repay the loan, and the value and adequacy of the collateral. * * *

If an individual loan application does not meet Encore’s formal written underwriting guidelines, but the underwriter is confident both that the borrower has the ability and willingness to pay and that the property provides adequate collateral for the borrower’s obligations, Encore’s underwriters can make underwriting exceptions up to certain limits within their formal exception policies and approval authorities. All of Encore’s loan programs have tiered exception levels whereby approval of certain exceptions, such as LTV ratio exceptions, loan amount exceptions, and debt-to-income exceptions, are escalated to higher loan approval authority levels. * * *

In the event that an underwriting exception is required for approval, only specifically designated personnel, dictated by the exception needed, are authorized to make such exceptions. * * *

The underwriting of a mortgage loan to be originated or purchased by Encore generally includes a review of the completed loan package, which includes the loan application, a current appraisal, a preliminary title report and a credit report. All loan applications and all closed loans offered to Encore for purchase must be approved by Encore in accordance with its underwriting criteria. * * *

Verification of Borrower’s Income. Encore’s mortgage programs include several levels of documentation used to verify the borrower’s income. . . . A verification of employment and position is done for each stated income loan. Appraisal Review. An assessment of the adequacy of the real property as collateral for the loan is primarily based upon an appraisal of the property and a calculation of the LTV ratio of the loan applied for and the combined LTV to the appraised value of the property at the time of origination. Appraisers determine a property’s value by reference to the sales prices of comparable properties recently sold, adjusted to reflect the condition of the property as determined through inspection.

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*

*

*

Quality Control. Encore’s quality control program is intended to monitor loan production with the overall goal of improving the quality of loan production generated by Encore’s retail loan operation and independent mortgage broker channel. 73. The above statements of material fact were false and misleading when made

because in truth, Encore: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. C. 74. Performance Credit Corporation Violated Its Underwriting Guidelines Performance Credit Corporation f/k/a Encore Credit Corporation (“Performance”)

originated a substantial percentage of the loans for several of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Performance’s underwriting standards and practices. For example, the prospectus supplement for the BSABS 2007-HE2 RMBS described Performance’s underwriting guidelines, in relevant part, as follows: If an individual loan application did not meet PCC’s formal written underwriting guidelines, but the underwriter was confident both that the borrower had the ability and willingness to pay and that the property provided adequate collateral for the borrower’s obligations, PCC’s underwriters could make underwriting exceptions up to certain limits within their formal exception policies and approval authorities. All of PCC’s loan programs had tiered exception levels whereby approval of certain exceptions, such as LTV ratio exceptions, loan amount exceptions, 30

and debt-to-income exceptions, are escalated to higher loan approval authority levels. PCC’s guidelines were primarily intended to (1) determine that the borrower has the ability to repay the mortgage loan in accordance with its terms and (2) determine that the related mortgaged property will provide sufficient value to recover the investment if the borrower defaults. The underwriting of a mortgage loan to be originated or purchased by PCC generally included a review of the completed loan package, which included the loan application, a current appraisal, a preliminary title report and a credit report. All loan applications and all closed loans offered to PCC for purchase had to be approved by PCC in accordance with its underwriting criteria. PCC regularly reviewed its underwriting guidelines and made changes when appropriate to respond to market conditions, the performance of loans representing a particular loan product and changes in laws or regulations. * * *

Verification of Borrower’s Income. PCC’s mortgage programs included several levels of documentation used to verify the borrower’s income. * * *

Appraisal Review. An assessment of the adequacy of the real property as collateral for the loan was made, primarily based upon an appraisal of the property and a calculation of the LTV ratio of the loan applied for and the combined LTV to the appraised value of the property at the time of origination. Appraisers determined a property’s value by reference to the sales prices of comparable properties recently sold, adjusted to reflect the condition of the property as determined through inspection. As lenders that generally specialize in loans made to credit impaired borrowers, PCC implemented an appraisal review process to support the value used to determine the LTV ratio. PCC used a variety of steps in its appraisal review process in order to attempt to ensure the accuracy of the value provided by the initial appraiser. This includes obtaining an independent automated property review on a majority of the loans that it originates. PCC’s review process required a written review on every appraisal report either by a qualified independent underwriter or by a staff appraiser. PCC employed several methods to determine which appraisals are higher risk and attempted to direct those reviews to one of its staff appraisers. The criteria for identifying higher risk appraisal reports included those properties receiving lower scores from the automated property review, properties with larger loan amounts and those units and properties that fail a scoring template 31

used by the internal underwriting staff. PCC also employed an appraisal review staff consisting mostly of staff appraisers. As part of their review process, the review department where available, verified the subject property’s sales history, those of comparable properties as well as reviews additional comparable data. In some cases the value of the property used to determine the LTV ratio was reduced where it was determined by PCC’s staff appraisers that the original appraised value cannot be supported. Quality Control. PCC’s quality control program was intended to monitor loan production with the overall goal of improving the quality of loan production generated by its retail loan operation and independent mortgage broker channel. Through systematically monitoring loan production, the quality control department could identify and communicate to management existing or potential underwriting and loan packaging problems or other areas of concern. The quality control file review ensured compliance with PCC’s underwriting guidelines and federal and state regulations. This was accomplished by focusing on: • the accuracy of all credit and legal information; • a collateral analysis, which may include a desk or field reappraisal of the property and review of the original appraisal; • employment and/or income verification; and • legal document review to ensure that the necessary documents are in place. 75. The above statements of material fact were false and misleading when made

because in truth, Performance: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process.

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D. 76.

Bear Stearns Residential Mortgage Corporation Violated Its Underwriting Guidelines Bear Stearns Residential Mortgage Corporation (“BSRM”) originated a

substantial percentage of the loans for several of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding BSRM’s underwriting standards and practices. For example, the prospectus

supplement for the BSABS 2007-HE1 RMBS described BSRM’s underwriting guidelines, in relevant part, as follows: The BSRM Underwriting Guidelines are intended to make sure that (i) the loan terms relate to the borrower’s ability to repay and (ii) the value and marketability of the property are acceptable. Exceptions to the BSRM Underwriting Guidelines are considered with reasonable compensating factors on a case-by-case basis and at the sole discretion of senior management. When exception loans are reviewed, all loan elements are examined as a whole to determine the level of risk associated with approving the loan, including appraisal, credit report, employment, compensating factors and borrower’s willingness and ability to repay the loan. Compensating factors may include, but are not limited to, validated or sourced/seasoned liquid reserves in excess of the program requirements, borrower’s demonstrated ability to accumulate savings or devote a greater portion of income to housing expense and borrower’s potential for increased earnings based on education, job training, etc. Loan characteristics such as refinance transactions where borrowers are reducing mortgage payments and lowering debt ratios may become compensating factors as well. * * *

All of the BSRM mortgage loans originated by BSRM are based on loan application packages submitted through the wholesale or correspondent channel. Each loan application package has an application completed by the applicant that includes information with respect to the applicant’s liabilities, income, credit history and employment history, as well as certain other personal information. The mortgage loan file also contains a credit report on each applicant from an approved credit reporting company. Credit history is measured on credit depth, number of obligations,

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delinquency patterns and demonstrated intent to repay reports, which can be used to underwrite any file. * * *

The BSRM Underwriting Guidelines are applied in accordance with a procedure that complies with applicable federal and state laws and regulations and requires (i) an appraisal of the mortgaged property that conforms to the Uniform Standards of Professional Appraisal Practice and are generally on forms similar to those acceptable to Fannie Mae and Freddie Mac and (ii) a review of such appraisal, which review may be conducted by a representative of BSRM. The maximum allowable loan-to-value ratio varies based upon the income documentation, property type, creditworthiness, debt service-to-income ratio of the applicant and the overall risks associated with the loan decision. 77. The above statements of material fact were false and misleading when made

because in truth, BSRM: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. E. 78. Countrywide Violated Its Underwriting Guidelines Countrywide originated a substantial percentage of the loans in several of the

Defendants’ RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Countrywide’s underwriting standards and practices. For example, the prospectus supplement for the BALTA 2006-4 RMBS

represented Countrywide’s underwriting guidelines, in relevant part, as follows: As part of its evaluation of potential borrowers, Countrywide Home Loans generally requires a description of income. If

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required by its underwriting guidelines, Countrywide Home Loans obtains employment verification providing current and historical income information and/or a telephonic employment confirmation. Such employment verification may be obtained, either through analysis of the prospective borrower’s recent pay stub and/or W-2 forms for the most recent two years, relevant portions of the most recent two years’ tax returns, or from the prospective borrower’s employer, wherein the employer reports the length of employment and current salary with that organization. Self-employed prospective borrowers generally are required to submit relevant portions of their federal tax returns for the past two years. * * *

Countrywide Home Loans’ underwriting standards are applied by or on behalf of Countrywide Home Loans to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. Under those standards, a prospective borrower must generally demonstrate that the ratio of the borrower’s monthly housing expenses (including principal and interest on the proposed mortgage loan and, as applicable, the related monthly portion of property taxes, hazard insurance and mortgage insurance) to the borrower’s monthly gross income and the ratio of total monthly debt to the monthly gross income (the “debt-to-income” ratios) are within acceptable limits. . . . Exceptions to Countrywide Home Loans’ underwriting guidelines may be made if compensating factors are demonstrated by a prospective borrower. * * *

The nature of the information that a borrower is required to disclose and whether the information is verified depends, in part, on the documentation program used in the origination process. In general under the Full Documentation Loan Program (the “Full Documentation Program”), each prospective borrower is required to complete an application which includes information with respect to the applicant’s assets, liabilities, income, credit history, employment history and other personal information. Self-employed individuals are generally required to submit their two most recent federal income tax returns. Under the Full Documentation Program, the underwriter verifies the information contained in the application relating to employment, income, assets and mortgages. * * *

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Except with respect to the mortgage loans originated pursuant to its Streamlined Documentation Program, whose values were confirmed with a Fannie Mae proprietary automated valuation model, Countrywide Home Loans obtains appraisals from independent appraisers or appraisal services for properties that are to secure mortgage loans. The appraisers inspect and appraise the proposed mortgaged property and verify that the property is in acceptable condition. Following each appraisal, the appraiser prepares a report which includes a market data analysis based on recent sales of comparable homes in the area and, when deemed appropriate, a replacement cost analysis based on the current cost of constructing a similar home. All appraisals are required to conform to Fannie Mae or Freddie Mac appraisal standards then in effect. 79. These statements were false and misleading when made in that they

misrepresented that Countrywide: (i) systematically failed to follow its stated underwriting standards; (ii) allowed pervasive exceptions to its stated underwriting standards in the absence of compensating factors; (iii) disregarded credit quality in favor of generating increased loan volume; and (iv) violated its stated appraisal standards and in many instances materially inflated the values of the underlying mortgage properties in the loan origination and underwriting process. F. 80. New Century Violated Its Underwriting Guidelines New Century Mortgage Corporation and its affiliated entities such as Home123

Corporation (“New Century”) originated a substantial percentage of the loans in several of the Defendants’ RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding New Century’s underwriting standards and practices. For example, the prospectus supplement for the CARR 2006-NC3 RMBS

represented New Century’s underwriting guidelines, in relevant part, as follows: The underwriting guidelines are primarily intended to assess the borrower’s ability to repay the mortgage loan, to assess the value of the mortgaged property and to evaluate the adequacy of the property as collateral for the mortgage loan. All of the mortgage

36

loans in the mortgage pool were also underwritten with a view toward the resale of the mortgage loans in the secondary mortgage market. While the originators’ primary consideration in underwriting a mortgage loan is the value of the mortgaged property, the originators also consider, among other things, a mortgagor’s credit history, repayment ability and debt service-toincome ratio, as well as the type and use of the mortgaged property. The mortgage loans, in most cases, bear higher rates of interest than mortgage loans that are originated in accordance with Fannie Mae and Freddie Mac standards, which is likely to result in rates of delinquencies and foreclosures that are higher, and that may be substantially higher, than those experienced by portfolios of mortgage loans underwritten in a more traditional manner. * * *

The mortgage loans will have been originated in accordance with the underwriting guidelines. On a case by case basis, exceptions to the underwriting guidelines are made where compensating factors exist. It is expected that a substantial portion of the mortgage loans in the mortgage pool that were originated by the originators will represent these exceptions. Each applicant completes an application which includes information with respect to the applicant’s liabilities, income, credit history, employment history and personal information. The underwriting guidelines require a credit report on each applicant from a credit reporting company. The report typically contains information relating to matters such as credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions or judgments. Mortgaged properties that are to secure mortgage loans are appraised by qualified independent appraisers. These appraisers inspect and appraise the subject property and verify that the property is in acceptable condition. Following each appraisal, the appraiser prepares a report which includes a market value analysis based on recent sales of comparable homes in the area, and, when deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. All appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and are on forms acceptable to Fannie Mae and Freddie Mac. * * *

Exceptions. As described above, the foregoing categories and criteria are guidelines only. On a case by case basis, it may be 37

determined that an applicant warrants a debt service-to-income ratio exception, a pricing exception, a loan-to-value ratio exception, an exception from certain requirements of a particular risk category, etc. An exception may be allowed if the application reflects compensating factors, such as: low loan-to-value ratio; pride of ownership; a maximum of one 30 day late payment on all mortgage loans during the last 12 months; and stable employment or ownership of current residence of four or more years. An exception may also be allowed if the applicant places a down payment through escrow of at least 20% of the purchase price of the mortgaged property or if the new loan reduces the applicant’s monthly aggregate mortgage payment by 25% or more. Accordingly, a mortgagor may qualify in a more favorable risk category than, in the absence of compensating factors, would satisfy only the criteria of a less favorable risk category. It is expected that a substantial portion of the mortgage loans will represent these kinds of exceptions. 81. These statements were false and misleading when made in that they

misrepresented that New Century: (i) systematically failed to follow its stated underwriting standards; (ii) allowed pervasive exceptions to its stated underwriting standards in the absence of compensating factors; (iii) disregarded credit quality in favor of generating increased loan volume; and (iv) violated its stated appraisal standards and in many instances materially inflated the values of the underlying mortgage properties in the loan origination and underwriting process. G. 82. Fremont Violated Its Underwriting Guidelines Fremont originated a substantial percentage of the loans for several of the RMBS

purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Fremont’s underwriting standards and practices. For

example, the prospectus supplement for the CARR 2007-FRE1 RMBS described Fremont’s underwriting guidelines, in relevant part, as follows: Mortgage loans were underwritten in accordance with Fremont’s underwriting programs, referred to as the Scored Programs (“Scored Programs”), subject to various exceptions as described in

38

this section. Fremont began originating mortgage loans pursuant to Scored Programs in 2001 and the Scored Programs were the exclusive type of origination programs beginning in 2004. Fremont’s underwriting guidelines were primarily intended to assess the ability and willingness of the borrower to repay the debt and to evaluate the adequacy of the mortgaged property as collateral for the mortgage loan. * * *

All of the mortgage loans were underwritten by Fremont’s underwriters having the appropriate approval authority. Each underwriter was granted a level of authority commensurate with their proven judgment, experience and credit skills. On a case by case basis, Fremont may have determined that, based upon compensating factors, a prospective mortgagor not strictly qualifying under the underwriting risk category guidelines described below was nonetheless qualified to receive a loan, i.e., an underwriting exception. Compensating factors may have included, but were not limited to, low loan-to-value ratio, low debt to income ratio, substantial liquid assets, good credit history, stable employment and time in residence at the applicant’s current address. It is expected that a substantial portion of the mortgage loans may represent such underwriting exceptions. * * *

Fremont’s underwriting guidelines were applied in accordance with a procedure which complies with applicable federal and state laws and regulations and required an appraisal of the mortgaged property, and if appropriate, a review appraisal. Generally, initial appraisals were provided by qualified independent appraisers licensed in their respective states. Review appraisals may have only been provided by appraisers approved by Fremont. In some cases, Fremont relied on a statistical appraisal methodology provided by a third-party. Qualified independent appraisers must have met minimum standards of licensing and provide errors and omissions insurance in states where it was required to become approved to do business with Fremont. Each uniform residential appraisal report included a market data analysis based on recent sales of comparable homes in the area and, where deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. The review appraisal may have been a desk review, field review or an automated valuation report that confirmed or supported the original appraiser’s value of the mortgaged premises. * * 39 *

Fremont conducted a number of quality control procedures, including a post-funding review as well as a full re-underwriting of a random selection of loans to assure asset quality. Under the funding review, all loans were reviewed to verify credit grading, documentation compliance and data accuracy. Under the asset quality procedure, a random selection of each month’s originations was reviewed. The loan review confirmed the existence and accuracy of legal documents, credit documentation, appraisal analysis and underwriting decision. A report detailing review findings and level of error was sent monthly to each loan production office for response. The review findings and branch responses were then reviewed by Fremont’s senior management. Adverse findings were tracked monthly. 83. The above statements of material fact were false and misleading when made

because, in truth, Fremont: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to its underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. H. 84. Impac Funding Corporation Violated Its Underwriting Guidelines Impac Funding Corporation (“Impac”) originated a substantial percentage of the

loans for several of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Impac’s underwriting standards and practices. For example, the prospectus supplement for the BSABS 2006-IM1 RMBS described Impac’s underwriting guidelines, in relevant part, as follows: Approximately 90.90% of the mortgage loans were underwritten pursuant to, or in accordance with, the standards of the Originator’s Progressive Series Program.

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* The Progressive Series Program

*

*

General. The underwriting guidelines utilized in the Progressive Series Program, as developed by the Originator, are intended to assess the borrower’s ability and willingness to repay the mortgage loan obligation and to assess the adequacy of the mortgaged property as collateral for the mortgage loan. The Progressive Series Program is designed to meet the needs of borrowers with excellent credit, as well as those whose credit has been adversely affected. . . . The philosophy of the Progressive Series Program is that no single borrower characteristic should automatically determine whether an application for a mortgage loan should be approved or disapproved. Lending decisions are based on a risk analysis assessment after the review of the entire mortgage loan file. Each mortgage loan is individually underwritten with emphasis placed on the overall quality of the mortgage loan. * * *

Each prospective borrower completes a mortgage loan application which includes information with respect to the applicant’s liabilities, income, credit history, employment history and personal information. The Originator requires a credit report on each applicant from a credit reporting company. The report typically contains information relating to credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions or judgments. * * *

Appraisals. The Originator does not publish an approved appraiser list for the conduit seller. Each conduit seller maintains its own list of appraisers, provided that each appraiser must: • be a state licensed or certified appraiser; • meet the independent appraiser requirements for staff appraisers, or, if appropriate, be on a list of appraisers specified by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC and the Office of Thrift Supervision under their respective real estate appraisal regulations adopted in accordance with Title XI of the Financial Institutions Reform Recovery and Enforcement Act of 1989, regardless of whether the seller is subject to those regulations; 41

• be experienced in the appraisal of properties similar to the type being appraised; • be actively engaged in appraisal work; and • subscribe to a code of ethics that is at least as strict as the code of the American Institute of Real Estate Appraisers or the Society of Real Estate Appraisers. * * *

Variations. The Originator uses the following parameters as guidelines only. On a case-by-case basis, the Originator may determine that the prospective mortgagor warrants an exception outside the standard program guidelines. An exception may be allowed if the loan application reflects certain compensating factors, including instances where the prospective mortgagor: • has demonstrated an ability to save and devote a greater portion of income to basic housing needs; • may have a potential for increased earnings and advancement because of education or special job training, even if the prospective mortgagor has just entered the job market; • has demonstrated an ability to maintain a debt free position; • may have short term income that is verifiable but could not be counted as stable income because it does not meet the remaining term requirements; and • has net worth substantial enough to suggest that repayment of the loan is within the prospective mortgagor’s ability. 85. The above statements of material fact were false and misleading when made

because in truth, Impac: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances

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materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. I. 86. Washington Mutual Bank Violated Its Underwriting Guidelines Washington Mutual Bank (“WaMu Bank”) originated or acquired a substantial The Offering

percentage of the loans for several of the RMBS purchased by BayernLB.

Materials for such RMBS contained false and misleading statements of material fact regarding WaMu Bank’s underwriting standards and practices. For example, the prospectus supplement for the WMALT 2007-2 RMBS described WaMu Bank’s underwriting guidelines, in relevant part, as follows: The sponsor’s underwriting standards and Washington Mutual Bank’s underwriting guidelines generally are intended to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. Some mortgage loans are manually underwritten, in which case an underwriter reviews a loan application and supporting documentation, if required, and a credit report of the borrower, and based on that review determines whether to originate a loan in the amount and with the terms stated in the loan application. * * *

Prospective borrowers are required to complete a standard loan application in which they may provide financial information regarding such factors as their assets, liabilities and related monthly payments, income, employment history and credit history. Each borrower also provides an authorization to access a credit report that summarizes the borrower’s credit history. * * *

Evaluation of the Borrower’s Repayment Ability Under all documentation programs other than the no ratio programs and the no documentation programs, in evaluating a prospective borrower’s ability to repay a mortgage loan, the loan underwriter considers the ratio of the borrower’s mortgage payments, real property taxes and other monthly housing expenses to the borrower’s gross income (referred to as the “housing-to43

income ratio” or “front end ratio”), and the ratio of the borrower’s total monthly debt (including certain non-housing expenses) to the borrower’s gross income (referred to as the “debt-to-income ratio” or “back end ratio”). The maximum acceptable ratios may vary depending on other loan factors, such as loan amount and loan purpose, loan-to-value ratio, credit score and the availability of other liquid assets. Exceptions to the ratio guidelines may be made when compensating factors are present. Evaluation of the Adequacy of the Collateral The adequacy of the mortgaged property as collateral generally is determined by an appraisal made in accordance with preestablished appraisal guidelines. At origination, all appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation, and are made on forms acceptable to Fannie Mae and/or Freddie Mac. Appraisers may be staff appraisers employed by Washington Mutual Bank or independent appraisers selected in accordance with the pre-established appraisal guidelines. Such guidelines generally require that the appraiser, or an agent on its behalf, personally inspect the property and verify whether the property is in adequate condition and, if the property is new construction, whether it is substantially completed. * * *

Documentation Programs Each mortgage loan has been underwritten under one of the following documentation programs. Under a full/alternative documentation program, a borrower’s employment and income are verified. The employment and income as stated in the prospective borrower’s loan application are verified either directly with the borrower’s stated employer(s) or through receipt of alternative documentation such as the borrower’s recent pay stub(s) and/or W-2 form(s) reflecting a minimum of 12 months of employment and income or, in the case of self-employed borrowers or borrowers who derive a substantial portion of their income from commissions, receipt of the borrower’s personal (and, if applicable, business) tax returns. For self-employed borrowers, profit and loss statements may also be required. Generally, under a full/alternative documentation program, the borrower’s stated assets are also verified either directly with the stated financial institution holding the stated asset or through receipt of alternative documentation such as the borrower’s recent bank and/or brokerage statement(s). In addition, the borrower’s employment may be verified with the employer by telephone or by other independent means.

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Generally, a reduced documentation program is available to borrowers with certain loan-to-value ratios, loan amounts, and credit scores. A reduced documentation program places increased reliance on the value and adequacy of the mortgaged property as collateral, the borrower’s credit standing and (in some cases) the borrower’s assets. * * *

Generally, a no ratio program is available to borrowers with certain loan-to-value ratios, loan amounts, and credit scores. A no ratio program relies on the value and adequacy of the mortgaged property as collateral and the borrower’s credit standing. The borrower’s income is not required to be obtained or verified. Generally, under a no ratio program, the borrower’s stated assets are also verified through receipt of the borrower’s recent bank or brokerage statements or directly with the financial institution. In all cases, the borrower’s employment is verified with the employer by telephone or by other independent means. Generally, a no documentation program is available to borrowers with certain loan-to-value ratios, loan amounts, and credit scores. A no documentation program relies on the value and adequacy of the mortgaged property as collateral and the borrower’s credit standing. Generally, the borrower’s employment, income and assets are neither obtained nor verified. In some cases, the borrower’s employment may be verified by telephone with the employer or by other independent means if the borrower’s employment has been disclosed. Exceptions to Program Parameters Exceptions to the underwriting standards described above may be made on a case-by-case basis if compensating factors are present. In those cases, the basis for the exception is documented. Compensating factors may include, but are not limited to, low loan-to-value ratio, low debt-to-income ratio, good credit standing, the availability of other liquid assets, stable employment and time in residence at the prospective borrower’s current address. Due Diligence The sponsor’s credit risk oversight department conducts a credit, appraisal, and compliance review of adverse samplings (and, in some cases, statistical samplings) of mortgage loans prior to purchase from unaffiliated mortgage loan sellers. Sample size is determined by due diligence results for prior purchased pools from that seller, performance of mortgage loans previously purchased

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and characteristics of the pool presented for purchase. Automated valuation models are obtained on all mortgage loans purchased from unaffiliated sellers. For mortgage loans originated by Washington Mutual Bank, Washington Mutual Bank’s credit risk oversight department conducts a quality control review of statistical samplings of originated mortgage loans on a regular basis. 87. The above statements of material fact were false and misleading when made

because in truth, WaMu Bank: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. J. 88. Long Beach Mortgage Company Violated Its Underwriting Guidelines Long Beach Mortgage Company (“Long Beach”) originated or acquired a

substantial percentage of the loans for several of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Long Beach’s underwriting standards and practices. For example, the prospectus supplement for the LBMLT 2006-5 RMBS described WaMu Bank’s underwriting guidelines, in relevant part, as follows: Long Beach Mortgage Company, the sponsor of the securitization transaction, is a Delaware corporation that originates, purchases and sells sub-prime mortgage loans secured by first and second liens on one- to four-family residences that generally do not conform to the underwriting guidelines typically applied by banks and other primary lending institutions, particularly with respect to a prospective borrower’s credit history and debt-to-income ratio.

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*

*

*

All of the mortgage loans owned by the trust have been, or will be, originated by the sponsor through wholesale brokers or reunderwritten upon acquisition from correspondents by the sponsor generally in accordance with the sponsor’s underwriting guidelines described in this section. The sponsor’s underwriting guidelines are primarily intended to evaluate the prospective borrower’s credit standing and repayment ability as well as the value and adequacy of the mortgaged property as collateral. Evaluation of the Borrower’s Repayment Ability The sponsor’s underwriting guidelines permit first lien mortgage loans with loan-to-value ratios at origination of up to 100%, or 80% if at the time of origination of the first lien mortgage loan, the originator also originated a second lien mortgage loan. The sponsor’s second lien mortgage underwriting guidelines permit second lien mortgage loans with a combined loan-to-value ratios at origination of up to 100%. The maximum allowable loan-to-value ratio varies based upon the residential loan program, income documentation, property type, creditworthiness and debt serviceto-income ratio of the prospective borrower and the overall risks associated with the loan decision. The maximum combined loanto-value ratio, including any second lien mortgage subordinate to the sponsor’s first lien mortgage, is generally 100% under the “Premium A,” “A,” “A-,” “B+” and “B” risk categories, and 95% under the “C” risk category. Evaluation of the Adequacy of Collateral The adequacy of the mortgaged property as collateral is generally determined by an appraisal of the mortgaged property that generally conforms to Fannie Mae and Freddie Mac appraisal standards and a review of that appraisal. The mortgaged properties are appraised by licensed independent appraisers who have satisfied the servicer’s appraiser screening process. In most cases, properties in below average condition, including properties requiring major deferred maintenance, are not acceptable under the sponsor’s underwriting programs. Each appraisal includes a market data analysis based on recent sales of comparable homes in the area and, where deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. Every independent appraisal is reviewed by an underwriter of the master servicer or its affiliate and is reviewed by one or more third party vendors which may refer the appraisal to the master servicer or one of its affiliates for additional further review before the loan is funded or re-underwritten. Depending upon the

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original principal balance and loan-to-value ratio of the mortgaged property, the appraisal review may include an administrative review, technical review, desk review or field review of the original appraisal. Underwriting Exceptions On a case-by-case basis and only with the approval of an employee with appropriate risk level authority, the sponsor may determine that, based upon compensating factors, a prospective borrower not strictly qualifying under its underwriting risk category guidelines warrants an underwriting exception. Compensating factors may include, but are not limited to, low loan-to-value ratio, low debt-to-income ratio, good credit history, stable employment and time in residence at the prospective borrower’s current address. It is expected that some of the mortgage loans owned by the trust will be underwriting exceptions. Documentation Programs The mortgage loans have been, or will be, originated or reunderwritten upon acquisition, generally in accordance with guidelines established by the sponsor under its full documentation, limited documentation or stated income documentation residential loan programs. * * *

Quality Control Review As part of its quality control system, the sponsor re-verifies information that has been provided by the mortgage brokerage company prior to funding a loan and the sponsor conducts a post-funding audit of every origination file. In addition, Washington Mutual Bank, as servicer, periodically audits files based on a statistical sample of closed loans. In the course of its pre-funding review, the sponsor re-verifies the income of each prospective borrower or, for a self-employed prospective borrower, reviews the income documentation obtained under the full documentation and limited documentation residential loan programs. The sponsor generally requires evidence of funds to close on the mortgage loan. 89. The above statements of material fact were false and misleading when made

because in truth, Long Beach: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating

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factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. K. 90. Washington Mutual Mortgage Securities Corp. Violated Its Underwriting Guidelines Washington Mutual Mortgage Securities Corp. (“WaMu Mortgage Securities”)

originated or acquired a substantial percentage of the loans for at least one of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding WaMu Mortgage Securities’ underwriting standards and practices. For example, the prospectus for the WMALT 2005-10 RMBS described WaMu Mortgage Securities’ underwriting guidelines, in relevant part, as follows: All of the credit, appraisal and underwriting standards will provide an underwriter with sufficient information to evaluate the borrower’s repayment ability and the adequacy of the Mortgaged Property as collateral. Due to the variety of underwriting standards and review procedures that may be applicable to the Mortgage Loans included in any Mortgage Pool, the related Prospectus Supplement will not distinguish among the various credit, appraisal and underwriting standards applicable to the Mortgage Loans nor describe any review for compliance with applicable credit, appraisal and underwriting standards performed by the Company. Moreover, there can be no assurance that every Mortgage Loan was originated in conformity with the applicable credit, appraisal and underwriting standards in all material respects, or that the quality or performance of Mortgage Loans underwritten pursuant to varying standards as described above will be equivalent under all circumstances. The Company’s underwriting standards are intended to evaluate the prospective Mortgagor’s credit standing and repayment ability, and the value and adequacy of the proposed Mortgaged Property as collateral. In the loan application process, prospective Mortgagors will be required to provide information regarding such factors as their assets, liabilities, income, credit

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history, employment history and other related items. Each prospective Mortgagor will also provide an authorization to apply for a credit report which summarizes the Mortgagor’s credit history. With respect to establishing the prospective Mortgagor’s ability to make timely payments, the Company will require evidence regarding the Mortgagor’s employment and income, and of the amount of deposits made to financial institutions where the Mortgagor maintains demand or savings accounts. In some instances, Mortgage Loans which were originated under a Limited Documentation Origination Program may be sold to the Company. For a mortgage loan originated under a Limited Documentation Origination Program to qualify for purchase by the Company, the prospective mortgagor must have a good credit history and be financially capable of making a larger cash down payment, in a purchase, or be willing to finance less of the appraised value, in a refinancing, than would otherwise be required by the Company. Currently, the Company’s underwriting standards provide that only mortgage loans with certain loan-to-value ratios will qualify for purchase. If the mortgage loan qualifies, the Company waives some of its documentation requirements and eliminates verification of income and employment for the prospective mortgagor. The Company’s underwriting standards generally follow guidelines acceptable to Fannie Mae and Freddie Mac. In determining the adequacy of the property as collateral, an independent appraisal is made of each property considered for financing. The appraiser is required to inspect the property and verify that it is in good condition and that construction, if new, has been completed. The appraisal is based on the appraiser’s judgment of values, giving appropriate weight to both the market value of comparable homes and the cost of replacing the property. 91. The above statements of material fact were false and misleading when made

because in truth, WaMu Mortgage Securities: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to its underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal

50

standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. L. 92. The Chase Originators Violated Their Underwriting Guidelines Chase Home Finance LLC and JPMorgan Chase Bank, N.A. (collectively, the

“Chase Originators”), originated a substantial percentage of the loans for several of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding the Chase Originators underwriting standards and practices. For example, the prospectus supplement for the JPALT 2006-A4 RMBS described the Chase Originators’ underwriting guidelines, in relevant part, as follows: Underwriting standards are applied by or on behalf of a lender to evaluate a borrower’s credit standing and repayment ability, and the value and adequacy of the related Mortgaged Property as collateral. In general, a prospective borrower applying for a loan is required to fill out a detailed application designed to provide to the underwriting officer pertinent credit information. As part of the description of the borrower’s financial condition, the borrower generally is required to provide a current list of assets and liabilities and a statement of income and expenses, as well as an authorization to apply for a credit report which summarizes the borrower’s credit history with local merchants and lenders and any record of bankruptcy. In most cases, an employment verification is obtained from an independent source (typically the borrower’s employer), which verification reports, among other things, the length of employment with that organization, the current salary, and whether it is expected that the borrower will continue such employment in the future. If a prospective borrower is self employed, the borrower may be required to submit copies of signed tax returns. * * *

Based on the data provided in the application and certain verification (if required), a determination is made by the original lender that the mortgagor’s monthly income (if required to be stated) will be sufficient to enable the mortgagor to meet its monthly obligations on the mortgage loan and other expenses related to the property such as property taxes, utility costs, standard

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hazard insurance and other fixed obligations other than housing expenses. * * *

The mortgage loans have been originated under “full” or “alternative,” “reduced documentation,” “stated income/stated assets” or “no income/no asset” programs. The “alternative,” “reduced,” “stated income/stated assets” and “no income/no asset” programs generally require either alternative or less documentation and verification than do full documentation programs which generally require standard Fannie Mae/Freddie Mac approved forms for verification of income/employment, assets and certain payment histories. * * *

These alternative sets of underwriting criteria are designed to facilitate the loan approval process. Loans underwritten under these programs are generally limited to borrowers who have demonstrated an established ability and willingness to repay the mortgage loans in a timely fashion. Permitted maximum loan to value ratios under these programs are generally more restrictive than those under the lender’s standard “full” documentation programs. The adequacy of the mortgaged property as security for repayment of the related mortgage loan will generally have been determined by an appraisal in accordance with pre-established appraisal procedure guidelines for appraisals established by or acceptable to the originator. All appraisals conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and must be on forms acceptable to Fannie Mae and/or Freddie Mac. Appraisers may be staff appraisers employed by the originator or independent appraisers selected in accordance with preestablished appraisal procedure guidelines established by the originator. The appraisal procedure guidelines generally will have required the appraiser or an agent on its behalf to personally inspect the property and to verify whether the property was in good condition and that construction, if new, had been substantially completed. The appraisal generally will have been based upon a market data analysis of recent sales of comparable properties and, when deemed applicable, an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property. * * 52 *

From time to time, exceptions to a lender’s underwriting policies may be made. Such exceptions may be made on a loan by loan basis at the discretion of the lender’s underwriter. Exceptions may be made after careful consideration of certain mitigating factors such as borrower liquidity, employment and residential stability and local economic conditions. 93. The above statements of material fact were false and misleading when made

because in truth, the Chase Originators: (i) abandoned their underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to their underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded their stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. M. 94. GreenPoint Mortgage Funding, Inc. Violated Its Underwriting Guidelines GreenPoint Mortgage Funding, Inc. (“GreenPoint”) originated a substantial The Offering

percentage of the loans for several of the RMBS purchased by BayernLB.

Materials for such RMBS contained false and misleading statements of material fact regarding GreenPoint’s underwriting standards and practices. For example, the prospectus supplement for the JPALT 2007-A1 RMBS described GreenPoint’s underwriting guidelines, in relevant part, as follows: Generally, the GreenPoint underwriting guidelines are applied to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. Exceptions to the guidelines are permitted where compensating factors are present. The GreenPoint underwriting guidelines are generally not as strict as Fannie Mae or Freddie Mac guidelines. GreenPoint’s underwriting guidelines are

53

applied in accordance with applicable federal and state laws and regulations. * * *

In determining whether a prospective borrower has sufficient monthly income available to meet the borrower’s monthly obligation on the proposed mortgage loan and monthly housing expenses and other financial obligations, GreenPoint generally considers the ratio of those amounts to the proposed borrower’s monthly gross income. These ratios vary depending on a number of underwriting criteria, including loan-to-value ratios (“LTV”), and are determined on a loan-by-loan basis. The ratios generally are limited to 40% but may be extended to 50% with adequate compensating factors, such as disposable income, reserves, higher FICO credit score, or lower LTV’s. * * *

As part of its evaluation of potential borrowers, GreenPoint generally requires a description of the borrower’s income. If required by its underwriting guidelines, GreenPoint obtains employment verification providing current and historical income information and/or a telephonic employment confirmation. Employment verification may be obtained through analysis of the prospective borrower’s recent pay stubs and/or W-2 forms for the most recent two years or relevant portions of the borrower’s most recent two years’ tax returns, or from the prospective borrower’s employer, wherein the employer reports the borrower’s length of employment and current salary with that organization. Selfemployed prospective borrowers generally are required to submit relevant portions of their federal tax returns for the past two years. * * *

In determining the adequacy of the property as collateral, an independent appraisal is generally made of each property considered for financing. All appraisals are required to conform the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standard Board of the Appraisal Foundation. Each appraisal must meet the requirements of Fannie Mae and Freddie Mac. The requirements of Fannie Mae and Freddie Mac require, among other things, that the appraiser, or its agent on its behalf, personally inspect the property inside and out, verify whether the property is in a good condition and verify that construction, if new, has been substantially completed. The appraisal generally will have been based on prices obtained on

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recent sales of comparable properties determined in accordance with Fannie Mae and Freddie Mac guidelines. 95. The above statements of material fact were false and misleading when made

because in truth, GreenPoint: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. N. 96. IndyMac Bank, FSB Violated Its Underwriting Guidelines IndyMac Bank, FSB (“IndyMac”) originated a substantial percentage of the loans

for several of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding IndyMac’s underwriting standards and practices. For example, the prospectus supplement for the LUM 2006-7 RMBS described IndyMac’s underwriting guidelines, in relevant part, as follows: IndyMac Bank has two principal underwriting methods designed to be responsive to the needs of its mortgage loan customers: traditional underwriting and e-MITS (Electronic Mortgage Information and Transaction System) underwriting. E-MITS is an automated, internet-based underwriting and risk-based pricing system. IndyMac Bank believes that e-MITS generally enables it to estimate expected credit loss, interest rate risk and prepayment risk more objectively than traditional underwriting and also provides consistent underwriting decisions. IndyMac Bank has procedures to override an e-MITS decision to allow for compensating factors. * * *

IndyMac Bank’s underwriting criteria for traditionally underwritten mortgage loans includes an analysis of the 55

borrower’s credit history, ability to repay the mortgage loan and the adequacy of the mortgaged property as collateral. Traditional underwriting decisions are made by individuals authorized to consider compensating factors that would allow mortgage loans not otherwise meeting IndyMac Bank’s guidelines. * * *

In addition to the FICO credit score, other information regarding a borrower’s credit quality is considered in the loan approval process, such as the number and degree of any late mortgage or rent payments within the preceding 12-month period, the age of any foreclosure action against any property owned by the borrower, the age of any bankruptcy action, the number of seasoned tradelines reflected on the credit report and any outstanding judgments, liens, charge-offs or collections. * * *

IndyMac Bank originates and purchases loans that have been originated under one of seven documentation programs: Full/Alternate, FastForward, Bank Statement, Stated Income, No Income/No Asset, No Ratio and No Doc. Under the Full/Alternate Documentation Program, the prospective borrower’s employment, income and assets are verified through written or telephonic communications. All loans may be submitted under the Full/Alternate Documentation Program. The Full/Alternate Documentation Program also provides for alternative methods of employment verification generally using W-2 forms or pay stubs. Borrowers applying under the Full/Alternate Documentation Program may, based on certain credit and loan characteristics, qualify for IndyMac Bank’s FastForward program and be entitled to income and asset documentation relief. Borrowers who qualify for FastForward must state their income, provide a signed Internal Revenue Service Form 4506 (authorizing IndyMac Bank to obtain copies of their tax returns), and state their assets; IndyMac Bank does not require any verification of income or assets under this program. * * *

To determine the adequacy of the property to be used as collateral, an appraisal is generally made of the subject property in accordance with the Uniform Standards of Profession Appraisal Practice. The appraiser generally inspects the property, analyzes data including the sales prices of comparable properties and issues an opinion of value using a Fannie Mae/Freddie Mac 56

appraisal report form, or other acceptable form. In some cases, an automated valuation model (AVM) may be used in lieu of an appraisal. AVMs are computer programs that use real estate information, such as demographics, property characteristics, sales prices, and price trends to calculate a value for the specific property. The value of the property, as indicated by the appraisal or AVM, must support the loan amount. 97. The above statements of material fact were false and misleading when made

because in truth IndyMac: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. O. 98. Option One Mortgage Corporation Violated Its Underwriting Guidelines Option One Mortgage Corporation (“Option One”) originated a substantial

percentage of the loans for at least one of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Option One’s underwriting standards and practices. For example, the prospectus supplement for the CARR 2006-OPT1 RMBS described Option One’s underwriting guidelines, in relevant part, as follows: The Mortgage Loans will have been originated generally in accordance with Option One’s Guidelines (the “Option One Underwriting Guidelines”). The Option One Underwriting Guidelines are primarily intended to assess the value of the mortgaged property, to evaluate the adequacy of such property as collateral for the mortgage loan and to assess the applicant’s ability to repay the mortgage loan. The Mortgage Loans were also

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generally underwritten with a view toward resale in the secondary market. The Mortgage Loans generally bear higher rates of interest than mortgage loans that are originated in accordance with customary Fannie Mae and Freddie Mac standards. On a case-by-case basis, exceptions to the Option One Underwriting Guidelines are made where compensating factors exist. * * *

Each mortgage loan applicant completes an application that includes information with respect to the applicant’s liabilities, income, credit history, employment history and personal information. * * *

Mortgaged properties that are to secure mortgage loans generally are appraised by qualified independent appraisers. Such appraisers inspect and appraise the subject property and verify that such property is in acceptable condition. Following each appraisal, the appraiser prepares a report which includes a market value analysis based on recent sales of comparable homes in the area and, when deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. All appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and are generally on forms acceptable to Fannie Mae and Freddie Mac. * * *

Option One Underwriting Guidelines require a reasonable determination of an applicant’s ability to repay the loan. Such determination is based on a review of the applicant’s source of income, calculation of a debt service-to-income ratio based on the amount of income from sources indicated on the loan application or similar documentation, a review of the applicant’s credit history and the type and intended use of the property being financed. Except with respect to the No Documentation program that is described below, the Option One Underwriting Guidelines require verification or evaluation of the income of each applicant and, for purchase transactions, verification of the seasoning or source of funds (in excess of $2,500) required to be deposited by the applicant into escrow.

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99.

The above statements of material fact were false and misleading when made

because in truth Option One: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. P. 100. American Home Violated Its Underwriting Guidelines American Home originated a substantial percentage of the loans for several of the

RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding American Home’s underwriting standards and practices. For example, the prospectus supplement for the NAA 2007-3 RMBS described

American Home’s underwriting guidelines, in relevant part, as follows: American Home Mortgage Corp., also referred to herein as the Originator, is a New York corporation. The Originator’s underwriting philosophy is to weigh all risk factors inherent in the loan file, giving consideration to the individual transaction, borrower profile, the level of documentation provided and the property used to collateralize the debt. These standards are applied in accordance with applicable federal and state laws and regulations. Exceptions to the underwriting standards may be permitted where compensating factors are present. In the case of investment properties and twoto four-unit dwellings, income derived from the mortgaged property may have been considered for underwriting purposes, in addition to the income of the mortgagor from other sources. With respect to second homes and vacation properties, no income derived from the property will have been considered for underwriting purposes. Because each loan is different, the Originator expects and encourages underwriters to use

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professional judgment based on their experience in making a lending decision. The Originator underwrites a borrower’s creditworthiness based solely on information that the Originator believes is indicative of the applicant’s willingness and ability to pay the debt they would be incurring. * * *

In addition to reviewing the borrower’s credit history and credit score, the Originator underwriters closely review the borrower’s housing payment history. In general, for non-conforming loans the borrower should not have made any mortgage payments over 30 days after the due date for the most recent twelve months. In general, for Alt-A loans, the borrower may have no more than one payment that was made over 30 days after the due date for the most recent twelve months. * * *

Every mortgage loan is secured by a property that has been appraised by a licensed appraiser in accordance with the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation. The appraisers perform on-site inspections of the property and report on the neighborhood and property condition in factual and specific terms. Each appraisal contains an opinion of value that represents the appraiser’s professional conclusion based on market data of sales of comparable properties and a logical analysis with adjustments for differences between the comparable sales and the subject property and the appraiser’s judgment. In addition, each appraisal is reviewed for accuracy and consistency by the Originator’s vendor management company or an underwriter of the Originator or a mortgage insurance company contract underwriter. * * *

The Originator realizes that there may be some acceptable quality loans that fall outside published guidelines and encourages “common sense” underwriting. Because a multitude of factors are involved in a loan transaction, no set of guidelines can contemplate every potential situation. Therefore, each case is weighed individually on its own merits and exceptions to the Originator’s underwriting guidelines are allowed if sufficient compensating factors exist to offset any additional risk due to the exception.

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101.

The above statements of material fact were false and misleading when they were

made because they misrepresented that American Home: (i) systematically failed to follow its own underwriting guidelines; (ii) allowed pervasive exceptions to its underwriting standards in the absence of qualifying compensating factors; (iii) disregarded credit quality to meet the demand for loans to securitize into RMBS; and (iv) violated its stated appraisal standards, and, in many instances, materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. Q. 102. SouthStar Funding LLC Violated Its Underwriting Guidelines SouthStar Funding LLC (“SouthStar”) originated a substantial percentage of the

loans for several of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding SouthStar’s underwriting standards and practices. For example, the prospectus supplement for the SAMI 2006-AR1 RMBS described SouthStar’s underwriting guidelines, in relevant part, as follows:

The following is a description of the underwriting policies customarily employed by SouthStar with respect to the residential mortgage loans that SouthStar originated during the period of origination of the mortgage loans. SouthStar has represented to the depositor that the SouthStar mortgage loans were originated generally in accordance with such policies. SouthStar Underwriting Guidelines are applied to evaluate an applicant’s credit standing, financial condition, and repayment ability, as well as the value and adequacy of the mortgaged property as collateral for any loan made by SouthStar. As part of the loan application process, the applicant is required to provide information concerning his or her assets, liabilities, income and expenses, along with an authorization permitting SouthStar to obtain any necessary third party verifications, including a credit report summarizing the applicant’s credit history. In evaluating the applicant’s ability and willingness to repay the proposed loan, SouthStar reviews the applicant’s credit history and

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outstanding debts, as reported on the credit report. If an existing mortgage or other significant debt listed on the loan application is not adequately reported on the credit report, SouthStar may request a written or oral verification of the balance and payment history of such debt from the servicer of such debt. SouthStar verifies the applicant’s liquid assets to ensure that the client has adequate liquid assets to apply toward any required down payment, closing costs, prepaid interest and at least two months’ worth of cash reserves. SouthStar also evaluates the applicant’s income to determine its stability, probability of continuation, and adequacy to service the proposed SouthStar debt payment. SouthStar’s guidelines for verifying an applicant’s income and employment are generally as follows. For salaried applicants, SouthStar typically requires a written verification of employment from the applicant’s employer, or a copy of the applicant’s two most recent IRS form 1040 or W2, a current pay stub with year-to-date earnings, and a verbal verification of employment. For non-salaried applicants, including self-employed applicants, SouthStar requires copies of the applicant’s two most recent federal tax returns, along with all supporting schedules. A self-employed applicant is generally required to submit a signed year-to-date profit and loss statement. In determining adequacy of the property as collateral for the loan, a Fannie Mae/Freddie Mac URAR appraisal of the property is performed by an independent appraiser approved by SouthStar. The appraiser is required to inspect the property and verify that it is in good condition and that any construction or renovation, if new, has been completed. The appraisal report indicates a value for the property and provides information concerning marketability, the neighborhood, the property site, interior and exterior improvements, and the condition of the property. 103. The above statements of material fact were false and misleading when made

because in truth, SouthStar: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in 62

many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. R. 104. First NLC Financial Services, LLC Violated Its Underwriting Guidelines First NLC Financial Services, LLC (“First NLC”) originated a substantial The Offering

percentage of the loans for several of the RMBS purchased by BayernLB.

Materials for such RMBS contained false and misleading statements of material fact regarding First NLC’s underwriting standards and practices. For example, the prospectus supplement for the BSABS 2006-HE7 RMBS described First NLC’s underwriting guidelines, in relevant part, as follows: Loan Application and Documentation. Each borrower must complete a mortgage loan application that includes information with respect to the applicant’s liabilities, income, credit history, employment history and other personal information. First NLC also requires independent documentation as part of its underwriting process. As part of this process, First NLC will pull its own tri merged credit bureau from one of its approved vendors. First NLC also requires an appraisal, a title commitment, and other income-verification materials. The credit report contains information relating to such matters as credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions or judgments. Derogatory credit items are disregarded if they are included in the overall credit score. All serious derogatory credit items, such as bankruptcies or foreclosures, must be satisfactorily addressed by the applicant. Appraisals. Appraisals are performed by licensed, third-party, feebased appraisers who are hired by First NLC or the broker and include, among other things, an inspection of the exterior and interior of the subject property. Appraisals are also required to address neighborhood conditions, site and zoning status and the condition and value of improvements. First NLC does not require its borrowers to use any particular appraiser; however, it maintains a list of appraisers whose appraisals it will not accept. An appraisal may not be more than 120 days old on the day the loan is funded.

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First NLC requires its underwriters to review all third-party appraisals against an appraisal checklist of qualitative standards, such as square footage, zoning status, comparable property information and improvements. If the underwriters are not satisfied with the accuracy of the third-party appraisal, they will request that a senior credit officer review the appraisal. * * *

Exceptions and First NLC Underwriting Guidelines. First NLC may make exceptions and upgrades to its underwriting guidelines on a case-by-case basis where compensating factors exist. For example, it may determine that an applicant warrants one of the following exceptions: • a debt-to-income ratio exception; • a pricing exception; • a loan-to-ratio exception; or • an exception from certain requirements of a particular category. An exception may be allowed if the application reflects certain factors, including: • a low loan-to-value ratio; • a maximum of one 30-day late payment on all mortgage loans during the last 12 months; • stable employment • ownership of the current residence of five or more years; or Accordingly and certain applicants may qualify in a more favorable risk category than would apply in the absence of such compensation factors. All exceptions and upgrades are subject to the approval of a senior officer or an assistant chief credit officer. Quality Control. First NLC reviews its loans for compliance with applicable legal requirements and its underwriting guidelines. * * * In addition to the above referenced file review, First NLC employees a traditional independent quality control review, a random sample of 5 to 10% of its production. These loans are reverified for accuracy of income, assets and adherence to underwriting and appraisal guidelines. Monthly findings are provided to the Operations Managers and Assistant Chief Credit Officers in each center as well as senior management. Any significant findings are quickly addressed and appropriate actions are taken.

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Verification of Income. First NLC’s underwriting guidelines require verification of the borrower’s income. First NLC has two primary levels of income documentation requirements, referred to as “full documentation” and “stated income documentation” programs. Under each of these programs, First NLC reviews the loan applicant’s source of income, calculate the amount of income from sources indicated on the loan application or similar documentation and calculate debt-to-income ratios to determine the applicant’s ability to repay the loan. 105. The above statements of material fact were false and misleading when made

because in truth, First NLC: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. S. 106. Argent Mortgage Corporation Violated Its Underwriting Guidelines Argent Mortgage Corporation (“Argent”) originated a substantial percentage of

the loans for several of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Argent’s underwriting standards and practices. For example, the prospectus supplement for the ARSI 2006-W4 RMBS described Argent’s underwriting guidelines, in relevant part, as follows: The Underwriting Guidelines are primarily intended to evaluate: (1) the applicant’s credit standing and repayment ability and (2) the value and adequacy of the mortgaged property as collateral. On a case-by-case basis, the Originator may determine that, based upon compensating factors, a loan applicant, not strictly qualifying under one of the Risk Categories described below, warrants an exception to the requirements set forth in the Underwriting Guidelines. Compensating factors may include, but

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are not limited to, loan-to-value ratio, debt-to-income ratio, good credit history, stable employment history, length at current employment and time in residence at the applicant’s current address. It is expected that a substantial number of the Mortgage Loans to be included in the mortgage pool will represent such underwriting exceptions. * * *

All of the Mortgage Loans originated by the Originator are based on loan application packages submitted directly or indirectly by a loan applicant to the Originator. Each loan application package has an application completed by the applicant that includes information with respect to the applicant’s liabilities, income, credit history and employment history, as well as certain other personal information. * * *

During the underwriting process, the Originator reviews and verifies the loan applicant’s sources of income (except under the Stated Income and Limited Documentation types, under which programs such information may not be independently verified), calculates the amount of income from all such sources indicated on the loan application, reviews the credit history of the applicant, calculates the debt-to-income ratio to determine the applicant’s ability to repay the loan, and reviews the mortgaged property for compliance with the Underwriting Guidelines. The Underwriting Guidelines are applied in accordance with a procedure which complies with applicable federal and state laws and regulations and requires (i) an appraisal of the mortgaged property which conforms to the Uniform Standards of Professional Appraisal Practice and are generally on forms similar to those acceptable to Fannie Mae and Freddie Mac and (ii) a review of such appraisal, which review may be conducted by a representative of the Originator or a fee appraiser and may include a desk review of the original appraisal or a drive-by review appraisal of the mortgaged property. The Underwriting Guidelines permit loans with combined loan-to-value ratios at origination of up to 100%, subject to certain Risk Category limitations (as further described in that section). The maximum allowable loan-to-value ratio varies based upon the income documentation, property type, creditworthiness, debt service-toincome ratio of the applicant and the overall risks associated with the loan decision. 107. The above statements of material fact were false and misleading when made

because in truth, Argent: (i) abandoned its underwriting guidelines, verification procedures and 66

quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. T. 108. Ameriquest Mortgage Company Violated Its Underwriting Guidelines Ameriquest Mortgage Company (“Ameriquest”) originated a substantial The Offering

percentage of the loans for several of the RMBS purchased by BayernLB.

Materials for such RMBS contained false and misleading statements of material fact regarding Ameriquest’s underwriting standards and practices. For example, the prospectus supplement for the ARSI 2006-W4 RMBS described Ameriquest’s underwriting guidelines, in relevant part, as follows: The Ameriquest Underwriting Guidelines are primarily intended to evaluate: (1) the applicant’s credit standing and repayment ability and (2) the value and adequacy of the mortgaged property as collateral. On a case-by-case basis, the Ameriquest Loan Sellers may determine that, based upon compensating factors, a loan applicant, not strictly qualifying under one of the risk categories described below, warrants an exception to the requirements set forth in the Ameriquest Underwriting Guidelines. Compensating factors may include, but are not limited to, loan-to-value ratio, debt-to-income ratio, good credit history, stable employment history, length at current employment and time in residence at the applicant’s current address. It is expected that a substantial number of the mortgage loans to be included in the mortgage pool will represent such underwriting exceptions. * * *

All of the mortgage loans originated by the Ameriquest Loan Sellers are based on loan application packages submitted directly or indirectly by a loan applicant to the Ameriquest Loan Sellers. Each loan application package has an application completed by 67

the applicant that includes information with respect to the applicant’s liabilities, income, credit history and employment history, as well as certain other personal information. The Ameriquest Loan Sellers also obtain (or the broker submits) a credit report on each applicant from a credit reporting company. The credit report typically contains the reported information relating to such matters as credit history with local and national merchants and lenders, installment debt payments and reported records of default, bankruptcy, repossession and judgments. If applicable, the loan application package must also generally include a letter from the applicant explaining all late payments on mortgage debt and, generally, consumer (i.e. non-mortgage) debt. During the underwriting process, each Ameriquest Loan Seller reviews and verifies the loan applicant’s sources of income (except under the Stated Income and Limited Documentation types, under which programs such information may not be independently verified), calculates the amount of income from all such sources indicated on the loan application, reviews the credit history of the applicant, calculates the debt-to-income ratio to determine the applicant’s ability to repay the loan, and reviews the mortgaged property for compliance with the Ameriquest Underwriting Guidelines. The Ameriquest Underwriting Guidelines are applied in accordance with a procedure which complies with applicable federal and state laws and regulations and requires (i) an appraisal of the mortgaged property which conforms to the Uniform Standards of Professional Appraisal Practice and are generally on forms similar to those acceptable to Fannie Mae and Freddie Mac and (ii) a review of such appraisal, which review may be conducted by a representative of the Ameriquest Loan Sellers or a fee appraiser and may include a desk review of the original appraisal or a drive-by review appraisal of the mortgaged property. The Ameriquest Underwriting Guidelines permit loans with combined loan-to-value ratios at origination of up to 100%, subject to certain Risk Category limitations (as further described in that section). The maximum allowable loan-to-value ratio varies based upon the income documentation, property type, creditworthiness, debt service-to-income ratio of the applicant and the overall risks associated with the loan decision. 109. The above statements of material fact were false and misleading when made

because in truth, Ameriquest: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive

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exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. U. 110. BNC Mortgage, Inc. Violated Its Underwriting Guidelines BNC Mortgage, Inc. (“BNC”) originated a substantial percentage of the loans for

at least one of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding BNC’s underwriting standards and practices. For example, the prospectus supplement for the BSABS 2006-HE6 RMBS described BNC’s underwriting guidelines, in relevant part, as follows: The BNC underwriting guidelines are generally intended to evaluate the credit risk of mortgage loans made to borrowers with imperfect credit histories ranging from minor delinquencies to bankruptcy, or borrowers with relatively high ratios of monthly mortgage payments to income, or relatively high ratios of total monthly credit payments to income. In addition, such guidelines also evaluate the value and adequacy of the mortgaged property as collateral. On a case-by-case basis, BNC may determine that, based upon compensating factors, a prospective borrower who does not strictly qualify under the applicable underwriting guidelines warrants an underwriting exception. Compensating factors may include, but are not limited to, relatively low loan-to-value ratio, relatively low debt-to-income ratio, good credit history, stable employment, and financial reserves. Under the BNC underwriting guidelines, BNC reviews the loan applicant’s sources of income, calculates the amount of income from all such sources indicated on the loan application or similar documentation (except under the “Stated Income” programs), reviews the credit history of the applicant and calculates the debtto-income ratio to determine the applicant’s ability to repay the loan, and reviews the mortgaged property for compliance with the BNC underwriting guidelines. The BNC underwriting

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guidelines are applied in accordance with a procedure that generally requires (1) an appraisal of the mortgaged property that conforms generally to Fannie Mae and Freddie Mac standards and (2) a review of the appraisal, such review may be conducted by a BNC staff appraiser or representative which, depending upon the original principal balance and loan-to-value ratio of the mortgaged property, may include a desk review of the original appraisal or a drive-by review appraisal of the mortgaged property. * * *

Each prospective borrower completes an application that includes information with respect to the applicant’s liabilities, income (except with respect to certain “Stated Income” mortgage loans as described below) and employment history, as well as certain other personal information. BNC pulls a credit report on each applicant from a credit reporting agency contracted by BNC. The report typically contains information relating to such matters as credit history with local and national merchants and lenders; installment, revolving and open debt payments; derogatory credit information including repossessions and/or foreclosures; and any public records of bankruptcies, tax liens, law suits or judgments. Also, the report includes social security number variations; name, address and employment variations; and consumer narrative, fraud, ID theft and OFAC alerts. Mortgaged properties are generally appraised by qualified independent appraisers. Each appraisal includes a market data analysis based on recent sales of comparable homes in the area and, where deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. Independent appraisals are reviewed by BNC before the loan is funded, with a full drive-by review appraisal performed in connection with loan amounts over a certain pre-determined dollar amount established for each state. * * *

BNC generally reviews the applicant’s source of income, calculates the amount of income from sources indicated on the loan application or similar documentation (except with respect to certain “Stated Income” mortgage loans as described below), reviews the credit history of the applicant, calculates the debt-toincome ratio to determine the applicant’s ability to repay the loan, and reviews the type and use of the property being financed. The BNC underwriting guidelines require that mortgage loans be underwritten according to a standardized procedure that complies with applicable federal and state laws 70

and regulations and require BNC’s underwriters to be satisfied that the value of the property being financed supports, as indicated by an appraisal and a review of the appraisal, the outstanding loan balance. 111. The above statements of material fact were false and misleading when made

because in truth BNC: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. V. 112. Lehman Brothers Bank, FSB Violated Its Underwriting Guidelines Lehman Brothers Bank, FSB (“Lehman”) originated a substantial percentage of

the loans for at least one of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Lehman’s underwriting standards and practices. For example, the prospectus supplement for the LUM 2006-7 RMBS described Lehman’s underwriting guidelines, in relevant part, as follows: The LBB Underwriting Guidelines are generally not as strict as Fannie Mae or Freddie Mac guidelines. The LBB Underwriting Guidelines are intended to evaluate the value and adequacy of the mortgaged property as collateral and to consider the borrower's credit standing and repayment ability. On a case-bycase basis, the underwriter may determine that, based upon compensating factors, a prospective borrower not strictly qualifying under the applicable underwriting guidelines warrants an underwriting exception. Compensating factors may include, but are not limited to, low loan-to-value ratios, low debt-toincome ratios, good credit history, stable employment, financial reserves, and time in residence at the applicant's current address. A

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significant number of the Mortgage Loans may represent underwriting exceptions. The LBB Underwriting Guidelines are applied in accordance with a procedure that generally requires (1) an appraisal of the mortgaged property by qualified independent appraisers, that conforms to Fannie Mae and Freddie Mac standards and (2) a review of such appraisal by the underwriter and, depending upon certain factors, including original principal balance and loan-tovalue ratio of the mortgaged property, may include a review of the original appraisal by Aurora’s review appraisal department. Each appraisal includes a market data analysis based on recent sales of comparable homes in the area. The LBB Underwriting Guidelines generally permit mortgage loans with loan-to-value ratios at origination of up to 100% (or, with respect to certain mortgage loans, up to 95%) for the highest credit-grading category, depending on the creditworthiness of the borrower, the type and use of the property, the debt-to-income ratio and the purpose of the loan application. Each prospective borrower completes an application that includes information with respect to the applicant's liabilities, assets, income and employment history (except with respect to certain "no documentation'' mortgage loans described below), as well as certain other personal information. Each originator requires a credit report on each applicant from a credit reporting company. The report typically contains information relating to matters such as credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcy, repossession, suits or judgments. * * *

LBB originates loans with different income and asset “documentation” requirements. The types of income and asset documentation include Full Doc (Alt A), Full Doc (Other than Alt A), Limited, Stated, Stated-Stated, No Ratio, and No Documentation. Verification of employment, income and assets in a mortgage loan file is dependent on the documentation program. 113. The above statements of material fact were false and misleading when made

because in truth Lehman: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions

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to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. W. 114. National City Mortgage Violated Its Underwriting Guidelines National City Mortgage (“National City”) originated a substantial percentage of

the loans for at least one of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding National City’s underwriting standards and practices. For example, the prospectus supplement for the LUM 2006-7 RMBS described National City’s underwriting guidelines, in relevant part, as follows: The originator’s underwriting standards are applied to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. These standards are applied in accordance with the applicable federal and state laws and regulations. Exceptions to the underwriting standards are permitted where compensating factors are present. Generally, each mortgagor will have been required to complete an application designed to provide to the lender pertinent credit information concerning the mortgagor. The mortgagor will have given information with respect to its assets, liabilities, income (except as described below), credit history, employment history and personal information, and will have furnished the lender with authorization to obtain a credit report which summarizes the mortgagor’s credit history. * * *

In determining whether a prospective borrower has sufficient monthly income available (i) to meet the borrower’s monthly obligation on their proposed mortgage loan and (ii) to meet the monthly housing expenses and other financial obligation on the proposed mortgage loan, the originator generally considers, when required by the applicable documentation program, the ratio of such amounts to the proposed borrower’s acceptable stable monthly gross income. Such ratios vary depending on a number of 73

underwriting criteria, including loan-to-value ratios, and are determined on a loan-by-loan basis. With respect to second homes or vacation properties, no income derived from the property will have been considered for underwriting purposes. * * *

Full/Alternative Documentation. Under full documentation, the prospective borrower’s employment, income and assets are verified through written and telephonic communications, covering a 2-year period for employment/income and a 2-month period for assets. Typically the following documentation required but not limited to: • Verbal verification of employment • Pay stubs covering the most recent 30 day period showing YTD income • Most recent 2 year’s 1040s for self-employed borrowers • 1 or 2 months bank statements • W-2 forms for 24 months Stated Documentation. Under a stated income documentation program, more emphasis is placed on the value and adequacy of the mortgaged property as collateral, credit history and other assets of the borrower than on a verified income of the borrower. Although the income is not verified, the originators obtain a telephonic verification of the borrower’s employment without reference to income. Borrower’s assets may or may not be verified. No Ratio Documentation. Under a stated income documentation program, more emphasis is placed on the value and adequacy of the mortgaged property as collateral, credit history and other assets of the borrower than on a verified income of the borrower. Under the no ratio documentation program the borrower’s income is not stated and no ratios are calculated. Although the income is not stated nor verified, lenders obtain a telephonic verification of the borrower’s employment without reference to income. No Income/No Employment/No Asset Documentation (NO DOC). Under the no income/no employment/no asset documentation program, income, employment and assets are not stated. The underwriting of such mortgage loans is based entirely on the adequacy of the mortgaged property as collateral and on the credit history of the borrower. No Income/No Asset/Employment Verified (NINA). Under the no income/no asset/employment verified documentation program, the borrower’s income and assets are not disclosed. A verbal

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verification of employment is required. The underwriting of such mortgage loans is based entirely on the adequacy of the mortgaged property as collateral and on the credit history of the borrower. Each mortgaged property securing a Mortgage Loan has been appraised by a qualified independent appraiser. All appraisals are required to conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standard Board of Appraisal Foundation. Each appraisal must meet the requirements of Fannie Mae and Freddie Mac. The requirements of Fannie Mae and Freddie Mac require, among other things, that the appraiser, or its agent on its behalf, personally inspect the property inside and out, verify whether the property was in good condition and verify that construction, if new, had been substantially completed. The appraisal generally will have been based on prices obtained on recent sales of comparable properties, determined in accordance with Fannie Mae and Freddie Mac guidelines. In certain cases an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property may be used. 115. The above statements of material fact were false and misleading when made

because in truth National City: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. X. 116. The CIT Group/Consumer Finance, Inc. Violated Its Underwriting Guidelines The CIT Group/Consumer Finance, Inc. (“CIT”) originated a substantial

percentage of the loans for at least one of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding

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CIT’s underwriting standards and practices. For example, the prospectus supplement for the BASBS 2006-HE6 RMBS described CIT’s underwriting guidelines, in relevant part, as follows: The underwriting guidelines are primarily intended to assess the borrower’s ability to repay the mortgage loan, to assess the value of the mortgaged property and to evaluate the adequacy of the mortgaged property as collateral for the related mortgage loan. While the originator’s primary consideration in underwriting a mortgage loan is the value of the mortgaged property, the originator also considers, among other things, a mortgagor’s credit history, repayment ability and debt service to income ratio as well as the type and use of the mortgaged property. Some of the mortgage loans bear higher rates of interest than mortgages loans that are originated in accordance with Fannie Mae and Freddie Mac standards, which is likely to result in rates of delinquencies and foreclosures that are higher, and that may be substantially higher, than those experienced by portfolios of mortgage loans underwritten in a more traditional manner. On a case-by-case basis, exceptions to the underwriting guidelines are made where compensating factors exist. It is expected that a substantial portion of the mortgage loans in the mortgage pool that were originated by the originators will represent these exceptions. Each applicant completes an application that includes information with respect to the applicant’s liabilities, income, credit history, employment history and personal information. The underwriting guidelines require a credit report on each applicant from a credit reporting company. The report typically contains information relating to matters such as credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions or judgments. Mortgaged properties that are to secure mortgage loans generally are appraised by qualified independent appraisers. These appraisers inspect and appraise the subject property and verify that the property is in acceptable condition. Following each appraisal, the appraiser prepares a report that includes a market value analysis based on recent sales of comparable homes in the area and, when deemed appropriate, market rent analysis based on the rental of comparable homes in the area. All appraisals are required to conform to the Uniform Standard of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and are generally on forms acceptable to Fannie Mae and Freddie Mac. The mortgage loans were originated consistent with and generally conform to the underwriting guidelines’ full/alternative 76

documentation, stated income documentation and limited documentation residential loan programs. Under each of the programs, the related originator reviews the applicant’s source of income, calculates the amount of income from sources indicated on the loan application or similar documentation, reviews the credit history of the applicant, calculates the debt service to income ratio, if required, to determine the applicant’s ability to repay the loan, and reviews the appraisal. In determining the ability of the applicant to repay the loan a qualifying rate has been created under the underwriting guidelines that generally is equal to the interest rate on that loan. The underwriting guidelines require that mortgage loans be underwritten in a standardized procedure that complies with applicable federal, state and local laws and regulations. * * *

The underwriting guidelines require that the income of each applicant for a mortgage loan under the full/alternative documentation program be verified. 117. The above statements of material fact were false and misleading when made

because in truth CIT: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. Y. 118. Flagstar Bank, FSB Violated Its Underwriting Guidelines Flagstar Bank, FSB (“Flagstar”) originated or acquired a substantial percentage of

the loans for at least one of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Flagstar’s

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underwriting standards and practices. For example, the prospectus supplement for the JPALT 2006-A7 RMBS represented Flagstar’s underwriting guidelines, in relevant part, as follows: The Flagstar Bank Underwriting Guidelines generally follow Fannie Mae’s Desktop or Freddie Mac LP Underwriter guidelines for loans with an original principal balance of up to $650,000, and standard Fannie Mae/Freddie Mac guidelines for loans with an original principal balance of $650,001-$5,000,000, and are designed to evaluate the applicant’s ability to repay the loan, their prior credit history, and availability of funds required for closing and cash reserves, as well as to evaluate the acceptability of the property to be mortgaged as collateral. The Flagstar Bank Underwriting Guidelines are updated on a regular basis to reflect changes required for new or existing mortgage loan products, and to maintain or enhance the suitability of Flagstar Bank’s loan products to its customers, and to investors in residential mortgage loans. Flagstar Bank’s use of standardized underwriting guidelines does not imply that each specific criterion was satisfied individually. Flagstar Bank will consider a mortgage loan to be originated in accordance with a given set of guidelines if, based on an overall qualitative evaluation, the loan is in substantial compliance with the Flagstar Bank Underwriting Guidelines. Even if one or more specific criteria included in the Flagstar Bank Underwriting Guidelines were not satisfied, if other factors compensated for the standards that were not satisfied, the mortgage loan may be considered to be in substantial compliance with the Flagstar Bank Underwriting Guidelines. Flagstar Bank requires that the applicant’s sources of income have the probability of continuing and are adequate to support the loan terms requested. The underwriter, assisted by Fannie Mae’s Desktop Underwriter or Freddie Macs LP system for loans with an original principal balance of up to $650,000, will review the applicant’s history of receiving stable income from employment or other verifiable sources, as well as evaluating the likelihood that the income will continue to be received in the foreseeable future. Emphasis is on the continuity of stable income, and an applicant who has changed jobs frequently, and has been able to earn consistent and predictable income may also be acceptable for underwriting approval. The underwriter will further review the application to evaluate whether the applicant has sufficient liquid assets available for down payment, closing costs and cash reserves, if required.

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As an integral part of the underwriting review, the underwriter will evaluate the intent and willingness of an applicant to repay the mortgage loan in a timely manner, again assisted by Fannie Mae’s Desktop Underwriter or Freddie Mac’s LP system for loans with an original principal balance of up to $650,000. In general, the intent is evaluated based on the applicant’s past credit performance. Flagstar Bank utilizes credit scoring provided by credit reporting agencies to assist in the analysis of an applicant’s credit history. Flagstar Bank may also consider a mortgage/rent payment history, in addition to the applicant’s credit history and credit scoring as maintained at credit reporting agencies. In order to determine the marketability of a property, a property valuation must be obtained from a Flagstar Bank-approved appraiser for all loans. 119. The above statements of material fact were false and misleading when made

because in truth Flagstar: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. Z. 120. NovaStar Mortgage, Inc. Violated Its Underwriting Guidelines NovaStar Mortgage, Inc. (“NovaStar”) originated or acquired a substantial

percentage of the loans for at least one of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding NovaStar’s underwriting standards and practices. For example, the prospectus supplement for the JPMAC 2006-HE2 RMBS represented NovaStar’s underwriting guidelines, in relevant part, as follows:

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General. Underwriting standards are applied by or on behalf of a lender to evaluate a borrower’s credit standing and repayment ability, and the value and adequacy of the related mortgaged property as collateral. In general, a prospective borrower applying for a loan is required to fill out a detailed application designed to provide the underwriting officer with pertinent credit information. As part of the description of the borrower’s financial condition, the borrower generally is required to provide a current list of assets and liabilities and a statement of income and expense, as well as an authorization to apply for a credit report which summarizes the borrower’s credit history with merchants and lenders and any record of bankruptcy. A lender may also originate mortgage loans pursuant to alternative sets of underwriting criteria under various documentation programs, including, but not limited to, stated documentation, reduced documentation, lite documentation, streamlined documentation, no documentation and no-ratio programs. Although the specific requirements of each lender’s documentation programs may vary, these programs are generally designed to facilitate the loan approval process and generally require less documentation and verification than do traditional full documentation programs. Generally, under these programs, certain documentation requirements concerning income/employment and asset verification are reduced or excluded. 121. The above statements of material fact were false and misleading when made

because in truth NovaStar: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process.

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AA. 122.

Ownit Mortgage Solutions, Inc. Violated Its Underwriting Guidelines Ownit Mortgage Solutions, Inc. (“Ownit”) originated or acquired a substantial

percentage of the loans for at least one of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Ownit’s underwriting standards and practices. For example, the prospectus supplement for the JPMAC 2006-HE2 RMBS represented Ownit’s underwriting guidelines, in relevant part, as follows: Ownit is the originator of the “RightLoan”, a proprietary loan product that focuses on purchase, owner occupied, full documentation loans. Ownit provides loans to borrowers not only for the purpose of purchasing homes, but also for debt consolidation and refinancing existing mortgages in accordance with the RightLoan underwriting guidelines. Ownit risk-base prices each loan by combining the credit score and loan-to-value price to price the loan. * * *

The underwriting guidelines and credit matrices of the RightLoan are designed to be used as a guide in determining the credit worthiness of the borrower and his/her ability to repay. The guidelines, a reasonable loan amount and the RightLoan itself offer a solution that also facilitates making logical exceptions to those guides. Exceptions to the guidelines will be made if the loan meets the primary criteria of the RightLoan and offers supported compensating factors when a deviation occurs. In all cases, the exception(s) and compensating factor(s) are clearly documented in the file and require branch manager approval and a second signature from the corporate underwriter. Using the three components, capacity, credit and collateral, the underwriter analyzes the loan profile. Capacity, which is the borrower’s ability to repay, is determined by cash flow. It must be clearly shown that the borrower has a proven, historical cash flow, which will support the requested loan amount. * * *

The underwriter’s objective is to analyze an application individually with the understanding that no single characteristic 81

will approve or deny a loan. The underwriter must utilize the credit report, loan application, asset verifications, appraisal and all other supporting documents in determining credit worthiness and risk. Credit risk can be defined as, but is not restricted to, limited liquid assets or reserves, and derogatory credit history. The overall situation and profile of a borrower, including compensating factors, which may offset negative characteristics, must be taken into consideration in determining if the borrower is creditworthy. Credit worthiness is determined by the borrower’s ability and willingness to repay his or her contractual debt and the value of the property securing the loan. A sufficient property value gives Ownit the ability to recover its investment if the loan defaults. Collateral. The collateral value and amount of equity in the subject property are important factors in assessing the risk of a particular loan. All properties must conform to the neighborhood and be in average or better condition. Acceptable property type includes: 1-2 family, 3-4 family, condominiums, planned unit developments (“PUDs”), modular homes and leasehold properties. Emphasis is placed on property type, location and occupancy to determine risk associated with specific LTV and credit score. Maximum financing is not available for rural properties, neighborhoods with declining values, oversupply of housing and/or marketing time over 6 months, or properties at the low or high end of value range with no comparable sales in the immediate area. Maximum financing is also not available on transactions involving a gift of equity. All appraisals should conform to the Uniform Standards of Professional Appraisal Practices. 123. The above statements of material fact were false and misleading when made

because in truth Ownit: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process.

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BB. 124.

Wells Fargo Bank, N.A. Violated Its Underwriting Guidelines Wells Fargo Bank, N.A. (“Wells Fargo”) originated or acquired a substantial The Offering

percentage of the loans for several of the RMBS purchased by BayernLB.

Materials for such RMBS contained false and misleading statements of material fact regarding Wells Fargo’s underwriting standards and practices. For example, the prospectus supplement for the JPMMT 2006-A1 RMBS represented Wells Fargo’s underwriting guidelines, in relevant part, as follows: General Standards. Wells Fargo Bank’s underwriting standards are applied by or on behalf of Wells Fargo Bank to evaluate the applicant’s credit standing and ability to repay the loan, as well as the value and adequacy of the mortgaged property as collateral. The underwriting standards that guide the determination represent a balancing of several factors that may affect the ultimate recovery of the loan amount, including, among others, the amount of the loan, the ratio of the loan amount to the property value (i.e., the lower of the appraised value of the mortgaged property and the purchase price), the borrower’s means of support and the borrower’s credit history. Wells Fargo Bank’s guidelines for underwriting may vary according to the nature of the borrower or the type of loan, since differing characteristics may be perceived as presenting different levels of risk. With respect to certain Mortgage Loans, the originators of such loans may have contracted with unaffiliated third parties to perform the underwriting process. Except as described below, the Mortgage Loans will be underwritten by or on behalf of Wells Fargo Bank generally in accordance with the standards and procedures described herein. * * *

A prospective borrower applying for a mortgage loan is required to complete a detailed application. The loan application elicits pertinent information about the applicant, with particular emphasis on the applicant’s financial health (assets, liabilities, income and expenses), the property being financed and the type of loan desired. A self-employed applicant may be required to submit his or her most recent signed federal income tax returns. With respect to every applicant, credit reports are obtained from commercial reporting services, summarizing the applicant’s credit history with merchants and lenders. Generally, significant unfavorable credit information reported by the applicant or a credit 83

reporting agency must be explained by the applicant. The credit review process generally is streamlined for borrowers with a qualifying Mortgage Score. Verifications of employment, income, assets or mortgages may be used to supplement the loan application and the credit report in reaching a determination as to the applicant’s ability to meet his or her monthly obligations on the proposed mortgage loan, as well as his or her other mortgage payments (if any), living expenses and financial obligations. * * *

In general, borrowers applying for loans must demonstrate that the ratio of their total monthly debt to their monthly gross income does not exceed a certain guidelines. Such maximum level guidelines vary depending on a number of factors including Loanto-Value Ratio, a borrower’s credit history, a borrower’s liquid net worth, the potential of a borrower for continued employment advancement or income growth, the ability of the borrower to accumulate assets or to devote a greater portion of income to basic needs such as housing expense, a borrower’s Mortgage Score and the type of loan for which the borrower is applying. These calculations are based on the amortization schedule and the interest rate of the related loan, with the ratio being computed on the basis of the proposed monthly mortgage payment. In the case of adjustable-rate mortgage loans, the interest rate used to determine a mortgagor’s total debt for purposes of such ratio may, in certain cases, be the initial mortgage interest rate or another interest rate, which, in either case, is lower than the sum of the index rate that would have been applicable at origination plus the applicable margin. * * *

The appraisal of any Mortgaged Property reflects the individual appraiser’s judgment as to value, based on the market values of comparable homes sold within the recent past in comparable nearby locations and on the estimated replacement cost. The appraisal relates both to the land and to the structure; in fact, a significant portion of the appraised value of a Mortgaged Property may be attributable to the value of the land rather than to the residence. Because of the unique locations and special features of certain Mortgaged Properties, identifying comparable properties in nearby locations may be difficult. The appraised values of such Mortgaged Properties will be based to a greater extent on adjustments made by the appraisers to the appraised values of

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reasonably similar properties rather than on objectively verifiable sales data. * * *

Underwriter Discretion. During the second calendar quarter of 2005, Wells Fargo Bank initiated a program designed to encourage its mortgage loan underwriting staff to prudently, but more aggressively, utilize the underwriting discretion already granted to them under Wells Fargo Bank’s underwriting guidelines and policies. This initiative was viewed by management as necessary and desirable to make prudent loans available to customers where such loans may have been denied in the past because of underwriter hesitancy to maximize the use of their ability to consider compensating factors as permitted by the underwriting guidelines. There can be no assurance that the successful implementation of this initiative will not result in an increase in the incidence of delinquencies and foreclosures, or the severity of losses, among mortgage loans underwritten in accordance with the updated philosophy, as compared to mortgage loans underwritten prior to the commencement of the initiative. 125. The above statements of material fact were false and misleading when made

because in truth Wells Fargo: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. CC. 126. Accredited Home Lenders, Inc. Violated Its Underwriting Guidelines Accredited Home Lenders, Inc. (“Accredited”) originated or acquired a

substantial percentage of the loans for at least one of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding Accredited’s underwriting standards and practices. 85 For example, the prospectus

supplement for the MSST 2007-1 RMBS represented Accredited’s underwriting guidelines, in relevant part, as follows: Underwriting Standards. Each mortgage loan originated or acquired by Accredited is underwritten prior to loan closing, or re-underwritten after loan closing but prior to purchase by Accredited, in accordance with Accredited’s underwriting guidelines. Accredited’s underwriting process is intended to assess a mortgage loan applicant’s credit standing and repayment ability and the value and adequacy of the real property security as collateral for the proposed mortgage loan. * * *

Each prospective mortgagor completes a mortgage loan application that includes information with respect to the applicant’s liabilities, income, credit history, employment history and personal information. At least one credit report on each applicant from an independent, nationally recognized credit reporting company is required. The credit report typically contains information relating to such matters as credit history with local and national merchants and lenders, installment debt payments and any record of defaults, bankruptcies, repossessions, or judgments. All derogatory credit items occurring within the preceding two years and all credit inquiries within the preceding 90 days must be addressed by the applicant to the satisfaction of Accredited. A full appraisal of the property proposed to be pledged as collateral is required in connection with the origination of each mortgage loan. Appraisals are performed by licensed, third-party, fee-based appraisers and include, among other things, an inspection of the exterior and interior of the subject property. Appraisals are also required to address neighborhood conditions, site and zoning status and the condition and value of improvements. Following each appraisal, the appraiser prepares a report which includes a reproduction costs analysis (when appropriate) based on the current cost of constructing a similar home and market value analysis based on recent sales of comparable homes in the area. Appraisals generally conform to the Uniform Standards of Professional Appraisal Practice and must be on forms acceptable to Freddie Mac and Fannie Mae. Every appraisal is reviewed by a non-affiliated appraisal review firm or by Accredited’s Appraisal Review Department or a qualified underwriter before the mortgage loan is closed. The appraisal may not be more than 180 days old on the day the

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mortgage loan is funded. A second full appraisal is required for combined mortgage loan amounts greater than $750,000. * * *

Each month, Accredited’s internal audit and quality control department generally reviews and reunderwrites a sample of the mortgage loans originated by Accredited. The statistical sample of mortgage loans is chosen by random selection and based on the prior defect rates. In addition, targeted reviews are conducted, including but not limited to the following areas: regulatory compliance, targeted and discretionary reviews, or where misrepresentation is suspected. The quality control department reunderwrites these mortgage loans through an in-depth analysis of the following areas: application, income/employment, appraisals, credit decision, program criteria, net tangible benefits, reverifications, and compliance. Specifically, these tests focus on verifying proper completion of borrower disclosures and other mortgage loan documentation, correct processing of all legally required documentation, and compliance with time frames imposed by applicable law. When material misrepresentation is suspected, the quality control department may undertake a comprehensive reunderwriting of not only the mortgage loan in question, but any related mortgage loans connected by broker, appraiser, or other parties to the transaction. All findings of the internal audit and quality control department are reported on a regular basis to members of senior management and the audit committee of the board of directors. The Chief Executive Officer and the Chief Operating Officer, along with the Director of Operations and others analyze the results of the monthly internal audit and quality control department audits as well as performance trends and servicing issues. Based upon this analysis, corrective actions are taken. * * *

Exceptions. Accredited may allow exceptions to its underwriting guidelines in accordance with Accredited’s established exception policy. Exceptions may be allowed based upon the presence of compensating factors such as a low LTV, demonstrated pride of ownership and stability of employment. 127. The above statements of material fact were false and misleading when made

because in truth Accredited: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive

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exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. DD. 128. Residential Funding Corporation Violated Its Underwriting Guidelines Residential Funding Corporation (“RFC”) originated or acquired a substantial

percentage of the loans for at least one of the RMBS purchased by BayernLB. The Offering Materials for such RMBS contained false and misleading statements of material fact regarding RFC’s underwriting standards and practices. For example, the prospectus supplement for the CARR 2006-RFC1 RMBS represented RFC’s underwriting guidelines, in relevant part, as follows: Prior to assignment to the sponsor, Residential Funding Corporation reviewed the underwriting standards for the mortgage loans and all of the mortgage loans were in substantial conformity with the standards set forth in Residential Funding Corporation’s AlterNet Program or are otherwise in conformity with the standards set forth in the description of credit grades set forth in this prospectus supplement. * * *

Residential Funding Corporation’s underwriting of the mortgage loans generally consisted of analyzing the following as standards applicable to the mortgage loans: • the creditworthiness of a mortgagor, • the income sufficiency of a mortgagor’s projected family income relative to the mortgage payment and to other fixed obligations, including in certain instances rental income from investment property, and • the adequacy of the mortgaged property expressed in terms of LTV ratio, to serve as the collateral for a mortgage loan.

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Generally, each mortgagor would have been required to complete an application designed to provide to the original lender pertinent credit information concerning the mortgagor. As part of the description of the mortgagor’s financial condition, each mortgagor would have been required to furnish information with respect to the mortgagor’s assets, liabilities, income, credit history, employment history and personal information, and furnished an authorization to apply for a credit report which summarized the borrower’s credit history with local merchants and lenders and any record of bankruptcy. The information may have been supplied solely in the loan application. The mortgagor may also have been required to authorize verifications of deposits at financial institutions where the mortgagor had demand or savings accounts. * * * Based on the data provided in the application, certain verifications, if required by the originator of the mortgage loan, and the appraisal or other valuation of the mortgaged property, a determination was made by the original lender that the mortgagor’s monthly income would be sufficient to enable the mortgagor to meet its monthly obligations on the mortgage loan and other expenses related to the property, including property taxes, utility costs, standard hazard insurance and other fixed obligations other than housing expenses. * * *

The adequacy of a mortgaged property as security for repayment of the related mortgage loan generally has been determined by an appraisal in accordance with pre-established appraisal procedure guidelines for appraisals established by or acceptable to the originator. Appraisers were either staff appraisers employed by the originator or independent appraisers selected in accordance with pre-established guidelines established by the originator. The appraisal procedure guidelines generally will have required the appraiser or an agent on its behalf to personally inspect the property and to verify whether the property was in good condition and that construction, if new, had been substantially completed. The appraisal would have considered a market data analysis of recent sales of comparable properties and, when deemed applicable, an analysis based on income generated from the property or replacement cost analysis based on the current cost of constructing or purchasing a similar property.

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129.

The above statements of material fact were false and misleading when made

because in truth RFC: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. EE. 130. Nomura Credit & Capital, Inc. Violated Its Underwriting Guidelines Nomura Credit & Capital, Inc. (“Nomura”) originated or acquired a substantial The Offering

percentage of the loans for several of the RMBS purchased by BayernLB.

Materials for such RMBS contained false and misleading statements of material fact regarding Nomura’s underwriting standards and practices. For example, the prospectus supplement for the NAA 2007-3 RMBS represented Nomura’s underwriting guidelines, in relevant part, as follows: The underwriting standards applicable to the Mortgage Loans typically differ from, and are, with respect to a substantial number of Mortgage Loans, generally less stringent than, the underwriting standards established by Fannie Mae or Freddie Mac primarily with respect to original principal balances, loan-to-value ratios, borrower income, credit score, required documentation, interest rates, borrower occupancy of the mortgaged property, and/or property types. To the extent the programs reflect underwriting standards different from those of Fannie Mae and Freddie Mac, the performance of the Mortgage Loans thereunder may reflect higher delinquency rates and/or credit losses. In addition, certain exceptions to the underwriting standards described in this prospectus supplement are made in the event that compensating factors are demonstrated by a prospective borrower. Generally, each borrower will have been required to complete an application designed to provide to the original lender pertinent credit information concerning the borrower. As part of the

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description of the borrower’s financial condition, the borrower generally will have furnished certain information with respect to its assets, liabilities, income (except as described below), credit history, employment history and personal information, and furnished an authorization to apply for a credit report which summarizes the borrower's credit history with local merchants and lenders and any record of bankruptcy. The borrower may also have been required to authorize verifications of deposits at financial institutions where the borrower had demand or savings accounts. In the case of investment properties and two- to four-unit dwellings, income derived from the mortgaged property may have been considered for underwriting purposes, in addition to the income of the borrower from other sources. With respect to mortgaged properties consisting of vacation or second homes, no income derived from the property generally will have been considered for underwriting purposes. In the case of certain borrowers with acceptable compensating factors, income and/or assets may not be required to be stated (or verified) in connection with the loan application. Based on the data provided in the application and certain verifications (if required), a determination is made by the original lender that the borrower’s monthly income (if required to be stated) will be sufficient to enable the borrower to meet their monthly obligations on the mortgage loan and other expenses related to the property such as property taxes, utility costs, standard hazard insurance and other fixed obligations other than housing expenses. Generally, scheduled payments on a mortgage loan during the first year of its term plus taxes and insurance and all scheduled payments on obligations that extend beyond ten months equal no more than a specified percentage not in excess of 60% of the prospective borrower's gross income. The percentage applied varies on a case-by-case basis depending on a number of underwriting criteria, including, without limitation, the loan-tovalue ratio of the mortgage loan. The originators may also consider the amount of liquid assets available to the borrower after origination. * * *

The adequacy of the Mortgaged Property as security for repayment of the related Mortgage Loan will generally have been determined by an appraisal in accordance with preestablished appraisal procedure standards for appraisals established by or acceptable to the originators. All appraisals conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and must be on

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forms acceptable to Fannie Mae and/or Freddie Mac. Appraisers may be staff appraisers employed by the originators or independent appraisers selected in accordance with pre-established appraisal procedure standards established by the originators. The appraisal procedure standards generally will have required the appraiser or an agent on its behalf to personally inspect the Mortgaged Property and to verify whether the Mortgaged Property was in good condition and that construction, if new, had been substantially completed. The appraisal generally will have been based upon a market data analysis of recent sales of comparable properties and, when deemed applicable, an analysis based on the current cost of constructing or purchasing a similar property. 131. The above statements of material fact were false and misleading when made

because in truth Nomura: (i) abandoned its underwriting guidelines, verification procedures and quality control standards in order to increase loan originations; (ii) allowed pervasive exceptions to the company’s underwriting guidelines in the absence of existing compensating factors; (iii) consistently failed to properly document prospective borrowers’ ability to repay their mortgage loans; and (iv) systematically disregarded its stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties in the loan origination and underwriting process. VI. DEFENDANTS KNEW THE TRUTH ABOUT THE ORIGINATORS’ LENDING PRACTICES 132. Defendants scrutinized the loans they purchased and identified the rampant

underwriting deficiencies at the mortgage originators discussed above. Notwithstanding their knowledge about the real risks of default those loans presented, they securitized them into the RMBS sold to BayernLB. A. 133. Defendants’ Due Diligence Identified Defects In The Loan Pools Defendants Purchased For Securitization Defendants learned, through their due diligence process, that a substantial

portion of the loans they securitized woefully failed to meet the stated underwriting standards of

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those originators, had other deficiencies, violated state and federal law, and/or were based on inflated property valuations. 134. As described in the FCIC, Defendants rejected Clayton’s credit due diligence

findings as a matter of course. During its review, Clayton would assign each loan a number—1, 2 or 3—to reflect Clayton’s evaluation of the soundness of the loan. The numbering referred to three different levels, “1” being the best—i.e., the loan met the originators’ underwriting guidelines—and a “3” being the worst. 135. As revealed by the FCIC and reports released by Clayton, approximately 27% of

the JPMorgan- and WaMu-securitized loans sampled by Clayton during the height of the mortgage boom (from 2006 to mid-2007), and 16% of such Bear Stearns loans (together with EMC loans), failed to meet the originator’s underwriting guidelines. The FCIC’s findings confirm that, over this same period, JPMorgan, WaMu and Bear Stearns (together with EMC) overruled Clayton’s findings and “waived” approximately 51%, 29%, and 42% respectively, of all such defective “exception” loans and securitized them into RMBS that were sold to investors like BayernLB. 136. Extrapolating the results of Defendants’ “waive in” rate of the loans Clayton had

rejected for failing to meet the originators’ guidelines to the entire loan pools backing their RMBS purchased by BayernLB reveals the extent to which Defendants knew the loans they had securitized were destined to fail. As the FCIC Report concluded with regard to the Offering Materials for RMBS securitized by Defendants: [M]any prospectuses indicated that the loans in the pool either met guidelines outright or had compensating factors, even though Clayton’s records show that only a portion of the loans were sampled, and that of those that were sampled, a substantial percentage of Grade 3 loans were waived in….[O]ne could reasonably expect [the untested loans] to have many of the same deficiencies, at the same rate, as the sampled loans. Prospectuses 93

for the ultimate investors in the mortgage-backed securities not contain this information, or information on how few of loans were reviewed, raising the question of whether disclosures were materially misleading, in violation of securities laws. FCIC Report at 167, 170. 137.

did the the the

Defendants’ astounding “waive in” rate, and the implications for the quality of

the RMBS underwritten by Defendants, rendered materially false and misleading numerous statements in the Offering Materials relied on by BayernLB in purchasing the RMBS. The Defendants’ prospectus supplements represented, for example, that “[e]xceptions to [EMC’s] underwriting guidelines are permitted when the seller’s performance supports such action and the variance request is approved by credit management.” Defendants knew that these and similar statements were materially false and misleading because, through their due diligence process, they had determined that a substantial number of the loans were exception loans that did not have compensating factors and, in fact, deliberately included many of those exception loans in the loan pools they securitized. Moreover, given that the loans actually reviewed by Clayton represented only a fraction of the loans Defendants actually purchased and securitized, Defendants either knew or recklessly disregarded that a highly material number of the loans underlying their RMBS purchased by BayernLB were not underwritten in compliance with the originator’s guidelines. 138. Bear Stearns, WaMu and JPMorgan were also well aware of the true quality of

the loans originated or acquired by their own origination subsidiaries such as EMC, Washington Mutual Bank, Long Beach, the Chase Originators, among others.

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VII.

DEFENDANTS KNEW THE CREDIT RATINGS ASSIGNED TO THE DEFENDANTS’ RMBS MATERIALLY MISREPRESENTED THE CREDIT RISK OF THE RMBS 139. To bring its RMBS to market, Defendants knew that they needed to obtain the

highest “investment grade” ratings possible from the credit rating agencies (“CRAs”)— Moody’s, S&P and Fitch—that rated Defendants’ securitizations. Indeed, Defendants featured the ratings prominently in the Offering Materials and discussed at length the ratings received by the different tranches of the RMBS, and the bases for the ratings. Yet, Defendants knew that the ratings were not reliable because those ratings were supported by false information that Defendants provided. 140. “Investment grade” products are understood in the marketplace to be stable,

secure and safe. Using S&P’s scale, “investment grade” ratings are AAA, AA, A and BBB, and any instrument rated below BBB is considered below investment grade or “junk bond.” 141. The Offering Materials for the Defendants’ RMBS BayernLB purchased state

that the issuance of each tranche of the RMBS was conditioned on the assignment of particular investment-grade ratings, and listed the ratings in a chart. All of the tranches of RMBS purchased by BayernLB were rated investment grade. For example, Bear Stearns represented in the BALTA 2006-3 prospectus supplement that: It is a condition to the issuance of each class of Offered Certificates that it receives at least the ratings set forth below from S&P and Moody’s. Offered Certificates Class I-A-1 Class I-A-2 Class I-M-1 Class I-M-2 Class I-B-1 Class I-B-2 Class II-1A-1 Class II-1A-2 Class II-1X-1 S&P AAA AAA AA A BBB BBBAAA AAA AAA 95 Moody’s Aaa Aaa Aa2 A2 Baa2 Baa3 Aaa Aaa Aaa

Class II-X-B1 Class II-X-B2 Class II-2A-1 Class II-2A-2 Class II-2X-1 Class II-3A-1 Class II-3A-2 Class II-3X-1 Class II-4A-1 Class II-4A-2 Class II-B-1 Class II-B-2 Class II-B-3 Class III-1A-1 Class III-1A-2 Class III-1X-1 Class III-2A-1 Class III-2A-2 Class III-2X-1 Class III-3A-1 Class III-3A-2 Class III-4A-1 Class III-4A-2 Class III-4X-1 Class III-5A-1 Class III-5A-2 Class III-6A-1 Class III-6A-2 Class III-B-1 Class III-B-2 Class III-B-3

AA A AAA AAA AAA AAA AAA AAA AAA AAA AA A BBB AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AA A BBB

Aa2 A2 Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aa2 A2 Baa2 Aaa Aa1 Aaa Aaa Aa1 Aaa Aaa Aa1 Aaa Aa1 Aaa Aaa Aa1 Aaa Aaa Aa2 A2 Baa2

The ratings assigned by S&P and Moody’s to mortgage passthrough certificates address the likelihood of the receipt of all distributions on the mortgage loans by the related certificateholders under the agreements pursuant to which such certificates were issued. S&P’s and Moody’s ratings take into consideration the credit quality of the related mortgage pool, structural and legal aspects associated with such certificates, and the extent to which the payment stream in the mortgage pool is adequate to make payments required under such certificates. S&P’s and Moody’s ratings on such certificates do not, however, constitute a statement regarding frequency of prepayments on the mortgages. 142. The above statements (and the substantially similar statements appearing in all of

the Defendants’ RMBS Offering Materials) regarding the ratings assigned to the Defendants’ 96

RMBS, as well as the ratings themselves, were materially false and misleading because Defendants touted these ratings while knowing that those ratings were based on the misleading information Defendants provided to the CRAs. 143. The credit ratings of the RMBS were further compromised by misinformation

provided by Defendants regarding the abandonment of the originators’ underwriting standards, rampant use of aggressive exceptions, Defendants’ knowledge or reckless disregard of pervasive fraud in the stated income loan programs, and the inflated appraisals assigned to the underlying collateral, as described above. The Defendants knew that the investment grade ratings assigned to the RMBS were false because the originators did not follow their own underwriting standards and, as such, no reliable estimate could be made concerning the level of enhancement necessary to ensure that the tranches purchased by BayernLB were of investment grade quality. By including and endorsing these investment grade ratings in the Offering Materials, Defendants made a false representation that it actually believed that the investment grade ratings were an accurate reflection of the credit quality of the RMBS. 144. Subsequent downgrades confirm that the investment grade ratings reported in the

Offering Materials were unjustifiably high and misstated the true credit risk of the RMBS purchased by BayernLB. The RMBS purchased by BayernLB—all of which were each initially awarded an investment grade rating—have almost without exception been downgraded to junk. The en masse downgrade of investment grade rated RMBS indicates that the ratings set forth in the Offering Materials were false, unreliable and inflated. VIII. DEFENDANTS’ FALSE AND MISLEADING MISSTATEMENTS AND OMISSIONS OF MATERIAL FACT IN THE OFFERING DOCUMENTS 145. The Offering Materials BayernLB relied upon in purchasing the Defendants’

RMBS contained numerous misrepresentations of material fact, or omitted to state material fact

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necessary to make the statements therein not misleading, regarding: (i) the originators’ underwriting practices and guidelines by which the loans were originated, including the prevalence and type of exceptions to those guidelines being applied to the underlying loans, and the rampant fraud in stated income loans; (ii) the value of the underlying property securing the loans, in terms of LTV and CLTV ratios and the appraisal standards by which such mortgaged properties were measured; (iii) the due diligence that Defendants conducted into the mortgage loans backing the RMBS, which identified pervasive defects in the loans underlying the securitizations; (iv) the credit ratings assigned to the RMBS; and (v) the true risks of the RMBS. Indeed, as the FCIC Report concluded with regard to the Offering Materials for the Defendants’ RMBS: [M]any prospectuses indicated that the loans in the pool either met guidelines outright or had compensating factors, even though Clayton’s records show that only a portion of the loans were sampled, and that of those that were sampled, a substantial percentage of Grade 3 loans were waived in….[O]ne could reasonably expect [the untested loans] to have many of the same deficiencies, at the same rate, as the sampled loans. Prospectuses for the ultimate investors in the mortgage-backed securities did not contain this information, or information on how few of the loans were reviewed, raising the question of whether the disclosures were materially misleading, in violation of the securities laws. A. 146. The Offering Materials Misrepresented The Originators’ Underwriting Guidelines. The originators discussed above originated the mortgage loans that backed the

RMBS purchased by BayernLB. The Offering Materials for the RMBS all contained identical or materially similar statements of material fact regarding the originators’ underwriting guidelines and practices. For example, the prospectus supplement for the BALTA 2006-4 RMBS described EMC’s underwriting guidelines, in relevant part, as follows:

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The EMC mortgage loans have either been originated or purchased by an originator and were generally underwritten in accordance with the standards described herein. Exceptions to the underwriting guidelines are permitted when the seller’s performance supports such action and the variance request is approved by credit management. Such underwriting standards are applied to evaluate the prospective borrower’s credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. These standards are applied in accordance with the applicable federal and state laws and regulations. Exceptions to the underwriting standards are permitted where compensating factors are present and are managed through a formal exception process. * * *

Generally, each mortgagor will have been required to complete an application designed to provide to the lender pertinent credit information concerning the mortgagor. The mortgagor will have given information with respect to its assets, liabilities, income (except as described below), credit history, employment history and personal information, and will have furnished the lender with authorization to obtain a credit report which summarizes the mortgagor’s credit history. 147. The above statements of material fact and similar statements regarding the

originators whose loans back the Defendants’ RMBS in which BayernLB invested, were materially false and misleading when made because, as explained above, they misrepresented the true facts, known by Defendants, that the originators: (i) systematically and flagrantly failed to follow their stated underwriting guidelines; (ii) allowed pervasive exceptions to their underwriting standards regardless of existing compensating factors; (iii) disregarded credit quality to fuel loan originations to sell to loan purchasers such as Defendants; and (iv) routinely allowed fraudulent representations of an applicant’s stated income, failed to verify a prospective borrowers documentation or statements regarding income or assets, and, in many cases, knowingly falsified the borrower’s stated or documented income or assets.

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B. 148.

The Offering Materials Misrepresented The Appraisals And LTV Ratios Of The Securitized Loans The adequacy of the mortgaged properties as security of the repayment of the The Offering Materials represented that

loans was purportedly determined by appraisals.

independent appraisals were prepared for each mortgaged property and that reports were prepared to substantiate these appraisals. For example, the LBMLT 2006-5 prospectus

supplement described Long Beach’s appraisal practices as follows: Evaluation of the Adequacy of Collateral The adequacy of the mortgaged property as collateral is generally determined by an appraisal of the mortgaged property that generally conforms to Fannie Mae and Freddie Mac appraisal standards and a review of that appraisal. The mortgaged properties are appraised by licensed independent appraisers who have satisfied the servicer’s appraiser screening process. In most cases, properties in below average condition, including properties requiring major deferred maintenance, are not acceptable under the sponsor’s underwriting programs. Each appraisal includes a market data analysis based on recent sales of comparable homes in the area and, where deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. Every independent appraisal is reviewed by an underwriter of the master servicer or its affiliate and is reviewed by one or more third party vendors which may refer the appraisal to the master servicer or one of its affiliates for additional further review before the loan is funded or re-underwritten. Depending upon the original principal balance and loan-to-value ratio of the mortgaged property, the appraisal review may include an administrative review, technical review, desk review or field review of the original appraisal. As discussed above, the representations regarding appraisals and LTV ratios were

149.

materially false and misleading in that they misrepresented that the appraisal process employed by the originators, including, among others things, the fact that: (i) the appraisers were not independent from the respective mortgage lenders, which pressured appraisers to value the mortgaged property at a pre-determined, preconceived, inflated, and false appraisal value; (ii) the actual LTV ratios for many of the mortgage loans underlying the RMBS would have exceeded

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100% if the mortgaged properties had been properly and independently appraised as represented in the Offering Documents; (iii) the appraisals failed to conform to the standards set by Fannie Mae and Freddie Mac. C. 150. Defendants Materially Misrepresented The Accuracy Of The Credit Ratings Assigned To The Certificates Defendants represented in the Offering Materials that all of the RMBS purchased

by BayernLB were worthy of being rated investment grade signifying that the risk of loss was virtually non-existent. 151. By providing ratings, Defendants represented that they believed that the

information provided to the rating agencies to support these ratings accurately reflected the Defendants’ underwriting guidelines and practices, and the specific qualities of the underlying loans. Specifically, the Offering Materials prepared by Defendants represented, in sum or substance, that: It is a condition to the issuance of each class of Offered Certificates that it receives at least the ratings set forth below from S&P and Moody’s. Offered Certificates Class I-A-1 Class I-A-2 Class I-M-1 Class I-M-2 Class I-B-1 Class I-B-2 Class II-1A-1 Class II-1A-2 Class II-1X-1 Class II-X-B1 Class II-X-B2 Class II-2A-1 Class II-2A-2 Class II-2X-1 Class II-3A-1 Class II-3A-2 Class II-3X-1 S&P AAA AAA AA A BBB BBBAAA AAA AAA AA A AAA AAA AAA AAA AAA AAA Moody’s Aaa Aaa Aa2 A2 Baa2 Baa3 Aaa Aaa Aaa Aa2 A2 Aaa Aaa Aaa Aaa Aaa Aaa

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Class II-4A-1 Class II-4A-2 Class II-B-1 Class II-B-2 Class II-B-3 Class III-1A-1 Class III-1A-2 Class III-1X-1 Class III-2A-1 Class III-2A-2 Class III-2X-1 Class III-3A-1 Class III-3A-2 Class III-4A-1 Class III-4A-2 Class III-4X-1 Class III-5A-1 Class III-5A-2 Class III-6A-1 Class III-6A-2 Class III-B-1 Class III-B-2 Class III-B-3

AAA AAA AA A BBB AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AA A BBB

Aaa Aaa Aa2 A2 Baa2 Aaa Aa1 Aaa Aaa Aa1 Aaa Aaa Aa1 Aaa Aa1 Aaa Aaa Aa1 Aaa Aaa Aa2 A2 Baa2

The ratings assigned by S&P and Moody’s to mortgage passthrough certificates address the likelihood of the receipt of all distributions on the mortgage loans by the related certificateholders under the agreements pursuant to which such certificates were issued. S&P’s and Moody’s ratings take into consideration the credit quality of the related mortgage pool, structural and legal aspects associated with such certificates, and the extent to which the payment stream in the mortgage pool is adequate to make payments required under such certificates. S&P’s and Moody’s ratings on such certificates do not, however, constitute a statement regarding frequency of prepayments on the mortgages. 152. These statements regarding the ratings assigned to the RMBS were false and

misleading because Defendants stated the assigned ratings while knowing that misleading information was provided to the rating agencies by Defendants to guarantee investment grade ratings were assigned to the RMBS.

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IX.

BAYERNLB’S INVESTMENT IN THE RMBS AND RELIANCE ON DEFENDANTS’ MISREPRESENTATIONS 153. The RMBS for all offerings were issued pursuant to the Offering Materials,

which contained the false and misleading statements set forth above. These documents also generally explained the structure and provided an overview of the RMBS. depositor prepared the Offering Materials. 154. The Offering Materials contained detailed descriptions of the mortgage pools The relevant

underlying the RMBS and provided the specific terms of the particular RMBS offering. The Offering Materials included tabular data concerning the loans underlying the RMBS, including (but not limited to) the type of loans; the number of loans; the mortgage rate and net mortgage rate (the mortgage rate net of the premium for any lender paid mortgage insurance less the sum of the master servicing fee and the trustee fee on the mortgage loan); the aggregate scheduled principal balance of the loans; the weighted average original combined LTV ratio; occupancy rates; credit enhancement; and the geographic concentration of the mortgaged properties. The Offering Materials also contained a summary of the originators’ underwriting and appraisal standards, guidelines and practices. 155. In deciding to purchase the RMBS, BayernLB relied on the Defendants’ false

representations and omissions of material fact regarding their underwriting standards and the characteristics of the mortgage loans underlying the RMBS in the Offering Materials. But for the Defendants’ fraudulent representations and omissions, BayernLB would not have purchased the RMBS. 156. BayernLB reasonably relied upon the Defendants’ representations in the

Offering Materials regarding the underlying loan quality. BayernLB did not know at the time it purchased the RMBS, and could not have known, that the originators were not following their

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underwriting guidelines, leading to a drastic increase in the origination of risky loans, nor did BayernLB know that the property appraisals secured by the originators were not independent and resulted in false appraisal values. BayernLB also did not know that the originators

knowingly or recklessly accepted false information about material fact such as borrowers’ stated income, which caused the Defendants’ representations to be false. BayernLB did not know that Defendants’ due diligence had identified significant problems with the originators’ loans signifying that a substantial number of the loans underlying the RMBS would not be able to be repaid. If BayernLB had known these and other material facts regarding Defendants’ fraudulent misrepresentations and omissions of material fact contained in the Offering Materials, BayernLB would not have purchased the RMBS. 157. Defendants’ misrepresentations and omissions of material fact caused BayernLB

to suffer losses on the RMBS, because the RMBS were far riskier—and their rate of default far higher—than the Offering Materials represented them to be. The mortgage loans underlying the RMBS experienced defaults and delinquencies at a much higher rate due to the originators’ abandonment of their loan-origination guidelines. 158. BayernLB purchased each RMBS in reliance on the information contained in the In connection with the offers and sales of the RMBS to

applicable Offering Materials.

BayernLB, Defendants provided directly or indirectly to BayernLB’s investment personnel or managers the Offering Materials. Similar information was sent to and analyzed by BayernLB’s investment personnel and managers if the RMBS was sold to them in the secondary market. 159. BayernLB reviewed and analyzed the Offering Materials provided directly or

indirectly by Defendants with respect to each offering of RMBS and performed various analyses of the RMBS-specific data for each offering. The analyses conducted by BayernLB were based

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on the information provided by Defendants to verify the investments were appropriate and sound. 160. Thus, BayernLB justifiably relied on the Offering Materials provided directly or

indirectly by Defendants for each offering of the RMBS. These documents contained numerous statements of material fact about the RMBS, including statements concerning: (i) the mortgage originators’ underwriting guidelines that were purportedly applied to evaluate the ability of the borrowers to repay the loans underlying the RMBS; (ii) the appraisal guidelines that were purportedly applied to evaluate the value and adequacy of the mortgaged properties as collateral; (iii) the LTV ratios and debt to income ratios; and (iv) the ratings assigned to the RMBS. 161. These statements of material fact were untrue because: (i) the originators

violated their stated underwriting guidelines and did not originate loans based on the borrowers’ ability to repay; and (ii) inflated appraisals caused the listed LTV ratios and levels of credit enhancement to be untrue. In addition, metrics such as debt-to-income ratios were untrue as a result of the other mortgage originators’ acceptance of untrue information from mortgage applicants. For example, Defendants and the mortgage originators allowed applicants for

“stated income” loans to provide untrue income information and did not verify the applicants’ purported income when required. In addition, the credit ratings on which BayernLB relied were materially misleading, did not reflect the true credit quality of the RMBS and were the result of intentional manipulation. X. BECAUSE OF DEFENDANTS’ FRAUDULENT CONDUCT, BAYERNLB SUFFERED LOSSES ON ITS PURCHASES OF RMBS 162. The ratings on virtually all of the RMBS have since been severely downgraded

and they are no longer marketable or salable at the prices paid for them by BayernLB. All of the RMBS in which BayernLB purchased interests were rated investment grade at issuance and 105

the vast majority of which have since been downgraded to junk. The massive defaults and ratings downgrades confirm that the true value of the RMBS at the time of purchase was far below what BayernLB paid, and substantiates the harm caused to BayernLB by Defendants’ fraud. 163. Further, the delinquency, bank ownership and foreclosure rates on the underlying

mortgages have soared since issuance. These current performance numbers do not reflect the number of loans which have been foreclosed since issuance and which are no longer included within the loan pools. A substantial number of the original loans contained in the loan pools have been removed from the pools, largely due to either foreclosure or early payout, negatively impacting the income payable to certificateholders. FIRST CAUSE OF ACTION (Common Law Fraud Against Defendants) 164. BayernLB repeats and realleges the allegations set forth in the preceding

paragraphs, as if fully set forth herein. 165. As alleged above, in the Offering Materials and in other communications to

BayernLB, Defendants made fraudulent and false statements of material fact, and omitted material facts necessary in order to make their statements, in light of the circumstances under which the statements were made, not misleading. 166. This is a claim for common law fraud against Defendants. As a corporate parent,

JPMorgan Chase & Co. directed the activities of JPMorgan Chase Bank, N.A. (which is the successor to Washington Mutual Bank), J.P. Morgan Securities LLC (which is the successor to Bear Stearns & Co. Inc.), J.P. Morgan Mortgage Acquisition Corporation, J.P. Morgan Acceptance Corporation I, Chase Home Finance, LLC, and Chase Mortgage Finance Corporation. 106

167.

Defendants knew at the time they sold and marketed each of the RMBS that the

foregoing statements were false or, at the very least, made recklessly, without any belief in the truth of the statements. 168. Defendants made these materially false and misleading statements and omissions

for the purpose of inducing BayernLB to purchase the RMBS. Furthermore, these statements related to these Defendants’ own acts and omissions. 169. Defendants knew or recklessly disregarded that investors like BayernLB were

relying on their expertise, and they encouraged such reliance through the Offering Materials and their public representations, as described herein. Defendants knew or recklessly disregarded that investors like BayernLB would rely upon their representations in connection their decision to purchase the RMBS. Defendants were in a position of unique and superior knowledge regarding the true facts concerning the foregoing material misrepresentations and omissions. 170. It was only by making such representations that Defendants were able to induce

BayernLB to buy the RMBS. BayernLB would not have purchased or otherwise acquired the RMBS but for Defendants’ fraudulent representations and omissions about the quality of the RMBS. 171. BayernLB justifiably, reasonably and foreseeably relied upon Defendants’

representations and false statements regarding the quality of the RMBS. 172. As a result of the false and misleading statements and omissions, as alleged

herein, BayernLB has suffered substantial damages. SECOND CAUSE OF ACTION (Fraudulent Inducement Against Defendants) 173. BayernLB repeats and realleges the allegations set forth in the preceding

paragraphs, as if fully set forth herein. 107

174.

As alleged above, in the Offering Materials and in other communications to

BayernLB, Defendants made fraudulent and false statements of material fact, and omitted material facts necessary in order to make their statements, in light of the circumstances under which the statements were made, not misleading. 175. This is a claim for fraudulent inducement against Defendants. As a corporate

parent, JPMorgan Chase & Co. directed the activities of JPMorgan Chase Bank, N.A. (which is the successor to Washington Mutual Bank), J.P. Morgan Securities LLC (which is the successor to Bear Stearns & Co. Inc.), J.P. Morgan Mortgage Acquisition Corporation, J.P. Morgan Acceptance Corporation I, Chase Home Finance, LLC, and Chase Mortgage Finance Corporation. 176. Defendants knew at the time they sold and marketed each of the RMBS that the

foregoing statements were false or, at the very least, made recklessly, without any belief in the truth of the statements. 177. Defendants made these materially misleading statements and omissions for the

purpose of inducing BayernLB to purchase the RMBS. Furthermore, these statements related to these Defendants’ own acts and omissions. 178. Defendants knew or recklessly disregarded that investors like BayernLB were

relying on their expertise, and they encouraged such reliance through the Offering Materials and their public representations, as described herein. Defendants knew or recklessly disregarded that investors like BayernLB would rely upon their representations in connection with their decision to purchase the RMBS. Defendants were in a position of unique and superior

knowledge regarding the true facts concerning the foregoing material misrepresentations and omissions.

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179.

It was only by making such representations that Defendants were able to induce

BayernLB to buy the RMBS. BayernLB would not have purchased or otherwise acquired the RMBS but for Defendants’ fraudulent representations and omissions about the quality of the RMBS. 180. BayernLB justifiably, reasonably and foreseeably relied upon Defendants’

representations and false statements regarding the quality of the RMBS. 181. By virtue of Defendants’ false and misleading statements and omissions, as

alleged herein, BayernLB has suffered substantial damages and is also entitled to a rescission of the sale of the RMBS. THIRD CAUSE OF ACTION (Aiding And Abetting Fraud Against Defendants) 182. BayernLB repeats and realleges the allegations set forth in the preceding

paragraphs, as if fully set forth herein. 183. This is a claim against Defendants for aiding and abetting the fraud by Each of these Defendants aided and abetted the fraud

Defendants amongst themselves.

committed by and among all of the other Defendants. 184. As alleged above, each of the Defendants knew that the RMBS were not backed

by high quality loans and were not underwritten according to the originators’ underwriting standards, conducted third-party due diligence on the loan pools securitized into the Defendants’ RMBS purchased by BayernLB that identified the originators’ deviations from loan underwriting and appraisal standards, participated in those violations and had actual knowledge of their own acts, or participated in or had actual knowledge of Defendants’ reckless or intentional dissemination of false and misleading information to the credit rating agencies.

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185.

Furthermore, Defendants provided to each other substantial assistance in

advancing the commission of the fraud. As alleged above, each of the Defendants participated in the violations of concealing the originators’ deviations from their established mortgage loan underwriting and appraisal standards, made false statements about the originators’ mortgage loan underwriting and appraisal standards and Defendants’ own underwriting guidelines, provided false information about the mortgage loans underlying the certificates to the credit rating agencies ,and provided false information for use in the Offering Materials. 186. It was foreseeable to Defendants at the time they actively assisted in the

commission of the fraud that BayernLB would be harmed as a result of their assistance. 187. As a direct and natural result of the fraud committed by Defendants, and

Defendants’ knowing and active participation therein, BayernLB has suffered substantial damages. FOURTH CAUSE OF ACTION (Negligent Misrepresentation Against Defendants) 188. BayernLB repeats and realleges each and every allegation set forth in the

preceding paragraphs above as if fully set forth herein, except any allegations that Defendants made any untrue statements and omissions intentionally or recklessly. For the purposes of this Count, BayernLB expressly disclaims any claim of fraud or intentional misconduct. 189. This is a claim for negligent misrepresentation against Defendants. As a

corporate parent, JPMorgan Chase & Co. directed the activities of JPMorgan Chase Bank, N.A. (which is the successor to Washington Mutual Bank), J.P. Morgan Securities LLC (which is the successor to Bear Stearns & Co. Inc.), J.P. Morgan Mortgage Acquisition Corporation, J.P. Morgan Acceptance Corporation I, Chase Home Finance, LLC, and Chase Mortgage Finance Corporation. 110

190.

BayernLB made 68 separate investments in 57 offerings of RMBS that

Defendants securitized and sold. 191. It is commonly accepted industry practice for underwriters of RMBS to perform

due diligence on the loans backing the RMBS to ensure that the quality of the loans are as represented in the offering materials provided to investors. The understanding that RMBS underwriters generally perform such due diligence caused BayernLB to believe that it could reasonably rely upon the Offering Materials. Moreover, by virtue of the third-party due

diligence Defendants performed, and Defendants’ extensive role in originating, purchasing, securitizing and selling the RMBS that BayernLB purchased, Defendants had unique and special knowledge and expertise regarding the loans backing those securities, including their quality, the nature of the underwriting, and the value of the collateral. 192. In particular, because BayernLB neither had the same level of information

regarding the mortgage lenders for the loans purchased by Defendants nor had access to the loan files for the mortgage loans underlying the Defendants’ RMBS, and because BayernLB could not examine the underwriting quality of the mortgage loans in the securitizations on a loan-byloan basis, BayernLB was heavily dependent on the Defendants’ unique and special knowledge regarding the underwriting standards of the relevant mortgage originators and the underlying loans when determining whether to invest in each RMBS. BayernLB was entirely dependent on the Defendants to provide accurate information regarding the underwriting standards for the loans and the quality of those loans in engaging in their analysis. Accordingly, Defendants were uniquely situated to evaluate the economics of each RMBS. 193. Because BayernLB was without access to critical information regarding the

underwriting standards of the mortgage originators for the Defendants’ RMBS, coupled with the

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industry understanding that RMBS underwriters perform due diligence, Defendants had a duty to BayernLB to verify the accuracy of the Offering Materials. 194. Over the course of almost two years, for 68 separate investments, BayernLB

relied on Defendants’ unique and special knowledge regarding the quality of the underlying mortgage loans and their underwriting when determining whether to invest in the RMBS. This longstanding relationship, coupled with Defendants’ unique and special knowledge about the underlying loans and the underwriting standards of the mortgage originators, created a special relationship of trust, confidence, and dependence between Defendants and BayernLB. 195. Defendants were aware that BayernLB relied on their unique and special

expertise and experience and depended upon them for accurate and truthful information. Defendants also knew that the facts regarding the originators’ compliance with their underwriting standards were exclusively within Defendants’ knowledge. 196. Based on their expertise, superior knowledge, and relationship with BayernLB,

Defendants owed a duty to BayernLB to provide complete, accurate, and timely information regarding the mortgage loans and the RMBS. Defendants breached their duty to provide such information to BayernLB. 197. Defendants likewise made misrepresentations, which they were negligent in not

knowing at the time to be false, in order to induce BayernLB’s investment in the RMBS. Defendants provided the Offering Materials to BayernLB in connection with the RMBS for the purpose of informing BayernLB of material facts necessary to make an informed judgment about whether to purchase the RMBS. In providing these documents, Defendants knew that the information contained and incorporated therein would be used for a serious purpose, and that BayernLB, like other reasonably prudent investors, intended to rely on the information.

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198.

As alleged above, the Offering Materials contained materially false and

misleading information. 199. Defendants should have known that the information in the Offering Materials

was materially false and misleading. 200. Unaware that the Offering Materials contained materially false and misleading

statements, BayernLB reasonably relied on those false and misleading statements when deciding to purchase the RMBS in the offerings. 201. BayernLB purchased RMBS from J.P. Morgan Acceptance Corporation I,

Structured Asset Mortgage Investments II Inc., Bear Stearns Asset Backed Securities I LLC, WaMu Asset Acceptance Corporation, Washington Mutual Mortgage Securities Corporation, Long Beach Securities Corporation, Chase Mortgage Finance Corporation, and from J.P. Morgan Securities LLC, Bear Stearns & Co. Inc., and WaMu Capital Corporation in the RMBS offerings, and is therefore in privity with those entities. 202. Based on Defendants’ expertise and specialized knowledge, and in light of the

false and misleading representations in the Offering Materials, Defendants owed BayernLB a duty to provide it with complete, accurate, and timely information regarding the quality of the RMBS, and breached their duty to provide such information to BayernLB. 203. BayernLB reasonably relied on the information provided by Defendants and

have suffered substantial damages as a result of their misrepresentations. FIFTH CAUSE OF ACTION (Successor and Vicarious Liability Against JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., and J.P. Morgan Securities LLC) 204. BayernLB repeats and realleges each and every allegation set forth in the

preceding paragraphs above as if fully set forth herein.

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205.

Defendant JPMorgan Chase & Co. is the successor to The Bear Stearns

Companies, Inc., pursuant to the Merger JP Morgan Chase & Co. is liable for The Bear Stearns Companies, Inc.’s wrongdoing, in its entirety, under common law, because The Bear Stearns Companies, Inc. merged and consolidated with JPMorgan Chase & Co., because JPMorgan Chase & Co. has expressly or impliedly assumed The Bear Stearns Companies, Inc.’s tort liabilities, and because JPMorgan Chase & Co. is a mere continuation of The Bear Stearns Companies, Inc. As such, this action is brought against JPMorgan Chase & Co. both in its own capacity and as successor-in-interest to The Bear Stearns Companies Inc. 206. Defendant J.P. Morgan Securities LLC is the successor to Bear Stearns & Co.

Inc., pursuant to the Merger. J.P. Morgan Securities LLC is liable for Bear Stearns & Co. Inc.’s wrongdoing, in its entirety, under common law, because Bear Stearns & Co. Inc. merged and consolidated with J.P. Morgan Securities LLC, because J.P. Morgan Securities LLC has expressly or impliedly assumed Bear Stearns & Co. Inc.’s tort liabilities, and because J.P. Morgan Securities LLC is a mere continuation of Bear Stearns & Co. Inc. This action is thus brought against J.P Morgan Securities LLC both in its own capacity and as successor-in-interest to Bear Stearns & Co. Inc. 207. Defendant JPMorgan Chase Bank, N.A. succeeded to Washington Mutual

Bank’s liabilities pursuant to the PAA. JPMorgan Chase Bank, N.A. is liable for Washington Mutual Bank’s wrongdoing, in its entirety, under common law, because Washington Mutual Bank merged and consolidated with JPMorgan Chase Bank, N.A., because JPMorgan Chase Bank, N.A. has expressly or impliedly assumed Washington Mutual Bank’s tort liabilities, and because JPMorgan Chase Bank, N.A. is a mere continuation of Washington Mutual Bank. This action is thus brought against JPMorgan Chase Bank, N.A. both in its own capacity and as a successor to Washington Mutual Bank. 114

PRAYER FOR RELIEF WHEREFORE, Plaintiff prays for relief and judgment, as follows: (a) Awarding compensatory and/or rescissory damages in favor of Plaintiff against

all Defendants, jointly and severally, for all damages sustained as a result of Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon; (b) (c) Awarding punitive damages for Plaintiff’s common-law fraud claims; Awarding Plaintiff its reasonable costs and expenses incurred in this action,

including counsel fees and expert fees; and (d) Such other relief as the Court may deem just and proper. JURY DEMAND Plaintiff demands a trial by jury on all claims so triable.

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