Retained by Jones Day
Phoenix Light SF Limited, Blue Heron Funding II Ltd., Blue Heron Funding V Ltd., Blue Heron Funding IX Ltd., Kleros Preferred Funding V PLC, Silver Elms CDO PLC, Silver Elms CDO II Limited, C-BASS CBO XIV Ltd., and C-BASS CBO XVII Ltd. bought an action against Wells Fargo Bank for alleged breaches of contractual and statutory duties by Wells Fargo in its role as trustee for several RMBS trusts, including failing to provide notice of R&W and failing to enforce repurchase of these breaching loans, as well as failing to address servicer breaches.
Vega supported Wells Fargo’s damages expert Dr. Cohen-Cole in analyzing the premises and assumptions of plaintiffs expert’s damages calculations, and found that the damages calculations rely on erroneous or unsupported assumptions and do not reflect damages to plaintiffs arising out of Wells Fargo’s alleged failure to fulfill its duties as trustee.
With the assistance from the Vega team, Dr. Cohen-Cole prepared a 103-page report and 26 exhibits. Example analyses include:
Historical Repurchase Demand Fulfillment Using ABS-15G Data
In calculating repurchase damages, Plaintiffs’ expert assumes that 100 percent of defective loans would have been repurchased had the trustee enforced the repurchase. Dr. Cohen-Cole did an empirical analysis to assess whether this assumption was consistent with historical repurchase activities. In assisting Dr. Cohen-Cole in performing this analysis, Vega collected more than 3,500 ABS-15 forms filed by RMBS securitizers with the SEC between January 1, 2012 and June 30, 2019.
Beginning in 2012, the SEC required securitizers of asset backed securities to periodically file such forms, where the underlying transaction agreements contain a covenant to repurchase in the event of breaches of representations or warranties. These filings disclose, for each reporting period, the total number of repurchase demands made, fulfilled, rejected, withdrawn, disputed, and still pending.
Based on this analysis, the historical repurchase rate is far lower than 100 percent. Indeed, only 4.5 percent of demands had been fulfilled, 0 percent of demands were still pending, and 7.8 percent of demands were still in dispute; the remainder had been rejected or withdrawn. Dr. Cohen-Cole found this evidence directly contradicts plaintiffs’ expert’s assumption.
Factors Considered in Matching Comparable Loans for a Benchmark Analysis
In calculating servicing damages, plaintiffs’ expert compared the historical performance of the at-issue loans against loans he deemed comparable from his matching exercise. Dr. Cohen-Cole analyzed the appropriateness of the factors considered in the matching exercise.
To support plaintiffs’ claim that Wells Fargo failed to take actions to address servicing breaches and enforce prudent servicing standards, plaintiffs’ expert compared the historical performance of the at-issue loans against loans he deemed comparable from his matching exercise.
To select comparable loans, plaintiffs’ expert utilized a matching estimator to match certain at-issue loans with loans held in the GSE’s portfolios. The factors incorporated in the matching exercise include FICO score, loan-to-value ratio, and original balance, among others. Plaintiffs’ expert claims that he found matches for over 80 percent of the at-issue loans.
After reviewing the data and assumption of plaintiffs’ expert’s matching exercise, Dr. Cohen-Cole found that the GSE-loan control group is composed entirely of fully-amortizing, fixed-rate mortgage, while the group of the at-issue loans contain a variety of other loan types, including adjustable-rate mortgage loans, balloon mortgage loans, and interest-only mortgage loans. The balance on loans with different product types can differ over time, affecting the performance of the loans.
Incorporating loan types in the matching exercise, the match rate drops from over 80 percent to less than 10 percent.
Analysis of Plaintiffs’ Cashflow Model
Plaintiffs’ expert’s damages calculations are based on a cashflow model developed by a consulting firm retained by plaintiffs. After analyzing plaintiffs’ cashflow model, Dr. Cohen-Cole found that by simply correcting an error in the cashflow model implementation, the damages can be reduced by roughly 50 percent for the relevant certificate.
Specifically, in determining whether a trigger event was in effect, plaintiffs’ expert made the incorrect determination and thus the wrong waterfall rule was implemented in distribution payments through the trust. Plaintiffs expert later acknowledged this mistake and corrected his cashflow model in the reply report.