Monday, February 21, 2011

An Actual Case of Reps and Warranties - CWHEQ 2006-S10

We have just published excerpts from the CWHEQ 2006-S10 deal, one of fifteen securitizations that are the subjects of the flagship repurchase case MBIA Insurance Corp. v. Countrywide Home Loans et al. We chose that deal because we thought it likely to be loaded to the brim with the stinkiest of crappy home equity. For future reference, these will be available under the label "CWHEQ 2006-S10."

The purpose for pulling these excerpts was to identify the points that we feel are the crux of MBIA's allegations. Mark Tapley may have been born in the 1800's, but not even experience compares with the certainty obtained from primary documents. We are all blessed with varying degrees of obsession, so we provide a summary here, what we consider key excerpts on the relevant posts, and links to the corresponding original documents on each excerpt post. There are also other neat documents like the insurance policy** on the SEC website. So dig as deep as you please!

In this examination, it is made plain that Countrywide made representations and warranties as to the characteristics of individual loans and the overall loan pool. Specifically in the Pooling and Servicing Agreement, Countrywide reps and warrants that "(7) the information set forth on the Mortgage Loan Schedule with respect to each Initial Mortgage Loan is true and correct in all material respects" and "(52) the Mortgage Loans, individually and in the aggregate, conform in all material respects to the descriptions thereof in the Prospectus Supplement." 

Because of their relevancy and specific citation, we have included excerpts from and links to the final Collateral Tables and Prospectus Supplement. Countrywide is responsible for the loans, individually and in aggregate, having the characteristics described. Most notably, this includes any representations of FICO, LTV, structure type, debt-to-income*, and origination type (Refi, Cash out, Purchase.) Any misrepresentation by the mortgagor not caught by Countrywide is Countrywide's problem, not MBIA's.

It is important to note that Countrywide specifically identifies residence type (primary, secondary, investment) data to be "based upon representations of the related borrowers at the time of origination." This is an important impediment against MBIA on this data point. However, in specifying such a qualification here, Countrywide strengthens MBIA's claim that Countrywide is responsible for the veracity of all other loan characteristics - regardless of mortgagor fraud. Some may consider this note irrelevant due to Countrywide's explicit representations and warranties of the loan characteristics, and we would agree.

And yes, Countrywide specifically reps and warrants that the loans it originated met its own guidelines.

"(45) The Mortgage Loans originated by CHL were underwritten in all material respects in accordance with CHL's underwriting guidelines for closed-end second lien mortgage loans or, with respect to Mortgage Loans purchased by CHL were underwritten in all material respects in accordance with customary and prudent underwriting guidelines generally used by originators of closed-end second lien mortgage loans."

Those underwriting guidelines were described in the prospectus supplement:
"Countrywide Home Loans will conduct a further credit investigation of the applicant. This investigation includes obtaining and reviewing an independent credit bureau report on the credit history of the applicant to evaluate the applicant’s ability and willingness to repay."

"Appraisals are generally performed for all closed end second mortgages" over $100k. 

Other significant reps and warranties that we think are the basis for MBIA recoveries include but are not limited to:
(10) No LTV over 100%;
(46) Appraisal by a qualified, independent appraiser;
(64) No predatory loans as defined by federal, state, or local law. 

Finally, The Pool and Servicing agreement goes on to describe the repurchase and replacement mechanism to be the contractual cure for any breach of the reps and warranties listed. The time frame in which such cure must take place is 90 days.

So if it pleases you to dig deeper see the posts published just prior to these. 

*Update: Or clarification really. We have not found debt-to-income to be an R&W in public documents - most notably the prospectus supplement - other than as referenced in underwriting guidelines which we consider weaker than the item 52 reps and warrants. All the other items have been listed publicly in the aggregate insomuch as they apply to the Statistical Calculation Pool which is basically the main piece of Initial Mortgage Loans but not the Subsequent Mortgage Loans which must not alter certain characteristics outside of a given band.
**Update again: we erroneously stated that the insurance agreement was available on through the SEC system. That document is not public as far as we know. We meant to say insurance policy.

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