countrywide rmbs settlement cowan burnaman

Excerpt of
Consolidated Expert Report of Charles D. Cowan, Ph.D.
Rebuttal to BNY Mellon Expert Reports and Reply in Support of Initial Report
April 11, 2013

12. Mr. Burnaman premises his analysis on the incorrect assertion that “a mortgage loan in which all contractual payments are made pursuant to the term of the loan cannot suffer losses occasioned by a failure of the originator/seller.”(5) The footnote to this assertion states:

some would argue that the mere existence of a breach would, de facto, give rise to a put-back right under the contract, as a defective mortgage loan would have a lower market value than it originally carried, its continued payment performance notwithstanding. In my experience as an investor, I have never experienced or heard of performing loans being removed from RMBS trusts for defects.(6)

13. My experience is that this has happened, in particular because the existence of the breach ostensibly gives rise to two very serious problems. The first is that the loan has a greater likelihood of default, and the put-back remedy was designed to remove these loans and allow a substitution of another loan that did not have a breach. Just because the loan hasn’t defaulted yet does not mean that it carries the same risk as a loan without a breach, and the investor bought the security with the understanding that all the loans conformed to guidelines. This is the essence of offering the put-back remedy.
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The other problem is that a breach may result in a loss in the recovery value for a loan because of the lack of documentation. The loan cannot be sold, foreclosed on, or some other activity necessary to get the value of the collateral. This means that a Catch-22 situation is created where the loan cannot be foreclosed on because of a breach in the origination of the loan (e.g. no title), so the loan is in a state of perpetual lateness, but not foreclosed. Since Mr. Burnaman is also opining on claims regarding the poor quality of BofA’s servicing, he is likely aware of the problems resulting from compliance breaches.
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5 Id. at 10.
6 Id.

http://www.cwrmbssettlement.com/docs/568.pdf