Pacific Life Insurance Company et al v. The Bank of New York Mellon

Exhibit A

Southern District of New York, nysd-1:2017-cv-01388

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08 EXHIBIT A 08 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK EXPERT REPORT OF MARK ADELSON January 17, 2020 Pacific Life Insurance Company and Pacific Life & Annuity Company - against- The Bank of New York Mellon 17-cv-01388 Expert Report of Mark Adelson CONFIDENTIAL 1 08 Table of Contents I. Introduction ......................................................................................................................... 4 II. Assignment .......................................................................................................................... 6 III. Qualifications ....................................................................................................................... 7 IV. Compensation ...................................................................................................................... 9 V. Overview of Residential MBS ........................................................................................... 9 A. General Structure of MBS ......................................................................................... 9 B. Issuance and Sale Process for Non-Agency MBS ................................................ 19 C. Participants in Non-Agency MBS Transactions .................................................. 20 VI. Role of the Trustee in MBS .............................................................................................. 23 A. Origins of the MBS Trustee ..................................................................................... 23 B. Sources for Market Expectations of the Role of the MBS Trustee ..................... 25 C. A Trustee's Role Prior to an Event of Default ...................................................... 26 1. Rating Agency Understanding of MBS Trustee Duties ............................. 26 2. Regulatory View of Trustee Duties .............................................................. 29 3. MBS Offering Materials as Source of Market Expectations ...................... 33 4. Investors' View of Trustee's Role ................................................................. 33 5. Other Market Participants' Expectations of the Role of the Trustee ....... 37 6. Duty to Not Be Negligent .............................................................................. 40 7. Contractually Specified Duties ..................................................................... 41 8. Duty to Avoid Conflict ................................................................................... 46 D. A Trustee's Role after an Event of Default ........................................................... 47 E. Trustee Workload vs. Compensation .................................................................... 52 VII. Importance of Complete Mortgage Files ....................................................................... 57 VIII. Importance of Representations & Warranties ............................................................... 63 IX. The Trustee's Role in Enforcing Repurchase Obligations ........................................... 67 X. Regulation AB Disclosure and Reporting ..................................................................... 70 XI. Opinions Concerning the Covered Trusts ..................................................................... 74 A. Market Participants Expect That a Prudent Person Would Have Acted Affirmatively to Address Events of Defaults ................................................. 74 B. Market Participants Would Have Expected an MBS Trustee to Enforce a Seller's Repurchase Obligation When the Seller Cannot Cure Document Exceptions and Would Have Expected the Trustee to Be Responsible for Determining the Materiality of Document Exceptions ................................ 81 C. Market Participants Would Have Expected an MBS Trustee to Enforce a Seller's Repurchase Obligation When the Seller Cannot Cure Breaches of Representations and Warranties ...................................................................... 84 D. Consequence of Not Disclosing Full Extent of Mortgage File Exceptions ...... 87 Expert Report of Mark Adelson CONFIDENTIAL 2 08 Attachment A .............................................................................................................................. 90 Attachment B .............................................................................................................................. 96 Attachment C .............................................................................................................................. 99 Expert Report of Mark Adelson CONFIDENTIAL 3 08 I. Introduction 1. The captioned proceeding relates to the role of The Bank of New York Mellon ("BNYM" or the "Trustee") as trustee in thirteen securitization trusts (the "Covered Trusts") that were created in connection with the issuance of the securities listed in Exhibit 1. Exhibit !: Listing of Purchased Securities Original Face Moody's Fitch S&P Security CUSIP Amount Dec Dec Dec Purchased ($) Initial Initial Initial 2015 2015 2015 1 CWALT 2006-32CB A20 02147XAV9 22,568,000 Aaa Caa3 AAA D AAA NR 2 CWALT 2006-45T 12A3 02149JAS5 15,523,000 Aaa Ca AAA D AAA NR 3 CWALT 2006-0A3 1A2 126688851 21,394,000 Aaa C N/A N/A AAA NR 4 CWALT 2007-5CB 1A4 02150EAD5 50,000,000 Aaa Ca AAA D AAA D 5 CWALT 2007-17CB 2A3 02151HAS4 43,788,000 Aaa Caa3 AAA D AAA NR 6 CWALT 2007-18CB A18 02151NBA9 25,000,000 Aaa Caa3 AAA D AAA NR 7 CWALT 2007-24 Ai 02151GAA5 100,000,000 N/A N/A AAA D AAA NR 8 CWALT 2008-iR 1A1 02152LAA3 69,786,975 N/A N/A AAA D AAA NR 9 CWHL 2005-5 A5 12669GQU8 2,000,000 N/A N/A AAA BB AAA BBB 10 CWHL 2005-13 A11 12669GD32 1,577,382 N/A N/A AAA D AAA NR 11 CWH L 2005-17 1A7 12669G5T4 25,466,000 N/A N/A AAA D AAA D 12 CWHL 2005-22 M 126694MB1 5,957,640 NR NR AAA WD NR NR 13 CWHL 2006-21 A13 12543PAN3 8,750,000 NR NR AAA D AAA D TOTAL 415,627,997 Note: CWALT 2008-iR is a resecuritization, backed in part by certificates from CWALT 2007-18CB. A resecuritization is a transaction where the underlying assets are themselves securities issued in prior securitization transactions. 2. The Plaintiffs are asserting claims against the Trustee for breach of its contractual and common law duties as trustee of the Covered Trusts. 3. This report has eleven parts. The first part is this brief introduction. The second part describes the assignment under which I prepared the report. The third and fourth parts describe my qualifications and compensation. 4. The fifth part provides an overview of residential mortgage-backed securities ("MBS"). It explains the rationale for mortgage securitization and the basics of underwriting mortgage loans. It describes the participants in the non-agency MBS sector and reviews the process for the issuance and sale of non-agency MBS. 5. The sixth part of the report discusses the role of a trustee in a non-agency MBS. It discusses the types of tasks or functions that a trustee is expected to perform prior to an Expert Report of Mark Adelson CONFIDENTIAL 4 08 Event of Default ("EOD" or "Event of Default") 1 and discusses the applicable "prudent person" standard that applies to a trustee's conduct after an Event of Default. The sixth part also discusses how a trustee is insulated from liability and from virtually all economic risk in connection with fulfilling its duties unless it was negligent, reckless, or acted willfully. 6. The seventh through ninth parts of this report discuss additional aspects of MBS securitization including: the importance of having adequate collateral documentation; the importance of representations and warranties ("R&Ws"); and the trustee's role in enforcing repurchase obligations. 7. The tenth part discusses the disclosure and reporting framework embodied in Securities and Exchange Commission ("SEC") Regulation AB (17 C.F.R. §§ 229.1100 to 229.1123). 8. The eleventh part of the report explains the basis of my opinions on the matters that I was asked to consider in connection with these proceedings. It explains my reasoning for the following conclusions: • Market participants expect that, following the occurrence of EODs, the Trustee should have taken positive action to protect investors' interests. Doing nothing was not reasonable. Appropriate actions would have included (and reasonable market participants would have expected) (i) performing inquiries concerning the servicing of loans in the trusts and, where appropriate, demanding improved servicing procedures (including improved loss mitigation procedures) and (ii) performing inquiries concerning possible defects in loans underlying the trusts and, where appropriate, enforcing cure or repurchase obligations with respect to loans with missing or deficient documentation and with respect to loans that had material breaches of R&Ws. • Market participants would have expected an MBS trustee to enforce a seller's repurchase obligation when the seller cannot cure document exceptions and would have expected the trustee to be responsible for determining the materiality of document exceptions. 1Sometimes governing agreements refer to an Event of Default by other terms, such as Servicing Default, Servicer Event of Default, Master Servicer Termination Event, Servicer Termination Event, or Event of Servicer Termination. Expert Report of Mark Adelson CONFIDENTIAL 5 08 • Market participants would have expected an MBS trustee to provide notices of R&W breaches and to enforce a seller's repurchase obligation when the seller cannot cure breaches of R&Ws. • If the Trustee had disclosed the existence and magnitude of its mortgage file exceptions pursuant to Item 1122(d)(4) of S.E.C. Regulation AB on a platform level or in Event of Default notices for the Covered Trusts, such disclosure would have been material to investors and the transaction participants would have faced significant pressure to comply with provisions of the PSAs (as defined below at 'l[ 74) concerning the treatment of document exceptions and the remedies for the failure to deliver complete mortgage files. II. Assignment 9. Wollmuth Maher & Deutsch LLP, which represents Plaintiffs in these actions, engaged me to provide an introduction to securitization and the role of the MBS trustee and other transaction participants. 10. I was also asked to review the Covered Trusts and to address the following issues: (a) Whether it was reasonable for the Trustee to take no action following the occurrence of Events of Default in the Covered Trusts. And, relatedly, the types of actions reasonable market participants would have expected the Trustee to have taken in such circumstances. (b) Whether market participants would have expected the Trustee to have been the party responsible for determining the materiality of document exceptions in the Covered Trusts and for enforcing a seller's repurchase obligation when the seller cannot cure document exceptions. (c) Whether market participants would have expected an MBS trustee to provide notices of breaches of R&Ws and to enforce a seller's obligation to cure or repurchase loans with such breaches. (d) What the likely consequences would have been if the Trustee had provided Regulation AB disclosures or notices of EODs disclosing mortgage file exceptions in the manner that Plaintiffs contend was required. And, relatedly, the most likely outcome if such notices had been provided. Expert Report of Mark Adelson CONFIDENTIAL 6 08 III. Qualifications 11. I have more than 30 years of experience with MBS. I have published numerous articles on the subject and have lectured extensively on it as well. My curriculum vitae contains a partial listing of my publications and public speaking experience (see Attachment A). My most recent significant article on the subject of MBS was Representations and Warranties in Mortgage-Backed Securities, which appeared in the Spring 2017 issue of The Journal of Structured Finance. I am also the author of a chapter in