Phoenix Light SF Dac et al v. The Bank of New York Mellon

Exhibit B

Southern District of New York, nysd-1:2018-cv-01194

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9 Exhibit B 9 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK E XPERT R EPORT OF M ARK A DELSON August 1, 2019 Phoenix Light SF DAC and Kleros Preferred Funding V PLC, m against m The Bank of New York Mellon 18-cv-11904 Expert Report of Mark Adelson CONFIDENTIAL 1 9 Table of Contents I. Introduction ......................................................................................................................... 3 II. Assignment .......................................................................................................................... 4 III. Qualifications ....................................................................................................................... 4 IV. Compensation ...................................................................................................................... 6 V. Overview of Residential MBS ........................................................................................... 7 A. General Structure of MBS ......................................................................................... 7 B. Issuance and Sale Process for Non-Agency MBS ................................................ 16 C. Participants in Non-Agency MBS Transactions .................................................. 17 VI. Investor Expectations Concerning MBS Transaction Structures and Documentation ..................................................................................................................................... 18 VII. Opinions Concerning the FNLC 2005-1 Transfer and Servicing Agreement ........... 25 Attachment A.............................................................................................................................. 28 Attachment B .............................................................................................................................. 34 Attachment C .............................................................................................................................. 36 Expert Report of Mark Adelson CONFIDENTIAL 2 9 I. Introduction 1. The captioned proceeding relates to the role of, as master servicer for First NLC Trust 2005- - . Plaintiffs are. 2. Plaintiffs are asserting claims against BNYM for breach of its duties under the FNLC 2005-1 Transfer and Servicing Agreement. 3. Plaintiffs purchased and currently hold notes issued by FNLC 2005-1 having an Notes are set forth in Exhibit 1: Exhibit 1: Selected Details about the Notes Orig. Face Date C[[Qeg_ HN`VZT Portfolio Tranche CUSIP Amt. (000s) Acquired Initial 6/2019 Phoenix Light FNLC 2005-1 M3 32113JAD7 5,990 9/8/2009 Aa3 C Phoenix Light FNLC 2005-1 M4 32113JAE5 5,000 9/8/2009 Aa3 C Phoenix Light FNLC 2005-1 M5 32113JAF2 24,440 9/8/2009 A1 C Phoenix Light FNLC 2005-1 M6 32113JAG0 17,000 9/8/2009 A2 C Phoenix Light FNLC 2005-1 M7 32113JAH8 6,110 9/8/2009 A3 C Kleros V FNLC 2005-1 M8 32113JAJ4 10,000 1/11/2007 A3 C 4. This report has seven 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. 5. The fifth part provides an overview of residential mortgage-backed securit 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. 6. The sixth part discusses investor expectations concerning MBS transaction structures and documentation. It explains that investors expect the main features of the structure and documentation of MBS in which they invest to conform to the broad norms of the sector. However, they do not develop strong prior expectations about the secondary features of individual MBS transactions, including (in particular) whether the governing agreement permit direct enforcement by an investor. Expert Report of Mark Adelson CONFIDENTIAL 3 9 7. The seventh part of the report explains the basis of my specific opinion that market participants would read the TSA as not containing a provision prohibiting holders of Notes from directly enforcing their rights under the agreement. II. Assignment 8. Wollmuth Maher & Deutsch LLP, which represents Plaintiffs in this action, engaged me to provide an introduction to securitization. I was also asked to address the issue of - III. Qualifications 9. 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 the latest edition of The Handbook of Mortgage Backed Securities (Frank Fabozzi ed., 7th ed. 2016). The title of my - 10. I am currently an independent consultant and the content director for Institutional Portfolio Management Journals. In addition, I am the editor of The Journal of Structured Finance and a member of the Structured Finance Committee of the New York City Bar Association. 11. From May 2008 to December 2011, I was the Chief Credit Officer of S&P. The company hired me as part of its initiative to review its rating methodologies in the wake of the global financial crisis. Under my leadership, S&P reaffirmed its commitment to a unified system of rating definitions to enhance the comparability of credit ratings across different product areas. Also, to promote both clarity for investors and consistency of ratings across sectors, I supervised extensive overhauls of the analytic methodologies for MBS and several other key fixed income sectors, including the following: a. CDOs; b. commercial mortgage- c. covered bonds; d. banks; Expert Report of Mark Adelson CONFIDENTIAL 4 9 e. sovereign governments; f. bond insurers; and g. derivative counterparty exposures. 12. In particular, I was significantly, benchmark credit enhancement levels associated with the archetypical pool. That exercise drew upon my knowledge of the history of mortgage loans in the U.S., including historical studies of mortgage loan performance during the Great Depression. 1 13. From July 2007 until May 2008, I was co-owner of a consulting firm called Adelson & Jacob Consulting. The firm offered securitization and real estate consulting services of three types: (i) investment consulting services, (ii) strategic consulting services, and (iii) expert witness services. Most of our work was of the first and second types, where we counseled banks and hedge funds on how to deal with their existing portfolios of distressed MBS and CDOs and on how to trade opportunistically in those areas. 14. From February 2001 to July 2007, I was the head of structured finance research within the fixed- at Nomura, I authored numerous reports on a wide variety of securitization topics, many of which focused on non-agency MBS and developments in the non-agency market. Many of those reports are available on my website at http://www.markadelson.com and some continue to attract readers even years later. For example, during 2018, my 2006 report titled MBS Basics had more than 900 hits. 15. From October 1991 through January 2001, I worked at Moody. I started as a senior analyst in the rating team that covered asset-backed commercial ratings on a variety of asset- From 1995 and, at various times, headed or co-headed various structured finance rating teams. In particular, from August 1997 through October 2000, I co-headed the MBS rating team and supervised analysts in rating many hundreds of MBS transactions. I chaired hundreds of MBS rating committee meetings. One of the most important publications 1Parisi, F., S. Mason, B. Cao, J. Wang, T. Gillis, and M. Adelson, Request for Comment: U.S. RMBS Rating Methodology and Assumptions for Prime Jumbo, Alternative-A, and Subprime Loans, S&P Criteria Article (15 May 2009); Parisi, F., T. Gillis, S. Mason, B. Cao, and J. Wang, Methodology and Assumptions for Rating U.S. RMBS Prime, Alternative-A, and Subprime Loans, S&P Criteria Article (10 Sep 2009); Adelson, M., Big Changes in Standard & Poor's Rating Criteria, S&P Research Report (3 Nov 2009). Expert Report of Mark Adelson CONFIDENTIAL 5 9 produced by that team under my supervision was Theme and Variation Understanding Why Credit Enhancement Levels Vary Among Jumbo MBS Issuers (18 Sep 1998). 16. From 1985 through October 1991, I practiced law at the firm of Thacher Proffitt & Wood, where I worked almost exclusively on MBS transactions and related regulatory matters. 17. During my time at Thacher Proffitt & Wood, I learned about the customs and practices of the U.S. mortgage market and about the history and evolution of the secondary mortgage market. I was there during the secondary mortgage market transition from using mostly using mostly public transactions - format with S.E.C. registration and trust structures. I became familiar with the roles of all the transaction parties and with Also, during my time at Thacher Proffitt & Wood, I started giving half-day lectures on MBS for the Federal Financial Institutions Examination Council as part of its training programs for bank examiners on off-balance sheet risk. From 1989 to 1995, I gave 36 such lectures titled Mortgage-Backed Securities: Origins, Structures and Regulatory Issues and one titled Selected Off-Balance Sheet Risk Issues: Asset and Mortgage-Backed Securities and Other Securitized Products. 18. From 1982 through 1985, I attended law school at the University of Michigan and received a Juris Doctor, cum laude, in 1985. From 1978 through 1982, I attended college at Princeton University and received an AB in economics, magna cum laude, in 1982. 19. During the past four years, I have prepared reports or testified as an expert witness in the matters listed in Attachment B. 20. A complete list of the materials cited or referenced in this report is included in Attachment C. IV. Compensation 21. I am being compensated for my work on this report at the rate of $750 per hour plus expenses. My testifying rate is $12,500 per day. The payment of my fees is not contingent upon the opinions that I reach or the outcome of this litigation. Expert Report of Mark Adelson CONFIDENTIAL 6 9 V. Overview of Residential MBS A. General Structure of MBS 22. Lenders originated more than $2 trillion of residential mortgage loans in 2016, and annual production levels have been even higher in the past (see Exhibit 2): Exhibit 2: U.S. First-Lien Residential Mortgage Loan Origination Volume 4 Origination Volume ($ trillions) 3 2 1 0 1995 2000 2005 2010 2015 Sources: Mortgage Market Statistical Annual 2018, p. 4., Y-Charts.com (for 2018) 23. The most common type of mortgage loan in the U.S. has a term of 30 years, a fixed interest rate, and provides for level monthly payments that amortize the loan over its term. Other types of mortgage loans provide for adjustable interest rates or have terms shorter or longer than 30 years. Some loans provide for fixed interest rates for a few years and then convert to adjustable interest rates. Some loans allow borrowers to pay principal balance to increase by the amount of accrued but unpaid interest. 24. The process of reviewing a mortgage loan application for the purpose of approving or Credit is the primary consideration in Credit reputation, (ii) Capacity, and (iii) Collateral. 2 2Freddie Mac,, available at http://www.freddiemac.com/corporate/au-works/factors.html. Expert Report of Mark Adelson CONFIDENTIAL 7 9 past payment behavior in paying his debts. A borrower who has a strong track record of paying debts on time is a lesser risk than one with a checkered history. Capacity payments. Capacity can