Académique Documents
Professionnel Documents
Culture Documents
1 2 3 4
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK -----------------------------) SYNCORA GUARANTEE, INC., formerly known as XL CAPITAL ASSURANCE, INC, Plaintiff, No. 09 Civ. 3106 (PAC) vs. EMC MORTGAGE CORPORATION, Defendant. -----------------------------) SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK -----------------------------) AMBAC ASSURANCE CORPORATION, PLAINTIFF, Index No. 65041/20111 -againstEMC MORTGAGE LLC (formerly known as EMC MORTGAGE CORPORATION), J.P. MORGAN SECURITIES LLC (formerly known as BEAR, STEARNS & CO. INC.) and JPMORGAN CHASE BANK, N.A., DEFENDANTS. -----------------------------) VIDEOTAPED DEPOSITION OF New York, Ne Saturday, January 21, 2012 Reported by:
6 7
8 9 10
11 12
13
14
15
16
17 18 19 20 21 22 23
24
877-702-9580
Page 42
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
A. Q. A. Q. A. Q. A. Q. A. Q. A. Q. A. Q. A. Q. A. Q. A. Q.
Yes. You worked on their loans? Yes. For Watterson or Clayton? That was with Watterson. Flag Star? That was with Watterson. You worked on their loans? Yes. Sun Trust? No. First Horizon? Not familiar with them. Watterfield? Not familiar. Maribella? Never heard of them. Impac? No. I want to focus a little bit on your
jobs -- your job as an underwriter at both Watterson and Clayton. What is your understanding of what the role of an underwriter was at Watterson and
TSG Reporting - Worldwide 877-702-9580
Page 43
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
re-underwrite the loans to specific guidelines to see if they were met and to give them a risk assessment that ranges from a 1, 2 or 3, so, therefore, the investor can assess whether to buy that group of loans or that particular loan that I underwrote. Q. And the investor that you mentioned,
you are talking about clients of Watterson and Clayton? A. Q. Yes. And let me just turn to paragraph 15
of your declaration, which is on page 5 here. It says here: "Importantly, in reviewing each
loan, the due diligence underwriter also had to assess whether the loan met the criteria set out in the underwriting guidelines. For
example, the underwriting guidelines for stated income loans required, among other things, that the borrower's income listed on the loan application must be reasonable." A. Q. That is correct. Did the underwriting guidelines also
TSG Reporting - Worldwide 877-702-9580
Page 44
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
require the underwriter to look for red flags of fraud? A. Q. Yes. And what do the underwriting
guidelines say about red flags for fraud? A. They were -- they were not
particular -- in other words, they were not particularly good loans and possibly these loans shouldn't have been approved. Q. How did the underwriters receive the
guidelines and directions regarding the guidelines? MR. EDLIN: A. to project. It varied. Objection. It varied from project
give you the parameters and write things on a flip pad or also on a dry board eraser, dry board, or sometimes they may have them up there near them, and sometimes we may be on the job and not have any guidelines at all. Q. So let me just clarify. It was the
project leads or the team leads who provided you these guidelines or other instructions relating to guidelines?
TSG Reporting - Worldwide 877-702-9580
Page 45
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
A. Q.
did the project leads and the team leads get these guidelines from? A. To the best of my knowledge,
going to come back to that a little bit later. Did you find that the guidelines that you were provided by these project leads and team leads of both Watterson and Clayton, did they always apply to the loans that you were reviewing? MR. EDLIN: A. Objection. Some guidelines
didn't meet any of the parameters of these loans. Q. Okay. And what do you mean when you
say the guidelines did not meet the parameters of the loans? A. Meaning the loans when they were
approved were outside the box of what was given to us, if we had guidelines at all. MR. EDLIN: Objection. Move to
877-702-9580
Page 46
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
are talking about a time period? A. Yes. The loans may have been
written to one set of guidelines compared to what you was given. MR. EDLIN: strike. Q. So as I understand it, I want to Objection. Move to
make sure that the record is clear on this, that Watterson Prime and Clayton underwriters like yourself were not often provided with the guidelines which were applicable to the loans at the time they were originated? A. That is correct. MR. EDLIN: Objection. Lack of
guidelines, the majority of the time you would have them, did not line up or was parallel with the loan approval at that time. These were the
Page 47
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
going to use for this particular project at that time and most of the time they were not parallel or lined up with the approval of how this underwriter came up with that decision. MR. EDLIN: Objection. Move to
receive from the clients of Watterson Prime and Clayton regarding how to conduct a re-underwriting review? A. Usually it was channeled through the
team lead or the project manager certain problems maybe after the first day we would run through and usually they would say, "hey, the client is -- they are going to ignore that" or "that's not a big concern and they will take care of that." Q. So as I understand it, through the
team leads you received directions that the clients wanted the underwriters to ignore certain defects in loans? MR. EDLIN: A. Objection.
877-702-9580
Page 48
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
affidavit, which is on page 5. It says here in the first line: "Clayton supervisors would often inform the due diligence underwriters that the purchasers wanted the underwriters to approve loans that often did not satisfy the underwriting guidelines." A. Q. That is correct. Is the same statement true for
pervasive at Watterson and Clayton? A. Q. A. Q. Yes. Across all clients? Yes. What type of deviations from
underwriting guidelines are you referring to in this sentence? A. You have -- you have things for They
Page 49
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
that didn't -- that wasn't jailed, in other words, the income wasn't there. THE COURT REPORTER: wasn't" -A. Jailed, or, in other words, that "That
income wasn't there for these borrowers and they will say find exceptions to compensate or for that loan is not -- that's not lining up correctly, don't worry about it, let's get it done, get the information in there and compensate it out, we will compensate it. Q. We are going to come back to the
issue of compensating factors a little bit later. You said just now that you found that the income wasn't there. by that? A. You would look at -- you would look What do you mean
at underwriters that are front-end underwriters that approve the loan at one income and it's true enough they may have -- if they had the documents -- if you had all the documents in the loan the income may have been that, but based on what you have in front of you the
TSG Reporting - Worldwide 877-702-9580
Page 50
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
income didn't line up, and then sometimes when you look at some of the income even if you had all the documents and recalculated it, it wasn't -- the income wasn't there. In other
words, the loan lacked substance of being approved. MR. EDLIN: strike. Q. Did you work on stated income loans Objection. Move to
at Watterson and Clayton? A. Q. Yes, I did. When you say that the income wasn't
there, could that be related to stated income loans? MR. EDLIN: A. Objection. Leading.
That is correct.
stated income loans that was out of the box and unreasonable. MR. EDLIN: Objection. Move to
income loans you found many times that the income listed on these loan applications was not reasonable?
TSG Reporting - Worldwide 877-702-9580
Page 51
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
A. Q.
Yes, there was. What instructions -MR. EDLIN: Just one second. Do we
have -- just to keep the flow going and lack of -- just save a little time, we have a standing objection, I take it, that any objections are reserved if not made? MR. FARIDI: I don't know what the
the usual stips on this dep? THE COURT REPORTER: go off the record? MR. EDLIN: record. THE VIDEOGRAPHER: 10:12. The time is Yes, we can go off the Do you want to
We are going off the record. (Discussion off the record.) THE VIDEOGRAPHER: The time is
10:13.
BY MR. FARIDI: Q. Let me go back to paragraph 17 of Let me read the second line "I recall specifically
877-702-9580
It states that:
Page 52
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
one occasion when representatives of Bear Stearns (the purchaser) told my supervisors that because Bear Stearns was willing to purchase loans that did not meet the underwriting guidelines, we should try to find a compensating factor for every single loan that did not meet the underwriting guidelines." A. Q. That is true. Do you recall any other instances -MR. EDLIN: responsive. Q. A. Q. A. Q. Move to strike as not
Is there a question?
Is that a true statement? That is a true statement. Do you recall any other instances? That's pretty much on all jobs. So you don't recall any of the
loans -- you are talking about a whole year doing -THE COURT REPORTER: A. I'm sorry?
doing multiple loans and different jobs. That's pretty much the standard through all -TSG Reporting - Worldwide 877-702-9580
Page 53
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
throughout my clear at Clayton. MR. EDLIN: non-responsive. Q. So it's fair to say that even though Move to strike as
you don't remember any other specific occasions when you received similar instructions, that you did receive these types of instructions on a regular basis? MR. EDLIN: A. Q. Leading.
pervasive practice at Watterson and Clayton for underwriters to fail to follow the underwriting guidelines? MR. EDLIN: A. Q. Leading.
pervasive practice at Watterson and Clayton for underwriters re-underwriting the loans to not follow the underwriting guidelines? MR. EDLIN: foundation. A. Q. Yes. In paragraph 17 you also state:
TSG Reporting - Worldwide 877-702-9580
Page 54
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
"When I could not find a compensating factor for certain defective loans even after a thorough review of the loan files, I was told to return to my desk and search again. Due
diligence underwriters like myself were forced to find compensating factors for defective loans where none existed." A. Q. A. Q. Yes. Is that a true statement? That is true. Did the same practice take place at
Watterson Prime underwriters to provide as compensating factors those that were not sufficient or were contrived? A. It was very common. MR. EDLIN: foundation. A. It was very common for that type of Leading and lack of
practice for both Watterson and Clayton. Q. Now, this paragraph in particular,
Page 55
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
particular job you found compensating factors that were contrived? A. Yes. MR. EDLIN: Q. says: Objection. It
application for a stated income loan that I processed stated that the borrower made $8,500 per month working as an assistant manager at McDonalds restaurant. I told my supervisor
that the borrower's stated income was unreasonable. I was told to find a The
compensating factor and approve the loan. compensating factor that I found did not sufficiently compensate for the defect." A. Q. A. Q. instances?
TSG Reporting - Worldwide 877-702-9580
That is correct. That's a true statement? Yes, that is. Do you recall any other specific
Page 56
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
A.
can't recall, but that stood out particularly, because I remember it was a California loan and they tried -- and the team lead tried to basically say this is California, of course they are going to pay higher, and at that time I believe 8,500 for someone that's around about 19 or 20 coming out of high school was not reasonable at a hundred thousand and you are not even the owner of a McDonalds. MR. EDLIN: Q. Move to strike.
recall, as you testified, other specific examples, do you believe that you found loans like this where the stated income was not reasonable on other occasions? A. Q. A. Yes. On Bear Stearns jobs? Yes. MR. EDLIN: Q. or 3s? A. 2. Most of the time it was graded as a Move to strike.
Page 57
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
that a little bit later. MR. EDLIN: strike. Q. At Watterson and Clayton, Objection. Move to
logistically speaking, how did the underwriters record the results of the review of loans? A. Once we entered all the information,
we hit "save" and it saves your initials or your user ID name in there. Q. When you say you enter information
and you hit "save," where are you entering information into and what are you hitting "save" on? A. We were provided their laptops,
Watterson and Clayton, and at the very end when you hit "save" to move to the next loan -- hit "save" or either at the very -- at the end of the script on each system that takes you out of that loan and, therefore, your name was -- your name or user ID was dropped in as the person that completed that loan. Q. Was there a particular software
TSG Reporting - Worldwide 877-702-9580
Page 58
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
installed on each of these computers where you entered information into? A. I think the CLAS system was based on
a DOS system, old DOS system, which is called CLAS, and StratQ, I'm not -- I can't remember what their -- what their system was based on. Q. You talked about a CLAS system.
Which company utilized the CLAS system? A. Clayton used -- utilized CLAS. That
StratQ was
the software that was created by Bruce Watterson for Watterson Prime. Q. So as I understand it, underwriters
enter information into the CLAS and the StratQ systems; correct? A. Q. A. Q. That is correct. Relating to each individual loans? Yes. And I think you testified about a
grading scheme; correct? A. Q. A. Yes. And what was that grading scheme? Both grading schemes were similar.
Page 59
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
and, you know, in other words, they was good loans to buy. 2s were loans that they were
borderline, meaning that there was some type of deficiency, but you had compensating factors that could overcome that deficiency. And 3s
were loans which you graded that were high risk to be defaults or loans that shouldn't have been approved on the front end. Q. Did both Watterson and Clayton
utilize the same grading system? A. Q. A. Q. Yes. StratQ and CLAS? Yes. And I think you talked about I
want to make sure we have covered that and the record is clear. A. Q. Okay. How did Clayton and Watterson track
which underwriter reviewed each loan? A. Each underwriter always had a unique
user name that you use throughout your employment or your contract employment with them.
TSG Reporting - Worldwide 877-702-9580
Page 60
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Q.
user name at Clayton for CLAS? A. Q. My user name at Clayton was Okay. .
time, because the system had upgraded several times. was one. A combination of my
last name and last four of my social, and, I think, may have -- was
approximately one of my user ID names. Q. A. Q. A. Q. So for StratQ Correct. D That is correct. And you said there was a third one ?
It was always a combination of your name or some type of particular number that you -- that was assigned to you and pretty much stayed up. Q. familiar? A. It doesn't sound familiar, but that
TSG Reporting - Worldwide 877-702-9580
What about
Page 61
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
would be my -- would be one of my user IDs, because I was the only at the company,
so there was no confusion that that was me. Q. So we can tell what loans you
reviewed at both Clayton and Watterson and what deals you worked on by checking whether your employee user ID number is listed on the reports for these loans and deals? A. Q. That is correct. Paragraph 20 of your declaration "Due diligence underwriters like
states that:
myself often faced significant pressure from supervisors to review loan files quickly as possible and to avoid finding defects." that a correct statement? A. Q. I would say that is true. Okay. And this statement applies Is
equally to Watterson Prime? A. Q. Yes, that is true as well. What pressure, if any, did you
receive as an underwriter to underwrite a large volume of loans and to avoid finding defects? A. Basically the pressure I received
Page 62
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
These loans
pressure was there to avoid finding defects. Do you see that? A. Q. A. Q. Yes. That's a correct statement? That is correct. Do you remember any specific
recollections of times when you were told to avoid finding defects? A. Most of the time it was on a lot of
Countrywide deals and also Bear Stearns and Lehman Brother deals. Q. And do you recall any statements
that were made to you by team leads? A. One particular that stands out like
say it was always any time we did a Bear Stearns job it was pretty much we just entering data into the system like Bear don't care. You
know, that was like the little slogan that they used to just basically throw around. So we
just pretty much put the information in there. MR. EDLIN: Move to strike as
877-702-9580
Page 63
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
that a slogan which was also used by team leads? A. Pretty much. I have heard one team
leader say that. Q. lead? A. I want to say Steve Shockley, but I Do you recall the name of the team
don't want to put it on that particular team lead, but he pretty much -- you know, he had the attitude like that, but I can't recall if that was the team lead that actually said that at one time. MR. EDLIN: hearsay. Q. Now, you said that there was a Move to strike the
significant amount of pressure here in the statement to review loans quickly. How many
loans were underwriters reviewing per day at both Watterson and Clayton? A. It depends. Each underwriter was
required to complete one loan per hour, so, therefore, if we were there for a ten-hour day,
TSG Reporting - Worldwide 877-702-9580
Page 64
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
you was required at least to complete ten, and some underwriters may have twelve to fifteen and it varies, and if you had too many days where you had less loans than the hours you worked, you would pretty particularly -- you probably were not going to get staffed again. Q. A. How many loans were you reviewing? I was in the middle of the pack. I
was always like one or two loans more than the hours that we worked, but I wasn't at the very top. Q. So if you worked a twelve-hour day,
you would have reviewed at least twelve loans, if not two or three more? A. Correct, I would have no less than
that twelve loans in that twelve-hour period. Probably I'd be around 14 or 15. Q. Now what happens to underwriters
were not doing twelve hours -- twelve loans per day in a twelve-hour day? A. You in particular might not get
staffed again, because you are not producing quantity and it was basically driven by quantity, not quality, because you may have
TSG Reporting - Worldwide 877-702-9580
Page 65
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
2,500 loans and you calculated per underwriter -- it was calculated per underwriter how many we had to get out of each underwriter in order to finish that pool in that particular time. MR. EDLIN: non-responsive. Q. So Clayton and Watterson traded Move to strike as
or the quality of the loan underwriting, rather, and the review of those loans suffer due to the pressure to increase the volume of loans reviewed? MR. EDLIN: Objection. Leading and
some things that if you was to take your time writing that -- underwriting that loan that you would have caught -- that you would have caught -- caught mistakes or things that you could have looked at and, say, you know, this
TSG Reporting - Worldwide 877-702-9580
Page 66
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
that large number of loans per day? A. Q. A. Your team leads, they set the goals. What is 1003 or 1008 underwriting? Basically that is -- like in the
writing world that's basically copying what's already written, plagiarizing. MR. EDLIN: strike. Q. A. Copying what from what? You are basically copying what's Objection. Move to
already written and you are not even bothering to calculate, you are just entering -basically you are just straight data entering, entering information directly from the loan application into the system. looking at the documents. Q. Well, let me just turn to paragraph You are not even
20 of your declaration on page 6 that states, the second sentence: "These pressures" -- and
these pressures are to review loans quickly and not to find defects -- "led many due diligence
TSG Reporting - Worldwide 877-702-9580
Page 67
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
underwriters to simply enter into the CLAS database information found on the loan application rather than entering information from the verification documents in the loan file, as required by the protocol." that? A. Q. Yes. And is that the practice of 1008, Do you see
1003 underwriting? A. Q. That is. And then you continue to write here:
"CLAS was therefore "re-calculating" the same information which already often appeared on the spreadsheet provided by the seller." A. Q. That is correct. So that practice is referred to as
1003 or 1008 underwriting? A. Q. Watterson? A. Q. A. Q. Yes. And Clayton? Yes. How prevalent was 1008 and 1003
TSG Reporting - Worldwide 877-702-9580
Page 68
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
some of the same people who had no experience at underwriting, so, therefore, they were copying straight from those documents. Q. Did this practice take place on jobs
for Bear Stearns? A. Q. Yes. Did this practice take place on jobs
for Credit Suisse? A. Q. A. Q. A. Q. Yes. Countrywide jobs? Yes. Deutsche Bank jobs? Yes. Do you recall any particular
underwriters who engaged in this practice? A. Q. A. Jason Westmore. Any others? Some of the ones that were related
Page 69
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
A. Q.
individuals engaged in this practice were related to Gary Barmore? A. Barmore. Jason was not related to Gary He is just a particular individual
that stood out that was notorious for doing it at Watterson Prime. MR. EDLIN: A. Objection.
he couldn't pass an underwriter test, because he was used to just entering information from the 1008 when you had to actually calculate this stuff from verified documents. MR. EDLIN: Objection. Move to
that relatives of Gary Barmore were also engaged in 1008, 1003 underwriting? A. Yes.
TSG Reporting - Worldwide 877-702-9580
Page 70
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Q.
earlier, was a team lead at Clayton? A. Q. Yes, he was. What, if anything, was done with
these 1008, 1003 underwriters who were related to Gary Barmore? A. Q. by Clayton? A. They got staffed at every job No. Were they continued to be employed Were they reprimanded?
because they put out numbers doing that type of underwriting. MR. EDLIN: Objection. Move to
strike as non-responsive. Q. What, if any -- strike that. Do you remember reviewing stated income loans at Watterson and Clayton? A. Q. Yes. Okay. What, if any, instructions
did you get from Watterson and Clayton team leads on how you should review stated income loan products? A. Basically don't look at them as
Page 71
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
closed and these people are already in their homes, just go ahead and enter information what they got down there, what they have stated on the application. MR. EDLIN: hearsay. Q. Were you given any instructions on Move to strike the
whether you should find and mark as defective those loans where the stated incomes were not reasonable? MR. EDLIN: A. Yes. Objection. Leading.
Some -- there is a
particular -- one particular team lead, Steve Shockley, he would have an exception written on a board or written down on a piece of paper, "hey, if you come into this type of problem, put this in your comment section for that stated income." MR. EDLIN: hearsay. Q. And what was that particular Move to strike as
Page 72
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
have it worded up so it looks uniformly for everyone to use that same exception. MR. EDLIN: Move to strike. Move to
that you should grade the loans as defective or as non-defective? MR. EDLIN: A. Objection.
2s, instead of being non-defective as 2s and they would clean them up on the back end. MR. EDLIN: hearsay. Q. Move to strike the
cleaning them up on the back end a little bit later. Basically what I want to make sure that the record is crystal clear on is whether or not you graded those loans where the income was not reasonable as 3s or 1s or 2s. A. Majority, 2s. MR. EDLIN: Q. Objection.
Page 73
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
have a defect but there is a comp factor; correct? MR. EDLIN: A. Q. Yes. And you testified earlier that the Objection.
comp factors that you found at the direction of the team leads were either contrived or not sufficient to overcome the defects? MR. EDLIN: A. Q. Objection.
and comp factors, did that apply to all deals that you worked on? A. Yes. MR. EDLIN: Q. A. Objection.
A. Q.
For both. Bear Stearns job -MR. EDLIN: Just -- let's just for
877-702-9580
Page 74
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
the purposes of the court reporter being able to take a record, at the end of the question if it's clear I am objecting, just wait for me to finish, then answer. At
least that way the court reporter can get everything down. THE WITNESS: MR. FARIDI: Okay. So just make sure that
after I ask my question he doesn't have an objection, and if he lodges an objection or if he doesn't lodge an objection, then can continue to answer. THE WITNESS: Q. Okay.
that we were talking about as well as comp factors, did this practice take place on jobs for Bear Stearns? MR. EDLIN: A. Objection.
Watterson when loans with unreasonable stated incomes were simply graded as 1s? MR. EDLIN: Objection. Lack of
877-702-9580
Page 75
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
-- or minority of the times? It would be the majority. Do you recall during your employment in
Do you recall during your employment at Watterson and Clayton coming across documents in loan files that appeared to be fraudulent? MR. EDLIN: foundation. A. Q. Yes, I have during that time. What instructions, if any, did you Objection. Lack of
receive from Watterson Prime and Clayton supervisors and team leads on what you should do with these documents? MR. EDLIN: and compound. A. Usually the instructions were just
TSG Reporting - Worldwide 877-702-9580
Objection.
Foundation
Page 76
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
go ahead and keep it moving, enter the information, we will take care of that with the investor, the seller, or we will get the document -- the correct documents later. Q. documents? A. Q. Yes. Were you told ever to grade loans Were you ever told to overlook these
where you found these types of documents as 1s, 2s or 3s? A. Q. What's the question again? Let me rephrase that. How were you told you should grade these loans which had these types of documents? MR. EDLIN: A. Objection.
a lot of these documents were missing -THE COURT REPORTER: A. I'm sorry?
documents were missing or it was prevalent that we don't have these documents, we were told to ignore, ignore that and grade them as normal, ignore that document that was needed. MR. EDLIN: Objection. Move to
877-702-9580
Page 77
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
strike and move to strike the hearsay. Q. I want to make sure we are talking I was talking about
loans where the documents appear to be fraudulent and I think you were talking about loans where there were missing documents. A. Q. Okay. Okay.
When -- if -- strike that. During your employment at Watterson and Clayton if you came across a document or when you came across a document which was -which appeared to be fraudulent, how did you grade such loans? MR. EDLIN: foundation. A. Objection. Lack of
Leading. They
pretty much sometimes would just ignore it, don't worry about that, that document, we will take care of it later, go ahead and grade it as normal, ignore that document. MR. EDLIN: Objection. Move to
Page 78
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
without that document, go ahead and grade it a 1 or accordingly. MR. EDLIN: hearsay. Q. Was this practice prevalent at both Move to strike the
Watterson and Clayton? MR. EDLIN: A. Q. Yes, it was. Did you ever notice in reviewing Objection.
stated income loan products at Watterson and Clayton W-2s and other tax documents that were left in the loan file? MR. EDLIN: A. Yes. Objection.
that W-2s, pay stubs, other documents that were in the file. Q. A. Q. On stated income loan products? Yes. Did at times any of these documents,
W-2s or the tax documents, contradict or call into question the income listed by the borrower on the loan application?
TSG Reporting - Worldwide 877-702-9580
Page 79
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Objection.
receive on what you should do with these loans? MR. EDLIN: A. Objection.
either they pull the documents -- they pull those documents out or we were told to turn them over and put them at the very back of the documents. MR. EDLIN: Move to strike as
non-responsive and move to strike the hearsay. Q. When you say "pull those documents
out," what do you mean by that? A. Pull them out of their folder,
sometimes we would put them in a pile and whatever they did with them, either they
TSG Reporting - Worldwide 877-702-9580
Page 80
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
shredded them or they got -- in other words, they disappeared, they disappeared, and sometimes the explanation would have been, well, this borrower was going for a full doc but they went stated. THE COURT REPORTER: A. I'm sorry?
you know, this borrower was going a full doc loan but they went stated. MR. EDLIN: Move to strike as
non-responsive and move to strike the hearsay. Q. So a lot of times these documents
were pulled out of the loan file and just destroyed? MR. EDLIN: A. Objection. Leading.
Yes, they were destroyed, but it was They was hidden. Move to strike as
"Supervisors and project managers repeatedly told due diligence underwriters that the loans
TSG Reporting - Worldwide 877-702-9580
Page 81
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
that we were reviewing had already closed and that the borrowers had already moved into their new houses, and as such, the due diligence underwriters should not be too strict in their review." A. Q. Is that a true statement? Yes. Did the similar practices take place
at Watterson? A. Yes. MR. EDLIN: Muhammad, when you are Do you have
at a time for a quick break. much longer to go? MR. FARIDI: break. maybe. MR. EDLIN: break. MR. FARIDI: record. THE VIDEOGRAPHER: 10:41. Okay.
The time is
We are going off the record. (Recess was taken from 10:41 to
The time is
877-702-9580
Page 82
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
10:50.
basically that you were instructed that because the loans had already closed your review of those loans should not be too strict. A. Q. A. Q. That is correct. That's true also? Yes. Okay. And paragraph 21, the first "There was a general attitude
at Clayton that underwriters should not be searching for discrepancies." statement? A. Q. Watterson? A. Q. Yes. Turn to paragraph 30. It states "With Yes. The same practice took place at Is that a true
respect to one particular job for Bear Stearns, I recall a Watterson supervisor stating, "I don't care how bad the loans are, I only want
TSG Reporting - Worldwide 877-702-9580
Page 83
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
to see them graded as 1s and 2s"." that? A. Yes. MR. EDLIN: hearsay. A. Q. A. Yes. Is that a true statement? Yes, it is. MR. EDLIN: hearsay. Q. lead here? A. Q. Steve Shockley.
Do you see
Objection to the
believe that these instructions were coming from the clients. A. Q. Do you recall that?
these instructions to not focus on finding defects and to grade loans as 1s and 2s were coming from the clients? A. Usually at the beginning of every
project the team lead or project manager would state "here is what the client wants and give
TSG Reporting - Worldwide 877-702-9580
Page 84
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
your parameters as met," and usually either somewhere in between that day or the next day after that either that project manager would get on the phone or go in a private meeting, they would come back and say, "well, the client is not accepting this," that usually come out of the project managers, "the client is not accepting this." Q. So you -MR. EDLIN: Objection. Objection.
Move to strike and move to strike the hearsay. Q. So you heard it from the mouths of
your team leads -A. Q. Yes. -- that the clients did not want you
manager's mouth that here -- the client accept this. MR. EDLIN: hearsay. Q. And do you recall whether -- strike
TSG Reporting - Worldwide 877-702-9580
Page 85
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
that. Do you recall the names of any particular clients which come to mind? MR. EDLIN: A. Q. Objection. Leading.
Bear Stearns were one of them. Do you recall -MR. EDLIN: Move to strike.
Q.
particular Bear Stearns representative which the team leads referenced? A. Q. familiar? MR. EDLIN: A. Q. Yes. Okay. Do you recall instances where Objection. Leading. No. Does the name John Mongoluzza sound
the team leads relayed instructions to you from Mr. Mongoluzza? A. Yes. MR. EDLIN: Objection. Leading.
Page 86
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
stated before, go ahead -- they gave us instructions to ignore this, go ahead, the client will accept that. That's usually when
you have seen the project manager either talking to the side with Mr. Mongoluzza or on the phone with him. MR. EDLIN: non-responsive. hearsay. Q. I want to go back to paragraph 21 of It states here, Move to strike as More to strike the
Clayton that if a due diligence underwriter graded a significant number of loans as EV-3s, that underwriter would not be hired for the next due diligence job." First off, EV-3s are the same things as 3s that we have been talking about? A. Yes. MR. EDLIN: the question. A. Yeah. Objection. Objection to
Page 87
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
MR. EDLIN: Q.
Move to strike.
underwriters were grading too many loans or a significant number of loans, that's what it says here, as EV-3s, those underwriters were not hired by Clayton for future jobs. A. That is correct. You usually
wouldn't see that underwriter for a while unless we had a huge job and they needed every pretty much body on a project and get a bunch of loans out. MR. EDLIN: non-responsive. Q. So basically the only time Move to strike as
underwriters who graded too many loans as 3s were called back for future jobs were when they needed -- when they didn't have enough people to cover a particular job? MR. EDLIN: Objection. Leading.
was prevalent with Watterson Prime, because it was small base and you pretty much knew every -- you pretty much knew underwriter.
TSG Reporting - Worldwide 877-702-9580
Page 88
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Move to strike as
easy to spot, because Clayton had pretty much 500 underwriters. MR. EDLIN: Objection. Move to
instances where underwriters were not called back for future jobs because they were grading too many loans as defective? MR. EDLIN: A. Q. mind? A. Q. Not at this time. I am going to turn to paragraph 25 It Yes. Any particular names which come to Objection.
underwriters determined that a particular loan had a defect that was not sufficiently overcome by compensating factors -- resulting in a grade of 3 -- supervisors would frequently change the
TSG Reporting - Worldwide 877-702-9580
Page 89
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
remember multiple occasions where I looked back at a loan that I had graded as a 3 and found that the grade had been changed to a 1 or a 2 without justification." statement? A. Q. Yes. Do you believe that the changes Is that a true
which were made to these loans, changes from 3s to 1s and 2s, were justified? MR. EDLIN: A. Objection.
justified at all, because there were particularly notes I put in there why they were 3s. Q. Could you give us examples of loans
that you had graded as 3s where the grade of those loans was changed to a 1 or 2 for unjustified reasons? A. I have been on multiple loans, but I
couldn't just give any single example, but it did happen. It happened like say I recorded
these loans every night on my scratch-off pad, would have the calculations of everything with
TSG Reporting - Worldwide 877-702-9580
Page 90
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
the loan number and usually I put a circle on that and go back and look at it again with -hoping that, well, let me see if I can see it with a fresh mind and fresh start and usually I will go back and they were changed. MR. EDLIN: Objection. Move to
it, you kept a notebook which indicated loan numbers and how you graded those loans? A. Yes. Because any time -- any time
they had any discrepancy on how many number of loans you have done, I could always refer back to here is the loans I worked on. Q. Okay. And on the next day after you
had done the review for a particular day, you went back and you checked to see whether grades that you had marked as defective on the previous day remained as defective in the Watterson and Clayton computer systems? MR. EDLIN: A. Q. Yes. And you found, as I understand your Objection.
Page 91
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
checked the following day you noticed that the loans that you had marked as defective the day before were marked now as non-defective? A. Q. Yes. Was this practice prevalent at
Watterson and Clayton? MR. EDLIN: A. Q. Yes. And these changes in grades you Objection.
believe took place for unjustified reasons? MR. EDLIN: A. Q. Yes. Objection. Leading.
Let's just stay on paragraph 25 for a second. The next line reads: "When such
changes occurred, Watterson's computer system deleted any evidence of the earlier grade." A. Q. A. Q. Yes. That's a true statement? That is true. I want to turn to paragraph 29 now.
I want to read just a couple of lines at the top. "Mr. Weeks pressured due diligence
Page 92
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
quickly, even if that meant sacrificing quality of loans." A. Do you see that? Yes. MR. EDLIN: Q. A. Objection.
Q. A.
manager in the Atlanta office for Watterson Prime. Q. Okay. Next line reads: "He told us
that we should "clear" (approve) the loans quickly and that Watterson would "clean it up on the back end"." A. Q. A. Q. Yes. That's a true statement? Yes. "During this "clean up" process Do you see that?
Mr. Weeks instructed Watterson personnel to change data on Watterson's due diligence reports to ensure that it matched the information on the spreadsheet or "loan tape"." Is that a true statement?
TSG Reporting - Worldwide 877-702-9580
Page 93
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
A. Q.
Yes. Now, how do you know -- strike that. Did Mr. Weeks instruct you to change
data on Watterson's due diligence reports to ensure that it matched the data provided on the loan tape? MR. EDLIN: A. Q. others? A. Q. Yes. And how do you know that he Objection. Leading.
No, he did not instruct me. And how do you -- did he instruct
worry about it, we will have the QCers and analysts take care of that on the back end" and they changed this information. MR. EDLIN: read that. Move to strike the hearsay. Q. Were you present when he provided Hold on. Let me just
Page 94
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
strike the hearsay. Q. You also provide here a statement "This changing of the data was
where it says:
done without any review of the documents in the loan file." A. Q. A. Q. Do you see that? Yes. That's a true statement? Yes, it is. And then I think you go on to
provide an example here in paragraph 29. Strike that. up. Was this practice prevalent at Watterson? MR. EDLIN: A. Q. Yes, it was. What about at Clayton? MR. EDLIN: A. way. Objection. Objection. Let me just go back and wrap that
Clayton did it when we went home for the night, the QCers and the project managers stayed back
TSG Reporting - Worldwide 877-702-9580
Page 95
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
maybe about an hour or two later and did that. MR. EDLIN: Non-responsive. Q. 'For example" -- and I am reading Objection.
here from paragraph 29 -- "on numerous occasions, based upon a review of the "HUD-1" forms, the due diligence underwriters found loans defective because they were considered "high cost" loans under state law. For these
loans, Mr. Weeks would routinely delete evidence of many closing charges from Watterson's computer systems despite the fact that these charges were clearly shown on the HUD-1 forms. Deleting evidence of closing
charges from Watterson's computer systems did not change the fact that the HUD-1 forms clearly showed that the borrowers paid those fees. Mr. Weeks was considered the master of
engineering apparent compliance with state law and manipulating the numbers." statement? MR. EDLIN: A. Objection. Leading. Is that a true
877-702-9580
Page 96
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
where Mr. Weeks was the manager? MR. EDLIN: A. Q. Yes, it was. In summary, just to wrap it up, is Objection.
it your view that the due diligence underwriting practices at Watterson and Clayton did not accurately or properly determine whether loans complied with the underwriting guidelines? MR. EDLIN: A. Q. Yes, it was. Is it your view that Bear Stearns Objection. Leading.
improperly directed Watterson and Clayton to deviate from underwriting guidelines and improperly changed loans ranked defective to loans ranked approved? MR. EDLIN: A. Yes. Objection. Leading.
negligent on their part as well as Watterson Prime and Clayton. MR. EDLIN: Objection. Move to
strike as non-responsive.
TSG Reporting - Worldwide 877-702-9580