Michael Schloessmann Vol.2 Mar24-2011

FILED: NEW YORK COUNTY CLERK 11/21/2012
NYSCEF DOC. NO. 3288
INDEX NO. 602825/2008 RECEIVED NYSCEF: 11/21/2012
EXHIBIT 160
In The Matter Of:

MBIAINSURANCECORPORATION v. COUNTRYWIDEHOMELOANS,INC.,etal.
__________________________________________________
SCHLOESSMANN,MICHAELW.Vol.2
March24,2011
___________________________________________________
MICHAEL W. SCHLOESSMANN - 3/24/2011

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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK -----------------------------------x MBIA INSURANCE CORPORATION, Plaintiff, -againstCOUNTRYWIDE COUNTRYWIDE COUNTRYWIDE COUNTRYWIDE and BANK OF Index No. 08/602825
HOME LOANS, INC., SECURITIES CORP., FINANCIAL CORP., HOME LOANS SERVICING, LP AMERICA CORP., Defendants.
-----------------------------------x VOLUME 2 March 24, 2011 9:35 a.m.
Continued Videotaped Deposition of MICHAEL W. SCHLOESSMANN, taken by Plaintiff, pursuant to Notice, at the offices of Quinn Emanuel Urquhart & Sullivan LLP, 51 Madison Avenue, New York, New York, before ERIC J. FINZ, a Shorthand Reporter and Notary Public within and for the State of New York.
Merrill Corporation - New York 1-800-325-3376 www.merrillcorp.com/law
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A P P E A R A N C E S: QUINN EMANUEL URQUHART & SULLIVAN LLP Attorneys for Plaintiff 51 Madison Avenue New York, New York 10010 BY: PHILIPPE Z. SELENDY, ESQ. (philippeselendy@quinnemanuel.com) -andCOURTNEY STATFELD, ESQ. (courtnestatfeld@quinnemanuel.com)
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GOODWIN PROCTER LLP Attorneys for Defendants Exchange Place Boston, Massachusetts 02109 BY: SARAH HEATON CONCANNON, ESQ. (sconcannon@goodwinprocter.com) -AND-
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GOODWIN PROCTER LLP 901 New York Avenue NW Washington, D.C. 20001 BY: DAVID I. FREEBURG, ESQ. (dfreeburg@goodwinprocter.com)
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ALSO PRESENT: JONATHAN POPHAM, Videographer

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MICHAEL W. SCHLOESSMANN A. Yes. Q. And what were those models? A. When you say in connection with these securitizations? Q. Second lien securitizations. A. I'm not sure, nor do I think I said we employed the models in connection with these securitizations. We had our own proprietary loss and prepay models that we used to evaluate collateral. We used to price collateral when we purchased loans through our conduits. Q. Okay. What are the names of those models? A. I don't know -- I don't know or remember anyway the specific names. They, generically speaking, were a default or loss model, as well as a prepay model. Q. Okay. And what did CSC use the default or loss model for? A. So these were loan level models, where you would input loans and loan attributes, and it would calculate
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MICHAEL W. SCHLOESSMANN THE VIDEOGRAPHER: Here begins volume 2, videotape No. 7 in the continuing deposition of Michael Schloessmann. Today's date is March 24, 2011, and the time is 9:09 a.m. M I C H A E L W. S C H L O E S S M A N N, resumed, having been previously duly sworn, was examined and testified further as follows: CONTINUED EXAMINATION BY MR. SELENDY: Q. Yesterday you made reference to some risk based pricing models that CSC used in evaluating the securitizations. What were you referring to? A. Can you give me some context? Q. Let me just ask it more generally. As of the time period from 2004 to 2007, did CSC employ risk based pricing models in connection with these securitizations?
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MICHAEL W. SCHLOESSMANN expected, you know, prepay and losses, and would allow you to project performance and/or, you know, price the loans based on, you know, execution assumptions. Q. And did CSC use those models in connection with loans acquired for HELOC securitizations, do you know? MS. CONCANNON: Objection. A. With very limited, if any, exception. All of the loans in the fifteen MBIA transactions, and I think for that matter the rest of the CHL HELOC securitizations and closed end second securitizations, were Countrywide loans and were not loans that we acquired through our conduits at CSC. Q. Does that mean you would not have used those CSC pricing models at all in connection with the securitizations in dispute? A. I'm unaware of -- asked now, I can't think of anything that immediately comes to mind as to why we would run them
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MICHAEL W. SCHLOESSMANN through those models, but I could be mistaken and I'm probably not the best person to ask. Q. Who is the best person to ask? MS. CONCANNON: Objection; vague. A. I would start with the structuring group or our -- actually, I would start with the structuring group. I was going to give you the name also of Wei Wang, who was in our fixed income research, and that team helped produce and develop the models. But they weren't -- they were not running them in terms of production mode. Q. The structuring group would be the group that ran them in production mode? A. Again, I can't be sure as it related to, you're asking about the securitizations themselves, and since the structuring group headed up by William Shang, as I said earlier, you know, managed the, you know, the process by
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MICHAEL W. SCHLOESSMANN Q. Do you know if the documentation program itself would be one of those attributes? A. I believe that would as well. Q. Okay. And that's because each of these things, CLTV, FICO, owner occupancy, documentation program, were all to be correlated in some respect with expected default risk? MS. CONCANNON: Objection. Q. Is that right? MS. CONCANNON: Lacks foundation. A. I would not hold myself out to be an expert on this, but I think there was a general understanding in the market shared by, you know, most market participants, including the rating agencies, if you were to look at their models, that those attributes would be all be deemed to one extent or another relevant in terms of the determination of or projection of performance on a group of collateral.
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MICHAEL W. SCHLOESSMANN which we were interacting with the rating agencies around ratings levels to the extent, you know, CHL wasn't, that they would seem to be the logical, you know, group to be using those models. Q. Do you know the particular loan attributes that would be entered in as inputs into the model, the default model? MS. CONCANNON: Objection. A. Some, but I don't have a top of mind exhaustive list. Q. Which attributes do you recall? A. It would have been certainly, you know, LTV, CLTV, FICOs, geography. Those kinds of things. Essentially the attributes that would or would be believed to impact either, you know, loss -- excuse me, losses or prepay experience on those loans. Q. Would owner occupancy be one of those attributes too? A. Yes, I believe so.
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MICHAEL W. SCHLOESSMANN Q. Performance meaning specifically whether the loans repay or whether they default? A. Repay, prepay. You know, it would allow you to project prepay speeds on a group of collateral, it would allow you to estimate or project default or loss experience on that same group. Q. Do you know if CSC used its default model to value the tranches in RMBS securitizations, even if it hadn't acquired the loans itself? MS. CONCANNON: Objection. A. When you say value the tranches, now we're talking about something very different. You are using structured finance tools like Intex, these are commercially available tools that model cash flows relating to bonds as opposed to the underlying loans. So you would not, so far as I know, you would not run bonds through, you know, the aforementioned models, which were, you know, by definition, you know, loan
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MICHAEL W. SCHLOESSMANN level. Q. But you wouldn't -- CSC would not do loan level analyses in order to back into valuations of the certificates? MS. CONCANNON: Objection. Q. I mean, for example, taking into account both the structure of the RMBS, the tranching and the like, but also looking at the expected performance of the loans underneath, would CSC take that data to try and get some sense of the true value of various certificates in the RMBS that it was underwriting? MS. CONCANNON: Objection to form. A. If we're talking about the HELOC securitizations generally that we underwrote and specifically the fifteen MBIA transactions, I'm not sure to what extent we -- I mean, we clearly modeled, you know, the transactions, I mean, that was our job, right, we structured, you know, we came up with a capital structure, and these were generally, you
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MICHAEL W. SCHLOESSMANN extent we did that on the fifteen MBIA or the other HELOC deals. Q. Again, that would be Mr. Shang who would be in charge of that? A. Yes, his group. Q. Okay. And his group was the structuring group? A. That's correct. Q. Does the collateral analytics group have a role in that or no? A. The collateral analytics group that was within my transaction management organization would prepare the loan level tapes, so they would typically, as I mentioned, in the context of providing rating agencies tapes, if we were doing that on behalf of the mortgage company, they would be putting together the pools at the direction of the mortgage company. They would not be running cash flow models, they did not have, for instance, Intex. That was the exclusive domain of William Shang's group. Q. Do you know whether
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MICHAEL W. SCHLOESSMANN know, at least on the HELOC side, very plain vanilla type structures. Typically they were a single AAA, you know, wrapped or class or, you know, pass-through bond, and that was the extent of it. As well as the residual, you know, I think I mentioned, you know, Countrywide retaining. Q. So what were the models -- did CSC actually use a model to evaluate the structure of these HELOC transactions? A. Yeah, well, you're using the Intex tool, which again, is a commercially available structuring tool, that structurers use to set up the deal. They can set up various scenarios or structural, you know, alternatives, and run the cash flows on those alternatives. I don't know, however, if losses were typically, you know, run through those. If they were ever done on the HELOC deals, there would have been no expectation of losses impacting the AAA bonds. But again, I don't know to what
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MICHAEL W. SCHLOESSMANN Mr. Shang's group used any model other than Intex with respect to the securitizations here? A. With respect to modeling the deal structures as opposed to the loans? Q. Yes. A. No, I think Intex was the, I can't be certain, but I believe Intex was the only cash flow model we used. Q. Okay. And are you aware of any other models used by any entity at Countrywide in connection with the MBIA securitizations at issue here? MS. CONCANNON: Objection; vague, overbroad. A. I'm not sure what the mortgage company used. I know they just in general when we underwrote securities for them, they relied on, you know, a lot of our analytics, secondary marketing may have produced their own, you know, summary of those transactions. But I didn't have a lot, if any, visibility into those.
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MICHAEL W. SCHLOESSMANN Q. By the mortgage company you mean CHL? A. Yes. Q. Okay. And to what extent did CHL rely on the analytics of CSC? MS. CONCANNON: Objection; vague. A. I think there was a good deal of reliance placed on the work we did as an underwriter. That's what underwriters typically do, they would prepare a, you know, best execution analysis if, again, depending on the structuring. As I said before, the HELOC structures were, amongst all the RMBS that we underwrote, very plain vanilla in terms of the simplicity of the structure. Oftentimes a single class of a pass-through security. But where there were structural, you know, variations to consider, we would put those together and present them to the mortgage company, CHL, so they could make a determination
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MICHAEL W. SCHLOESSMANN relative to other transactions we were doing that had more complicated structures. Q. Was CSC acting as agent for CHL in connection with these MBIA securitizations? MS. CONCANNON: Objection. A. Look, we were securities underwriter. When I said agent, I sort of loosely refer to, you know, we're a security underwriter is essentially working, you know, on behalf of the issuer, we get paid a fee, as we talked about, for placing those securities. You can do, you know, underwriting can take the term of mandatory commitments, best efforts, so there could be a principal component if you're taking down bonds. But typically, you know, virtually all the bonds were sold at issuance so there wasn't a position we were taking in those bonds. Q. Was it a mandatory commitment or a best efforts or something else?
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MICHAEL W. SCHLOESSMANN of which structure they wanted to go with. Q. Are you aware of any particular requests that came from CHL to CSC with respect to assessment of analytics for the MBIA securitizations? A. Specifically, no. Q. Okay. So as far as you know it's the general description of the deal that you just described, and you're not aware of other things? A. No, I am speaking more broadly about RMBS deals where we were essentially agent for CHL underwriting the securities. I would be surprised, you know, just my recollection was that the HELOC deals more than really any other transactions that we did, were very simplistic, straightforward in structure. There was not much variation deal over deal. And so there would probably be a minimal, on a relative basis, there would likely be a minimum level of the kind of analytics I just described, you know,
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: Objection. A. I believe it was best efforts. I'm not sure. You know, I can't remember. As I said, what I do remember, you know, the substantial majority of the time, you know, most, if not all of the bonds were being placed at issuance as opposed to, you know, either CHL taking back bonds or Securities Corp. In my recollection is as I think about it now, is if there were, if there was a tail, we would probably take it down at CSC. But I'm not sure. Q. Okay. And you don't recall having to take down any tail, as you described it, for these deals? A. Not in particular. Q. Okay. A. It wouldn't surprise me just in the normal course of our underwriting activities if we positioned some bonds, you know, that were left unsold after issuance. MR. SELENDY: Let's mark as
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MICHAEL W. SCHLOESSMANN 574, a document CWMBIA 9549475 through 80. (Plaintiff's Exhibit 574 for identification, email dated May 25, 2006, production numbers CWMBIA 9549475 through CWMBIA 9549480.) Q. Let me know when you've had a chance to look at that. A. Sure. Okay. Q. Okay. Are you familiar with this document? A. I am not. I don't recall ever seeing this particular document. Q. On the first page of the document, there is an email that is sent by Paul Abate of internal audit to you, among others. Do you see that? A. Um-hum. Q. Who is Paul Abate, and what was his responsibility? A. He was one of our internal auditors.
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MICHAEL W. SCHLOESSMANN page, it shows that Ron Kripalani forwarded this assessment to Grant Couch. Do you see that? A. Yes. Q. What was Grant Couch's responsibility as of May 2006? A. Grant was our, Countrywide Securities Corporation's chief operating officer. Q. Okay. And did you have discussions with Mr. Kripalani about the internal audit response, do you recall? A. I don't have recollection. Q. Okay. If we turn to the response itself. On page 3 of the response, it's 9479, there are comments by internal audit on the recommendations that were documented by CSC. Do you see that? A. Where specifically? Q. At the top of the page it says "Exhibit A, internal audit comments on each of the recommendations documented by CSC."
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MICHAEL W. SCHLOESSMANN Q. And you don't recall receiving this from Mr. Abate? A. I mean, I obviously see that I'm, you know, on the note. I just -- I recall engaging with internal auditor, having them come meet with me as a result of this just to discuss this. I just don't have specific recollection of, when I look at this, it doesn't, you know, ring familiar. But it, you know, isn't inconsistent with the discussion that I do recall having with, and I'm not sure if it was Paul, I think it was, that I met with. But I definitely do have a recollection of meeting with internal audit on this subject. Q. Did you meet with internal audit about this time frame, May 2006? A. I would -- my guess is yes, I sent this out in May. It would surprise me if it wasn't somewhat proximate to the time I sent it out that I would have met with them. But I can't say for sure. Q. Okay. At the top of the first
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MICHAEL W. SCHLOESSMANN A. Okay. Q. Parentheses, section 4 of M. Schloessmann's memo. A. I see it. Q. The first one, 4-A, these are your recommendations which they're responding to; right? MS. CONCANNON: Objection. A. I'll take at face value, they look familiar to me having looked at the document yesterday. Q. Do you need to refer back to your white paper? A. If you're going to be asking me to confirm these were in fact my recommendations, I would prefer to have it in front of me. Q. Sure. It's Exhibit 260, I think it's still in the stack right there. And so 4-A in the internal audit comments states "quickly resolve existing pipeline purchase claims as to Ramius, Hanover and other investors."
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MICHAEL W. SCHLOESSMANN And do you see how that corresponds to your recommended action by Countrywide point 4-A? A. Yes, I do. Q. The internal audit response states "resolve claims. If due to a rep and warranty breach, initiate a repurchase. If not, provide an expedited response, including support for the reasons why the repurchase request was denied." Do you see that? A. I do. Q. Do you know if in fact CSC implemented this recommendation from internal audit? MS. CONCANNON: Objection. Q. Well, let me first ask you, is this a direction, a recommendation or something else from internal audit, as you understand it? MS. CONCANNON: Objection. A. As I understand the recommendation and as I understand the
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MICHAEL W. SCHLOESSMANN audit that was part of the LERC process. Q. Did investor audit become LERC, or what's the relation between the two? MS. CONCANNON: Objection. A. Investor audit, and I'm not entirely certain it was known by that, but I do believe at the time it was referred to as investor audit, that was the group that executed the operational responsibilities under or around reviewing files and repurchase claims. LERC was the committee, loss exposure review committee, that reviewed recommendations that came out of internal audit, I believe. Q. And as of this point in time, May '06, were you part of the investor audit group, do you know? A. No, I definitely was not. Q. And were you part of LERC? A. I don't believe so, no. Q. Okay. Was there anyone from CSC that was a part of LERC, do you know?
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MICHAEL W. SCHLOESSMANN role of investor -- excuse me, internal audit, this would not have been a direction, that was not their place to direct action, it was to make recommendations. I would also say that what is unclear is who they're, you know, providing the recommendation to. As we saw from some prior correspondence we reviewed yesterday, it wasn't our responsibility to repurchase loans, we made some recommendations about, you know, allowing for delegated authority and the like, again, we covered that yesterday. I believe this would have been, you know, a recommendation to CHL, but I can't be sure just by virtue of this letter. Q. As of May 2006, was it the investor audit group at CHL that handled those repurchase requests, do you know? MS. CONCANNON: Objection; lacks foundation. A. I believe it was investor
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MICHAEL W. SCHLOESSMANN A. At some point in time, and I'm not sure it was in May of '06, at some point in time as a result of, I believe, all of these discussions and recommendations that were going on, one of -- we had a representative from my group that sat in on LERC, I don't know if they were a voting member or not. But they would have sat in on those conversations. Again, not sure as to when that took place. Q. Who was that representative? A. I recall it was Rex Malott. Q. At what point in time did you start to become involved with the repurchase activity? MS. CONCANNON: Objection. Q. You personally. A. In terms of direct responsibility as opposed to in my role as managing director of Countrywide Securities? Q. Yes. A. I don't know precisely when.
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MICHAEL W. SCHLOESSMANN It was in 2008. You know, sometime during, you know, the first half of 2008 I assumed responsibility for part of -well, there was a two-step process. When I assumed partial responsibility for the workout strategies, you know, component, it did not include investor audit. Subsequently, and again, I can't be sure of dates top of mind, but subsequently I also assumed responsibility for the internal audit or excuse me, investor audit function. Q. Meaning you're now in charge of that function; is that right? A. Yes. MS. CONCANNON: Objection. Q. Is that, do you report to legal in that capacity, or is your function a business capacity? MS. CONCANNON: Objection. Q. Do you know? A. Yes, I do know. I mean, I don't report to -- my capacity is a business function. I don't report to
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MICHAEL W. SCHLOESSMANN or why. Q. Do you know when it was first created? A. I don't. Q. Is it still used today in connection with repurchases? A. Yes. Q. What group is responsible for the entry of data into the PAT database? MS. CONCANNON: Objection; lacks foundation. Q. Well, let me just ask you, it is a database; right? A. Yes. Q. And there are persons responsible for entering data into the database; right? A. Yes. Q. Okay, so what person or group is responsible for the entry of data into the database? MS. CONCANNON: Objection. A. Mostly internal auditors -internal audit. Investor audit
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MICHAEL W. SCHLOESSMANN legal directly, if that's what you're asking. Q. Right. So the repurchase group is part of the business side of Countrywide? MS. CONCANNON: Objection. A. Well, the operational activities around reviewing claims and files and the like, again, operationally speaking, the group resides in the line of business, that is correct. Q. Do you know what the PAT database is? A. Yes. Q. What is that? A. That's the primary database for repurchase claims in terms of their logging, tracking and monitoring. Q. What does it stand for, PAT? That's the thing about acronyms. A. It preceded me actually. I believe it was product administration tracking. It was a legacy system, it's not -- I don't know who came up with that
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MICHAEL W. SCHLOESSMANN associates who review claims, log in the claims, and responses. But others within, you know, workout strategies also have the ability to input information as well. Q. That group is all under your supervision, the group of persons who are responsible for entering data into the PAT database? A. Yes. Q. Okay. And what types of data go in there specifically? A. It would be all data regarding repurchase claims. Q. Meaning every step of the process, the demand for the repurchase, the analysis of the repurchase, the response on the repurchase, all of that goes in the database? MS. CONCANNON: Objection. A. When you say every step of the process, during the course of the process there is data extracted from the claim itself that gets input initially. And
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MICHAEL W. SCHLOESSMANN there is a process by which those claims are reviewed. And the specific, you know, factual allegations asserted by the claimants in terms of, you know, finding types, are input, as well as the resulting review or some part of the resulting review is input. Q. When you said some part of the resulting review, is part of the review not entered into the database? A. There is not specific parts not. But I don't want to characterize the database as capturing every aspect of the review. I don't know, you know, that any certain aspect is not. I mean, again, it's a database, so it's not just a, you know, a, you know, running commentary of the entire lifecycle of a claim necessarily. Although it seeks to capture the, you know, critical components of the review cycle in the claim. Q. With respect to MBIA's repurchase demands, would the data that
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MICHAEL W. SCHLOESSMANN reports off the database that would give a full history of the processing of repurchase demands for a particular counterparty? MS. CONCANNON: Objection. A. Yes. Q. Okay. So it would be possible to query the database and say give us the full records with respect to the MBIA repurchase demands? A. When you say full records, you could query certain data elements regarding a particular claimant, a group of claimants, status, you know, various, you know, data attributes, you know, that you could pivot off of and pull down a report. Q. Okay. Are there regular reports that you request to have generated from the PAT database? MS. CONCANNON: Objection. A. There are, I mean, there are certainly reports that are generated that are used primarily to allow our team to
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MICHAEL W. SCHLOESSMANN you've just described be entered into that PAT database? MS. CONCANNON: Objection; incomplete hypothetical. Q. Well, we discussed yesterday that MBIA has made about in excess of 13,000, 14,000 repurchase demands. Do you recall that, that discussion? A. I don't recall the 13,000. Q. I don't recall the exact number either. But there is some -MR. SELENDY: What's the number? MS. STATFELD: Over 13,000. MS. CONCANNON: Yes, you represented yesterday it was over 15,000. Q. And you said that Countrywide is actively processing those claims. That processing would be reflected in the PAT database; is that right? A. Yes, just like any other claim received by, from another claimant, yes. Q. Are you able to generate
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MICHAEL W. SCHLOESSMANN operate and to manage, you know, the business and, you know, to comply, you know, with our internal, you know, service level, you know, standards and whatnot. Q. And which reports are those? A. I don't know any by name. There are a number. Each of the, you know, groups within the organization, you know, will have reports run either on a regular basis or on an ad hoc basis, depending on, you know, what they perceive, you know, the needs to be and what sort of visibility they want into the pipeline to ensure it's being, you know, managed appropriately. Q. When you're referring to each of the groups within the organization, which groups specifically are those that might be requesting reports from the PAT database? MS. CONCANNON: Objection. A. Just loosely define, I'm speaking of the different segments.
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MICHAEL W. SCHLOESSMANN We've referred to segments, and there is a GSC segment, a monoline segment, a private investor segment and a mortgage insurance segment. Q. Okay. So with respect to MBIA, if we wanted to see reports that have already been generated, it would be the reports requested by the monoline segment of the group; is that right? MS. CONCANNON: Objection. A. Yes. Q. Okay. Do you know whether -have you personally requested reports be generated with respect to the MBIA repurchases? MS. CONCANNON: Objection. I would instruct you to answer solely to the extent you can do so without revealing attorney-client communications with either in-house or outside counsel, or work that was undertaken in connection with the litigation at instruction of counsel.
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MICHAEL W. SCHLOESSMANN monoline space has been in direct consultation with counsel. Q. So you can't separate the sort of, the reports generated as part of the ongoing business function from the reports generated in consultation with counsel? MS. CONCANNON: Objection; assumes fact not in evidence. Also asked and answered. A. I would have difficulty separating the two, just given an involvement of counsel in the entire claims process as it relates to monoline claims. Q. But that's a process that began before any threat of litigation; isn't it? MS. CONCANNON: Objection. Q. This repurchase process? MS. CONCANNON: Objection; vague as to repurchase process, also assumes facts not in evidence. A. Can you restate the question,
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MICHAEL W. SCHLOESSMANN Q. I'm not interested in communications with counsel about it. I would just like to know what reports you requested to have run from the database in connection with MBIA. A. I don't recall doing any, you know, subject to what was just discussed, I don't recall doing any specific MBIA, you know, query. Q. Do you know whether the -- do you know what types of reports the monoline segment of your group has requested to be created by the PAT database? MS. CONCANNON: The same instruction, to the extent that those reports were requested or involved the subject matter of requests in connection with litigation or communications with counsel. A. I can't separate the two. I mean, you would say most, if not the entirety, of what we've done in the
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MICHAEL W. SCHLOESSMANN please? Q. Yes. I mean, you've indicated that the, for example, the PAT database is a legacy database, the investor audit group was functioning, you know, some time ago, now you've stepped into that function. But we are talking about a process that has been in place for years, right, with respect to the business management of repurchases? MS. CONCANNON: Objection; mischaracterizes prior testimony, assumes facts not in evidence. Q. Isn't that right? A. Here's how I would describe it: Yes, the PAT database has been in place for years, I've indicated I don't know exactly how long. Yes, we have, you know, processed repurchase requests in what I would call the ordinary course pre-2008. We had, for instance, received a fairly regular, although relative to current volumes, much less significant volume of repurchase claims, mostly from
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MICHAEL W. SCHLOESSMANN the GSEs and, you know, claim denials from the mortgage insurance companies. That was part of what I would call our business as usual, you know, process. Beginning in 2008, I think the world changed pretty dramatically, and for instance there was no such thing as a monoline repurchase claim, so far as I'm aware, before 2008. And so as that activity picked up, you know, our focus, you know, clearly changed in response to those developing trends. And so when we say -- when you say we were processing those without the threat of litigation, I don't believe that to be true. I think if we look at the MBIA case, which I think was filed in the third quarter of '08, and given that we just received first claims sometime I think in the first half of '08 for the first time ever from any monoline, it is, in my recollection and judgment, they are inextricably linked concepts here, in terms of claims and threat of litigation.
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MICHAEL W. SCHLOESSMANN a significant number of conversations that I'm aware of, you know, secondhand, you know, in early 2008, with our mortgage investor relations team and MBIA and perhaps other monolines, that, again, made the processing of repurchase claims, you know, the whole notion of processing the claims was, in our view, done with or under the, you know, threat of litigation. Q. Okay. Now, yesterday you testified that Countrywide is processing MBIA's repurchase claims just the same as if it were not in litigation with MBIA. Is that still your testimony or are you changing that? MS. CONCANNON: Objection; mischaracterizes prior testimony. A. If you want to read it back, we can go down that road. What I testified to, as I recall, is the determination that we made and make as to specific breach claims is no different and is not at all impacted by whether
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MICHAEL W. SCHLOESSMANN Q. Okay. And you're referring specifically to the monoline repurchase demands, you're saying inextricably linked. MS. CONCANNON: Objection. Q. I'm trying to distinguish. The business process of evaluating repurchase claims is something that existed prior to threat of litigation. And you're saying with respect to the monolines, those became inextricably linked because the monoline repurchases first arose in 2008 when everything changed. MS. CONCANNON: Objection; mischaracterizes prior testimony. A. I'm not suggesting that the threat of litigation existed solely for the monolines, okay. But the threat of litigation clearly existed for the monolines, and that the instance of receiving, you know, or experiencing receiving claims did not start until 2008, at which time there was, you know,
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MICHAEL W. SCHLOESSMANN we're in litigation with a claimant or not. I said, you know, the manner in which we engage with that counterparty could, and in the case of MBIA, certainly is impacted by the fact that we are in litigation. I think those are two distinctly different concepts. Q. Can you explain the difference or the distinction that you're making here? I mean, can you elaborate upon that distinction, I want to be sure I'm following you when I ask a follow-up question. MS. CONCANNON: Objection. A. Well, I'll just state just factually what has happened, and it should come as no surprise to MBIA. When we received the claim, we log it, we conduct a thorough review and we provide a response on those claims. Thereafter there is no further engagement, discussion with MBIA, as a result of litigation and perhaps for all
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MICHAEL W. SCHLOESSMANN I know, because MBIA doesn't in turn, you know, reach out to us or hasn't engaged with us, you know, beyond, you know, receipt of our response. Q. Okay. So is it fair to say that the first part of that process where you log it, evaluate the claim, and generate the response to MBIA, that is what you meant as saying that's all done just the same as if there were no litigation. And it's the second part, the engagement with the counterparty about the acceptance or denial of the repurchase claim that is affected by the litigation? MS. CONCANNON: Objection; mischaracterizes prior testimony. Q. I'm asking, is that fair? A. Well, it's beyond just the logging of the claim and the processing. The determination, the review and determination of the claim and the response is, so far as I know, consistent with how we respond to all claims.
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MICHAEL W. SCHLOESSMANN repurchase demand; is that right? MS. CONCANNON: Objection; mischaracterizes prior testimony. A. It's not -- look, I don't know, frankly, whether it's MBIA has reached out and sought to engage with us or they have similar concerns about being in litigation, but there is heightened sensitivity in talking to a counterparty beyond, you know, complying with our obligation, what we think our obligation is, to review and respond to requests asserted by parties that have standing to bring claims, which we've done. Beyond that, we don't believe we're contractually bound, nor do we think, as -- nor do we think as a result of the litigation we ought to be spending time engaging in a free flowing discussion around loans that we're being sued on. Q. Okay. Turning back to Exhibit 574. At the bottom of the page, there is a discussion of your recommendation 4-C,
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MICHAEL W. SCHLOESSMANN Q. In the ordinary course of business? MS. CONCANNON: Objection. A. Well, in general that process, and it may differ between claimant groups, we may have different operating principles or rules of engagement, for instance, with the GSEs. But in general, and specifically as it relates to all of the monolines, claim comes in, it's logged, it's reviewed, it's responded to. And the criteria we use to make a determination of whether we think there is an actionable breach is no different from one monoline versus the other, unless the contract terms are, you know, materially different. And at the end of the day it's the contract terms that dictate the ultimate determination. Q. Okay. And so the change because of litigation is with respect to how Countrywide thereafter interacts with the counterparty in connection with the ultimate resolution of the disputed
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MICHAEL W. SCHLOESSMANN to modify the CHL repurchase policy and process. Do you see that? A. Yeah. Q. Okay, that's on page 9479. A. No, I see it, I'm just trying to compare it to the other document. Q. Is that consistent with your recommendation? MS. CONCANNON: Objection; vague. A. I'm just, again, looking at my document to see if it is. Okay, so we are on 479. Q. Yes, page 3 of the internal audit response. A. Right. Q. To your recommendations. A. And we're talking about 4-C. Q. Yes. A. In which internal audit is suggesting that a proactive approach to purchasing loans is not recommended at this time without further study.
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MICHAEL W. SCHLOESSMANN Q. Let me be clear as to my question. First, I'm just talking about the heading, "modify the current CHL repurchase policy and process." Here they're responding to the recommendation in 4-C of your memorandum; is that right? A. It appears so, yes. Q. Okay. Then in terms of what they do recommend, at the bottom of 4-C, they state "specifically regarding repurchase requests, the following should occur: If a repurchase request is a rep and warranty breach, it should be repurchased without delay. If a repurchase request is not a clear rep and warranty breach, it should be specifically looked at from the relationship point of view." Do you know whether those recommendations were followed by Countrywide Home Loans? MS. CONCANNON: Objection. A. I do not. MR. SELENDY: Let's mark as
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MICHAEL W. SCHLOESSMANN servicing is being transferred to our system, and there is a process, or excuse me, in the interim there is, you know, the data is static as opposed to fluid, because you're not getting real-time access to payments until those loans actually board, is what I recall this being about. Q. By boarding you mean until the data is loaded on to the AS 400 system? A. Yes. Q. What is that system exactly? A. That system is and was Countrywide's proprietary servicing system. It was not a commercial application as many servicers use, it was essentially an organic item built over the years by Countrywide. Q. So that's the name that is used for the computer platform that is used as the basis for Countrywide Servicing? MS. CONCANNON: Objection. A. Yes.
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MICHAEL W. SCHLOESSMANN 575, an email from Bill Endicott to you, dated June 6, 2006. (Plaintiff's Exhibit 575 for identification, email dated June 6, 2006, production numbers CWMBIA 0011019994 through CWMBIA 0011019996.) MR. SELENDY: The size of the font is courtesy of Countrywide. MS. CONCANNON: Again, we produced them in the best format available. MR. SELENDY: I believe it. Q. So my first question is whether this is an email exchange involving you in June of '06. A. It appears to be, yes. Q. And do you know what the issue was with delinquency reporting? MS. CONCANNON: Objection; vague. A. From the review of this, it generally refers to the issue around loans that are being purchased, where the
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MICHAEL W. SCHLOESSMANN Q. And so the issue concerned data that may become stale after the time -- well, I'm sorry. Exactly how does the question of static data correspond to a problem in delinquency reporting? MS. CONCANNON: Objection. Q. As you had discussed in this context. A. So as I recall and having had my recollection refreshed by this note, when you purchase loans, most of the time we purchase loans we also bought the servicing rights. And so there was a time period in which you transitioned the servicing from the prior servicer to the new servicer. And during that time period you weren't getting real-time or couldn't get, you know, it's typical of servicing transfers, where you weren't getting real-time information. And so if those loans were securitized, okay, during this interim servicing transfer period, and you came
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MICHAEL W. SCHLOESSMANN up to the first reporting cycle and the loans weren't boarded, then they would, I believe what was, you know, the practice, was they were just showing those loans as delinquent. So you'd see this anomalous spike in delinquencies in the first reporting cycle, which would ultimately normalize. But that temporary spike was creating what I thought was, you know, unnecessary, you know, investor backlash, as my note indicated. Q. Is this with respect to loans that CSC purchases? A. Yes. Q. Or is it broader? A. No, specifically loans that CSC purchased. Q. From originators other than Countrywide? A. Yes, Countrywide, all of Countrywide's originations aren't impacted by this. When Countrywide originates a loan, it begins servicing that loan, you know, immediately.
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MICHAEL W. SCHLOESSMANN think I alluded to earlier, where they're funding each individual loan, the manner in which those loans were set up as a condition of funding, they were able to, I believe, effect a concurrent transfer of servicing or transfer servicing concurrent with their purchase. Our business model was buying bulk packages where sellers weren't able to accommodate that same process, so we had this interim challenge in terms of transferring servicing, as any other, you know, bulk buyer of loans did. Q. How long was the gap that you've just described, typically? A. Typically, as I recall, from the date of purchase to the date you would actually have the loans boarded, it might be 30 to 45 days, generally speaking. Q. Okay. And the problem was you had, either you would overreport because you don't have the data, or you might underreport, again, because you wouldn't
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MICHAEL W. SCHLOESSMANN Q. What about loans that Countrywide Home Loans purchases from other originators? A. So -MS. CONCANNON: Objection; vague. A. We purchase loans from other underwriters at Countrywide Securities Corporation. Q. Right. A. Are you -Q. I'm saying Countrywide Home Loans also purchased loans from other originators; didn't it? A. Yes, through correspondent lending. Q. Right. And so with respect to those purchases through correspondent lending, was there a similar problem? MS. CONCANNON: Objection; lacks foundation. Q. If you know. A. I don't believe so. I think the nature of how they purchased loans I
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MICHAEL W. SCHLOESSMANN have the data; right? A. Yeah, yes, you're making an assumption, you know, absent real-time information. Q. And you were advocating underreporting the delinquent loans because you thought that would be a closer approximation? MS. CONCANNON: Objection. Q. Than overreporting? A. Yeah, I believe it was -recognizing when we bought loans we bought current loans only. So every loan we bought, okay, we were -- we bought a current loan. And so, you know, we're talking about the passage of 30 to 45 days thereafter. And some of those were newly originated where the first payment might not be due for 30 or 45 days out. And so in my estimation, we were faced with a choice of substantially overreporting, substantially overreporting delinquencies on that subset of loans that were securitized, or
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MICHAEL W. SCHLOESSMANN modestly underreporting delinquencies, albeit temporarily. Q. Okay. A. Typically it would be one reporting cycle, one monthly reporting cycle. Q. Okay, thank you. MR. SELENDY: Let's mark as 576, CWMBIA 10372346 through 56. (Plaintiff's Exhibit 576 for identification, email dated June 7, 2006, production numbers CWMBIA 10372346 through CWMBIA 10372356.) Q. And this is an extended email exchange involving you, among others; right? A. It appears to be. I'm just trying to get my bearings here. Q. Okay, let me know when you're ready. A. Okay. I haven't looked carefully at McMurray's note. I don't know where your questioning is going to be.
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MICHAEL W. SCHLOESSMANN calculating repurchase amounts used by CSC differ from that used by CHL? MS. CONCANNON: Objection. A. I don't have a reason to believe that, you know, this is wrong. And it's clearly suggesting as much. Q. What is the difference, or what was the difference as of June '06? MS. CONCANNON: Objection. A. Do you want me to simply interpret? Q. If you can characterize it. MS. CONCANNON: Objection. Q. What's your understanding of the difference as described by Debbie Brown to you in the email that was sent to you? I know it was a few years ago. MS. CONCANNON: You can speak as to your understanding at the time, but don't speculate if you are just interpreting what's on the page. A. I would be simply just reiterating what's on the page here. I
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MICHAEL W. SCHLOESSMANN Q. Let me start, and if you need more time to review, just by all means say so. First thing I would like to ask you about is on page 2 of the document. There is an email from Debbie Brown to you at the top of the page. Do you see that? A. Yes. Q. And she says "I hear from Mike that our method of calculating repurchase amounts differs from CHL." Do you see that? A. I do. Q. Do you understand what that issue concerned? MS. CONCANNON: Objection. A. I understand it only from the, you know, the language or text that follows. Q. Okay. So you don't recall having a discussion about this? A. Not specifically. Q. In fact, did the method of
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MICHAEL W. SCHLOESSMANN mean, I don't have a specific recollection of this issue coming up or even this email chain. Q. As you sit here today, what's your understanding of the difference that Ms. Brown is reporting here? MS. CONCANNON: Objection. Q. You can answer that. A. She is -- she is appearing to allude to the calculation of a repurchase price that on one hand or in one methodology includes the price paid for the loan, and on the other hand, and again, I'm just inferring from this, would be setting the repurchase price at par, or essentially 100 percent of the outstanding principal balance. Which was typically, in most contracts, was the repurchase price. Q. And did CSC -- which method was used by CSC, as you understand it? MS. CONCANNON: Objection. Q. The price paid or the par amount?
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: Objection. You're asking him to read the document? A. I don't recall. I'm going off of this letter. Q. She says "we include per diem interest through funding and repurchase price is calculated with premiums if applicable." Does that suggest that CSC used a par calculation as opposed to the price paid calculation? MS. CONCANNON: Objection; calls for speculation. A. Just give me a second here. Again, it's simply -- it's speculation about what is being said by Debbie in this letter, or email. And it appears, again, inferring from this is that, you know, the question of difference in methodology was do you include a premium or not. In the calculation of a repurchase price. Q. And CSC did and CHL did not?
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MICHAEL W. SCHLOESSMANN direct your attention to the second page of that email, starting at 51, where he reproduces a policy on high risk products. Do you see that? A. Yes. Q. Are you familiar with that policy, that looks like it extends from page 51 through 52? A. I'm going to take a closer look. Q. Yes. A. Okay. Q. Does this reflect a policy that John McMurray put together in his capacity as chief credit officer? MS. CONCANNON: Objection; calls for speculation, lacks foundation. A. I would be making that conclusion only based on John's note, which appears to include this policy that he I believe is claiming ownership of, at least indirectly.
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: Objection. Q. Is that -- I just want to understand which entity did which, as you understand it. MS. CONCANNON: If you know. A. As a general matter, what I do know is our contracts typically called for the repurchase at par plus accrued interest. And that if premiums were to be included, those were specifically negotiated repurchase terms. Q. Okay. A. That isn't what is necessarily -- Debbie is suggesting. That's my actual recollection just of the premium issue generally, and what were in many of our contracts. Although, again, each contract can be different and separately negotiated. Q. Okay. If you turn to page 350, this is the email from John McMurray to Scott Kurzban, copying a number of others. And actually I'd like to
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MICHAEL W. SCHLOESSMANN Q. You've seen that policy before from him; right? A. It is -- it's vaguely familiar. I don't remember looking at this specific one. But as I read through it these are, you know, concepts that aren't altogether unfamiliar to me. So I don't know in what context I may have, you know, seen this or heard of these in the past. Q. Was this a policy that he wanted CFC to adopt or CHL, do you know? MS. CONCANNON: Objection. A. I believe -- I believe this is a Countrywide Home Loans, you know, policy. Some of it, when I see all repurchases, a references to all repurchases going through LERC, you know, I'm not sure if he intended for those to have -- I'm not sure of whether he intended that specific policy to, you know, impact Countrywide Securities Corporation. Q. In the first paragraph under
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MICHAEL W. SCHLOESSMANN the heading, there is a definition given for high risk product, and he states "a high risk product is any product where the ALCO or RCC triggers are reached." Do you know what that means? A. I don't specifically. Q. Okay. Is ALCO the asset liability committee? A. I believe so, yes. Q. And which entity is that a part of? A. I'm not sure if that was Countrywide Bank or Countrywide Home Loans or both. I don't know. Q. How about RCC? MS. CONCANNON: Objection to form. Q. Do you know what that stands for? A. Actually I don't. Q. Okay. Under the next paragraph, it states "risk retention. As a matter of policy, we do not retain credit risk on high risk products."
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MICHAEL W. SCHLOESSMANN But again, it wasn't one I, you know, recollect, you know, specifically. Q. Okay. If you drop down to the bottom of the page, it says "underwriting approach. Loans must be documented and underwritten such that there is no question that each loan clearly meets all applicable program guidelines, including exception guidance, if any. Loan exceptions are not allowed unless they can be documented to demonstrate that they explicitly conform to the exception guidance." Do you see that? A. Yes. Q. As of mid-2006, Countrywide Home Loans actually didn't originate loans that included documentation of how the loan exceptions conformed to exception guidance with respect to the HELOCs and closed end seconds in dispute here; right? MS. CONCANNON: Objection.
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MICHAEL W. SCHLOESSMANN Did you understand that to be CHL's policy? MS. CONCANNON: Objection; lacks foundation. A. I don't recall that specifically. Q. Okay. Do you recall any discussions during the time period 2005 through 2007 suggesting that Countrywide's policy was not to retain risk on high risk products? MS. CONCANNON: Objection. A. I don't recall this specifically. This policy. I mean, it's not entirely surprising to me. I mean, the email chain includes a reference to an HSBC transaction where there were, you know, a number of loans we were buying back as a result of post-closing due diligence, and there was concern about that and some level of surprise within senior management. And so, you know, when I take that together with this, it's not a surprising policy.
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MICHAEL W. SCHLOESSMANN Q. Did you understand that question? I know it was a long one. A. I understand what you're asking. I think there's -- you're making an assumption that HELOCs are a part of this high risk product policy. I'm not sure what, you know, loan products this includes. Q. Okay. A. The HSBC -- HSBC loans were not the HELOCs that we were securitizing with MBIA or other monolines. Q. Okay. Is it fair to say that just as a matter of practice as of this point in time, 2006, Countrywide Home Loans did not document how loan exceptions explicitly conformed to exception guidance? MS. CONCANNON: Objection; lacks foundation, assumes facts not in evidence. A. Sorry, so we did not -- are you suggesting, are you asking me to acknowledge that we did not document how
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MICHAEL W. SCHLOESSMANN a loan conformed? Q. To exception guidance. A. What I'm confused about is, are you asking me as a general matter as to Countrywide's originations? Q. Yes, I'm asking you with respect to the HELOCs and closed end seconds in the MBIA securitizations, which Countrywide Securities Corp. reviewed as part of its underwriting due diligence. Isn't it a fact that there was not full documentation of how exceptions conformed to any exception guidance? MS. CONCANNON: Objection. A. I don't know to what extent that's true. Q. Okay. You just don't know one way or the other? MS. CONCANNON: Objection; mischaracterizes prior testimony. A. I don't know how to address that. I don't know to what extent that is a correct statement.
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MICHAEL W. SCHLOESSMANN communications and/or work undertaken in connection with this litigation. MR. SELENDY: Well, no. The witness testified as to a fact. And I'm asking what was your source for that fact. MS. CONCANNON: And I am instructing him to answer within the parameters of how I just defined it. A. Within those parameters, there are members of the team, when asked specific recollection about the most recent batch of claims that MBIA had aggregated over many months, I think there were some, you know, close to 9,000 claims that MBIA asserted at a single, on a single day in June. In the course of our initial review, it was discovered that we were being claimed on loans that had been paid in full, loans that were current. And just as a sort of high level summation of those 8,800 or 9,000
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MICHAEL W. SCHLOESSMANN Q. Okay. A. How many loans, what percentage of loans, that covers. Q. Okay. A. If at all. Q. Okay. By the way, yesterday you mentioned that you believed the reason MBIA's repurchase demands were not being granted, except for the few hundred which have, is that they were of poor quality. Have you reviewed any of those repurchase demands yourself? MS. CONCANNON: Objection; mischaracterizes prior testimony. A. No. Q. Okay. Who conveyed to you that the quality of the repurchase demands coming from MBIA was not -- was not good? MS. CONCANNON: Objection. And I would instruct you not to answer to the extent that it might reveal attorney-client
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MICHAEL W. SCHLOESSMANN claims, that was clearly suggestive of, you know, quality, that there was no basis. Without even looking at the loan file, the fact that a loan had been paid in full suggests to me that that is not a particularly thoughtful repurchase attempt by MBIA. So that is, you know, the basis for or a basis for, you know, my comment yesterday. Q. Okay. So the basis was that there were certain loans within the repurchase demands as to which the borrower had already repaid the loan? MS. CONCANNON: Objection; mischaracterizes prior testimony. Q. I just want to understand. Because you made that very strong statement of fact. A. Yes. Q. And I want to know the basis for it. So if there is any other basis for that statement, I would like to know that as well.
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: Objection; asked and answered, argumentative. Q. Okay. You've given me the example certain loans within the population concerned loans that were repaid in full. Other loans you say were performing loans. And you said that that's without regard to the quality of the analysis as to material breach, it's simply that without looking at the loan files, these attributes of the loans could be identified and were identified to you as problems in the repurchase demands. Right? MS. CONCANNON: Objection; mischaracterizes prior testimony. A. Those two examples were cited to me, and they are two that I recall specifically being informed of in connection with the June claim submission by MBIA. Other discussions that we may have had would have involved -- around these claims specifically, would have involved discussions in consultation with
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MICHAEL W. SCHLOESSMANN been either of those two groups that would have summarized for me, sort of at a high level, you know, the facts that, you know, the loans were current or had been paid in full. Q. How many people are under Shareef Abdou's group? A. I'm not sure. Q. Do you know any of the other individuals who are in that group? A. In Shareef's, no. Q. How many are in the Jacksonville group? A. I believe there, and I'm not sure, there is probably three or four, maybe five. Q. Okay. So the total between the two groups, about ten people, or you just don't know? MS. CONCANNON: Objection; mischaracterizes prior testimony. A. I don't know how many are in Shareef's group. I would imagine it's twenty to thirty, perhaps more. But I'm
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MICHAEL W. SCHLOESSMANN not sure of the number. It's certainly more than the five implied by your comment there. Q. Okay, I appreciate that. MR. SELENDY: The tape is about to run out. Would you like to take a break? MS. CONCANNON: We should definitely go off the record to change the tape. MR. SELENDY: We will go off the record. I'm happy to continue in a minute if you want. We can go off the record. THE VIDEOGRAPHER: Going off the record at 10:25 a.m., this marks the end of tape No. 7. (A recess was taken.) MR. SELENDY: Let's mark this as 577. (Plaintiff's Exhibit 577 for identification, document entitled "notes document entitled ID099D2520D33CC8D8852575840003631E,"
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MICHAEL W. SCHLOESSMANN counsel. And that's why I'm, you know, drawing the line there. Q. Who cited those problems to you? Who specifically? MS. CONCANNON: Objection. A. I don't know if I recall specifically who. I'm actually not sure. Q. Was it a team that brought that to your attention? MS. CONCANNON: Objection. A. It would have been somebody working on those claims. Q. Is that part of the monoline segment of your group? A. Yes. Q. And you just don't recall. Who's in that segment of your group, generally speaking who would be responsible for evaluating those loan files from MBIA? A. It's an investor audit team led by Shareef Abdou. And there is a team in Jacksonville that also works on the monoline claims. So it could have
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MICHAEL W. SCHLOESSMANN production numbers CWMBIA 15897317 through CWMBIA 15897347.) THE VIDEOGRAPHER: We are back on the record at 10:44 a.m., this marks the beginning of tape No. 8. BY MR. SELENDY: Q. I've asked the reporter to mark as Exhibit 577, CWMBIA 15897317 through 347. I'm not going to ask you to read the very small print on the first couple of pages. A. Thank you very much. Q. Unless you really have a hankering to. I would like to ask you about, a few questions about the attachment, the eighth periodic mortgage fraud case report. A. Okay. Depending on your questions, how carefully do I read this. Q. Have you seen these case reports coming from MARI? MS. CONCANNON: Objection; vague.
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MICHAEL W. SCHLOESSMANN A. I do. Q. And that's one of the MBIA securitizations; right? MS. CONCANNON: Objection. Q. Feel free to take a look at the amended complaint. A. Where is the complaint? If you are really asking me to confirm. Q. Go ahead and confirm it. Paragraph 29. A. Yes, that appears to be one of the deals in the complaint. Q. Okay. So on the exhibit, if you would turn to page 213. MS. CONCANNON: Have you had a chance to review the whole document? THE WITNESS: No. Let me, I apologize, let me have just another two minutes, please. A. Okay. Q. The email on page 213 extending on to 214 appears to be one sent from Chris Sonnycalf at Watterson
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MICHAEL W. SCHLOESSMANN A. I don't know if I've ever seen this. This was not a report I would have regularly reviewed. Not that I haven't, one wouldn't have come across my desk at some point in time. Q. Okay. So this is not something that you tracked in your ordinary course of work? A. Not that I can recall. Q. All right. Let's skip that then. MR. SELENDY: Let's mark as 578, CWMBIA 13132210 through 15. (Plaintiff's Exhibit 578 for identification, email dated June 22, 2006, production numbers CWMBIA 13132210 through CWMBIA 13132215.) Q. And the subject line, I know the email is reproduced in an unusual fashion. The subject line appears in a few different places, including on page 21, where it says "CWHEQ 2006-E status update." Do you see that?
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MICHAEL W. SCHLOESSMANN Prime to Tonya LyBrand. Does that look right to you? MS. CONCANNON: Objection. A. That's how it appears to me. Q. And in the email itself he says -- and that, by the way, that was one of the third party due diligence outfits that CSC used in connection with these HELOC securitizations; right? MS. CONCANNON: Objection; asked and answered. A. Correct. Q. Okay. He states "we've completed the review of approximately 110 loans at this time. Overall kicks have been limited primarily to missing documents and make up about 45 percent of the loans reviewed. The culprits seem to be missing HUDs and/or other critical documents, such as title, verbal VOEs and some appraisals." Do you see that? A. I do. Q. Do you remember we talked
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MICHAEL W. SCHLOESSMANN yesterday about what documents were critical and what were not. Would you agree with Watterson Prime that the HUDs, title and verbal VOEs are critical? MS. CONCANNON: Objection. A. Not necessarily. For instance, I don't know what title refers to. And I think I stated yesterday that the criticality of a document would depend on, you know, a number of factors or could depend on a number of factors in terms of how we were going to assess the missing document or any missing document in the context of a particular loan file. Q. Do you recall any discussions between CSC -MR. SELENDY: Let's just pause for a second here. Are you ready? THE WITNESS: Yes. Q. Do you recall any discussions between CSC and Watterson Prime regarding the identification of critical documents in the loan files?
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MICHAEL W. SCHLOESSMANN "the original credit sample consisted of a random and adverse sample of 200 loans." Do you see that? A. I do. Q. And if you still have the other exhibit in front of you, Watterson Prime had said well, the review was only 110 loans; right? MS. CONCANNON: Objection. A. Well, I don't know whether -this was sent out apparently on June 20th, the first sentence says "we've completed a review of approximately 110 loans at this time." So in my mind that's not suggesting that the entirety of the population had been reviewed, but just it was a status report. That's what I'm inferring from this note. Q. Okay. So you would expect in the ordinary course that if the summary said 200 loans were part of the sample, that the due diligence outfit would actually have looked at 200 loans, not at
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: Objection. A. I don't. I don't recall any conversation I ever had with Watterson Prime around that issue. MR. SELENDY: Let mark as -keep that document handy. Let's mark as 579, the CSC executive summary on the same transaction, CWHEQ 2006-E. (Plaintiff's Exhibit 579 for identification, CSC executive summary for CWHEQ 2006-E, production numbers CW 0000013833 through CW 0000013839.) Q. And this is the executive summary that CSC prepared and sent to MBIA in connection with the due diligence on the CWHEQ 2006-E transaction; right? MS. CONCANNON: Objection. A. I don't know if we had sent that to MBIA. It appears to be the due diligence summary for that 2006-E deal. Q. Okay. And in the summary, it states, under "scope of diligence," that
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MICHAEL W. SCHLOESSMANN say 110? MS. CONCANNON: Objection; argumentative. Q. Is that right? A. If the executive summary indicated that our sample size was 200 loans and reported out that we reviewed the 200 and reported the findings on that 200, then yes, I would have expected that we would have reviewed all the loans indicated as reviewed in the executive summary. Q. Okay. Thank you. MR. SELENDY: Let's mark as Exhibit 580, CWMBIA 11029957 through 62. (Plaintiff's Exhibit 580 for identification, email dated July 24, 2006, production numbers CWMBIA 11029957 through CWMBIA 11029962.) Q. My first question is whether this is an email exchange between yourself, Debora Brown and others, in July of 2006.
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MICHAEL W. SCHLOESSMANN A. It appears to be, yes. MS. CONCANNON: If you haven't completed the document, reviewing the document, please do. THE WITNESS: Okay. A. Okay. Q. Okay. So I'd like to focus your attention on first the email starting on the third page of the document, that you send to Josh Adler in secondary marketing. Do you see that? A. Yes. Q. And you say "in addition to the CLTV issue, it appears that we regularly come across a significant amount of data issues on CHL production." What were the data issues that CSC was having with the CHL production at this time? A. I don't specifically recall specific data attributes, other than what I've read. The CLTV issue that was cited in the string of emails is familiar to
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MICHAEL W. SCHLOESSMANN to it. Q. Did that lead to the reporting of incorrect data by CSC? MS. CONCANNON: Objection. Q. Do you know? A. When you say reporting of incorrect data, to? Reporting to whom? Q. To rating agencies or to investors. A. I don't know to what extent the data we provided, if it was on CHL loans, again, we would be, again, providing that data on behalf of CHL. And I don't know to what extent, you know, I'm seeing references here to the data, you know, being fluid, you know, post-funding. So to what extent that data, if it was wrong at any point in time, was corrected before any tape submission. Q. Okay. You don't know the answer? A. I simply don't know. Q. Okay. On the first page of
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MICHAEL W. SCHLOESSMANN me. There is a reference also to, you know, margin. But beyond that, I just don't specifically recall. Q. What was the CLTV issue? A. Just that there was, and again, I'm just recollecting specifically by virtue of, you know, the note that I believe I sent out. That CLTV -- that we had reason to believe CLTVs on correspondent lending loans, or some correspondent lending loans were incorrect. Q. Do you know, can you describe the nature of the errors that you saw on those CLTVs? MS. CONCANNON: Objection. Q. In what respect were they incorrect? A. Just that they were inconsistent with what we -- I believe they were inconsistent with what we had seen before. And I don't remember if it was investors' due diligence that brought the issue up or what called our attention
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MICHAEL W. SCHLOESSMANN the document, there is an email from yourself to Garrett Galati. What was his responsibility at this point in time, July 2006? A. As I recall, Garrett Galati was, I know he was in secondary marketing, on the trading desk in secondary. And Garrett worked on second lien transactions. Q. Okay. And you're responding to a short email from him that says "please see the explanation sent to Debora below. It is not an analyst problem as she has insinuated. This is a widely known issue and CSC needs to add an extra step to their settlement process." And you respond and you say "I don't think that really addresses the issue of bad data, e.g. CLD's CLTV data, as I'm under the impression that those values would not all have been updates on the AS 400. Additionally, CLTVs aside, even though it appears that the data like
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MICHAEL W. SCHLOESSMANN margins is getting updated on the system, I think someone should look into why the data is getting incorrectly entered on the front end by production presumably." Do you see that exchange? A. Yes. Q. Was there an ongoing discussion between CSC and CHL as to how CHL had to improve the data that they provided on their loan origination? MS. CONCANNON: Objection. A. There was constant interaction between CSC and CHL, we worked very closely with them. We were there -- you know, we worked for them on securitization transactions, we sold whole loan packages to our clients. And during the course of all those transactions -- whole loan packages, by the way, that involved Countrywide production. And so this, you know, this is one of, I would imagine, any number of other issues that we were, you know,
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MICHAEL W. SCHLOESSMANN vague, overbroad. A. As I said earlier, you know, there is a general understanding that CLTV is a, you know, loan attribute that you would evaluate in projecting, you know, performance on a loan or sizing credit support, yes. Q. Okay. MR. SELENDY: Let's mark as Exhibit 581, document CWMBIA 8782496 through 501. (Plaintiff's Exhibit 581 for identification, email dated August 9, 2006, production numbers CWMBIA 8782496 through CWMBIA 8782501.) Q. This is an exchange between yourself and Ryan Watts. A. Give me a second to read the whole thing. Okay. Q. What was Ryan Watts' function as of August 2006? A. Ryan managed the collateral analytics group for the transaction
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MICHAEL W. SCHLOESSMANN confronting, just as you would in the ordinary course of business, you know. And so, you know, I think, you know, again, I can only speak to what I've said in my note and what I've read, because I don't have specific recollection about, you know, this conversation. I do, as I said, have a recollection around the CLTV issue. But I don't have the proper context to frame it beyond that. Q. The CLTV issue was important because that was one of the primary indicators of the creditworthiness of the -- the ability to repay of the borrower; right? MS. CONCANNON: Objection; assumes fact not in evidence. MR. SELENDY: I'll strike that. Q. CLTV was important because that's one of the primary attributes that would be evaluated in trying to assess the credit quality of a loan? MS. CONCANNON: Objection;
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MICHAEL W. SCHLOESSMANN management group within Countrywide Securities. Q. And he appears very upset in this email that he's writing to you. Do you recall the issue that he was raising? MS. CONCANNON: Objection to the characterization of the document, which speaks for itself. Q. Let me just ask you, it's pretty clear he was extremely upset; isn't it? MS. CONCANNON: Objection. A. It would appear from his email to me that he was a little bothered, yes. Q. Okay. What was he so upset about? MS. CONCANNON: Objection. A. I don't have a specific recollection about these -- this event. Although just from, you know, the note exchange I would infer that it had to do with Ryan feeling that he and his group were being blamed for the delays, you know, caused by not getting, you know,
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MICHAEL W. SCHLOESSMANN timely data. And therefore not marketing the deal when the trading desk, you know, wanted to market the deal. Q. Was that a recurrent problem for the CSC analysts in getting timely data from CHL? MS. CONCANNON: Objection. A. Again, because I don't recollect specifically, Ryan's obviously implying or outright saying that, you know, this is something that they've been challenged with in the past, in terms of getting the needed data from secondary marketing so that they could do their jobs, and he didn't feel that it was their job to chase down the data. Q. Did they need that data in order to do their part of the due diligence that Countrywide Securities was handling? A. This didn't have to do with the due diligence, per se. This had to do, as I've mentioned earlier, they would construct, at the direction of the
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MICHAEL W. SCHLOESSMANN Q. Was there tremendous pressure on the analysts because of the huge volume of deals that CHL and CSC were putting together? MS. CONCANNON: Objection; assumes facts not in evidence, vague, overbroad. A. I think as a general characterization that's correct. There were pressures on everybody involved in the transaction process due to timing and, you know, the volume of the transactions that we were doing. MR. SELENDY: Let's mark as 582, CWMBIA 11035434 through 38. (Plaintiff's Exhibit 582 for identification, email dated August 12, 2006, production numbers CWMBIA 11035434 through CWMBIA 11035438.) Q. Okay. This is an August '06 email exchange between yourself, Mr. Watts and Ms. Brown; right? A. Just give me one more minute, please.
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MICHAEL W. SCHLOESSMANN mortgage company, the tape that would go out to the rating agencies, that would allow us to -- and for preparation of the marketing materials for a deal, it was a collateral analyst function to aggregate that data and put together, you know, either the rating agency tape or whatever stratifications we were going to need for purposes of preparing marketing materials in which we, you know, marketed, you know, the bonds on the transactions. Q. So this group was responsible for getting the data from CHL that would be used to put together the package going to the rating agencies in connection with the securitizations? MS. CONCANNON: Objection. A. In this securitization and others that we were doing on behalf of CHL, it was, you know, often the case where we would put together the tape for them, and that certainly appears to be the case here by virtue of the email string.
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MICHAEL W. SCHLOESSMANN Okay. Q. This is an email exchange between yourself, Mr. Brown -- Mr. Watts and Ms. Brown; right? A. Yes, appears to be. Q. Okay. In Mr. Watts' email to you, he says "apparently the desks" -I'm sorry. Yes, he says "apparently the desks have been instructing the prime analysts to change existing data in WLTs, consequently due diligence whole loan trades are funding late." Do you know what issue he's referring to there with respect to the instructions from the desks to change data? MS. CONCANNON: Objection. A. I have a general recollection of the, you know, the broader issue. Q. Okay. What was the broader issue? A. The broader issue, the data, as I recall this issue dealt with loans that we were buying through the conduits
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MICHAEL W. SCHLOESSMANN and then later securitizing. The desks involved are the ARM desk that did a lot of these conduit, you know, securitizations. So there was a process by which we would bid on a package, data got entered. If we won the package, we would proceed to do our due diligence and, you know, manage the other transaction management components before we closed the transaction. In that intervening, call it a month, you know, the data remained fluid as we were doing our due diligence. And we had issues with multiple groups, in this case, you know, the desk, the collateral analysts and you had the due diligence group, and it created confusion and potential for data integrity issues when you had, you know, the desk making changes to data while we were still completing our due diligence. So you might have the situation where, you know, that data would subsequently be
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MICHAEL W. SCHLOESSMANN had a chance to read it. A. Okay. Do you want me to review the -Q. Let me ask you questions. If you want to focus in on anything, as always, feel free. A. Sure. Q. First, do you recall this document? A. I recall in general, you know, the process and the notion of coming up with our, you know, Countrywide Securities Corp. repurchase policy. Q. Did you review this in connection with your preparation for the deposition? MS. CONCANNON: Objection. A. I don't believe I've seen this as part of my preparation. Q. Okay. And were you proposing here a repurchase policy that would extend to the MBIA securitizations, among others? A. I don't -- no, that would not
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MICHAEL W. SCHLOESSMANN overwritten by the due diligence folks, or vice versa. And so we wanted a period of time in which to lock down the data so that we didn't have data integrity challenges. And that was the general issue. And again, this, as I recall, was specifically or specifically involved conduit loans that we purchased as opposed to CHL loans. Q. Okay. MR. SELENDY: Let's mark as Exhibit 583, a document that you sent others entitled "omnibus repurchase policy," dated August 12, 2006. (Plaintiff's Exhibit 583 for identification, email dated August 12, 2006, with attachment, production numbers CWMBIA 00100425061 through CWMBIA 00100425073.) Q. And let me know when you've
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MICHAEL W. SCHLOESSMANN have been my understanding as it related to what we were trying to bring within our purview at Countrywide Securities. You know, given that the MBIA loans were Countrywide loans, Countrywide securitizations. Q. Well, you say in the second paragraph "I want this to be an omnibus policy, so we need to ensure that it contemplates every possible category of repurchase, i.e. this policy should cover every type of repurchase transaction in which the following apply: A, a Countrywide entity is repurchasing a loan, and B, CSC has some involvement, including CSC having securitized the loan, sold the loan, purchased the loan, or a business relationship with the claimant." Do you see that? A. Yeah. Which is why I led off by saying it was my understanding that this would not have been a, an MBIA transaction would not have come, you
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MICHAEL W. SCHLOESSMANN know, under our purview. It wasn't something we wanted to or felt like we needed to control. What is unclear to me from my own note is including, you know, the Romanette 1, securitize the loan. Q. Right. A. I don't know if I was intending that to mean broadly speaking we underwrote the securitization, or we sponsored, as we often did on all of our own transactions, where we were effectively the principal in those transactions as opposed to just the underwriter. My sense is that we were, you know, again, just based on my general recollection, that it would not have included MBIA transactions, although it's unclear to me in reading this whether I intended that to be the case or not. Q. Okay. Because obviously those MBIA securitizations did involve deals where a Countrywide entity would be
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MICHAEL W. SCHLOESSMANN Q. Okay. And do you know whether the policy that you ended up with was one that in fact would cover deals where CSC acted as underwriter but not sponsor? MS. CONCANNON: Objection. A. No, I do not. Q. You don't know? A. I don't know. Q. Okay. Here you say, with respect to the repurchases, if you look halfway down the page, you say "we absolutely" -- on the first page. "We absolutely can never repurchase any loan from a trust unless such repurchase is unambiguously contemplated and specifically permitted by the securitization documents." Do you see that? A. Yes, I do. Q. And here basically, as part of the policy, in August '06 you were suggesting that at this point you're going to construe any ambiguity against the repurchase demand; right?
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MICHAEL W. SCHLOESSMANN repurchasing a loan and where CSC securitized the deals. MS. CONCANNON: Objection. A. Well, it's unclear to me. Right -Q. Because you don't know how you meant securitize? A. By securitize, CHL, right, just understanding the transactions as they were, CHL securitized the loans, not us. We were an underwriter. Again, my general recollection is we would not have sought to bring those under our purview. And I think you can read that consistently with this, if you ascribe the meaning to securitize that I've suggested. Q. Do you know whether the proposed omnibus repurchase policy was ever implemented? A. I don't know. My general recollection is we did end up with a policy, whether it was this one, I can't say for sure.
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: Objection; mischaracterizes the document. A. Yeah, I don't think I draw the same inference you do. Q. Okay. What did you mean by that statement? A. So this, the reason I made this point emphatically was that we had concerns, I think I described yesterday, from an accounting perspective all of these deals were done as sale transactions. There was a FAS 140 ruling that required limited involvement of the sponsor or seller after the securitization. These were supposed to be, as I referred to, quote, braindead, you know, trusts. So you could not, a seller, sponsor or servicer could not do things even if it was what an investor wanted, for instance, unless that action was sanctioned by the documents themselves. So I did not want people -for instance, if a trading desk said can
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MICHAEL W. SCHLOESSMANN we buy out this loan, you know, as an accommodation, I did not want people just reacting without being very thoughtful, without being very methodical about ensuring that such action was actually contemplated and permitted under the express terms of the securitization documents. So I don't think that's at all different than what I've described yesterday. Q. Okay. So this statement that the repurchase is unambiguously contemplated, you regard as consistent with the statement that the reps were subjective and they could be read broad enough to cover repurchases that were, for example, outside of guidelines or not prudent origination? A. Yes, I believe so. To put another way, or my way, I'm not suggesting that with respect to inherently subjective representations and warranties, we've alluded to a couple, you know, yesterday, that we couldn't
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MICHAEL W. SCHLOESSMANN in, you know, this process. Q. And had you asked them to put together the original draft of the repurchase policy? MS. CONCANNON: Objection. A. I may have charged Debbie with that. But both of them would have been under Debbie's management. So whether I asked them directly, I recall generally having, you know, a number of conversations around this repurchase policy with both of them as well as Debbie. Q. Okay. And this draft is one that Debbie Brown would have signed off on? It says she reviewed, revised it. MS. CONCANNON: Objection; calls for speculation. A. I would assume as much given her role and the fact that this document, you know, clearly indicates that she's reviewed and revised the document. But I don't have knowledge of that specifically.
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MICHAEL W. SCHLOESSMANN exercise subjective judgment. And that in order to buy out a loan, you know, I'm not suggesting here, I don't believe, that we had to determine beyond a shadow of a doubt that the rep had been, you know, breached. Especially given its inherent, or some of their inherent subjective quality. Q. Okay. And then with respect to the attachment, the policy, the policy draft, I guess, it states "last reviewed, revised June 1, 2006. Original authors R. Malott and M. Nadeau." Do you see that? A. Yes. Q. What were the responsibilities of R. Malott and M. Nadeau as of June 2006? A. Rex Malott -- sorry, Rex Malott and Michael Nadeau were both in my organization. Michael was in our post-closing risk management area. I believe Rex was as well, although I'm not certain. In any case he had involvement
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MICHAEL W. SCHLOESSMANN Q. Do you recall having any disagreements with the form of the policy as laid out in the draft here? MS. CONCANNON: Objection. A. I haven't studied this carefully. If you'd like me to, I can. I will say we had a number of conversations spanning months over this repurchase policy and it was being done at my direction. Now, whether every draft accurately reflected, you know, what I had communicated, I don't know. But I don't recall there being any, you know, disagreement or dispute amongst our group over that policy. I think they were taking my lead and trying to craft a policy that contemplated what I had asked. Q. Well, let me ask you a couple of specific points on that. First of all, post-closing risk management, what was that -- what was that group's responsibility? A. Within our transaction, within
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MICHAEL W. SCHLOESSMANN our transaction management group, they would have handled any of the responsibilities that came about, you know, after loans were -- and this was principally in connection with our conduit purchase activity. So where we bought loans in, post-closing there were a number of things that needed to be tended to, including servicing transfers, you know, enforcement of, you know, early payment defaults and a variety of other things I can't recall specifically. Q. Okay. And under 4.2.4.2 of the draft, it's on page 065, it says "repurchase reason, evaluate the repurchase request to identify one of the following repurchase reasons." And then it lists due diligence kick, rep and warranty breach, early payment default, rate and term modifications. Do you see that? A. Yes. Q. Were those the four basic reasons for repurchase requests as of
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MICHAEL W. SCHLOESSMANN in some select whole loan transactions, as I indicated previously. There was no early payment default protection or covenant in any of the HELOC documents, so far as I can recollect. And the modifications, I'm not sure if that related to the HELOC deals or not. Q. Okay. I show you a document previously marked as Exhibit 175. A. Okay. Q. Okay. What does this document reflect? A. This document appears to reflect the challenge in procuring documentation on full spectrum lending loans, which were, you know, our subprime first lien, you know, loans. I don't believe it has any, you know, impact or relevance to the HELOCs in my recollection. But in short, it was a challenge, again, operationally based, not as a product of underwriting, getting timely documentation for purposes of
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MICHAEL W. SCHLOESSMANN that time, August '06? MS. CONCANNON: Objection; vague, overbroad, lacks foundation. Q. For securitizations in which CSC was involved. MS. CONCANNON: Objection; vague, overbroad. A. This doesn't refer to securitizations specifically. And I haven't had a chance to think through the implications of securitization. As I said, the group was principally charged with post-closing activities around our whole loan purchase program. Q. Okay. Would these same four reasons be applicable to HELOC securitizations, do you know? MS. CONCANNON: Objection; lacks foundation, assumes facts not in evidence. A. Well, certainly some would not be. There was no concept of, you know, post-closing due diligence as there was
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MICHAEL W. SCHLOESSMANN completing our due diligence reviews. And I expressed to Scott, as I did to others on a number of occasions, just the challenges we were having from a process standpoint getting timely documentation so we could complete our review. Q. You said in your email to Scott Kurzban, "Scott, this is preventing us from performing the level of due diligence required of securities underwriters. I am concerned about having to in effect cut corners because we don't get complete files from CHL to review." When you made that statement and you referred to complete files, were you referring to complete mortgage files from CHL? MS. CONCANNON: Objection. A. I was referring to, I believe I was referring to complete origination files. Q. Okay. And the problem is that if you didn't have the complete
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MICHAEL W. SCHLOESSMANN origination files, they were missing documents, and that impaired the due diligence that CSC had to do on those transactions; right? MS. CONCANNON: Objection; mischaracterizes the document. A. It really goes to, you know, delaying the process, in that we were forced to chase those down from a variety of sources as opposed to having them, you know, delivered in a, you know, complete file the first time around. Q. Is it the problem that you couldn't complete the due diligence until you had the missing documents? MS. CONCANNON: Objection. A. As I generally recollect on full spectrum, it had to do with appraisals, for instance, that were imaged, for reasons I can't recall specifically, imaged in a separate database. And so what we were asking, knowing that that was how full spectrum imaged their documentation heading into
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MICHAEL W. SCHLOESSMANN know, some of the doc challenges. Q. How does cutting corners relate to delay? Isn't cutting corners skipping steps? MS. CONCANNON: Objection; mischaracterizes the document and prior testimony. A. As I said, I don't know if I was referring to anything in particular. I was, you know, trying to perhaps being a little provocative because I wanted -these were issues we had challenges with secondary marketing, the rest of the mortgage company, that we wanted, you know, perhaps greater level of responsiveness in terms of helping us do our jobs. Q. When you're referring to the mortgage company, you're referring to CHL? A. CHL, yes. Q. Okay. Let me show you a document previously marked as Exhibit 162.
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MICHAEL W. SCHLOESSMANN these deals, we knew we would have to tap, you know, multiple sources to get complete files. So I think it was, if not universally the case on the full spectrum loans, on a significant, you know, part of those loans that we'd be reviewing that we wouldn't have appraisals and perhaps other documents without going to other sources. Q. When you said you were concerned about having to cut corners because you don't get complete files, what did you mean by that? A. Well, my sense is that I was trying to impress upon secondary marketing, you know, the need for action. And in terms of referencing cutting corners, my sense is that we were concerned about delays and having to push our due diligence review into a post-closing phase, as we did on a number of these transactions, given the limitation in timing, as well as, you
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MICHAEL W. SCHLOESSMANN A. Okay. Q. Okay. This is another exchange about missing documents from Countrywide Home Loans; right? MS. CONCANNON: Objection. A. Yes, it appears to be. Q. And this time it does concern the HELOCs and the seconds; right? MS. CONCANNON: Objection. A. Yes, the correspondence references 2006-G. Q. Okay. And this is an email exchange between Tonya LyBrand and yourself, among others, in September 2006? A. Yes. Q. She states to you "historically, our HELOC deals and seconds have been our biggest challenge in terms of procuring missing documents." As of that point in time, was that correct? MS. CONCANNON: Objection. A. I don't have reason to believe
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MICHAEL W. SCHLOESSMANN it wasn't. Q. Okay. And she states "we always seem to run against the clock to get things cleared and meet deadline expectations from the desk, still leaving a long list of loans that can't be completed for review. We need to discuss because I don't have a resolution to propose." Do you recall discussions with Ms. LyBrand about this problem of missing data and having to close deals where the long list of loans can't be completed? MS. CONCANNON: Objection; mischaracterizes the document. A. I certainly have general recollection of this being an ongoing topic of discussion, you know, with Tonya and others in the due diligence group, regarding, I think you said missing data, regarding missing documentation, as is suggested here. Q. Were you able to find out why there was a problem in getting the
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MICHAEL W. SCHLOESSMANN documentation. Those are two that come to mind. Q. Can you think of any other reasons? MS. CONCANNON: Objection. A. Other reasons, you know, could have been, again, other trailing documents, other documents that for one reason or another got imaged separately, or separate and apart from the origination file. And that could have to do with timing as well. Q. What about documents that were never in the application to begin with? MS. CONCANNON: Objection; assumes facts not in evidence. A. Documentation that weren't -that were never procured as part of the origination? Q. Yes. A. I'm not sure how to answer that. Q. Was that also a problem, that there were documents that were simply not
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MICHAEL W. SCHLOESSMANN documents from CHL for these HELOC and second deals? MS. CONCANNON: Objection. A. Certainly so some of the reasons that were explained to us and that we came to know as second liens were often done in conjunction with a first lien. And so you had, you didn't necessarily have duplicative documentation. These were simultaneous first and second liens that were done together. And so oftentimes some of the missing documentation existed in the first lien file. There were issues, as I described yesterday, of inherent trailing documents, like the HUD1, that would -weren't required to be completed by the closing agent until, you know, three days after closing. And so those would follow and get imaged on a separate database outside of the imaged files. I'm sure there were a variety of other reasons that explained, you know, the missing
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MICHAEL W. SCHLOESSMANN part of the origination file that you wanted to see as part of your due diligence? MS. CONCANNON: Objection. A. I testified yesterday as to our ongoing experience contending with some of these missing document issues, in that when we had embarked on an effort to procure the documents, that it was, in the case -- in most of the cases it was a matter of being able to procure the document as opposed to the document never having existed. And so we had developed, as I alluded to this body of experience, we knew from having done so many of those transactions, while very frustrating, we knew that the missing documents were a function of process and not the underwriting of the loan itself. I'll leave it at that. Q. Are there any contemporaneous -- I mean as of '06, '07, any contemporaneous memoranda or reports
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MICHAEL W. SCHLOESSMANN reflecting the conclusion you've just given, do you know? MS. CONCANNON: Objection. A. I don't know. Q. Okay. Because I haven't seen any, that's why I'm asking. Do you know whether CSC came to some kind of a written report saying well, we're okay with missing documents from CHL because we have an experience that these are just process issues, not substance issues? MS. CONCANNON: Objection to the form of the question; calls for speculation, incomplete hypothetical. A. I'm not aware of documents -excuse me, documentation, per se, that would exist. I do have specific recollection around having conversations that here is our thought process, I think I walked you through that yesterday, where we had due diligence that we needed to complete and we were missing documents and we would, you know, proceed to
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MICHAEL W. SCHLOESSMANN there was unprecedented, yeah, loan volume at Countrywide and every other originator. And yes, within my group at least there was a significant amount of, you know, pressure in terms of just the time demands of the job and the time frames and the sheer volume of work that we were all tasked with doing. Q. On the second page of this document, there is a statement by, it looks like Ms. LyBrand to you, saying -sorry. Is that to you? Are you forwarding it to Darren Bigby and Garrett Galati, is this you saying our doc exceptions are extremely high? A. It looks as though that's my email. Q. And say "our doc exceptions are extremely high on this HELOC deal and likely others as well, which renders the comfort letter process insignificant. i.e. there is no value having the accountants verify the integrity of our
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MICHAEL W. SCHLOESSMANN attempt to identify a subset of those to make sure that the documents in fact existed and they didn't change or alter in any material respect the ultimate underwriting decision. And it was those instances, I would imagine, that led to this, you know, this body of experience and the conclusion we drew from that experience about the documentation issue not being a problem insofar as the docs never have been obtained as part of the underwriting, but simply a post-closing, you know, process challenge. Q. Wasn't there also pressure from Countrywide Home Loans and for that matter CFC to close the deals that were built on CHL loans? MS. CONCANNON: Objection; vague, overbroad. A. I think, as I alluded to before, I think it's a fair and general characterization to say that at the period of time in question, there were --
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MICHAEL W. SCHLOESSMANN data if they're unable to determine a good chunk of it." What did you mean by that statement? A. Beyond what I just described? I'm not trying to be flip here. Q. You meant what you said; right? MS. CONCANNON: Objection. Q. The question is, you did mean what you said; right? MS. CONCANNON: Objection. A. I would like to think so, yes. MR. SELENDY: Let's mark as 584, CWMBIA 8743084 through 3091. (Plaintiff's Exhibit 584 for identification, minutes of the meeting of the credit risk management committee, September 28, 2006, production numbers CWMBIA 8743084 through CWMBIA 8743091.) Q. This is entitled "minutes of the meeting of the credit risk management committee of Countrywide Financial
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MICHAEL W. SCHLOESSMANN Corporation, dated September 28, 2006," and you are listed as attending. And just take a moment to review the document, I'll ask you a few specific questions. A. Is there a part of this you want me to focus on? Q. Yeah, I'll just ask you about the second page, actually, the top of the second page. My first question, though, is whether in fact you were present at this quarterly meeting of the credit risk management committee? A. I don't have specific recollection of this meeting. There was a time where I sat on this and the fact that they've noted me as present, I don't have reason to question that. Q. Do you know whether you ever reviewed the minutes of the meeting? A. I don't recall. Q. Okay. My question really is, at the top of the page, with reference to
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MICHAEL W. SCHLOESSMANN were rising as more lenient guidelines were adopted for underwriting of loans? MS. CONCANNON: Objection. A. Well, separating the two, I have general recollection, obviously, of what was unfolding, whether it was exactly at this time or not, I don't know. But there obviously was a point in time where, you know, delinquency rates across a number of, you know, product types were on the rise. Q. And do you recall any assessment of whether that increase was a function in part of more lenient underwriting guidelines? MS. CONCANNON: Objection. Q. Loan underwriting guidelines? MS. CONCANNON: Objection; vague and overbroad. A. I don't recall specifically. I mean, again, general understanding of, you know, collateral performance is it's dependent on the, you know, program parameters. I mean, that was a, and
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MICHAEL W. SCHLOESSMANN the statements made by David Walker. What was his responsibility as of this point in time? A. All I remember is Dave had an executive position at Countrywide Bank. And I can't remember specifically what it was. Q. It states that "Mr. Walker next presented the actual versus predicted performance for pay options." This is at the top of page 2. "Reporting that each vintage's delinquency rate had been progressively higher than the previous due to more lenient underwriting guidelines." Do you recall any discussion about delinquency rates rising due to more lenient underwriting guidelines? MS. CONCANNON: Objection; vague, overbroad, mischaracterizes the document. A. I don't recall specifically. Q. Do you recall that being a general issue, that delinquency rates
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MICHAEL W. SCHLOESSMANN still remains a driver of collateral performance. Essentially, you know, the loan attributes that, you know, a loan possesses is going to impact its performance. And so as credit was liberalized, as investors were willing to buy, you know, higher LTV, lower FICO loans, right, that buy box increased and that, you know, I think it's generally understood, as we talked about earlier, that, you know, there are loan risk attributes that can influence the performance of the loan. Q. You would expect to see a higher level of delinquencies if you have weaker guidelines, in general? MS. CONCANNON: Objection; asked and answered, mischaracterizes testimony, calls for speculation. Q. Isn't that fair? MS. CONCANNON: Objection. A. Weaker is not my term.
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MICHAEL W. SCHLOESSMANN Q. More lenient, excuse me. If you have more lenient guidelines you would expect to see -MS. CONCANNON: Objection. A. Specifically there are loan attributes that are generally viewed as impacting our influencing performance; risk of default, prepays, et cetera. Loan to value ratios, FICOs, doc types and assorted other variables, right, are generally understood to impact performance. So as you increase the level of risk by virtue of the loan attributes, then yes, you would expect that everybody's models assume that that would have an impact on performance. Q. And that could happen either from adopting more lenient -- that could happen from adopting more lenient underwriting guidelines, lenient specifically meaning broader tolerances with respect to CLTV or FICO score or the like; right?
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MICHAEL W. SCHLOESSMANN a bearing on performance. And again, that is just generally understood by the marketplace. Anybody who had a risk based model which the monolines all had, we had, any other market participant had, would have had to one degree or another those factors built into how they evaluated risk. Q. Okay. MR. SELENDY: Let's mark as 585, CWMBIA 10828824 through 8826. (Plaintiff's Exhibit 585 for identification, document entitled "notes document ID FF860549D092CE3385257693006E89E8," production numbers CWMBIA 10828824 through CWMBIA 10828826.) A. Okay. Q. Okay. This document reflects your comments in late September 2006 on a proposed Bank of America/Countrywide repurchase process; correct? MS. CONCANNON: Objection.
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: Objection. A. Yes. Q. It could also happen if the loan originator simply disregarded the underwriting guidelines; right? MS. CONCANNON: Objection. Q. Either way you would have a situation where CLTVs were higher or FICO scores were lower and so forth? MS. CONCANNON: Objection; calls for speculation, argumentative. A. In both cases, whether it was the expansion of underwriting guidelines or, to use your characterization, disregarding guidelines, it really, in my mind, goes to the loan attributes themselves. Guidelines aside, if you look at the principal, what is generally understood to be the principal drivers of performance, again, LTV, FICOs, doc type, occupancy, then the fact that you were doing loans with higher LTVs, lower FICOs, reduced documentation, would have
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MICHAEL W. SCHLOESSMANN A. It appears to. Q. And this is obviously before the merger between Bank of America and Countrywide; right? MS. CONCANNON: Objection; irrelevant. A. Certainly before the merger and specifically having to do with -nothing to do with that, but rather just our ongoing business relationship with Bank of America in terms of loan packages that we sold them. Q. And your comment on the proposal, in the first line you state "Ron, Cindy, this proposal seems entirely reasonable." Do you see that? Is that you? A. It's hard for me to decipher this kind of format. But it seems, it seems like that came from me, just from what I'm looking at here. Q. Okay. And in the proposal it states that -A. Let me step back, because I'm
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MICHAEL W. SCHLOESSMANN actually confused by the message after, that Rod, Cindy reference. Q. Okay. A. It says forwarded by, and then it has a to. To be honest with you, I'm not sure if that's me or not. Q. It says 1, alarm, 2 appointment type. I actually don't know this format either, this is how it was produced to us. I notice in the section I read, right after those four lines, it says "forwarded by Michael Schloessmann." And then below that there appears to be an email that's sent to you from Michael Sorensen. Is that right? A. Yeah. I mean, as I look at this more carefully, that appears to be the case. The bottom of the page appears to be Mike Sorensen's note. The top of the page would appear, the first four lines would appear to be my note. Q. Okay. And so then the proposal you were commenting on was the
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MICHAEL W. SCHLOESSMANN responsibility to do -- to get credit risk management's, you know, buy in or at least have, if we had objections to any of it, comment and suggest revisions. But that was, you know, my view within that context, yes. Q. Is it a more aggressive time period than was typical for Countrywide Home Loans to respond to repurchase requests? MS. CONCANNON: Objection; lacks foundation, vague as to time period. A. I didn't have responsibility for that area. I don't know exactly what their normal turn around times were. Q. Okay. MR. SELENDY: Let's show you a document previously -- well, it hasn't been marked in our case. Let's mark this as Exhibit 586, CWMBIA-G81387 through 98. (Plaintiff's Exhibit 586 for identification, document entitled
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MICHAEL W. SCHLOESSMANN attachment, the next page, 8826; correct? A. That's what it appears, yes. Q. In that proposal, at line 5, it states "CWHL should respond to all initial repurchase requests within 30 to 45 days." Just as a general matter, did you believe that was a reasonable time period for Countrywide Home Loans to respond to repurchase requests? MS. CONCANNON: Objection. A. I think this should be viewed within the context that it is. And that is, we had, Bank of America was a very large buyer of loans. We had encountered challenges and disagreements in the repurchase process. And as a condition to doing future business with us, they insisted that we come up with a protocol that was satisfactory to them. So in an effort to facilitate that business relationship, this proposal, I think, was initially produced by them and it was our job or
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MICHAEL W. SCHLOESSMANN "enterprise wide asset securitization," dated September 29, 2006, production numbers CWMBIA-G81387 through CWMBIA-G81398.) A. Do you want to start asking questions and I'll know what to zero in on. Q. You've seen this document before; right? A. I believe I have, yes. Q. And what is the document? A. It's an internal audit review of part of our business, which includes my area, or at least part of my area. Q. Okay. So when it says "enterprise wide asset securitization," that is securitization across Countrywide? MS. CONCANNON: Objection. Q. Is that right? A. Yes. Q. So it includes, obviously, certain of the activities of Countrywide
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MICHAEL W. SCHLOESSMANN Securities Corporation? A. Yes. Q. If you could turn to page 6 of that report. The first finding states "the executive summary within the CSC deal file does not adequately document and represent the results of underwriting due diligence or conclusions of CSC management." Do you see that? A. Yes, I do. Q. And we've reviewed a few of those executive summaries in the course of this deposition; right? MS. CONCANNON: Objection. A. Yes. Q. Those are summaries of the third party due diligence analysis; right? MS. CONCANNON: Objection to form. Q. Isn't that right? MS. CONCANNON: Objection. A. Summaries of Countrywide
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MICHAEL W. SCHLOESSMANN requirements." Do you see that? A. Yes. Q. What is a saleability code? A. I believe what is referred to is something I talked about yesterday, and that is when the underwriters, the third party underwriting firm underwrote or reunderwrote the loans, they would make a determination as to whether the loans conformed to guidelines, and if they were outside of guidelines, whether there were compensating factors present. So there were codes that corresponded to each of those scenarios. Q. Okay. In the next sentence, they state "however, there is no documentation or analysis supporting the acceptance of loans with identified concerns, in which the vendor has concluded the loan is in. Even though the concerns noted may be similar to loans that are identified as out." Do you understand the
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MICHAEL W. SCHLOESSMANN Securities' due diligence review, which included using third party contractors to underwrite the files, yes. Q. Okay. And would you agree with internal audit's statement that there are four aspects to the due diligence process, credit review, compliance review, an agreed upon procedures review and a property review, or would you put it differently? MS. CONCANNON: Objection; compound. A. You think that's, you know, it may not be exactly right. To the extent, for instance, we did or did not do property review. But I think in general that probably suffices. Q. Okay. And the next paragraph, it states that "in the credit, compliance and property reviews, the external vendor contracted to perform the review is responsible for assigning a saleability code, which in general is a conclusion if the loan meets the deal documentation
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MICHAEL W. SCHLOESSMANN criticism that internal audit is raising here? MS. CONCANNON: Objection. A. I have a specific recollection about an issue they had with our process. And it had to do with the lack of documentation or what they thought was the lack of documentation or documenting our thought process as to, you know, which loans -- how we analyzed the results from our third party due diligence vendor and made the ultimate decision or assessment on that loan. They believed that the documentation was lacking. I think we, or as I recall, there was a lot of back and forth with audit around this issue because of the very iterative nature of, you know, the process. That there was a process by which the results were reviewed and vetted and determinations made. And I think our team felt like to have to document each and every part of that, that thought process, that
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MICHAEL W. SCHLOESSMANN iterative process, was onerous and unnecessary. Even if we ended up, you know, agreeing to some management plan. That's my recollection around this issue. Q. And you did in fact agree to provide a management action plan on finding 1; right? MS. CONCANNON: Objection. A. Let me see exactly what we did. By the way, do we know whether this is the final report or a draft? I'm not sure. Q. You can't tell from looking at it? This is how it was produced to us. I notice certain parts of this have been redacted. We don't know what was taken out in the redactions. A. So I do see the reference to, you know, for providing a management, or me being -- I don't know if it I'm agreeing to it. But it just says Mike Schloessmann will provide management
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MICHAEL W. SCHLOESSMANN any disagreement with the finding made by internal audit as to the lack of adequate documentation in the executive summary? MS. CONCANNON: Objection; vague, overbroad. Q. You know, at the time period involved here. A. I do, as I testified previously, I do recall having conversations. What I don't recall specifically is whether it was simply within my group, you know, my interaction directly with internal audit. But in my recollection, whether it was me or someone in my group, we clearly expressed the -- an issue with what they were asking for, or at least expressed, you know, the challenges in documenting every single step of the thought process. Q. Beyond expressing that it's a challenge to document it, was there a specific disagreement with the factual finding that the documentation wasn't adequate?
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MICHAEL W. SCHLOESSMANN action plan. Q. Do you recall putting together an action plan on this issue of documenting the basis for including loans that had identified concerns? A. I don't recall, nor would I have put that together. That would have been under Debbie's area of responsibility. She and her team would have been charged with responding appropriately to investor -- excuse me, internal audit's finding. MR. SELENDY: We've been asked to change the tape. I would like to just continue on. THE VIDEOGRAPHER: We're going off the record at 12:03 p.m., this marks the end of tape No. 8. (A recess was taken.) THE VIDEOGRAPHER: We are back on the record at 12:08 p.m., this marks the beginning of tape No. 9. BY MR. SELENDY: Q. Do you recall ever expressing
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: Objection; mischaracterizes prior testimony. A. No, I think we -- well, internal audit was suggesting that we did not document every aspect of the process by which we considered the results from the third party and we ultimately made our assessment. And so as a factual matter, putting aside, you know, whether we thought that was, you know, a business necessity or even desirable, I think that was probably correct. Q. It was correct that the documentation wasn't completed as internal audit believed it should be? MS. CONCANNON: Objection; asked and answered, mischaracterizes prior testimony. A. Internal audit, by virtue of this audit report, to my mind is clearly suggesting that the documentation around that process wasn't as robust as they would like to see. Or felt it should be. Q. Do you know how internal audit
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MICHAEL W. SCHLOESSMANN reached that finding, the process by which they reached the finding? MS. CONCANNON: Objection. A. Not specifically. Q. Do you have a general understanding of how internal audit reached their factual findings as to, let's focus on the executive summaries? A. Yes. Q. Okay. A. They -- well, let's talk more generally if we could, because I'm not sure I have a specific, you know, recollection as to how they handled this particular issue, because I don't. But in general when they performed audits, they would engage with the business unit, they would ask, right, they would sit down, they would interview those involved in the various processes that they were going to be auditing. And, you know, with an eye towards developing an understanding of how it worked so that they could, you know,
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MICHAEL W. SCHLOESSMANN did. And that I always viewed as, you know, certainly not a fatal flaw, but an inherent shortcoming of the internal audit process, at least as existed at Countrywide. Q. Isn't that true of any audit process, the auditors will come in, they won't be embedded in the business, they'll come in from outside, take the time necessary to assess whatever they're there to assess, and then reach their conclusions? Isn't that inherent in an audit function? MS. CONCANNON: Objection. A. I can't speak to -- look, I have limited experience, I have the experience I've had with Countrywide. And I will simply say that that was a challenge that we felt. And again, not a fatal one, it did not mean to me that they had nothing useful to offer. I always, as I said, looked at it as an opportunity to improve our process.
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MICHAEL W. SCHLOESSMANN offer their assessment on, you know, the adequacy of that process from an audit standpoint. Q. Would you characterize the internal audit review process as a robust one? MS. CONCANNON: Objection. A. As a robust one? Q. Was it thorough? MS. CONCANNON: Objection. A. What I recollect, and I always personally welcome these audits as a means of improving the, you know, the activities of our group. The sort of one issue we typically had with internal audit is because they were not embedded in the line of business, they would come in, they would do a review over a relatively short span of time, was, you know, whether or not they could sufficiently immerse themselves so as to develop a real understanding for the business in order to be able to make assessments along the lines of what they
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MICHAEL W. SCHLOESSMANN Q. And in fact you did agree to adopt an action plan in response to the finding number 1; right? MS. CONCANNON: Objection; asked and answered. A. It says that I will provide one. So, you know, one could infer that I agreed to do so. And I don't have any reason to question that. Q. If you turn to page 4, there is a finding at the bottom of the page. Page 8, I'm sorry. Finding number 4 at the bottom of the page. A. Okay. Q. It states "current staffing levels within SMD are inadequate given the high volume of securitizations executed on a monthly and quarterly basis." First, what is SMD? A. I believe that's secondary marketing division. Q. Okay. Do you recall any discussions about the secondary marketing
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MICHAEL W. SCHLOESSMANN division having inadequate staff to handle all of the requirements for the high volume of securitizations? MS. CONCANNON: Objection. A. I don't specifically, nor would that have been under my scope of responsibilities. So it's not an issue that they would have taken up with me. Q. Okay. Then if you'll turn to page 10, finding number 6 states "policies and procedures for the SMD and CSC asset securitization process have not been updated to reflect current practices." Do you see that? A. Yes. Q. And then for CSC specifically, it states that "a current approved comprehensive policy and procedures manual that defines responsibilities, requirements, operational procedures and oversight for all aspects of the CSC asset securitization process is not in place."
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MICHAEL W. SCHLOESSMANN or is that we, you know, the whole notion of documenting our policies and procedures was an evolving one. So it was -- when I sort of think back in general terms about audit findings, it was, you know, probably, you know, more than any substantive defect, I think the thing that I recall being cited more often than not is just, not that we weren't doing what we were supposed to do, it's just that we had not, you know, documented, you know, as thoroughly as investor -- excuse me, internal audit thought we should, you know, the process. So that was the case here. I was a proponent of, and very supportive of having written policies and procedures, it was an evolving process. It was one in which we're balancing the work load and also trying to devote the necessary time to, you know, to do what is, you know, can be a pretty labor intensive undertaking. MR. SELENDY: Let's mark as
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MICHAEL W. SCHLOESSMANN Do you see that? A. Yes. Q. And the recommendation, if you turn to the next page, recommendation number 6, is that "management should establish complete policies and procedures governing all aspects of the securitization process." Do you see that? A. Yes. Q. And the response of CSC was, you specifically agreed with this recommendation; correct? MS. CONCANNON: Objection. A. I do see that reference. Q. And did you in fact agree with the recommendation? A. I don't have reason to believe I didn't if it indicates my agreement. Q. Do you know whether CSC did adopt a comprehensive policy and procedures manual with respect to the securitization process? A. My general understanding was
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MICHAEL W. SCHLOESSMANN Exhibit 587, CWMBIA 11053508 through 3512. (Plaintiff's Exhibit 587 for identification, email dated September 29, 2006, production numbers CWMBIA 11053508 through CWMBIA 11053512.) A. I haven't read carefully page 3, but if it's okay I'll wait for you to question. Q. Okay. This reflects a back and forth exchange between yourself and internal audit in connection with CSC's response to the findings of internal audit that we just discussed; correct? MS. CONCANNON: Objection. A. Yes, I believe so. Q. Okay. And you notice -- by the way, Derrek Michelson, what was his function within internal audit? A. I believe he worked, I'm not sure, but I believe he worked on Paul Abate's team in internal audit, and he was somebody we would have interacted
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MICHAEL W. SCHLOESSMANN with in the course of their audit or audits. Q. Was Paul Abate the senior auditor there? A. I don't know if he was the senior most manager, I believe Derrek was on his team, although I'm not sure. Q. Do you notice Mr. Michelson makes the statement, "our general point is this, should a third party ever review the due diligence results, we certainly would not want them to get the idea that absolutely no consideration is being given to the results because I do not believe that to be the case. However, based on the level of documentation currently in place, I would be afraid that would be the impression others would have." Do you see that? A. Yes. Q. And this is supporting their recommendation that you have to document the process by which loans are accepted,
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MICHAEL W. SCHLOESSMANN said it's not retained on the system in red. So the comments on page 3 would appear to be both yours and Derrek Michelson's; right? A. That is what I would believe to be the case. Do we want to go through this? Q. I'm not going to ask you to go through the whole thing. But let me ask you a couple of points. A. Okay. Q. There is a statement approximately fourteen lines down or so saying "while the concerns noted may be similar for a loan determined to be saleable, i.e. outside of guidelines, but sufficient compensating factors present to justify guideline exceptions as a loan determined to be unsaleable, the process of determining the difference between saleable (4) and unsaleable (5) is highly subjective." Do you know who wrote that sentence?
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MICHAEL W. SCHLOESSMANN in particular with respect to exception loans; right? MS. CONCANNON: Objection. A. That's what this is referring to. Q. And then in your email, this is -- the email from Paul Abate to you, on page 3, let me ask you, is there -A. Just a second. I don't see this on page 3. Are you referring -Q. Okay. A. Which page? Q. How does the -- who drafted the text on page 3, which is 3510? A. So I'm looking at on page 2 a note that appears to be from Derrek to me, starts out "hi, Mike." So I don't -it would appear to be from Derrek to me. Now, above that -Q. Right, it says you've included your comments in red. A. In red. Q. And unfortunately we don't get them produced in red and your counsel
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: I would just instruct you to the extent this is a confusing document in black and white, that to the extent you need to review the entire email chain in order to respond to that question, that you please do so. MR. SELENDY: Of course. Q. That was your statement, wasn't it? A. It's really hard for me to say definitively, but I believe, having gotten a little bit more context around this, that that is mine. As is the sentence or two beginning about five lines up. Q. Right. And did in fact -- did you in fact regard the difference, the process of determining the difference between the saleable and unsaleable loan as highly subjective? MS. CONCANNON: Objection. A. I think -- yes, I do. And I think I testified as much yesterday as
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MICHAEL W. SCHLOESSMANN well. Q. I believe you go on to say a few lines down, that "the analysis you referred to as lacking is the list of compensating factors, et cetera, cited by the underwriter. It would be unnecessarily burdensome to the process and unconventional to require someone to provide written documentation summarizing our analysis on each loan approved for purchase. I don't think it is reasonable to require this procedure." That's your statement; right? A. I believe it is. Q. And did you in fact regard it as unduly burdensome to have to document the compensating factors that might justify including a loan that was an exception to guidelines? MS. CONCANNON: Objection to form; mischaracterizes the document. A. I think I just testified that it did, it was onerous I thought to
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MICHAEL W. SCHLOESSMANN I do recall that part of the data that the underwriters gathered would have included a text field, I think I alluded to this yesterday as well, that would have cited some of the compensating factors around the loan. So a discussion or documentation of how each of those compensating factors was evaluated in connection with the assessment, I believe, and I'm just, this is a number of years old, I believe that's the aspect of the documentation that I took issue with. Q. Okay. In other words, it's proper and appropriate to include the list of compensating factors, but you didn't think there should have to be some discussion as to all the reasons why those compensating factors were sufficient in light of the exceptions? MS. CONCANNON: Objection; mischaracterizes prior testimony. Q. Isn't that fair? MS. CONCANNON: Asked and
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MICHAEL W. SCHLOESSMANN document every aspect of the process. This statement is consistent with that. I don't know if I intended to suggest that there shouldn't be any sort of recitation of compensating factors from the underwriter. We would have expected, as I recall our process, the underwriter who was assigning those preliminary saleability codes, at least in their judgement, would have included a list of compensating factors for why a loan was a 4 versus a 5. Q. Well, so what did you mean by saying that the list of compensating factors would be, it would be too burdensome to include that? MS. CONCANNON: Objection. A. I believe that the requirement, should one exist, that our employee have to document how they came to a decision, right, by citing every component part or every input to that decision, was burdensome. That's my belief, you know, today as well.
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MICHAEL W. SCHLOESSMANN answered. A. In part, yes. The one thing I would clarify is the -- my operating assumption is that the third party underwriters, or the ones doing the reunderwriting, that they in the data file they would have sent back to us, which included the loan attributes they verified as well as certain text comments around the loan, would have included, in terms of a, you know, concluding their loan was outside guidelines but with compensating factors, would have recited some of the compensating factors that they used in coming to their decision. For our guys to go in and then offer up their own compensating factors or, you know, insight specifically in terms of how they thought about each loan in making the assessment, is what I was considering unduly burdensome. Q. And the third party underwriters, such as Clayton or MDMC or Watterson Prime, they were reunderwriting
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MICHAEL W. SCHLOESSMANN loans that had already been underwritten by the loan originator; correct? A. Yes. Q. And so as a standard practice for loan origination, the compensating factors should already have been noted in the file; right? MS. CONCANNON: Objection. Q. The list of factors. A. They may or may not have. I mean, the factors, right, can be derived from any review, whether it's the underwriting review or a reunderwriting review. The factors that we've, I've just cited by way of example, aren't dependent on there being a list from the loan originator or underwriter who originated the loan. Right, I mean, it can be gleaned from just a review of the facts concerning each loan. Q. Would you not have expected to see the compensating factors identified in the loan origination file? MS. CONCANNON: Objection;
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MICHAEL W. SCHLOESSMANN of the loan. What I can tell you is what we sought to do, okay, in our experience in looking at these files, is compensating factors were documented to varying degrees, you know, loan by loan. And our job, we believed, was to reunderwrite that loan and make an independent assessment. So irrespective of whether there was a, you know, a comprehensive recitation of all the compensating factors, again, as part of our independent reunderwriting, we would, you're putting together a story on every loan that has its own unique facts and circumstances. So we would look at all the factors that were relevant in determining whether there was sufficient compensating factors. And again, that could be gleaned from the file with or without the benefit of a list from the origination underwriter. Q. So you don't have a view as to whether that list of factors ought to be
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MICHAEL W. SCHLOESSMANN vague, overbroad, lacks foundation. Q. I'm trying to distinguish between there are three different processes of review here, there is the origination, there is the third party underwriting, and then, as you've described it, there is CSC's review of the third party underwriting or reunderwriting results. Correct? Sorry, you need to verbalize. A. Yes. Q. With respect to the first part, the origination, isn't it standard sort of reasonably prudent practice to document the compensating factors even if there is no discussion about the reasons by which those factors justify the exceptions? MS. CONCANNON: Objection; lacks foundation, vague and overbroad. A. So you're asking me for my opinion on what's prudent in terms of the underwriting, the original underwriting
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MICHAEL W. SCHLOESSMANN included in the original origination file? MS. CONCANNON: Objection; asked and answered. A. No, I don't think that's particularly relevant when we're going back and reunderwriting a file. Even if that list is there, our underwriters would be making their own assessment. So even if it's -- the mere fact you have the compensating factors listed in and of itself does not suggest that, you know, that they were sufficient, right. Yes, it's insight into what the loan originator, you know, was thinking, perhaps. And to that extent, yes, it makes it easier to sort of divine that, you know, sort process at the time of origination. But again, we were reunderwriting after the fact and trying to come up with our own independent assessment of the loans. Q. Don't you want to have the
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MICHAEL W. SCHLOESSMANN list, though, to make sure that it's clear that compensating factors were considered as opposed to an exception loan simply being approved? MS. CONCANNON: Objection. A. Well, it is certainly more convenient to have a list where you, right, where you at least have some clear insight into what the underwriter was thinking. The absence of a list does not, however, mean the underwriter did not give thought and consideration to the totality of the loan file they were originating. And so as I said, you would see or observe that sort of documentation to varying degrees, but again, it doesn't go to proving or suggesting whether or not that consideration was given to those factors. Q. Would you agree that it's better practice to list the compensating factors if you're approving a loan that otherwise would be an exception loan?
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MICHAEL W. SCHLOESSMANN 588, CWMBIA 9553311 through 15. (Plaintiff's Exhibit 588 for identification, email dated October 30, 2006, production numbers CWMBIA 9553311 through CWMBIA 9553315.) A. Okay, I've just given the issue list a cursory once over. Q. Okay. What is this document? A. This was a document, just judging from the email from me to Kevin, Michael and Greg, was in anticipation of a meeting we were going to have with correspondent lending on some of the issues we were having with, you know, the two organizations, you know, working together. Q. What were the positions held as of October 30, 2006 by Kevin Doyle, Michael Julius and Greg Jacobson? A. Kevin Doyle, I believe at the time was the senior trader on our ABS trading desk. Mike Julius was a senior trader on our fixed rate or CMO trading
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: Objection; asked and answered, lacks foundation, calls for an opinion. A. Look, if I was an underwriter, and I'm not, I would, just my nature being my nature, I would probably document the thought process. Or at least cite the facts. But again, that's -- what we're talking about our role is reunderwriting the loans. And so even though, you know, an underwriter were to, you know, have demonstrated by listing all the factors, it doesn't mean you would, as somebody reunderwriting the file, would accept those factors. Q. I agree with that, even if you have a list you want to make sure that it's a justifiable list; right? MS. CONCANNON: Objection to form. Q. That's your point? A. Yes. MR. SELENDY: Let's mark as
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MICHAEL W. SCHLOESSMANN desk. And Greg, he -- I'm trying to remember what he did. He had some function within the sales organization. He wasn't a salesperson specifically, but was there to assist the sales team in some fashion I can't remember. Q. Okay. And why were you writing to the traders with respect to the issues that CSC had with CLD? MS. CONCANNON: Objection. A. Because some of those issues impacted, you know, their businesses. Q. Okay. And what issues had you identified as problems? MS. CONCANNON: Objection. A. Issues that, and I think, I'm not sure who prepared this, I'd presume would have been someone on my team given that most of these issues impact the transaction management realm. Sorry. Q. Okay. Were the issues reflected in the attachment? A. I don't, by virtue of this
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MICHAEL W. SCHLOESSMANN note I was trying to expand upon this list to make sure we were also including those issues that the trading desks had. And so I'm not sure this is a comprehensive, you know, list of those issues, at least from the trading desk perspective. Q. What's the issue referred to under the second bullet point, point 2, where it states "CLD purchased several pools from a CSC account and asked the client to keep that information from CSC." A. Where are you reading that? Q. This is page 1. A. Oh, I got it, sorry. So there was a running tension between the two businesses, in that we were both involved in purchasing loans. And, you know, correspondent historically had been a business about buying loans on an individual basis. Sort of what we referred to, onesy, twosy, loans come in, and then they started to buy, you know,
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MICHAEL W. SCHLOESSMANN result. CLD standards for sample size, due diligence and credit and compliance requirements are not as strong as CSC." Do you see that? A. Yes. Q. And what's the issue that this is dealing with? MS. CONCANNON: Objection. A. So I believe I testified yesterday to the fact that CLD was conducting due diligence on our behalf, and these would be common clients that, you know, we didn't want to subject to two different purchase processes, because they were quite different. And so we had over a span of I think a number of months had engaged with CLD to ensure that if they were going to be the funding mechanism for loans that were coming in to our position, then we needed to ensure that the protocols they were using were consistent with our own. And so there was, you know, conflict in terms of our protocols and their own
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MICHAEL W. SCHLOESSMANN mini bulk packages. Whereas it we transacted on a bulk basis. So anyway, because of that, that inherent potential conflict where we'd be competing against one another, we came up with a, you know, $10 million demarkation between anything under, packages under that would be, you know, CLD's to bid, packages over that would be CSC's to bid. And we would not be competing with each other, the same company overall, on packages. And my recollection is, notwithstanding that relatively clear line of demarkation, we continued to have challenges with how they operated. Q. Okay. If you'll turn to the second page of the attachment, there is a heading "due diligence, credit and compliance." And under point 1 of that it states "CLD, correspondent lending, may not follow established protocol for CSC underwriting standards. CSC has had to reunderwrite several loans as a
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MICHAEL W. SCHLOESSMANN protocols. I mean, they would tell you theirs were perfectly sufficient. We, all I can say from my recollection, and just a cursory review of this, in various aspects, inconsistent with our own, and we wanted to insist upon them following our protocol since we were going to be the ultimate, you know, buyer of that loan. Or those loans. Q. And do you know whether there were any loans procured through CLD that ended up in the MBIA securitizations? MS. CONCANNON: Objection; vague, overbroad, mischaracterizes prior testimony. Q. The fifteen deals that we have here. A. If there are -- well, there certainly are correspondent loans, which is one of the three origination channels at Countrywide, in MBIA's fifteen deals, as well as, you know, every other HELOC deal. Q. Okay.
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MICHAEL W. SCHLOESSMANN MR. SELENDY: Let's mark as 589, CWMBIA 11068600 through 8603. (Plaintiff's Exhibit 589 for identification, email dated November 22, 2006, production numbers CWMBIA 11068600 through CWMBIA 11068603.) A. Okay. Q. Okay. What does this document reflect? MS. CONCANNON: Objection; foundation. A. This email chain, part of the chain, you know, is a note from Josh Adler in secondary marketing seeking our input on, you know, what is referred to in these emails as manufacturing issues or problems. And so we were asked, as someone who's interacted a great deal with their loans, you know, what our thoughts were. And Debbie summarized a few in her note to me, which I forwarded on to Josh, as you can see from the top of page
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MICHAEL W. SCHLOESSMANN Q. And this concerns specifically problems with loan origination by Countrywide Home Loans; correct? MS. CONCANNON: Objection; mischaracterizes the document and prior testimony. A. It is around the origination process of Countrywide loans, yes. Q. In the email at the bottom of the first page, it states, and this is the email that Debbie Brown sends to you, cc'ing others, "from my experience, LTV, CLTV, junior and senior lien amounts and life caps on HELOCs are the areas we see the most frequent issues. Secondary (Kurzban) indicated they are aware of the frequent CLTV discrepancies between systems, which seems to be related to the timing of receipt of data, not recording piggyback seconds." Then she goes on to say "here is a summary of issues." Do you see all that? A. Yes. Q. So is she saying to you that
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MICHAEL W. SCHLOESSMANN
12:48:59 1. 12:49:00 Q. Okay. And these were emails that you exchanged with Josh Adler, among 12:49:04 12:49:08 others, in November 2006; is that right? 12:49:11 A. It appears to be the case, 12:49:13 yes. 12:49:14 Q. And the first line of the 12:49:16 email at the top on the first page, it 12:49:19 says "Josh, I'm assuming you guys will 12:49:21 use these findings as part of Bartlett's 12:49:25 efforts to fix the manufacturing plant." 12:49:26 What were you referring to 12:49:29 there by Bartlett's efforts to fix the 12:49:34 manufacturing plant? 12:49:36 A. Going back to Josh's note 12:49:38 further down in the email string, he's 12:49:40 reaching out to us for our input, I don't 12:49:42 know if he says specifically, but 12:49:44 presumably at least in response to what 12:49:45 Kevin is trying to do in terms of 12:49:50 identifying and remediate issues around, 12:49:52 you know, the manufacturing process, 12:49:53 including data issues, I presume, since 12:49:58 we provided some feedback on data.
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MICHAEL W. SCHLOESSMANN the most frequent problems you had with respect to the CHL data concerned data relating -- with respect to HELOCs, relating to LTV, CLTV, junior and senior lien amounts, and life caps? MS. CONCANNON: Objection; calls for speculation, the document speaks for its eventually. A. I don't know what -- she appears to be responding to my request to provide feedback on what we were seeing on CHL. I don't know if this was specific to any product or was just sort of in broad strokes, you know, what we were observing across the board with CHL. So it's hard for me to say. Q. Wasn't this focused on HELOCs, this particular reference? MS. CONCANNON: Objection. A. Debbie's opening sentence is, appears to be, you know, limited to HELOCs, yes. Q. And then on the second page, at the end of her email, she says "a
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MICHAEL W. SCHLOESSMANN primary concern is securitization deals if we are repping CLTV." Do you know what she meant by that statement? MS. CONCANNON: Objection; lacks foundation, calls for speculation. A. I think she's simply, I'm inferring from this note, based on what I know, she is, or my general understanding, she is suggesting that, you know, CLTV, the CLTV data issue may be problematic if we are making a representation and warranty around that data field. Q. Is that what she meant by securitization deals, that it would be deals where you're making representations and warranties, or is it more generally any deal where you're acting as an underwriter? MS. CONCANNON: Objection; compound. MR. SELENDY: Strike that.
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MICHAEL W. SCHLOESSMANN A. Any -- it would have been with respect to CHL originations, it would have been CHL's decision what data they wanted to disseminate. Q. Do you know why CHL was not distributing DTI information? A. My general recollection is there was a concern about, you know, that the reliability of that. And we didn't feel sufficiently comfortable to communicate that data, and did not believe we were required to in connection with our securitization activity. Q. Was there a similar problem with respect to the CLTV information? MS. CONCANNON: Objection; vague. A. We've seen, you know, anecdotal evidence of that in the various, you know, emails that you've put forth. So to what degree, I can't tell. But clearly, you know, there are references to CLTV data integrity challenges, timing and so forth.
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MICHAEL W. SCHLOESSMANN Q. Let me refer you to the last email, which is coming from Mark Hanlon at CSC. And he's writing to you, and says "Mike, many customers have asked for DTI and CLTV information. Most, if not all of CWL's competitors give this information out, specifically RFC, First Horizon and Wells. Not distributing this information is putting us at a competitive disadvantage." Do you see that? A. Yes. Q. Do you know why CSC was not giving DTI information, or was it CHL that was not giving it? MS. CONCANNON: Objection; compound. MR. SELENDY: Let me ask the question. Q. Was it Countrywide Home Loans or CSC that was not distributing the DTI information? MS. CONCANNON: Objection; assumes facts not in evidence.
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MICHAEL W. SCHLOESSMANN MR. SELENDY: Last document before we break. Let's show you Exhibit 169. Q. My only question here is if you are familiar with the issue that is being discussed by Tonya LyBrand and Keith Werber, specifically the issue that is raised at the bottom of the first page. MS. CONCANNON: Objection to the characterization of the document. A. So I'm not familiar with this email chain. Do you want my -- are you asking for my, what I infer from it? Q. Yeah, do you understand what she says when she's writing to Keith and says "the same applies for the S9 deal. We both know that results will likely come back unfavorable. You might want to rethink your decision on giving the 18th as a deadline, unless you were comfortable with Clayton's findings as our final kicks and post-closing
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MICHAEL W. SCHLOESSMANN cleanup." Do you understand what that's about? MS. CONCANNON: Objection; calls for speculation. A. Again, I would be offering speculation. Q. Are you aware of any issues about relying solely on Clayton's findings? MS. CONCANNON: Objection; vague. Q. I'll refer you to the second page, there is a statement "please note that the due date of the 18th will not allow for any cures/rebuttals, and will rely solely on Clayton's findings." Are you aware of any issues where the timing was so tight that CSC had to basically rely on Clayton's findings without a further process of reunderwriting? MS. CONCANNON: Objection; vague, overbroad, mischaracterizes
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MICHAEL W. SCHLOESSMANN AFTERNOON SESSION 1:52 p.m. THE VIDEOGRAPHER: We are back on the record at 1:52 p.m., this marks the beginning of tape No. 10. MR. SELENDY: Mark this as 590, please, CWMBIA 8947488 to 489. (Plaintiff's Exhibit 590 for identification, email dated December 26, 2006, production numbers CWMBIA 8947488 through CWMBIA 8947489.) M I C H A E L W. S C H L O E S S M A N N, resumed, having been previously duly sworn, was examined and testified further as follows: CONTINUED EXAMINATION BY MR. SELENDY: Q. And if you would, Mr. Schloessmann, I would like to focus your attention on the second page of the document. Feel free to review as much as you want.
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MICHAEL W. SCHLOESSMANN the document. A. I'm not aware of, specifically aware of any deals where we did not have the back and forth review and assessment, you know, once we got the findings with our third party firm. MR. SELENDY: We can take a break now, it's 12:55. And so we'll resume at 1:45. THE WITNESS: Thanks, guys. THE VIDEOGRAPHER: We are going off the record at 12:56 p.m., this marks the end of tape No. 1. (Luncheon recess: 12:56 p.m.)
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MICHAEL W. SCHLOESSMANN A. Okay. Q. The email, first of all, this is an email exchange between Tonya LyBrand and Kathryn Martin at secondary marketing on December 26, 2006; right? A. That appears to be the case, yes. Q. And CWHEQ 2006-S9 is another one of the MBIA deals; right? A. Yes. Q. Okay. Ms. LyBrand states "there is a high incident rate of missing documents for the reference deal. However, in light of timing and exhaustive efforts in curing, the desk has agreed to waive the loans in and would like to continue to cure post-closing." What was the process -- first of all, do you see that? A. Yes. Q. What was the process by which it was acceptable for CSC to waive loans in even where there was a high incident
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MICHAEL W. SCHLOESSMANN rate of missing documents? MS. CONCANNON: Objection; lacks foundation, mischaracterizes the document, asked and answered. Q. You can answer it. A. I'm sorry, can you restate the question? Q. Yeah. Did you approve a process by which CSC could waive loans in even where there was a high incident rate of missing documents for the reference deal? MS. CONCANNON: Objection. A. Are you referring to the post-closing due diligence? Which this seems to imply. Q. At this point it states that, in the email, that the desk has agreed to waive the loans in. There is a suggestion that there will be a continued effort to cure post-closing. But I'm focusing specifically on the decision to waive the loans in as of the closing date, notwithstanding the
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MICHAEL W. SCHLOESSMANN diligence construct in light of the timing and the fact that we were not able to complete the due diligence, on the assumption that, you know, based on our significant experience dealing with this type of issue with CHL, that these were in fact going to be curable to a high degree, and therefore we would do so on a post-closing basis. And we had a comfort level that we would not find anything in our process post-closing that would create an issue of materiality in terms of the offering document. If, to follow on your hypothetical, if we were to find anything at the conclusion of due diligence post-closing that did, it would have necessitated stickering the book in order to reflect the change in disclosure necessitated by the ultimate findings. Q. What do you mean by stickering the book? A. It's a process where the
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MICHAEL W. SCHLOESSMANN high incident rate of missing documents. Had you approved that type of process for Countrywide Securities? MS. CONCANNON: Objection. A. I don't have specific recollection of approving, you know, this process or, excuse me, this transaction. My general recollection is that there was a recognition that while not ideal, that due diligence could be done and would be done on a post-closing basis if necessary, given the time constraints of the transactions. Q. Well, what if you discovered post-closing that you had the same high incident rate of missing documents as you had when CSC waived the loans into the deal? MS. CONCANNON: Objection; incomplete hypothetical, assumes facts not in evidence. A. Just to repeat my testimony from yesterday. The process was such that we agreed to a post-closing due
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MICHAEL W. SCHLOESSMANN prospectus supplement is essentially revised or amended and recirculated to investors. Q. If CSC could not cure the missing documents post-closing for some number of loans, would those loans then be the proper subject of repurchase requests? MS. CONCANNON: Objection; incomplete hypothetical, assumes facts not in evidence. Q. Again, for these HELOC transactions, specifically the ones referenced here where there is a high incident rate of missing documents as of the closing. MS. CONCANNON: Same objections. Also mischaracterizes Exhibit 590. A. As I've indicated before, the due diligence results, once final, a full assessment of the transaction would have been handled. In terms of whether a loan would have been repurchased as a result
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MICHAEL W. SCHLOESSMANN of that would have depended on whether we had discovered a breach of our, one of our rep and warrants. This is not the post-closing due diligence that we've seen reference to on whole loan deals, which by their very terms were distinctly different than these securitization transactions. Q. Don't the reps and warrants require the inclusion of all of the specified documents in the origination files? MS. CONCANNON: Objection. Q. We looked at I think one of those reps and warrants yesterday on the purchase agreement. MS. CONCANNON: Objection; vague, overbroad. A. Well, it would depend on the specific reps and warrants in a transaction. The rep and warrant, as I recall, that you are alluding to had to do with the mortgage file, which is defined, I believe, relates to the
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MICHAEL W. SCHLOESSMANN CWMBIA-G88571.) Q. There is very little text in this document, you might just read the whole thing. A. Okay. Q. Okay. The subject line of the email on the third page states "monthly meeting with Mike." Did you have monthly meetings with Ms. Brown and Ms. Sumner, do you recall, as of this point in time? A. I'm not sure at this point in time, but I did have a, for a time, a monthly meeting routine with Debbie and her team, or parts of her team. Q. Okay. And this is January of 2007; is that right? A. It appears to be the case. Q. Okay. In the email that Ms. LyBrand sends to Ms. Brown and Ms. Sumner, she states "I would like to request to have the two items listed below revisited in one of your upcoming meetings with Mike. 1, missing
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MICHAEL W. SCHLOESSMANN collateral file and the collateral, the key collateral documents, including the note and the mortgage, not the origination file and all the credit documents. MR. SELENDY: Let's mark as Exhibit 591, CWMBIA-G88567 through -- there are multiple numbers on this document. Let's use the one that runs -- last page is 10828868. We're going to figure out -MS. CONCANNON: It actually looks like you have an attachment that does not belong with the prior document. Because you have CWMBIA-G88567. MR. SELENDY: Let's stop it at 71. Rip off the remaining pages. 567 through 71. (Plaintiff's Exhibit 591 for identification, email dated January 8, 2007, production numbers CWMBIA-G88567 through
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MICHAEL W. SCHLOESSMANN documents. A, approximately 30 to 40 percent of the loans being underwritten are failing for various reasons. This virtually across all CW originated products." Let me stop right there. As of January 2007, were you aware that 30 to 40 percent of loans being underwritten were failed -- were failing across virtually all of Countrywide's originated products? MS. CONCANNON: Objection; mischaracterizes the document, assumes facts not in evidence. A. I don't have specific recollection of those percentages you cite. I do have a general recollection of a recurring, you know, issue or challenge around the missing documents. Q. The missing documents with respect to loans originated by Countrywide Home Loans? MS. CONCANNON: Objection. A. Yeah, correct. Q. And then on the second page,
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MICHAEL W. SCHLOESSMANN under the heading "regulatory compliance," subpart A states "revisit our compliance internal policy with regard to securitizing loans that have missing compliance documents that cannot be completed for review. The desk and secondary continue to make the argument that loans of this nature should stay in the pool regardless of what the street is doing." And then she continues, "in an earlier meeting, Mike said he was on the fence about our current process and risk exposure." Do you understand what Ms. LyBrand is referring to here? MS. CONCANNON: Objection; lacks foundation, calls for speculation. A. I have a general understanding, yes, although I don't have a specific recollection of this exchange. Q. Okay. What's your general understanding? A. My general understanding is,
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MICHAEL W. SCHLOESSMANN recollection about this, other than the general understanding of the issue that I just recited. Q. Do you know what Tonya's referring to by the desk and secondary? MS. CONCANNON: Objection; foundation. A. Typically reference to the desk is the trading desk, or one of our trading desks at CSC. Q. And secondary would be secondary marketing at Countrywide Home Loans? MS. CONCANNON: Objection to form. A. That would be my understanding from her reference. Q. Okay. As of January 2007, was the rest of the street excluding loans that had missing compliance documents, as far as you know? MS. CONCANNON: Objection; lacks foundation. A. I don't have specific
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MICHAEL W. SCHLOESSMANN and I think we got into it a little bit yesterday, is that when dealing with compliance issues, specifically, you know, the presence -- excuse me, the absence of a document, was not necessarily indicative of a compliance failure or a compliance violation. And so, you know, the general question as to whether you would exclude a loan because of the missing document, you know, absent knowing more about it, was the question at issue. And taken at face value, because I don't remember having this exchange specifically with Tonya, she is implying that I'm, you know, on the fence or deciding what, you know, route we should take. Q. Do you remember as of January 2007 if you were on the fence about the process in any particular respects? MS. CONCANNON: Objection; vague. A. I don't have a specific
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MICHAEL W. SCHLOESSMANN knowledge of what the street was doing at this time with respect to this particular issue. Q. Do you recall any discussions with Ms. LyBrand regarding other firms having a stricter policy with regard to compliance documents than Countrywide had? MS. CONCANNON: Objection. A. I don't have a specific recollection of any conversation with Tonya as it relates to, you know, this compliance issue and what other street firms were doing. Q. Okay. And is that true as of any point in time? MS. CONCANNON: Objection; overbroad. A. As to this -Q. As to this issue. A. As to this issue, I don't have a specific recollection on this particular issue, other than the general understanding that I just talked about.
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MICHAEL W. SCHLOESSMANN Q. Was Ms. LyBrand concerned, do you recall that Countrywide ought to have a stricter policy with respect to missing compliance documents? MS. CONCANNON: Objection; assumes facts not in evidence, mischaracterizes prior testimony. Q. That's a question. You can answer. A. I don't know what Tonya's thinking was behind this issue other than what I see expressed in her email. Q. Okay. You don't recall any other instances in which she expressed a view that there ought to be a tighter compliance policy at Countrywide Securities with regard to missing compliance documents on Countrywide loans? MS. CONCANNON: Objection; mischaracterizes prior testimony. A. I don't recall specifically Tonya recommending or bringing to me a recommendation to tighten our compliance
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MICHAEL W. SCHLOESSMANN Let's start with the email at the front briefly. This is an email exchange between Tonya LyBrand and James Baker; right? A. Yes. Q. And do you know what James Baker's function was as of February 2007? A. James was with -- James was in Debbie's organization, as I recall, and in operations capacity of some sort. I don't recall the specifics, though. Q. And when you refer to Debbie's operation, which operation was that? A. Debbie Brown's organization. Q. And therefore, which group? A. It included the due diligence operations, post-closing risk management. Q. Okay. Now, on the second page, Ms. LyBrand states "it does make sense. I would add that overall risk exposure is assessed based on the results from the due diligence review and reps and warrants can also be relied on providing investors with recourse."
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MICHAEL W. SCHLOESSMANN policy as it related to this issue. Q. But you do recall that there was a general issue with missing compliance documents for the Countrywide originated loans? A. I have testified that I have a general understanding or had a general understanding of the missing doc or recurring missing document issues and challenges that we were confronted with in trying to complete due diligence. MR. SELENDY: Let's show you a document that I would like marked as 592. It's CWMBIA 13222164 through 182, plus the attachments. (Plaintiff's Exhibit 592 for identification, email dated February 9, 2007, with attachments, production numbers CWMBIA 13222164 through CWMBIA 13222182.) A. Is there something in the securitization due diligence protocol you'd like me to -Q. Yeah, I'll turn to that.
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MICHAEL W. SCHLOESSMANN Do you see that? A. Yes. Q. Are you familiar with the suggestion that reps and warrants could be relied on providing investors with recourse? MS. CONCANNON: Objection; vague, overbroad, lacks foundation. Q. In this context. A. Honestly I don't have the context to understand. I certainly understand the statement reps and warrants can be relied upon. But I don't understand the context in which it's being -Q. At the end of this email sequence there is a reference to a credit underwriting results and findings from MDMC showing, among other things, a 22.34 percent of the loans couldn't be completed for review due to missing documentation. And is it your understanding that CSC took comfort in the reps and warrants to deal with issues
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MICHAEL W. SCHLOESSMANN of missing documentation? MS. CONCANNON: Objection. Q. Insofar as it was due diligencing these transactions? MS. CONCANNON: Objection; lacks foundation, mischaracterizes the document. A. So I'm having trouble connecting this particular aspect of the email chain to reps and warrants. Q. If you turn to the attachments. There is a securitization due diligence protocol, and also an Exhibit B, which is an executive summary example. Do you see both of those in these documents? A. Yes, I do. Q. Okay. Starting with the securitization due diligence protocol, this is -- this states that it was last reviewed/revised on January 31, 2007 by Tonya LyBrand and approved by Lynn Sumner, effective as of the same date.
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MICHAEL W. SCHLOESSMANN time; right? MS. CONCANNON: Objection. A. Yes. Q. Would this have been approved without your having some involvement in it? MS. CONCANNON: Objection; calls for speculation, mischaracterizes prior testimony. A. I would say, as I have as to other policies and protocols, that they were constantly evolving. That I had hundreds of conversations with Debbie, Lynn and others over the course of years. And so clearly, you know, had opportunity to provide input. But in terms of specific recollections about a particular policy at a particular point in time, it is, you know, very difficult for me to, you know, remember. Q. Do you have any reason to doubt that this was in fact the protocol for CSC's due diligence for HELOC and
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MICHAEL W. SCHLOESSMANN Do you see that? A. Yes. Q. And does this reflect the securitization due diligence protocol for CSC as of this point in time? MS. CONCANNON: Objection; lacks foundation. Q. As it states at the top of the page. MS. CONCANNON: Objection. You can ask him what he knows rather than just reading the document. Q. You can answer the question. A. I don't know specifically, other than inferring from, you know, the policy status being active and approved. Again, just taking that at face value, I don't have specific recollection or knowledge around this particular document being our policy at the time. Q. You were ultimately responsible for Countrywide Securities' due diligence protocol at this point in
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MICHAEL W. SCHLOESSMANN closed end second transactions, among others, as of this point in time? MS. CONCANNON: Objection. A. No reason comes to mind as to why it wouldn't or couldn't be. Q. Okay. And if you turn to the Exhibit B, the executive summary example. Do you know whether this was intended to be a representative example of how the executive summaries should be written? MS. CONCANNON: Objection; lacks foundation. Also vague. A. Having not looked at this carefully, I don't know whether it's -Q. Just take a moment. I'll note that the heading states "executive summary sample," if that's helpful. A. Okay. This protocol by its terms represents Exhibit B as an example of what the executive summary should look like. Q. Okay. If you would take a look at section 5, there is a change in this compared to some of the executive
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MICHAEL W. SCHLOESSMANN summaries we looked at before. Specifically there is the sentence referring to missing documentation, which is the second to last sentence in the first paragraph. And it states "based on the positive trend on the 48 loans, CSC was able to get comfortable that the remaining 42 loans with missing documentation would have the same results, and overall risk exposures for those loans that were underwritten outside guidelines. CSC did not find the issues material enough to remove from the security." Do you see that? A. Yes. MS. CONCANNON: Object to the characterization of the document and the prior exhibits, for the record. MR. SELENDY: I'm trying to ask a question. MS. CONCANNON: You did a long
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MICHAEL W. SCHLOESSMANN executive summaries by specifically detailing how CSC evaluated the missing documents in the sample? MS. CONCANNON: Objection. A. I don't recall specifically. I don't, you know, reject the notion. I just don't have, you know, a factual basis to make that statement. Q. Okay. I would like to show you a document previously marked as 235. A. Okay. Q. Okay. CWHEQ 2007-S1, that's another MBIA deal; right? A. It appears to be from your copy of the complaint, yes. Q. Okay. And the subject of this February 21, 2007 email is missing documents in connection with that deal; right? MS. CONCANNON: Objection. A. It does reference missing documents in the deal. Q. What was Stacey Casebolt's responsibility as of this point in time?
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MICHAEL W. SCHLOESSMANN preamble, I was waiting for the question. That's my objection. I object to the preamble. "Do you see that" is acceptable. Q. Was the inclusion of a statement referring to the number of documents with missing documentation a response to the internal audit recommendation, consistent with the documents we previously reviewed today? MS. CONCANNON: Objection; lacks foundation. A. I have no idea whether that statement as to the missing documents contained in Exhibit B was there by design or it happened to be because this was a recent due diligence summary. So I don't know the basis for that statement being in there, other than it appears to be from an actual deal that we had completed. Q. Okay. So you don't recall whether there was an effort to improve the quality of the disclosures in the
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MICHAEL W. SCHLOESSMANN A. I can see from her title that she would have been within, you know, my organization, and specifically within Debbie Brown's organization. I don't know Stacey or I don't remember who Stacey is. Q. Okay. And she states "with respect to the referenced second lien deal, we are seeing a high incident rate of various missing document issues. Although we have been able to satisfy some, we still have a high percentage of missing documents that we were unable to cure. The vendor and I have gone back to verify on imaging, VLF, fraud detector and in the senior lien loan files. We need secondary's assistance to help cure and possibly reduce the number of issues so that we can get to an acceptable tolerance." Do you see that? A. Yes. Q. Were you aware as of this point in time that even post-closing,
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MICHAEL W. SCHLOESSMANN after efforts to cure, there was an unacceptable number of issues with respect to missing documents? MS. CONCANNON: Objection; vague, overbroad, mischaracterizes the document. Q. You can answer. A. I don't know if I would characterize the incidence as unacceptable. Q. Ms. Casebolt said that more work had to be done to reduce the number of issues to an acceptable level; right? MS. CONCANNON: Objection. A. So as a general matter, our due diligence employees were charged with conducting and completing the due diligence process. And so it was part of their job to, to the best of their ability, procure any missing documents so as to help facilitate the completion of the due diligence. There were instances, you know, where notwithstanding those efforts
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MICHAEL W. SCHLOESSMANN assumes facts not in evidence. MR. SELENDY: The document speaks for itself. MS. CONCANNON: Same objections. A. To answer your question, I don't know whether this transaction or the disclosure documents for this transaction was stickered for reasons related to this note or otherwise. I don't know whether, you know, and what the final results were on the documentation and to what extent we thought that was, you know, had a material impact on that disclosure. This note doesn't answer either of those questions for me. Q. Okay, this is February 21, 2007. I'm going to show you a document a couple of weeks later, March 6, 2007, also making reference to the same transaction. MR. SELENDY: Let's mark that as 593.
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MICHAEL W. SCHLOESSMANN due to time or otherwise, the documents were not obtained. And, you know, any reference to acceptable or unacceptable would have been made, you know, in light of the total deal and what we thought the implications were for the transaction. I think we spent a lot of time talking about, you know, the missing documents, I've tried to take you through, you know, how we thought about missing documents in the context of materiality. I think the MDMC memo bears out that, our thinking behind, you know, the missing documents, as one example. Q. Ms. Casebolt's email on the SWHEQ 2007 deal suggests that even after the post-closing curing effort, there was still a high percentage of missing documents. Do you know whether there was any restickering of this transaction, as you suggested earlier? MS. CONCANNON: Objection; mischaracterizes the document,
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MICHAEL W. SCHLOESSMANN (Plaintiff's Exhibit 593 for identification, email dated March 6, 2007, with attachment, production numbers CWMBIA 0008084603 through CWMBIA 0008084606.) Q. I'm actually just going to ask you -THE WITNESS: Can I just make a note to myself? MS. CONCANNON: Something deposition related or something not deposition related? THE WITNESS: Something I was reminded of. I won't remember at a break. MR. SELENDY: Your counsel doesn't want you to write it down because then I'm entitled to look at it. MS. CONCANNON: Even if it says pick up dry cleaning. Q. So I'm only going to ask you about the first page. We produced the
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MICHAEL W. SCHLOESSMANN attachment so you had comfort that you had the full document. A. Okay. Q. There is a statement here in the email from Ms. LyBrand, in the middle of the page, "please note, transaction management group, TMG, was able to get comfortable with the missing document exceptions for inclusion to the securitizeable pool based on the overall risk exposure to the security and sufficient amount of loans we were able to cure without any material findings." Do you see that? A. Yes. Q. Do you recall any discussion about how TMG was able to get comfortable given a reported high incident of missing documents even after post-closing efforts just two weeks before? MS. CONCANNON: Objection; mischaracterizes Exhibit 235, asked and answered. Q. Or do you not recall any
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MICHAEL W. SCHLOESSMANN similar degree of success procuring the remaining documents, and therefore given time constraints or otherwise, we could get comfortable in concept with the idea of not having to go procure every single missing document because of that experience and the conclusions we drew from that experience. Q. In light of that statement, are you surprised by the statement in Exhibit 235 that even after this effort to cure post-closing there was still a high percentage of missing documents and even more work had to be done to get to an acceptable tolerance? MS. CONCANNON: Objection; mischaracterizes Exhibit 235. Q. It's a little inconsistent with the other exhibit; isn't it? MS. CONCANNON: Argumentative. A. I guess I don't see the same inconsistency. Q. Well, you suggested you could have -- you hoped for a high success rate
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MICHAEL W. SCHLOESSMANN discussions about this issue at the time? MS. CONCANNON: Objection. A. Well, I can't recall specifically at this time, but I have testified previously to discussions and thinking around missing documents. I testified yesterday, for instance, that we had -- I referred to the substantial body of experience in dealing with Countrywide issues like missing documents, and that it was our experience that when we had identified a document as missing and sought to expend the time and effort to procure the document, we had a very high success rate in so doing. So what this note -- this note would appear to me to be entirely consistent with the approach I articulated yesterday, in which if we had, for instance, fifty loans with missing documents and on the first 25 we sought to procure we had a very high success rate, the belief was that there was no reason to think we wouldn't have a
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MICHAEL W. SCHLOESSMANN in post-closing curing. But that's not what's shown on the immediate exhibit that I gave you, 235, wherein Ms. Casebolt says even after the curing effort, we still have a high incident of missing documents. MS. CONCANNON: Objection; mischaracterizes Exhibit 235. Mischaracterizes prior testimony, asked and answered and argumentative. A. Sorry, so where are you, I apologize? Q. Exhibit 235 was the preceding document from Ms. Casebolt. A. Look, I don't know what Casey or Stacey, rather, was alluding to in terms of tolerances. The due diligence employees were charged with trying to procure missing documents, and they had tolerance levels they were trying to operate within. And to the extent we were outside of any such tolerance, there would be an analysis and a determination
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MICHAEL W. SCHLOESSMANN made as to materiality, and what would be factored into that materiality analysis would be issues such as our experience in procuring missing documents. And did we have any significantly observed experience of finding that documents were not provided at origination, and did we -- and moreover, did we find that even when we found the documents, that there would be material findings within those documents. I think this exhibit, 593, suggests and supports what I've testified to both today and yesterday. That we did not believe it to be a material issue, the mere fact that we were missing documentation. That's not to suggest it wasn't our desire and intention to procure every missing document. It would have been our preference had every document been there. It was a tremendous amount of resources we expended in the course of our due diligence review. So I'm expressing, yeah, a
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MICHAEL W. SCHLOESSMANN the deal did not close? MS. CONCANNON: Objection; vague, overbroad. Q. You referred to a fee yesterday, I don't recall if it was 25 basis points or something else. Was that it? A. An underwriting fee of typically 25 basis points. Q. Right. Would CSC be paid its fee if the deal did not close? MS. CONCANNON: Objection; vague, overbroad. A. We didn't ever have to necessarily deal with that issue that I can remember. But our fee was paid out of the proceeds of the bonds. If there was no deals, I think you can extend that to the conclusion that there would be no fee to take out of the bond proceeds. Q. Referring back to the first page of this document, Ms. LyBrand states at the top, "a total of 22 loans should be excluded from the pool."
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MICHAEL W. SCHLOESSMANN preference to have it in there. But the files are the files, and we had to make determinations and risk assessments around the files as they existed. Q. And your preference was to close the deal if you could; right? MS. CONCANNON: Objection; mischaracterizes prior testimony, argumentative. Q. Isn't that fair? Wasn't the imperative of Countrywide Securities to close as many of these transactions as possible based on Countrywide Home Loans? MS. CONCANNON: Objection; vague, overbroad. A. Look, I would say with respect to every transaction participant, be it issuer, underwriter, investor, monoline insurer, everybody was participating in these deals for reasons. So yes, I think that's a fair characterization that all transaction participants desired the deal to close. Q. Would CSC be paid its fee if
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MICHAEL W. SCHLOESSMANN And that was 22 loans out of, if you look toward the bottom, out of the credit sample of 200 loans; right? MS. CONCANNON: Objection; calls for speculation. A. I see the reference to 200 loans in the credit sample from Tonya's note, and the 22 recommendation -- 22 loans being removed from the pool. Q. Would in excess of 10 percent be a high percentage in your view? MS. CONCANNON: Objection; vague, overbroad, lacks foundation. A. I've tried to state all along that every assessment was done on a deal-by-deal basis looking at the totality of the findings, the nature of the findings, the risk that we perceived, you know, each finding to imply. And therefore that, you know, if in fact the finding rate was 22 out of 200, it would depend on -- just over 10 percent of it would depend on the nature of those issues.
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MICHAEL W. SCHLOESSMANN Q. If the sample was chosen to be representative of the population as a whole, would it be fair for us to conclude from this that the expectation was that in excess of 10 percent of the loans would be ineligible for exclusion in the securitization based on the sample results of 22 loans excluded? MS. CONCANNON: Objection; incomplete hypothetical, asked and answered. A. That wouldn't be my characterization. The 22 loan finding does not necessarily speak to eligibility or ineligibility in the pool. I mean, if it's a missing document, it doesn't necessarily render that loan ineligible. And in our view, as I've stated previously, you know, particularly where we've had a substantial amount of experience that told us that the documents did in fact exist even if they were hard to procure, and that once procured they most often did not reveal
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MICHAEL W. SCHLOESSMANN A. The initial or final saleable? Q. Yes. Both initial and final saleability codes for what's on this page. A. I would agree that the report that is a range from 5 to 7. Q. Okay, and 5 to 7, whether it's 5, 6 or 7, that means that the loan was unsaleable using the ranking that CSC used; correct? A. I can't recall what the, you know, I think it I remember what the saleability code 5 was. I don't know about 6 and 7. Q. The number had to be less than 5 for it to be acceptable for inclusion in this securitization? MS. CONCANNON: Objection; asked and answered. Q. Whatever 6 and 7 meant? MS. CONCANNON: Objection; asked and answered. A. I don't recall the saleability codes being a rank ordering of issues
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MICHAEL W. SCHLOESSMANN any material fact that would have altered our determination or assessment of that particular loan. Q. Well, although I said I wasn't going to ask you to look at the attachments, I think I have to in light of that response. There is an attachment that follows after page CW 8084606. The file was produced natively and then we printed it out. After this page. A. Yup. Q. Then there is a rather large file. And that has a listing of loans, including loans with initial and final saleability codes. Do you see that page? MS. CONCANNON: Objection. A. Yes. Q. And the saleability codes here range from 7 to 5; correct? MS. CONCANNON: Objection. Q. Just on this page.
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MICHAEL W. SCHLOESSMANN necessarily. But I would have to see what the, you know, what the descriptions of each code are. Q. Well, there is some description in the column to the right, "for each of these loans," and let's just take a look at them. Under "CR-EXP-CMT." First of all, do you know what that means, that heading? A. I don't believe I do. Q. Okay. Are you familiar with this form of report? A. Not particularly. I don't know if I've ever, I mean, I wouldn't put it beyond me ever having seen it. But there is nothing that, noteworthy about it that looks familiar. Q. It's an underwriting summary; correct? MS. CONCANNON: Objection to the characterization of the document, asked and answered. Q. If it helps in the cover email, Ms. LyBrand refers to an
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MICHAEL W. SCHLOESSMANN underwriting summary_final as an attachment in the middle of the page. I don't know if that helps. A. Okay. I'm not sure what you're looking for me to. Q. Okay. Well, staying with this column on the front page, are these short summaries of the findings for those loans? MS. CONCANNON: Objection; lacks foundation, calls for speculation. THE WITNESS: Are you waiting for me? MR. SELENDY: Yes. Q. Is that column on the right a short summary of the findings for these loans? MS. CONCANNON: Objection; lacks foundation, calls for speculation. A. I don't prepare this, obviously. So are you asking me just to -Page 676
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MICHAEL W. SCHLOESSMANN excluded from the deal, do you have any idea? MS. CONCANNON: Objection; lacks foundation, calls for speculation. A. Just by reviewing the report or taken together with -Q. Taken together with the email at the front. MS. CONCANNON: And don't guess. A. Then I can't say for certain. Q. What's your best understanding? MS. CONCANNON: Objection. Based on his reading of the document he's never seen before? Q. Yes, based on your reading given your 18 years expertise and your position as head of the transaction management group responsible for the due diligence and underwriting of these securitizations and the fact that this is a report sent by your subordinate, Tonya
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MICHAEL W. SCHLOESSMANN Q. Is that your understanding? MS. CONCANNON: Objection. Q. I mean, as someone who was in the industry for 28 years, I don't know how many years. A. I'm not that old, thank you. Look, if somebody handed me this report, I would assume that each line item relates to a single loan. And that any comments would relate to the loan indicated in the left most column. Q. Just you did start in the industry in '93; didn't you? Am I mistaken? MS. CONCANNON: Objection. Q. Which actually was 28 years ago. A. 18. Don't date me. 18 years. Q. 18 years, you're right. Sorry. Forgive me. That's the year I graduated from law school, so that would have dated me too. Can you tell whether these loans on the first page were included or
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MICHAEL W. SCHLOESSMANN LyBrand, I'm sure you've seen various forms of this, you know, countless times. MS. CONCANNON: Objection; mischaracterizes prior testimony. Q. So in light of that, what's your best understanding? MS. CONCANNON: Objection; mischaracterizes prior testimony, mischaracterizes the document, which he is not a recipient of, calls for speculation and incredibly argumentative. Q. You can still answer. What's your best understanding? MS. CONCANNON: Objection. THE WITNESS: Am I supposed to answer the question? MR. SELENDY: Yes. MS. CONCANNON: If you can. A. So if I received this, and I didn't, I'm supposed to -- you want me to tell you what my understanding would be? Q. Yes. A. If in fact these were
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MICHAEL W. SCHLOESSMANN attachments to that? Q. Yes. A. Well, I would -- if in fact there are 22 loans on this report, I'm not sure there is, I'm trying to count quickly, it seems like there is only 21. Q. That's what I count also. A. So that was kind of, again, if I was consuming this information had it been sent to me, I would have made that assumption likely. If the 22 loans tied out with the schedule, it doesn't for one reason or another, and I have no idea why. So, you know, perhaps it calls out in the questions, I don't know. Q. Is a missing appraisal a reason to kick a loan, just going through some of these reasons? Missing appraisal, no reserves required per CLUES. MS. CONCANNON: Objection; lacks foundation. Q. Would that be an adequate basis to kick a loan?
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MICHAEL W. SCHLOESSMANN hypothetical. A. I've tried to communicate it a number of times that being presented with a finding in isolation without knowing more about the loan is an insufficient basis for me sitting here, many years later, to tell you whether it should have been included or not. You know, there is nothing that I can see in a cursory review of this or there are some things in here that clearly in my mind are not, you know, dispositive of, you know, to your term, eligibility, ineligibility. So you can't make a determination just reading these comments without knowing more about the loan. Or at least I can't. Q. Okay. And is that true for all of the comments here, none of these would be in your view sufficient, just based on the limited information you have, to say that loan should not have been included? MS. CONCANNON: Objection;
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: Objection; lacks foundation, calls for speculation. Q. From one of these HELOC transactions? MS. CONCANNON: Overbroad, vague. MR. SELENDY: Let me finish the question. MS. CONCANNON: Let me get my objection. MR. SELENDY: Your obligation is to wait until I finish my question. MS. CONCANNON: I thought you were done. Q. So with respect to the HELOC transaction here, SWHEQ 2007-S1, would a missing appraisal and no reserves required per CLUES be a sufficient basis to kick the loan? MS. CONCANNON: Objection; lacks foundation, calls for speculation, incomplete
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MICHAEL W. SCHLOESSMANN mischaracterizes prior testimony, asked and answered. Q. Is that fair? MS. CONCANNON: Objection. A. If you would like to know my professional opinion as a nonunderwriter. Q. No, what I'm trying to get at is whether the descriptions here, whether any of them might be sufficient to give you comfort to say right, that loan shouldn't be included. And I take your point that you'd want to see a lot more information. So if your answer is the same for all the others as it is for the top column, no matter what it says you would still need more information, then I'm not going to pester you with the lower columns. MS. CONCANNON: Objection. A. Sorry, lower columns? Q. Everything after the first entry. I asked you about the first entry, missing appraisal, no reserves
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MICHAEL W. SCHLOESSMANN required per CLUES. And you said you can't answer just based on that limited amount of data. A. Okay. MS. CONCANNON: Objection. A. In that case, no, I restate my point, that is insufficient basis to determine whether a loan has to be or could be included or excluded from a transaction. Q. Okay. MR. SELENDY: Let's mark as 594, CWMBIA 10722613 through 615. 615 is a TIF placeholder, which is reprinted out in part. (Plaintiff's Exhibit 594 for identification, email dated March 30, 2007, with attachment, production numbers CWMBIA 10722613 through CWMBIA 10722615.) Q. I'm just going to ask you about the first page of the document. A. Okay. Just the first page?
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MICHAEL W. SCHLOESSMANN valuation due diligence was that we had established tolerances given that appraised values are statements of opinion, there is invariably discrepancies that you find between two appraisers looking at the same property, as well as the fact that when you're doing AVMs or broker's price opinions, instead of an origination appraisal where an appraiser goes to the site and actually inspects the inside and outside of the property, there are potentially inherent shortcomings of these other more limited valuation techniques. And so we had tolerances that we would, you know, establish. And my recollection is we had them, and those tolerances would depend on the LTV of the loan, with higher LTVs having smaller tolerances for what should be obvious reasons. In any event, when we would do our property valuation, loans, whatever tool we were using, to the extent the
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MICHAEL W. SCHLOESSMANN Q. Yes. That's all I'll ask you about. A. Okay. Q. In the second full paragraph -- first of all, this is an email from Debora Brown to you, dated March 30, 2007; right? A. It appears to be, yes. Q. Okay. In the second paragraph, Debora Brown makes the statement "LandSafe used a 10 percent tolerance level and CSC used a 15 percent tolerance from the appraised value, which accounts for four of the seven loans passing." Do you have an understanding of what she meant by the 10 percent tolerance level and the 15 percent tolerance level? MS. CONCANNON: Objection; lacks foundation, calls for speculation. A. My general understanding of our process of conducting property
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MICHAEL W. SCHLOESSMANN results came back with a value within tolerance, there would typically be no further review. If the value was outside of tolerance, that would either result in either a rejection or additional due diligence done on the loan. I'm stating just, you know, the process as I knew it very generally. Q. And the 15 percent tolerance would mean if the AVM value came in 15 percent below the appraised value that was in the file, that would be the limit that CSC used? MS. CONCANNON: Objection. Q. If it was a 15 percent tolerance level. MS. CONCANNON: Objection. A. Again, just based on my understanding and not trying to determine what Debbie meant. Q. Right. A. If, whether it's an AVM value or anything else, in the normal course of things we, to my understanding, didn't
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MICHAEL W. SCHLOESSMANN kick out loans solely based on their AVMs just because of their inherent reliability issues, you're not looking at the property, you're tapping a public database of, you know, recent sales and the like. But if you were within, if the tolerance was 15 percent, and you were within that, then the loan would be deemed to, you know, pass that filter, anyway. Q. And when you said the acceptable tolerances for that difference between the AVM or other valuation and the reported appraised value in the file, depended on LTV, do you recall what the range of tolerances was? MS. CONCANNON: Objection. Q. Any recollection of that? A. I don't. I stated what, the most I can specifically recollect is the higher the LTV, the smaller the tolerance. I don't remember how many gradations we had. I seem to recall
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MICHAEL W. SCHLOESSMANN A. I would have expected it to be in our due diligence policies and procedures. But I can't say for sure. Q. So it might be in that due diligence protocol we looked at before? A. I don't -- that -- it could be, it could be in other policies and procedures, particularly those involving whole loan purchases. Q. Okay. Okay. Farther down on the same page, Debora Brown makes a statement, this is about eight lines up from the bottom, "we see a lot of LandSafe appraisals that we do not agree on value and kick or materially revalue." Do you see that? A. Yes. Q. And then she says "CAMCO," I don't know what CAMCO is, do you? MS. CONCANNON: Objection. Q. C-A-M-C-O? A. CAMCO was one of our trading desks that purchased distressed residential assets. So that would mean
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MICHAEL W. SCHLOESSMANN there being two. But that's the extent of it. Q. Do you recall if the other tolerance level was above or below 15 percent? MS. CONCANNON: Objection. Q. You said you seem to recall two. MS. CONCANNON: Objection. A. Yeah, I don't -- well, my -- I don't have a specific recollection of what the two tolerance levels were. I just, I know for some period of time, perhaps a long period of time, we had, again, tolerances that were LTV dependent. And I can't speak to specifics. Q. Was that documented somewhere, the tolerance for particular LTVs, do you know? MS. CONCANNON: Objection. Q. As some kind of a guideline or criteria? MS. CONCANNON: Objection.
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MICHAEL W. SCHLOESSMANN scratch and dent or nonperforming collateral typically. Q. Is that Countrywide Asset Management Co.? A. Yes. Q. And do you have a general recollection of problems with LandSafe appraisals that CSC did not agree on value and either kicked or materially revalued? MS. CONCANNON: Objection; vague, overbroad, mischaracterizes the document. A. I have a general recollection -- I have a general recollection of the subject of this email, in our efforts to consider using, you know, LandSafe or LandSafe products as part of our property value scope. And I also have a general recollection that there were times where we or our process would have called into question some of the values. But I would not characterize it as a perception of a problem, just
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MICHAEL W. SCHLOESSMANN that, you know, the value tools that we used, you know, would sometimes identify, you know, loans that were appraised by LandSafe. Q. Do you regard it as not a problem that there were a lot of LandSafe appraisals, according to Debora Brown, as to which CSC did not agree on value and kicked or materially revalued? MS. CONCANNON: Objection; mischaracterizes the document. Q. That's what she says, right, we see a lot of appraisals that we do not agree on value? MS. CONCANNON: Objection. A. I have -- look, I don't know what a lot of appraisals mean. What I do know is in the course of our due diligence, you know, of all sorts of different lenders, appraisers, we had due diligence, you know, findings. And so, again, I don't know the context within, you know, this reference to a lot, I don't know what that means.
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MICHAEL W. SCHLOESSMANN MR. SELENDY: You are not going to have to read every page unless your counsel makes you. Let's mark this as 595. It's CWMBIA 8472354 through 2358, together with various attachments. I'm sorry, through 23 -- oh, I see. Through 456. And then the attachments begin with a reproduction of the TIF file that's printed out, and that TIF file is 2357 and 58. MS. CONCANNON: I may be misreading the document, but I don't have what you have, I don't think. MR. SELENDY: I think your colleague found it. MS. CONCANNON: What I have is CWMBIA 8472354. MR. SELENDY: Correct. MS. CONCANNON: Through 56. And then my document picks up on 8472365, with a gap in the Bates
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MICHAEL W. SCHLOESSMANN Q. Well, a lot means more than a little; doesn't it? MS. CONCANNON: Objection. A. But is that a lot meaning in absolute numbers without regard to what percentage of the LandSafe appraisals we looked at? I simply don't know. I can't -- I can read like you can. If I was reading that and I read a lot, I would ask further questions of, you know, the person, you know, describing it that way. Q. Well, Debora Brown did send this to you saying a lot. Do you recall whether you asked her, well, how many were there? MS. CONCANNON: Objection; argumentative. A. I wouldn't dismiss the possibility of me following up with further questioning. I have no specific recollection of engaging with Debbie on this particular email. Q. Okay.
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MICHAEL W. SCHLOESSMANN numbers. MR. SELENDY: I think that corresponds to the TIF files. As I mentioned, 57, 58, are TIF files. And I believe if we look through this we're going to see the same thing for each of the other numbers until we get to 65. Yup. MS. CONCANNON: So what we have is -MR. SELENDY: So the way in which you produced it to us, you stamped pages 54 through 56, and then gave us a series of TIF files, and then continued to stamp from 65 until the end. MS. CONCANNON: I'm not objecting to the fact that we produced it to you as a TIF file. What I'm objecting to is the fact that its the fact that it's not in sequentially numbered order. To the extent you don't intend to ask any questions about the attachments
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MICHAEL W. SCHLOESSMANN anyway, I think we can look past that. MR. SELENDY: Well, I'm going to ask one question about the attachment, which is -- no, you're right, not about the TIF file. (Plaintiff's Exhibit 595 for identification, email dated March 30, 2007, with the attachments.) Q. So as you look at this, I am going to ask you about the first page. But feel free to look at whatever you want in there. A. Okay. Q. The top of the document reflects an email that you sent to Brian Kuelbs on March 30, 2007. Is that right? A. Appears to be, yes. Q. How do you say his name? A. Kuelbs. Q. Kuelbs, okay. And the subject line is, from an email that you're forwarding, "CWABS 2007-S2 fixed seconds, missing docs." Is
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MICHAEL W. SCHLOESSMANN documents in which we could not complete our underwriters' review in time of tie out." Do you see that? A. Yes. Q. What is your understanding of what Ms. LyBrand was conveying there? MS. CONCANNON: Objection; lacks foundation, calls for speculation. Q. I mean, you understood at the time what she meant; right? MS. CONCANNON: Objection; argumentative. A. In reading this now, and I recognize that I'm on the original distribution, it could have meant either two things. You know, the word pre-fund, pre-funding, as I know the term, in connection with the transactions we did, involved transactions where 100 percent of the collateral was not allocated to the deal at closing, and instead the deal would be partially collateralized by cash
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MICHAEL W. SCHLOESSMANN that right? A. Yes. Q. And do you recall why you sent this to Brian Kuelbs? A. I sent it in an effort to give Brian Kuelbs, who is in secondary marketing, he was a senior manager in secondary, and it was an effort to give him feedback on what we were observing on CHL loan originations. Q. And what were you observing on those loan originations? A. As it relates to this note, the incidence level of missing docs. Q. Specifically what about the incidence level of missing docs? A. Just that we had continued to see, you know, missing documents in the files that we were due diligencing. Q. And the email from Tonya LyBrand, she says "with respect to CWHEQ 2007-S2 and S3, and CWABS 2007-5 and 6, for all four deals we had to pre-fund due to high incident rate of missing
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MICHAEL W. SCHLOESSMANN until loans could be subsequently delivered, which typically happened in the weeks following the closing of the transaction. That's what pre-funding means. Now, whether Tonya meant that versus post-closing due diligence, I don't know. It's certainly possible and it's easy enough to verify whether these deals were in fact pre-funded, they would be in the offering documents. Or reference to pre-funding would be in the offering documents. Q. Okay. And she's referring to the high incident rate of missing documents across all four deals, which made it impossible to complete the underwriters' review in time; correct? MS. CONCANNON: Objection. A. I mean, she states what she states. We're able to cure several loans from each of the four deals, however, there are still, or there is still issues in which we cannot cure and need to lean
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MICHAEL W. SCHLOESSMANN on secondary for assistance. Q. When she says "we could not complete our underwriters' review in time of tie out," what does that mean, in time of tie out? MS. CONCANNON: Objection; lacks foundation, calls for speculation. Q. Are you familiar with that term? A. I'm familiar with the reference to tie, tying out is essentially a reconciliation exercise. You know, the deadline that I would, again, in my understanding of the transactions, would be up until -- you had a time up until the point where you had to finalize the population that was going to be included in the transaction at the closing date. And therefore you'd have to essentially lock down the population, generate the loan schedule for all the transaction documents. Whether she meant that or not, I don't
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MICHAEL W. SCHLOESSMANN THE VIDEOGRAPHER: We are going off the record at 3:11 p.m., this marks the end of tape No. 10. (A recess was taken.) THE VIDEOGRAPHER: We are back on the record at 3:24 p.m., this marks the beginning of tape No. 11. BY MR. SELENDY: Q. Let me show you a document previously marked as Exhibit 145. A. Have we previously reviewed this? Q. No, it was marked in a different deposition. A. Sorry, I just don't recognize it immediately. Q. It's been marked in the case already, that's all that that means. A. Okay. Q. You should take a moment to review it. And just for your reference, my question will really be to ask you what this is. A. Okay.
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MICHAEL W. SCHLOESSMANN know. But that's generally how the transactions worked. Q. Okay. And do you recall any discussion with Ms. LyBrand about the inability to complete the underwriting review in time for these four transactions because of the high incident rate of missing documents? MS. CONCANNON: Objection. Q. As she says in her email? MS. CONCANNON: Objection. A. I mean, I don't have a specific recollection of this exchange or these four deals in particular. We've talked to a great extent about missing documents. Q. These are just other examples? MS. CONCANNON: Objection. A. This appears to be an example of the challenge we were having with missing documentation. MR. SELENDY: Okay. We need to change the tape, so we'll go off the record for a second.
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MICHAEL W. SCHLOESSMANN Q. First, are you familiar with this document? A. I have a vague recollection of a bank versus, you know, Countrywide Securities due diligence comparison. Q. And is Debora Brown sending to you a comparison that you asked her to do as to the due diligence of CSC versus Countrywide Bank? MS. CONCANNON: Objection. A. I'm not sure whether I requested it. But, you know, the email appears to be coming from Debora and sent to me. So I will assume on that basis that I received it and probably reviewed it. Q. Do you know why the comparison was done? A. Actually, no, I don't remember why. Q. Do you recall anything about the results of the comparison, or the significance of the test? MS. CONCANNON: Objection.
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MICHAEL W. SCHLOESSMANN A. No. I'm struggling to remember for starters why it was done. And no, I don't. I remember little, if anything, about the comparison, just that at one point in time, at least one point in time we did a comparison. Q. Do you know if any decisions were reached as a result of this comparison? A. I don't. Q. Do you recall any discussions, just generally, not necessarily in connection with this email, about the differences between the diligencing done by CSC and that done by Countrywide Bank? MS. CONCANNON: Objection; vague, overbroad. A. I recall more generally discussions with the bank. We had numerous discussions around due diligence since we, on occasion, I can't recall how frequently, we provided the transaction management support for their whole loan acquisitions. And so the topic of the
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MICHAEL W. SCHLOESSMANN securitizations? MS. CONCANNON: Objection; vague, overbroad, lacks foundation. A. Would you restate the question, please? Q. Yes. I just want to ask you, as a general matter, whether the fraud review conducted by CSC in connection with its due diligencing of loan securitizations is consistent with the fraud review described on these pages, bearing in mind that you said you didn't know whether this was a CSC document or not. MS. CONCANNON: Objection; vague, overbroad, lacks foundation. A. I don't know to what extent, you know, this document or the practices contained in the document represent our due diligence practices at CSC. Q. Was there a particular group in charge of fraud review in connection with due diligencing for securitization deals?
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MICHAEL W. SCHLOESSMANN appropriate level of due diligence in connection with their, you know, the bank purchases, came up from time to time. Q. If you look at the last three pages of the exhibit, there is a printout of something entitled "fraud review, underwriter worksheet." Do you have that? A. Yes. Q. Do you know what this document is? A. My understanding is this is a worksheet to be -- no, I don't have -I'm guessing, actually. So no, I don't have a clear understanding. Q. Do you have any knowledge as to whether this is a worksheet used by Countrywide Securities? A. I don't know that. Q. Okay. If you take a moment to look at it. Are the inquiries here consistent with the type of review that CSC would conduct for fraud in connection with its underwriting of loans for
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MICHAEL W. SCHLOESSMANN A. Ever? Q. Within CSC. A. Within CSC, any fraud review we conducted as part of our due diligence would have been managed by Debbie Brown's group. Q. Okay. MR. SELENDY: Let's mark as 596, MBIA 15817067 through 7069. (Plaintiff's Exhibit 596 for identification, email dated April 6, 2007, production numbers MBIA 15817067 through MBIA 15817069.) Q. And I'm going to focus my questions on the first page, if that's helpful. A. Okay. Q. First, do you know what this document is? A. It appears to be an email from Craig Mozilo to me. Q. And does it reflect in part an email that you had sent to Mr. Naselow, if you look farther down the page?
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MICHAEL W. SCHLOESSMANN A. Yes, it does. Q. In your email, you say "I ran into McMurray yesterday and asked him about the CMS score, and he told me that it is designed to rank loans by risk of default. Since this is fundamentally addressed in all of our pricing models, my feeling, for what it's worth, is that we should be constructing our adverse sample by reference to criteria which will best identify those loans with the greatest risk of mispricing." Could you explain the points you were raising here? MS. CONCANNON: Objection; vague, overbroad. Q. You can answer it. A. What I was trying to get at is for purposes of developing an adverse selection methodology, we should not focus simply on the high risk attributes that are already known as part of the loan tape, and consider in pricing, given that pricing is based on, you know,
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MICHAEL W. SCHLOESSMANN Q. Okay. A. I mean, perhaps that's one that came to mind obviously, as I noted it. Q. What was Mr. Naselow's responsibility? A. Craig, I believe at this time, he was certainly with Countrywide Bank. I believe he was the chief investment officer, although I'm not sure of the exact title. Q. And do you recall whether any -- there was any follow-up to this exchange between yourself and Mr. Naselow? A. I don't. MR. SELENDY: Let's mark as 597, CWMBIA 10750120 through 26. And there is a printout of an attachment as well. (Plaintiff's Exhibit 597 for identification, email dated April 13, 2007, with attachment, production numbers CWMBIA 10750120
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MICHAEL W. SCHLOESSMANN default risk, and that we should be trying to identify variables that our pricing model might not be considering. I think I use one example around a declining real estate market. Q. So in other words -- well, the variables that the pricing models did consider included, I think you mentioned CLTV, FICO, owner occupancy, documentation program. Is that right? MS. CONCANNON: Objection. A. Those were examples of attributes that I think are generally understood to impact, you know, the pricing on the loan as a result of performance or perceived performance. Q. And you were suggesting which variables -- you gave the example of geographic pockets with abnormally high foreclosure rates. Were there other variables that you had in mind? MS. CONCANNON: Objection. A. I can't possibly say this many years removed.
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MICHAEL W. SCHLOESSMANN through CWMBIA 10750126.) Q. I'm only going to ask you about the third page, the second to last paragraph on the page beginning with the sentence "prior experience with LandSafe using them as a property inspection vendor was very distressing." A. I'm sorry, third page? Q. Second to last paragraph on the page. MS. CONCANNON: But please do take the time to review as much of the document as you need to. A. Okay. Q. Okay. First, what was Tim Knight's responsibility as of November 2006? A. Tim Knight was in Debbie Brown's organization. And he was within our property valuation group. He was an appraiser by training. Q. So was he responsible for due diligencing property valuations? MS. CONCANNON: Objection.
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MICHAEL W. SCHLOESSMANN A. I believe he was. Q. Okay. Do you know why the email chain here was sent to you, among others, on April 13, 2007? A. My general recollection around the use of LandSafe tools in our process was that we had a fairly long running dialogue with LandSafe about using them and their products. And there were plenty of exchanges of information in terms of what we needed for them to be able to produce. And so as I was part of those conversations, it would not be unusual for me to get updates around developments. Q. Do you recall taking any steps after receiving the email which included Tim Knight's statement that prior experience with LandSafe using them as a property inspection vendor was very distressing? MS. CONCANNON: Objection. A. I don't recall specifically what action I may have taken as a result
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MICHAEL W. SCHLOESSMANN Just give me one more minute. Okay. Q. Okay, first, what is this document? A. The document is a collection of emails from me to Jordan, who was in my transaction management group, from Jordan to me. And from John McMurray to a number of people, including myself. Q. Okay. On the first page there is a reference in the email, about the middle of the paragraph at the bottom. This is the email to you, is that from Jordan? A. Yes, on the first page? Q. Yes. A. Yes. Q. Okay. And he says "we should probably discuss what constitutes materiality, as we regularly have counterparties negotiate the syntax of certain reps and warrants and I don't think it is necessary to capture all differences within the PSA reps and A.
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MICHAEL W. SCHLOESSMANN of this. I do know there were a number of conversations going back and forth with them where we were communicating, among other things, that their service levels, pricing, service turn around times, and the things cited in this, you know, did not meet our needs. MR. SELENDY: Let's mark as Exhibit 598, CWMBIA 11132065 through 2070. (Plaintiff's Exhibit 598 for identification, email dated May 22, 2007, production numbers CWMBIA 11132065 through CWMBIA 11132070.) Q. Let me know when you're ready. A. How carefully do I need to read McMurray's? Q. I don't know if I can answer that. I think you should read it so that you're comfortable with the document. I will ask you questions throughout this document. But as always, if you need to read further after I ask you a question, you can.
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MICHAEL W. SCHLOESSMANN warrants." Do you see that? MS. CONCANNON: Objection. A. Yes. MS. CONCANNON: I just note this is another document that refers to comments in red. MR. SELENDY: Okay. MS. CONCANNON: So it may not be clear who is making various comments. THE WITNESS: I obviously didn't read that carefully enough. Q. And at the time you received the document, did you have an understanding of what was meant by that, or was that something that you wrote yourself? A. Sorry, give me a second. I think that's, I believe that's my response to Jordan's question in the first sentence -- excuse me, second sentence. Q. Okay. What did you mean by
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MICHAEL W. SCHLOESSMANN saying "what constitutes materiality"? A. So this addresses the request from McMurray that we catalog all of our existing whole loan sale contracts so we could better understand the reps and warranties we made in connection with all of the whole loan sales, in an effort to, you know, dimension or for John to dimension, you know, risk associated with those. And so what one of the things they had asked us to focus on was to identify those specific counterparties and contracts that had reps and warranties different from what we considered standard reps and warranties, where we used the securitization standard as the benchmark, essentially. So anything where we went beyond or reps and warrants that went beyond that in terms of posing additional risk, he was interested in having this capture. My reference to materiality isn't the contractual materiality that
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MICHAEL W. SCHLOESSMANN as I said, the benchmark for a standard that we were using just to determine where we went above and beyond that on certain transactions. Q. Are those deals where CSC acted as sponsor and gave reps and warrants itself? MS. CONCANNON: Objection; mischaracterizes. Q. I'm just trying to understand what deals fall within that. A. There was no differentiation in terms of those deals. My recollection or general understanding would be that our, you know, we used the same depositors as the mortgage company, the four registered SEC shelves to issue our own securities. And therefore we typically did not, you know, have a different program insofar as reps and warranties, insofar as I can remember. Q. So the reps and warranties in the standard securitization would be
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MICHAEL W. SCHLOESSMANN gets bandied about frequently, but rather because each of these contracts were individually negotiated with counterparties, there may be changes that we would view as inconsequential in terms of altering the overall risk profile of the reps and warrants, and so we didn't want to necessarily have to capture every single counterparty that might have some immaterial, you know, difference in reps and warranties. Q. When you refer to the standard securitization reps and warrants, what does that mean? MS. CONCANNON: Objection. A. The reps and warrants contained in our securitization documents or with respect to our securitization programs, there were four different shelves. They tended to be, you know, consistent deal over deal. They were not specially negotiated each time they were reps and warrants approved by the rating agencies and, you know, they served as,
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MICHAEL W. SCHLOESSMANN comparable to the reps and warranties in the MBIA deals; is that right. MS. CONCANNON: Objection; vague. Q. Or is that not right? MS. CONCANNON: Overbroad. A. There may be distinctions between shelves. I think the purpose here wasn't to, you know, the notion of the PSAs having, you know, being the standard or the benchmark, doesn't have any significance beyond the fact that the majority of the loans we sold were securitized. And so that was viewed as a baseline level of risk. And so the credit risk management group, led by John McMurray, wanted to identify loans that were sold through channels that had higher or elevated rep and warrant exposure. You know, again, relative to, you know, the bulk of what we sold through securitization vehicles. Q. Okay. Would you turn to page
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MICHAEL W. SCHLOESSMANN 68 of the document. This is part of the email that John McMurray sent; right? A. It appears to be, yes. Q. Okay. So on point 2, representation and warranty, he states "except for loans retained in the bank investment portfolio, we generally seek to sell the risk associated with all loans we originate or purchase." Do you see that? A. Yes. Q. And did you understand that at the time to mean that this was a description of the Countrywide Home Loans practice with respect to originated loans? MS. CONCANNON: Objection. A. I would -- yes, I would have understood this to be a general operating principle for the sale of loans, where the intention is to transfer the risk and reward associated with those assets. Q. Then if you'd refer to the next page at the top, he states, under
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MICHAEL W. SCHLOESSMANN reps and warranties in excess of what we believed the standard was, as evidenced by the reps we made on our securitization transactions, that we would need to have a, you know, book a specific reserve or liability, you know, for that incremental or, you know, risk that we were taking on as a result of making more expansive reps and warranties. Q. Was there a standard reserve taken in these deals so that this would amount to an additional incremental reserve on top of the deal? MS. CONCANNON: Objection; vague, overbroad, mischaracterizes prior testimony. Q. We can focus it to HELOC deals if you want. MS. CONCANNON: Objection; vague, overbroad, lacks foundation, mischaracterizes prior testimony. A. I'm not comfortable with my knowledge base about what the mortgage company reserved, you know, at this time,
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MICHAEL W. SCHLOESSMANN the heading "accounting," "rep and warranty risk above the corporate standard is addressed through a specific reserve and/or balance sheet accrual." Do you see that? A. Yes. Q. And by rep and warranty risk above the corporate standard, did you understand that to mean risk for reps and warranties that were materially distinct from the standard set of reps and warranties that you described earlier? MS. CONCANNON: Objection. A. That is my understanding. Q. Okay. And what does it mean to say that risk was addressed through a specific reserve and/or balance sheet accrual? MS. CONCANNON: Objection; lacks foundation, calls for speculation. Q. I mean, do you know what was meant by that? A. If we were going to provide
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MICHAEL W. SCHLOESSMANN for HELOCs or, you know, any other products for that matter. Q. Okay. Could you look at the bottom of that page, there is a heading "retained risk boundaries." Do you see that? A. Yes. Q. And it says "we previously provided retained risk boundaries e.g. see Ingerslev's credit risk retention policy impact to exceptions dated March 27, '06. These boundaries are most operative for seconds where we sell the asset but retain much of the credit risk through a residual." What was your understanding of the statement that we retain much of the credit risk through a residual? MS. CONCANNON: Objection; lacks foundation, calls for speculation. Q. Did you understand it at the time? A. I don't know what I understood
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MICHAEL W. SCHLOESSMANN at the time. I understand that, I don't think, in my mind, there is not a whole lot of ambiguity about it. Our second lien transactions, I think I mentioned this yesterday, our second lien transactions were done predominantly with Countrywide holding the residual interest, which, as I said, was the security that absorbed losses before anyone else. And it was, you know, historically, you know, our practice to retain, you know, those residuals created off of second lien transactions. MR. SELENDY: Let's mark as 599, CWMBIA 14123986 through 92. (Plaintiff's Exhibit 599 for identification, email dated May 29, 2007, production numbers CWMBIA 14123986 through CWMBIA 14123992.) Q. You'll see it's an extended email chain, but about halfway through it it's forwarding an email that you sent to Nancy Deliban. A. Is that what you want to focus
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MICHAEL W. SCHLOESSMANN the servicing system. And had sought to embark on an effort to learn more about the problem for purposes of confirming its existence and remediating the problem. And that there are references in my note to Jack Schackett from the mortgage company, in terms of, quote, shutting down or shut down the project. So this was, you know, perhaps an example of -- well, I won't, strike that. Q. What were you about to say? MS. CONCANNON: Objection. Q. Was it an example of tension between CSC and CLD? MS. CONCANNON: Objection. Q. You can answer that. MS. CONCANNON: Between CSC and CLD? Objection. A. I think you could infer that from the, you know, exchange. Q. And the loan administration data integrity project was a project that was initiated within CSC; is that right? MS. CONCANNON: Objection.
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MICHAEL W. SCHLOESSMANN on? Q. Well, I think you should just read, it's not too long a document. A. Okay. MS. CONCANNON: Please do. A. Okay. Q. Is this an email exchange involving you, among others, in late May 2007? A. It appears to be, yes. Q. David Sambol's asking a question, "what's the story here?" And that's basically my question too. What's the story in connection with this email? MS. CONCANNON: Objection to form. Can you ask a more specific question? MR. SELENDY: I think the question is clear. Isn't it? A. Well, a recap of this email string would indicate that we in capital markets or Countrywide Securities Corp. had observed some level of issues around the prepayment penalty data that was on
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MICHAEL W. SCHLOESSMANN A. I'm sorry? Q. Was the loan administration data integrity project part of the CSC effort? A. Where are you seeing that reference, sorry? Q. This is in your email to Nancy Deliban, where you say "I have no idea why Schackett shut down loan administration's data integrity project." A. No, this was, loan admin is servicing. Servicing is a data integrity project, that was their project. We may have had a hand in, you know, influencing it or bringing to their attention issues around prepay penalty data, but it was their responsibility to, you know, enforce prepayment penalties or prepayment penalty terms on those loans that had prepay penalties. Q. And what was Schackett's responsibility at this point, May 2007? A. I believe Jack was the mortgage company's chief operating
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MICHAEL W. SCHLOESSMANN officer. I'm not sure if it says anywhere. But again, I'm not sure exactly the title, but that's my recollection. Q. Was he able as the chief operating officer of the mortgage company to shut down a project within servicing? MS. CONCANNON: Objection; calls for speculation, mischaracterizes prior testimony. A. I don't know if at the time -my recollection is Jack, that servicing reported up to Jack at that point in time. I can't be sure, though. That's something that could probably be easily confirmed. Q. Who had suggested that CSC was only interested in pointing out CLD's flaws, as reflected in the second sentence of your email? MS. CONCANNON: Objection. A. I don't recall. Q. Okay. But did you feel that CSC was being attacked for trying to
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MICHAEL W. SCHLOESSMANN response to the concerns that were expressed here? MS. CONCANNON: Objection to form. A. Again, I don't recall. Q. Okay. MR. SELENDY: Let's mark as Exhibit 600, document that is CWMBIA 15974470 through 78. (Plaintiff's Exhibit 600 for identification, minutes of the meeting of the credit risk management committee, May 29, 2007, production numbers CWMBIA 15974470 through CWMBIA 15974478.) Q. And my questions here will focus on pages 7 and 8. A. 7, the carry over? Q. The section "performance outlier" and I'll ask you a bit about layered risk and the loan manufacturing remediation project. And then key initiatives. A. Okay.
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MICHAEL W. SCHLOESSMANN address data integrity problems? MS. CONCANNON: Objection. A. I can only -- I can only go by what I stated in my email. Q. In Nancy Deliban's email, she says "Jack is preventing servicing from helping us clean up the data. You need to help." Do you see that? That's in her email to Dave Sambol. A. I'm sorry, yes. Q. Were you a part of any follow-up discussions involving Dave Sambol or -- well, involving Dave Sambol with respect to this matter? MS. CONCANNON: Objection. A. I don't recall any subsequent discussions that were had as a result of this issue. Q. Do you recall any resolution of this issue? A. I don't recall. Q. Okay. So you don't know whether any actions were taken in
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MICHAEL W. SCHLOESSMANN Q. Okay. First, does this document reflect the minutes of the May 29, 2007 meeting of the credit risk management committee of Countrywide Financial Corporation? A. That's how it's titled, yes. Q. And you attended that meeting? A. I am listed as an attendee. So I don't have reason to believe I didn't attend. Q. If you turn to page 7, under the section "performance outlier," in the middle of the paragraph there is the statement "Mr. Sambol then expressed concern around the quality of SLD, structure loan desk, reporting, stating that there needs to be more controls around the process with reporting, and increased levels of visibility. Mr. Sambol further explained that there needed to be a holistic strategy around how the exception loans are handled, and the committee entered into an extended discussion of the current process."
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MICHAEL W. SCHLOESSMANN Do you recall anything of that discussion? A. I don't recall a single thing about the discussion. Q. Do you have a general understanding of the concerns that were expressed by Mr. Sambol regarding the quality of structured loan desk reporting? MS. CONCANNON: Objection. A. Nothing more than I can infer from what you just read. Q. Okay. At the end of the paragraph it states "Mr. Sambol then asked that Mr. Schackett be responsible for putting together a comprehensive enterprise wide process in place to ensure that exception loans were handled in an appropriate and consistent manner with respect to pricing, execution, reserving and origination -- originator accountability." Do you see that? A. Yes.
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MICHAEL W. SCHLOESSMANN greater than the individual risk attributes themselves might otherwise imply. Q. Could you give an example of that? MS. CONCANNON: Objection. A. Based solely on my general understanding of layered risk, if you had a low doc loan coupled with, you know, another risk attribute, say a FICO score, that if you evaluated FICO and doc type on their own and had some assumption around default risk associated with each individual attribute, that when taken together as part of a loan, that the impact to performance might be greater as a whole than the sum of the parts. Q. Is that equally true if you have multiple exceptions in a given loan, that you would need to consider the layered risk effect of multiple exceptions? MS. CONCANNON: Objection; mischaracterizes prior testimony.
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MICHAEL W. SCHLOESSMANN Q. Do you know whether Mr. Schackett in fact put together such a comprehensive enterprise wide process? MS. CONCANNON: Objection. A. I don't. Q. Did you ever see a draft of any such enterprise wide process protocol? MS. CONCANNON: Objection. A. Not that I recall. Q. The next section refers to layered risk. What is layered risk? A. Layered risk generally is reference to loan attributes, loan risk attributes, where you have, you know, multiple risk attributes on a given loan. Q. Does that increase the level of risk? What's the significance of the layering of multiple risk attributes? A. Yeah, the general understanding, as I know it, would be that there is, you know, elevated levels of risk in the case of loans that have multiple risk attributes. That might be
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MICHAEL W. SCHLOESSMANN For just the same reason? MS. CONCANNON: Vague and overbroad. A. Hard to address exceptions. As I said earlier, if performance is projected based on, you know, objective loan attributes, and so, you know, to the extent you were, you know, to the extent the exceptions you were referring to, you know, were sort of encompassed in the description I just gave, again, putting less emphasis on the notion of the exception and more emphasis on just what are the loan attributes, you could have a loan, for instance, within guidelines that might actually, you know, when you considered the risk attributes of that loan, could have a higher expected default rate than a loan with an exception. Because it might have, you know, very low risk attributes other than, you know, the one exception. So when I look at layered, personally, my understanding of layered Q.
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MICHAEL W. SCHLOESSMANN risk has more to do with the objective, you know, risk attributes of the loan than any sort of vague notion of an exception. Q. Okay. But if the exceptions concern the fundamental attributes of credit, such as CLTV or FICO score and the like, then I take it for the same reason you could have a layered risk problem on the basis that you described, you could also have a layered risk problem if you have a problem in more than one area, say it's CLTV plus documentation program, or CLTV plus FICO score? MS. CONCANNON: Objection. A. I wouldn't characterize it as a problem. I would instead characterize it as, first of all, they're not mutually exclusive concepts. Like I said, I gave a very elementary example of layered risk, attributes, how the risk could be greater than, you know, the sum of the individual risk attributes. Right, you
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: My legitimate objection is that you haven't asked whether he received these minutes, you haven't asked whether he reviewed these minutes, you haven't asked whether this is a portion of the meeting he attended. Often attendees did not attend the entire credit risk committee meetings. Simply because it indicates that he was an attendee, does not necessarily mean that he was even present for the portion of the minutes for which you are inquiring. Q. Mr. Schloessmann, did you walk out halfway through the meeting or did you tend to sit through the whole meeting here? MS. CONCANNON: Objection. A. I have no recollection as to my participation in this meeting. Q. Do you have a general understanding of what the loan
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MICHAEL W. SCHLOESSMANN could have exceptions that were encompassed effectively by that sort of description. So yes, it's certainly plausible that the exceptions, to the extent they impacted those very same risk attributes that helped determine or project performance, you could certainly have a situation like I just described. Q. Okay. If you'll turn to the next page. At the top there is the statement "status of loan manufacturing remediation projects." Do you know what that refers to, the loan manufacturing remediation projects? MS. CONCANNON: Objection; foundation. MR. SELENDY: I'm sorry, what's the foundation objection? The witness has testified he was at the meeting. He's read the document. What's your legitimate objection here?
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MICHAEL W. SCHLOESSMANN manufacturing remediation projects were, as of May of 2007? MS. CONCANNON: Objection. A. I have a vague recollection of a project by that name. I don't know any of the particulars of the project, other than what the project name implies. Q. What was the -- what were the projects intended to accomplish, do you know? MS. CONCANNON: Objection. A. Again, my knowledge is limited. I didn't participate in the project. My knowledge is limited to, you know, guessing or inferring from, simply from the name of the project. Q. Okay. Earlier we reviewed a document that talked about problems with the manufacturing of the loans. Does this concern, to your understanding, improving the data in connection with the origination of loans? MS. CONCANNON: Objection; mischaracterizes prior exhibit and
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MICHAEL W. SCHLOESSMANN prior testimony. A. I don't remember the specific context, although I remember the reference to the manufacturing, or I think I referred to manufacturing plant. I don't know if it was part of this project. It very well could have been. I don't even remember the date range. But this is what, May of '07, I thought the other was '06. But I could be mistaken. Q. It was prior to this. A. So I'm not sure if it would have fallen under this particular project. Q. Okay. If you look farther down on the page, under "key initiatives," there is the statement "Mr. McMurray then reviewed the key initiatives, starting with the HELOC default model, reporting that new models were under development for both the ALLL and residual valuations, and reviewed the current approach, statistical VAN as it
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MICHAEL W. SCHLOESSMANN Q. Do you know anything about the statistical VAN approach that is referenced here? A. I don't. Q. How about the three new approaches that are described here? A. No, I don't. Q. Okay. I show you a document previously marked as 155. A. Okay. Q. Okay. What does this document reflect? A. Series of emails regarding a meeting that was proposed to discuss the structured finance transaction manager's involvement in our securitization due diligence process. Q. Do you know what precipitated the meeting? A. I don't recall specifically what precipitated the meeting. I recall a discussion I had with Matt Tomiak, who I believe was leading this group. And I conveyed to Matt that while the response,
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MICHAEL W. SCHLOESSMANN compared to the three new approaches; historical roll rate, hybrid and statistical note." Do you see that? A. Yes. Q. Is the HELOC default model the risk pricing default model you referred to earlier, do you know? MS. CONCANNON: Objection; foundation, mischaracterizes prior testimony, assumes a fact not in evidence. MR. SELENDY: Notwithstanding all your counsel's objections, you can still answer. A. The loss model, I believe I referred to loss and prepay models that we used at Countrywide Securities. There were models, different models at different parts of the company. I do not recall Countrywide Securities having a HELOC, you know, loss model. So I'm left to assume that this was a bank, you know, model.
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MICHAEL W. SCHLOESSMANN direct responsibility for due diligence resided in Debbie Brown's area, that I expected the securitization transaction managers to also provide input and oversight in that process. Q. And is the email that Matt Tomiak sends to the CSC structured finance group, cc'ing you, part of that input given in response to your direction? MS. CONCANNON: Objection. A. I'm suggesting -- I don't have any reason to believe that any of this was dictated by me, if that's what you're asking. My concern, as I recall, was that we have checks and balances in our process. And I expected the due diligence -- or excuse me, the securitization transaction managers to have a meaningful role in that process, even though the direct responsibility for it resided elsewhere. Q. Do you recall any discussion about Matt Tomiak's suggestions with
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MICHAEL W. SCHLOESSMANN respect to the executive summary of the due diligence conducted by CSC? A. I'm sorry, did I recall? Q. Any discussion about Matt Tomiak's suggestions of the executive summary of the due diligence process conducted by CSC. MS. CONCANNON: Objection. A. Specifically, are you referring to anything specific in this email? Q. Yeah, do you recall any discussions about his suggestions in this email? A. No, I don't recall actually, you know, I know I'm copied on here, I don't have a recollection of seeing this. Q. Okay. You don't doubt that it was sent to you? A. No, I have no reason to believe it's not as it purports to be, which is an email where I'm copied. Q. Okay. Do you recall any concern expressed by Matt Tomiak that
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: Objection; mischaracterizes prior testimony. Q. Did I misstate what you had done? A. Well, the securitization transaction managers, it wasn't as though they were not -- their responsibility was to manage the deal, start to finish. Including all component parts, even though it involved other participants, both internal and external to Countrywide Securities. So they were essentially supposed to be the cohesive force to pull all these constituent parts together. So it wasn't as though they had no involvement. I think this email came as a result of a conversation where I had conveyed to Matt that I wanted them to, you know, redouble their efforts or I wanted to emphasize the importance of their engagement in that process, not that it never existed before. I think following this, to your question, I'm not sure what
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MICHAEL W. SCHLOESSMANN phrases such as waived it in and it was not checked due to lack of time are not acceptable? MS. CONCANNON: Objection. Q. As expressed in the first full paragraph on page 362? MS. CONCANNON: Objection. A. I apologize again, do I recall having conversations around that? Q. Do you recall any concerns expressed by him with regard to the use of phrases like that in the executive summaries? MS. CONCANNON: Objection. A. I don't have a specific recollection of concerns he expressed around phrases like this or others. But again, that's more, you know, the passage of time. Q. Do you know whether the process of preparing executive summaries changed as a result of your bringing in the structured finance group to oversee the process with you?
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MICHAEL W. SCHLOESSMANN ultimately materialized, although I can make an observation that should be known to all that less than two months later, you know, we never did another securitization transaction when the market shut down in early August. Q. Do you know which securitization transaction managers were responsible for the MBIA securitizations? A. No, not off the top of my head. But every deal was allocated to a transaction manager. And -- well, I don't know personally, you know, there is -- each manager -- excuse me, each deal did have a transaction manager. Q. Did you have managers assigned by product type, so that you'd have a HELOC securitization manager, for example? A. It may have varied over time. But certainly for periods of time we had -- certain transaction managers focus on certain of the trading desks. So yes, to answer your question, you might have a
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MICHAEL W. SCHLOESSMANN manager who had a disproportionate number of HELOC deals relative to anybody else. Q. Do you recall who may have had -- strike that. Did you in fact have a manager responsible for HELOC deals primarily in the period 2004 to 2007? MS. CONCANNON: Objection; asked and answered. A. Well, during that period, my recollection would have been there would have been more than a single transaction manager. We had staffed up, some people had moved on into trading or outside the firm. So as well as there would have been a desire to make sure people were exposed to other transactions as well, just to, you know, broaden their exposure and experience. Q. Do you recall the names of the transaction managers who handled HELOC deals during that period, 2004 to 2007? A. I can think of a couple of them.
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MICHAEL W. SCHLOESSMANN A. The document appears to be an email string, first from me to Ryan Watts. And it has, you know, a history leading up to that communication from Ryan, Mike Henderson, Mike Henderson, back to Ryan and so forth, a few more. Q. What do the emails concern? MS. CONCANNON: Objection; vague. A. Emails appear to concern a change in the data fields required by Moody's, and the resulting impact on our business in terms of what we needed to do to be able to accommodate the more expansive data set that they were apparently asking for. Q. There is a reference at the bottom of the page that says, in the second, looks like the second sentence, "some of these data fields result in loss level hits of 40 percent if the data is not provided." Do you see that? A. Yes.
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MICHAEL W. SCHLOESSMANN Q. Okay. A. I believe Ted Owens, Ted Bouloukos, Bentley Hodges. I mean, there could have been more. You are free to ask for, you know, the staff, I believe, of the transaction management group. And for all I know, I mean, it could very well be the case that all of them had some exposure to HELOCs. I just don't know. Q. Okay. Would it be the same name for closed end second deals, or fixed rate seconds? A. Possibly. Q. Okay. MR. SELENDY: Let's mark as 601, CWMBIA 11141425 to 27. (Plaintiff's Exhibit 601 for identification, email dated June 13, 2007, production numbers CWMBIA 11141425 through CWMBIA 11141427.) A. Okay. Q. Okay. Can you identify this document?
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MICHAEL W. SCHLOESSMANN Q. Is that suggesting that some of the new fields concerned areas where there would be, in effect, missing data for up to 40 percent of the deals? MS. CONCANNON: Objection. Q. 40 percent of the loans? MS. CONCANNON: Objection; mischaracterized the document. Q. What was your understanding at the time of what was meant by that statement? A. I don't have a recollection of this particular issue. My general understanding of the data required and the impact of not providing the data is that the rating agencies would customarily take a more pessimistic view. So if you weren't able to provide the data, they assumed the worst. And I'm inferring, just my understanding of the email as written, is that there would be a, you know, significant hit as a result to loss levels if we weren't providing the data,
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MICHAEL W. SCHLOESSMANN because of the, you know, the worst case assumption. Q. So as of June 2007, missing documents were not acceptable to Moody's at least; right? MS. CONCANNON: Objection; mischaracterizes the document. Q. Is that what that means, missing data was not acceptable to Moody's? MS. CONCANNON: Objection. A. No, two entirely different -two entirely different issues. Q. You said there would be a significant hit to loss levels if we weren't providing the data. What did you mean by that in your testimony? A. If we weren't providing the requested data. So going to the last email in this string, there is a listing, Ryan is listing out fifteen data elements that Moody's was asking us to provide. And my inference of Ryan's note here on page 1 is that, and my general
Page 752
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MICHAEL W. SCHLOESSMANN credit quality of the pool of loans for each of these securitizations? MS. CONCANNON: Objection; assumes facts not in evidence. A. My understanding -- my general understanding of this request and other similar requests for data was that the rating agencies were using that data as part of their overall evaluation of the ratings process in connection with transactions they provided ratings on. Q. And in particular CSC was asking the agencies to give ratings as to the credit quality of the various certificates in the RMBS securitizations; right? MS. CONCANNON: Objection; vague, overbroad. Q. Isn't that what you were seeking, you were seeking ratings from Moody's, among others, as to the credit quality of the certificates issued by the various securitization trusts? MS. CONCANNON: Are you
Page 754
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MICHAEL W. SCHLOESSMANN understanding of how the rating agencies operated with respect to data requirements, is that they were asking that this data be provided in the tape submissions. Those data fields together with all of the other data fields would be evaluated by them in coming up with loss coverage levels. And if we were unable to provide the data under their, you know, worst case assumption, that was going to have a meaningful impact on loss levels, or loss coverage levels, which is essentially the feedback we get back from them when we give them a tape, they tell us, you know, for certain ratings, what sort of loss coverage levels you need to achieve a rating. So it was going to essentially have a negative impact on loss coverage levels. Q. Did you understand that Moody's was requesting this data in order to be able to generate a rating as to the
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MICHAEL W. SCHLOESSMANN talking about this exhibit now or something more general? Just so I'm clear. Q. Are you able to answer that question? A. As a general matter, we weren't seeking, you know, a credit quality assessment, per se. I mean, if you're talking about the process very generally, as we've talked about before, it was, you know, in connection with transactions, we provide the data, they provide, you know, loss coverage levels or credit support levels necessary to achieve desired ratings, right, all part of the normal process. This is nothing outside the ordinary scope of the rating agency interaction, this just happened to be a case where they were expanding their data elements they required. Q. A rating, though, at its most basic, is in fact a statement of credit quality; right?
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Page 755 Page 757
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: Objection. A. Credit quality, I -- ratings are provided by the rating agencies. And as they would tell you, they express their opinion as to the likelihood of timely receipt of principal and interest on the bonds that are accorded their rating. Q. So the ratings reflect a view as to the expected default on recovery rates? MS. CONCANNON: Objection. Q. On the securities; right? MS. CONCANNON: Objection; asked and answered, mischaracterizes prior testimony. A. As a general matter, the ratings, in arriving at the ratings, the rating agencies, depending on the rating, subject the collateral and the transaction to certain stress levels. So the higher the rating given, the higher the stress you subject the collateral and transaction to.
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: Objection; asked and answered, mischaracterizes prior testimony. MR. SELENDY: It's not characterizing prior testimony. Again, you're totally out of line in your objections. We do have the record here. But in the interest of trying to move forward, I'd like to see if you could answer my question. MS. CONCANNON: As I stated previously, I will state the basis happily for any of my objections. I am able to give one word grounds. MR. SELENDY: I'm noting for the record. We're noting your objections today. We are going to watch you in the future. And we have a record made throughout these days. I've tried not to call you on it too many times in the interest of proceeding. But you're
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MICHAEL W. SCHLOESSMANN Q. Would you agree with me that the ratings reflect a view as to the expected default and recovery rates of the securities? MS. CONCANNON: Objection; asked and answered. Q. As a general matter? MS. CONCANNON: Objection; asked and answered. A. Look, I would characterize it as I previously did. The ratings express an opinion as to the likelihood of timely receipt and repayment of principal and interest on the bonds being rated. So there are different, from a AAA down to, all the way down to a single B rating, there are gradations of likelihood of timely receipt of principal and interest. As dictated or evaluated by the rating agencies. Q. Another way of expressing the likelihood of repayment of principal and interest is the likelihood of default on principal or interest; right?
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MICHAEL W. SCHLOESSMANN completely out of line. I'm going to ask my question. MS. CONCANNON: Mr. Selendy, the only thing that has been disruptive is your lectures to me on my ability to object under New York CPLR. You have been completely out of line which your lectures. I will state for the record that we have reviewed your transcripts, and both Ms. Sheth and Mr. Cohen have made very similar objections to the types of objections that I've been making today. So before you attack me for the way in which I have been defending this deposition, I would ask that you look at your own conduct as well. And again, under the CPLR it is entirely permissible for me to state one word grounds as to the basis of my objection, which is all
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MICHAEL W. SCHLOESSMANN that I have been doing over the course of two days. MR. SELENDY: If you had one word -MS. CONCANNON: The record will also reflect -MR. SELENDY: This is not one word. MS. CONCANNON: -- you asked the same question, five, six, seven, twelve times throughout the course of two days of testimony. MR. SELENDY: May I have the question read back, please. (Record read as requested.) MS. CONCANNON: Objection; asked and answered. A. I'm puzzled because I haven't thought of it in those exact terms. I would let the ratings and what they mean stand on their own, you know, as expressed by S&P, Moody's, Fitch, and other rating agencies. If you're asking, in terms of
Page 760
MICHAEL W. SCHLOESSMANN take effect since we got advance notice of it until July, I really don't know whether it ended up being consequential at all. Q. Because you didn't do further securitizations where you would have had to provide that? MS. CONCANNON: Objection. A. Beyond July we didn't do another new issue securitization. MR. SELENDY: The tape needs to be replaced. What I would suggest is we take a short break, maybe five minutes, whatever you want, and I'll try and finish in the next session after we come back. THE VIDEOGRAPHER: We are going off the record at 4:39 p.m., this marks the end of tape No. 11. (A recess was taken.) THE VIDEOGRAPHER: We are back on the record at 4:48 p.m., this marks the beginning of tape No. 12.
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MICHAEL W. SCHLOESSMANN assessing the likelihood of timely receipt of interest and principal on bonds that are being rated, whether that has any relationship to the underlying collateral, I would say yes, it does. I'm not sure that's what you were asking. Q. Close enough, thank you. If you'll turn to page 427 of the document. One of the data fields requested by Moody's was debt to income; right? A. Yes. Q. And was that a problem for Countrywide, do you recall? MS. CONCANNON: Objection; vague, overbroad. A. I've stated in my prior testimony that we, the reason we didn't disclose it in our transactions was we were concerned about reliability. Moody's was asking for it here. I presume they were not asking for it before. You know, given that this is June and the requirements probably didn't
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MICHAEL W. SCHLOESSMANN BY MR. SELENDY: Q. Let me show you a document previously marked as Exhibit 108. A. Okay. Q. Okay. Have you seen this document before? A. I believe I have, at least parts of it. Q. Okay. What was Josh Adler's position as of June 2007? A. I believe he's managing director in secondary marketing. Q. Okay. And Ted Owens' position at the same time? A. Ted Owens was, I don't know his title, but he was within our transaction -- securitization transaction management group, structured finance and banking, within my group. Q. And is it fair to say that as of this point in time, there was still a live issue on the part of investors as to why CSC was not disclosing DTIs on Countrywide loans?
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: Objection. A. I think there was -- what I will say is I think there was still investor interest in getting DTI from the mortgage company. It wasn't CSC's data. Q. And if you look at the last page, there is an email written to you, right? A. Yes. Q. Is that from Rob Graham? A. Yes, it appears to be. Q. And what was his position at that time? A. Rob was on our ARM desk, trading desk, and traded, specifically traded in, you know, credit sensitive, you know, bonds. So essentially the lower rated bonds that had more credit exposure. Q. Okay. And he writes to you saying "if I were an investor, I might wonder why CSC doesn't disclose DTIs when it securitizes CW loans. In fact, I might buy into the street story that CSC
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MICHAEL W. SCHLOESSMANN forward it. Q. I see. Did Ted Owens forward that to Josh Adler cc'ing you? A. It looks that way, yes. Q. Okay. MR. SELENDY: Let's mark as Exhibit -- this is previously marked. Q. I show you a document previously marked as Exhibit 132. And my first question to you will be whether you can identify what this exhibit is. A. It appears to be an internal audit department review of enterprise wide asset securitization. Q. And was this basically end of year 2007? A. It's dated December 6, 2007. Q. If you turn to page 1 of the memorandum. It's 402, Bates number 402. In the conclusion, it states -A. I'm sorry, hold on. Got it, 402. Q. Do you see the section that
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MICHAEL W. SCHLOESSMANN securitizes the sh*t CHL loans, e.g. is a dumping ground of kickouts and weak credit loans. I might ask myself what does CSC have to hide." Do you see that? A. Yes, I'm sorry. Q. And he goes on to say "CSC, where the playing field isn't level (to our collective detriment)." Do you see that? A. I do. Q. Did you talk with him about that issue? A. I don't remember if we had a conversation or I just received his email. Q. And you forwarded on his email to Josh Adler; is that right? MS. CONCANNON: Objection. Q. Who did you forward the email to? MS. CONCANNON: Objection. A. I'm not sure. I'll trying to figure that out. I can't tell if I did
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MICHAEL W. SCHLOESSMANN says "the following conclusions were reached during our review? A. Yes. Q. And it states, in the first subpoint, "internal controls over asset securitization require improvement. Recommendations from prior year were not fully implemented resulting in partial repeat findings for SMD and Countrywide Securities Corporation." Do you see that? A. Yes, I do. Q. Did you have any discussion with internal audit as to its conclusion that recommendations from the prior year had not been fully implemented with regard to Countrywide Securities Corporation? MS. CONCANNON: Objection. A. I don't have any specific recollection in discussing this particular audit with them. It would not have been unusual for me to both receive and discuss these findings.
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MICHAEL W. SCHLOESSMANN Q. Do you know why the recommendations from the prior year had not been fully implemented as to Countrywide Securities Corporation? MS. CONCANNON: Objection; mischaracterizes the document. Q. As stated in the document on page 1. MS. CONCANNON: Objection; assumes facts not in evidence. A. I do not, although I think it's noteworthy to point out that this is at a time where four months have passed, four plus months had passed since we did a securitization and we were not, you know, intending to do any securitization imminently because of the markets. Q. But you don't have any understanding of why before the time that CSC stopped underwriting new deals, the recommendations of internal audit had not been fully implemented? MS. CONCANNON: Objection. A. I don't know which one, I
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MICHAEL W. SCHLOESSMANN "partial repeat finding CSC." Do you see that? A. Yes. Q. Do you recall expressing any disagreement at the time with internal audit's finding that the CSC underwriting still did not provide adequate support and rationale for conclusions in the executive summary? MS. CONCANNON: Objection; mischaracterizes the document. A. I don't recall specific conversations I had in connection with this audit. We spoke earlier about a similar audit finding in connection with an earlier audit, and I stated the issues that I had. Whether or not I communicated those directly or through my team to internal audit, they were well aware of the challenges we thought in, you know, complying with their request. MR. SELENDY: Let's mark as Exhibit 602, CWMBIA 12863199 to 3201.
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MICHAEL W. SCHLOESSMANN haven't had an opportunity to review, I don't know which ones they were suggesting were not fully implemented and why. Q. If we look through the document, there are certain headings saying partial repeat finding. For example, in heading 2, it states "CSC underwriting due diligence documentation does not provide adequate support and rationale for the conclusions reached." A. I apologize. Q. This is page 17. Sorry, 7 of the document. A. Okay. Q. Are you there? A. Yes. Q. So in heading 2, it states "CSC underwriting due diligence documentation does not provide adequate support and rationale for the conclusions reached. Results and conclusions are not documented clearly and accurately in the executive summary." Then it states
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MICHAEL W. SCHLOESSMANN (Plaintiff's Exhibit 602 for identification, email dated July 18, 2008, production numbers CWMBIA 12863199 through CWMBIA 12863201.) Q. This is dated July 18, 2008. A. Okay. Q. Are you able to identify this document? A. I'm not. I don't know if you have the attachment. I'm not sure. I mean, obviously it purports to be an attachment on HELOC residual valuation, just by virtue of the caption. But I can't tell. Q. On the second page at the bottom it says "attachment deleted by Michael Schloessmann." Do you see that? A. Yeah. Q. Do you know whether you deleted the attachment? MS. CONCANNON: Objection. A. I have no idea. Q. Okay. Do you know what the
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MICHAEL W. SCHLOESSMANN subject is, the HELOC residual valuations that's reflected in the subject line of the email? A. Other than the caption, I mean, I assume it has something to do with the residuals we held on balance sheet, as I stated earlier, which was the majority of the second lien transactions we did. Q. On the first page you ask Alex Panin two questions, the first one is "what about any fixed seconds residuals that we have on the books? Same conclusion about there being no monoline default exposure." Do you recall what you were asking in those questions? A. Other than what -- same conclusion about there being no monoline default exposure. If left to guess -- I'm not supposed to guess. Q. What's your best understanding of what you meant when you wrote this
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MICHAEL W. SCHLOESSMANN But in the form that this email was produced to us, it was deleted. Let's mark as Exhibit 603, BACMBIA-A92326 through 92328. (Plaintiff's Exhibit 603 for identification, document entitled "Countrywide Financial Corporation repurchase operations committee charter," production numbers BACMBIA-A92326 through BACMBIA-A92328.) MS. CONCANNON: Philippe, I am going to claw back this document on the record as subject to our current pending or your current pending motion to compel repurchase related documents. I'll note for the record that this appears to have been prepared on or around September 30, 2008, which is after the date on which the litigation was filed. MR. SELENDY: What is the basis of your claw back? Are you
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MICHAEL W. SCHLOESSMANN email? MS. CONCANNON: Objection; asked and answered. A. I don't have any recollection of sending this. I'm just trying to -reading it does not spark in me a recollection. So I'm literally stuck with the words and trying to figure out what was meant. Q. What does monoline default exposure mean to you? A. Whether, well, in the abstract, monoline default exposure to me would mean do we have exposure by virtue of our residual holdings if the monolines default. But, you know, that's a guess. That's my best guess at those words. Q. So you have no idea today what you meant when you said same conclusion about there being no monoline default exposure? A. Not without more context. MR. SELENDY: Okay. We'll see if we can locate the attachment.
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MICHAEL W. SCHLOESSMANN asserting that it's a privileged document? MS. CONCANNON: I am asserting that consistent with the affidavits of our witnesses, Shareef Abdou and David Sobul, submitted in connection with our opposition to your motion to compel on Monday, that the formation of the ROC, the committee charter of the ROC, and events subsequent to February of 2008 regarding the operations of that committee are attorney-client privileged, attorney work product and attorney trial preparation privileged. And that's the basis for my claw back of the document. MR. SELENDY: Okay. I disagree with the assertions of privilege and work product protection. But in light of your statement and instruction, I assume to the witness, I won't ask about this document. However, we're
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MICHAEL W. SCHLOESSMANN reserving our right generally to ask this witness to come back in connection with repurchase requests, including specifically relating to the repurchase operations committee, pending the result of the motion that's presently in front of the judge. And with that I have no further questions as of today. Thank you. THE WITNESS: Thanks. MS. CONCANNON: Let's take a short break. THE VIDEOGRAPHER: Going off the record at 5:03 p.m. (A recess was taken.) THE VIDEOGRAPHER: We are back on the record at 5:16 p.m. EXAMINATION BY MS. CONCANNON: Q. Mr. Schloessmann, I just have a few follow-up questions about some of the exhibits that were marked during your
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MICHAEL W. SCHLOESSMANN 573 received a copy of your white paper? A. No. Q. Do you know whether the person who authored this document discussed it with anyone else before offering the opinions set forth here? A. No. Q. Did you ever receive a copy of this document? A. Don't recall ever seeing this before. Q. Prior to yesterday, had you ever seen this document before? A. I don't believe so. Q. And to the extent you were responding to questions from Mr. Selendy yesterday regarding the contents of this document, you were doing so based on inferences drawn from your reading of the document during yesterday's testimony? MR. SELENDY: Objection; leading. A. That's correct. Q. In responding to Mr. Selendy's
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MICHAEL W. SCHLOESSMANN two days of testimony. And I've placed a stack of those in front of you. The first is Exhibit 573. Do you recall being asked some questions about this document yesterday? A. I do. Q. Do you know who authored this document? A. I don't. Q. Do you know when this document was authored? A. I don't. Q. Do you know how the person who authored this document received a copy of your white paper that you discussed yesterday during your testimony? A. I don't. Q. Do you know who provided the person who authored this document with a copy of your white paper? A. No. Q. Do you know why the person who authored this white paper received a copy -- the person what authored Exhibit
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MICHAEL W. SCHLOESSMANN questions yesterday regarding this document, what, if anything, were you basing your opinions on? MR. SELENDY: Same objection in light of the prior question. A. I believe my comments were based on my reading of this document. Q. Assuming that this document was authored in August of 2006, as Mr. Selendy represented to you yesterday, would this document be referring to monoline repurchases? MR. SELENDY: Objection. A. I don't believe it would, in that we didn't receive any monoline repurchase until 2008. Q. All right, you can set that one aside. The next you should have in front of you is 567. Is that right? A. I have 173. Q. Great. A. You want me to go to 567? Q. Yes, let's go to 567, which
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MICHAEL W. SCHLOESSMANN should be the next one. A. Okay. Q. Do you recall counsel asking you a number of questions about this document? MR. SELENDY: I just ask you the date of that document? MS. CONCANNON: It is an email chain, the top most email is October 28, 2005. MR. SELENDY: Thank you. A. Yes, I do recall. Q. And in your email, which begins at the bottom of the first page with the Bates number ending 271 and then continues on to the next page, in the first sentence you refer to "reporting issues we have had on the Citizens HELOC portfolio since we've been at this at least July." What reporting issues are you referring to in that sentence? A. I believe I'm referring to the reporting issues or issues in connection
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MICHAEL W. SCHLOESSMANN Q. Well, you're referring to, I presume, servicing reporting issues; is that right? A. That's right. Q. What are the servicing reporting issues being described in this particular email? A. I don't have a specific recollection of exactly what the issues were. They had requested certain data to be reported to them on a monthly basis, and this email chain references the difficulty we were having in providing all of the requested data fields to Citizens Bank. Q. Again, this is data that was being provided in connection with the servicing of whole loan trades to Citizens Bank? A. That's right. Q. What, if anything, does the servicing referenced in your email of October 28, 2005 have to do with the collection of servicing fees by either
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MICHAEL W. SCHLOESSMANN with the monthly reports that we were sending Citizens Bank, as we did all whole loan investors. Q. And so this is referring to reporting to a whole loan investor? A. That is correct. Q. Does it have any relation to reporting in connection with securitizations, including the MBIA securitizations that you've been discussing for the last two days? A. No, it doesn't. Q. And there is a sentence in your email that states "they indicated that we are the only servicer they have experienced reporting issues with." What servicing are you referring to there? A. Can you direct my attention? Q. It's mid-paragraph in that same email. A. Sorry, I see it now. And you're asking me about the issues?
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MICHAEL W. SCHLOESSMANN CHL or CHLS in connection with securitizations? A. I don't think they have anything to do with one another. Q. Why is that? A. The general nature of the issues, as I recall, was around the data that Citizens wanted us to report out to them. And I don't recall anything about servicing fees. But rather just that it was a data availability issue. Q. And then you state "we have created the impression in their minds that we are a subpar servicer." What, if anything, does that statement have to do with the quality of servicing provided by CHLS and CHL in connection with securitizations of HELOC and CES mortgages at issue in this case? A. I don't see how it has any impact on what we were doing for other investors with whom we had different reporting requirements, which was the case in the securitization transactions.
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MICHAEL W. SCHLOESSMANN Q. And at the time you drafted this email in October of 2005, did you believe that CSC, CHL or CHLS was a subpar servicer? A. I don't recall what I was thinking. Based on this, on this email chain, I do recall this specifically had to do with the providing of certain data that was requested, uniquely requested by Citizens Bank. Q. Let's go to the next one in the stack, which is 564. The top most document is a John McMurray email to Nick Krsnich, dated June 2, 2005. A. Hold on. Q. I'm not in order, I apologize. My fault, it wasn't in front of you. And if you turn to the third page in the document, which ends with the Bates number 070, this is an email that you discussed with Mr. Selendy yesterday that contains both Mr. McMurray's comments and your comments, kind of
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MICHAEL W. SCHLOESSMANN and white contractual requirement that didn't involve judgment. And therefore we thought, as a result of it being a more perfunctory process, we could expedite that process without undue harm to the company. Q. What is a post-close repurchase? A. Post-closing due diligence is, would have been an arrangement that we specifically negotiated on certain whole loan transactions that we were selling to whole loan buyers that due to the limited amount of time or a buyer, buyer's desire to close earlier than that which would afford them the time to complete their due diligence review, we allowed them to continue their due diligence review following the closing for some specified period of time. And at the conclusion of that process, identify loans that they wanted to reject from the pool. And have us repurchase. Q. What is an EPD repurchase?
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MICHAEL W. SCHLOESSMANN interspersed with one another. Do you recall that? A. I do. Q. And yesterday you walked through this email in some detail with Mr. Selendy indicating which comments were yours and which comments were Mr. McMurray's. A. You recall. Q. I would like to direct you to the first of your comments in this email, in which you state "I believe we should differentiate repurchases relating to post-closing due diligence and EPDs from all other repurchases for two reasons." Why did you believe that you should differentiate repurchases relating to post-closing due diligence and EPDs from all other repurchases? A. Because they did not require any sort of judgment in -- sorry, let me back up. These two types of repurchases involve a very straightforward or black
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MICHAEL W. SCHLOESSMANN A. EPD repurchase is an early payment default. Again, that was specific contractual provision negotiated in only some of, and in fact very few of our contracts where we sold loans to whole loan buyers, again, that, again, required us to repurchase the loan if any of the cover payments were missed by the borrower. Q. Do you recall responding to some questions regarding an HSBC repurchase? A. I do. Q. What types of repurchases were taking place in the HSBC matter? A. As I recall, those repurchases that were referenced were also post-closing due diligence repurchases. Q. Do you recall what the underlying loan collateral was in the HSBC whole loan transaction? A. These were subprime second lien whole loans. Q. Do you know whether any of the
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MICHAEL W. SCHLOESSMANN loans at issue in the MBIA matter, the ones, the securitizations that are listed in paragraph 29 of the amended complaint, are subprime seconds similar to those included in the HSBC whole loan transaction? A. I don't believe any subprime seconds were included in our HELOC transactions that were -- or the fifteen HELOC transactions wrapped by MBIA. Q. What's the basis of that belief? A. It was a different product, and you look at the FICO score distribution, for instance, you can readily determine, you know, or see a distinction in terms of the credit profile by virtue of the FICO scores in the subprime seconds population versus that in the MBIA and other of our HELOC securitizations. Q. Were there securitizations of subprime seconds, to your knowledge? A. There were.
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MICHAEL W. SCHLOESSMANN "because missing documents are not considered an indication of error, any loans with this issue may be waived into the pool." Is that right? A. That's what it says, yes. Q. Why did CSC hire third party vendors to complete its first stage due diligence? A. I'm sorry, I was busy looking at something. So would you repeat that, please? Q. Why did CSC hire third party vendors to complete its first stage due diligence? A. We, like all of the street firms, didn't have the internal staff to actually do the reunderwriting, and instead outsourced that to third party vendors that specialized in reunderwriting of loans and used our in-house personnel to review and analyze and assess the results. Q. What do you mean when you say
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MICHAEL W. SCHLOESSMANN Q. Were those securitizations of subprime seconds designated in a particular way? A. I don't -- I believe there are two subprime second securitizations that we did. They were designated as SPS1 and SPS2, as I recall. Q. I'm going to show you the exhibit that was previously marked as Exhibit 153. And I actually couldn't find it when I was going through your stack, so I'm just going to hand you my copy. It does have an annotation, but nothing substantive. There is just a bracket on it. MR. SELENDY: What's the date again? MS. CONCANNON: That is the Tonya LyBrand to Errol Arne email of October 28, 2004. MR. SELENDY: Thank you. Q. And in Ms. LyBrand's email up at the top of the first page of Exhibit 153 to Errol Arne at MBIA, she states
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MICHAEL W. SCHLOESSMANN third party vendors that specialized in reunderwriting of loans? A. Those were third party due diligence firms that had or specialized and focused on reviewing loan files, doing a credit underwriting of loan files, and reporting findings back to the client. Q. Let's go to the next exhibit, which should be 587. A. Yup. Q. And this is an email from Derrek Michelson to Michael Schloessmann, dated September 29, 2006. And I'd actually like to direct you again to the email that begins on the page Bates numbered 509, which is the second page. Continues over into 510. And this is another email that appears to contain embedded comments between Derrek Michelson and yourself; is that right? I'll just direct you up at the top of the page where you state "thank you for helping to facilitate" --
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MICHAEL W. SCHLOESSMANN A. Yes, thank you. I was looking for that reference. Okay. Q. So you state "thank you for helping to facilitate my response, I have included my comments below in red." A. I see that, okay. Q. And Mr. Selendy asked you a few questions about this document, but what I would like to do is similar to what you had done with the prior document, and discuss which comments in this email are yours and which comments are Mr. Michelson's. A. Okay. Q. And reading through, there is a description of the, a paragraph starting with number 1 that carries over on to the page 510. And then about seven lines down. A. Okay. Q. It states "there are basically two levels of review. At the first level the underwriter, who is usually employed by a third party contract underwriting
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MICHAEL W. SCHLOESSMANN This then goes on to state "it would be unnecessarily burdensome to the process and unconventional to require someone to provide written documentation summarizing our analysis on each loan approved for purchase. I don't think it is reasonable to require this procedure." A. I see that. Q. Is that the end of that portion of your comments? A. It appears to be. Q. And then there is a sentence that states, "there is also no review or approval of the conclusions reached or determinations made by the analyst reviewing the due diligence work." Is that a comment by Mr. Michelson? A. I believe it is. Q. And then it picks up again with your response, stating "I'm not sure at what point you cease to have someone checking the work of another, but suffice it to say I think our practices are
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MICHAEL W. SCHLOESSMANN firm that we engage, performs a thorough reunderwriting of the loan based on the underwriting guidelines we provide at the beginning of the job." And then it continues on at some length. Ending with "this person is charged with the responsibility of reviewing the work of the contract underwriters who perform the first level of review with a particular emphasis on the saleability 4 loans, the analysis you refer to as lacking is the list of compensating factors, et cetera." Is that paragraph that I've just indicated your comment? A. I believe -- let me just finish reading. I believe my comments do start at the seventh line, "there are basically two levels of review." Okay. I'm not entirely sure here where mine stops. Sorry. Q. Actually, I ended at "compensating factors, et cetera, cited by the underwriter."
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MICHAEL W. SCHLOESSMANN prudent and consistent with industry standards. That said, the management action that I will recommend will be consistent with what you think is warranted. I just wanted to convey my thoughts on this." Is that also your comment? A. That I believe is my comment. And it stops there. Q. And then it starts up with "the review also noticed instances in which a loan or loans was determined to be out of the deal per the executive summary, but the loans were not removed from the collateral pool." Is that a comment by Mr. Michelson? A. I believe it is. Q. Then it picks up again, "I asked Tonya LyBrand to research the instance you cited, e.g. two loans noted as rejected were included in the BoNY tape. She indicated that these two loans were originally flagged as rejects but
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MICHAEL W. SCHLOESSMANN later were approved during the rebuttal process and thus were included in the deal. The error occurred when Tonya failed to update the exec summary so that it reflected the final results. I'm not sure what kind of policy and/or procedure this requires, if any, but I will again defer to your judgment on management action." Are those your comments? A. I believe they are. Q. And is this an accurate statement of your response to the internal audit comments that you were receiving in September of 2006? A. I believe it is. Q. And the next paragraph has a sentence starting "in addition," states, "in addition, there is no documentation or analysis supporting the results of the due diligence sample as compared, if it were extrapolated to the total loan population, to assess if the loan collateral is consistent with the
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MICHAEL W. SCHLOESSMANN periodic quality control assessment of the jobs the external vendors have been hired to perform, primarily regarding the credit and compliance reviews." Is that a comment by Mr. Michelson? A. I think it is. Q. Then you state, "we do a significant amount of due diligence on the front end on all vendors in terms of their compliance capability. Additionally, we have a meaningful opportunity to evaluate the quality of work performed by our underwriters due to the fact that the vast majority of sellers actively engage us in a rebuttal process with respect to our findings, particularly the rejected loans. Moreover, on a substantial majority of deals, we have a Countrywide employee on site whose primary job function is to review the work of the underwriter to ensure consistency. If this could be better documented, we will do so."
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MICHAEL W. SCHLOESSMANN prospectus and the prospectus supplement." Is that a comment by Mr. Michelson? A. I believe it is. Q. And then I believe you state "the struct finance deal person is responsible for working with Tonya's area to ensure that the actual collateral attributes are consistent with the prospectus disclosure. Tonya circulates the exec summary to all interested parties including the deal manager, and the deal manager is responsible for reviewing to make sure there is nothing therein that warrants further consideration or is inconsistent with the prospectus. This procedure could probably be better documented, and thus that would be my recommendation." Is that your comment? A. Yes, I believe it is. Q. Then it states "lastly, a process is not in place to perform a
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MICHAEL W. SCHLOESSMANN Is that your comment? A. Yes, I believe it is. Q. And that's an accurate statement of the processes and procedures in place in CSC in October of 2006? MR. SELENDY: Objection. A. As I understood it at the time, yes. Q. That's an accurate statement of the processes and procedures in place in CSC in September of 2006? MR. SELENDY: Objection. A. Yes. Q. Then under "risk rating," it states "the finding is rated as moderate risk as thoroughly documented due diligence work is a key component of a security underwriting defense should litigation be brought against CSC." Is that Mr. Michelson's comments? A. Yes, I believe it is. Q. Then it states "the risk is mitigated as executive summary highlights
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MICHAEL W. SCHLOESSMANN work performed on items that are identified as out by the external vendors." Is that also Mr. Michelson's comment? A. I think it is, yes. Q. I have nothing further on that one. Were you ever concerned with the accuracy of LandSafe appraisals? A. Are we referring to a specific exhibit? Q. We can, but I was asking more broadly. A. The only concern I recollect is, you know, came up in the context of having LandSafe perform property or some of our property valuation work on behalf of CSC. And as to I think the principal objections were as to service levels in terms of timing, pricing and data deliverables. Q. What do you mean by service levels?
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MICHAEL W. SCHLOESSMANN form. A. As a broader concern or problem, no. Q. Did you ever -A. None that I can specifically recollect. Q. Do you recall ever discussing with anyone either senior to you or junior to you at CSC, concerns regarding the accuracy of LandSafe's appraisals? A. My only recollection around LandSafe in discussions we had in connection with due diligence at CSC was in connection with the services that they were -- or we contemplated them providing for us. As opposed to origination appraisals they may have done on the front end of the business. Q. Let's go to Exhibit 599. This is an email, the top most email is from Jack Schackett to Paul Szymanski, dated May 29, 2007. Do you recall being asked some questions by Mr. Selendy regarding this
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MICHAEL W. SCHLOESSMANN A. Just the service level standards we needed them to perform at in order to ensure they could do the quantity of work we needed within the time frames we needed, and also give us the work product or output in a manner that allowed us to make decisions on our whole loan purchases. Q. Aside from those service level concerns, did you have any concerns with regard to the accuracy of LandSafe's appraisals? MR. SELENDY: Are you asking about Mr. Schloessmann personally? Objection as to form. A. In terms of -- can you restate the question, please? Q. Aside from the service level concerns as you just described them, which relate to the timing, pricing and data deliverables from LandSafe, did you ever have concerns with the accuracy of LandSafe appraisals? MR. SELENDY: Objection as to
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MICHAEL W. SCHLOESSMANN document? A. Yes. Q. Now, this document, the subject line is "urgent: PPP." Do you see that? A. Yes. Q. What is PPP? A. Prepayment penalties. Q. What is a prepayment penalty? A. Prepayment penalty is a term of a mortgage note where if the borrower prepays more than a certain amount of principal before its scheduled due date, then there would be a penalty associated with that prepayment. Q. And what was the issue with regard to prepayment penalties that was being discussed in this particular email chain? A. I recall it being around the integrity of the prepayment penalty types, and the specific terms of the prepay penalties that were in the system. Q. What impact, if any --
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MICHAEL W. SCHLOESSMANN A. Servicing system, excuse me. Q. What impact, if any, did the prepayment penalty issue have? A. In general or? Q. Well, from your perspective, why were you discussing this prepayment penalty issue? A. From my perspective, first of all, I think it's important to note there is no prepayment penalties on any of the HELOC loans, so far as I know, and specifically the MBIA transactions. But the prepayment penalties that were part of the mortgage terms on other loans, to the extent we securitized those loans and allocated or assigned the prepayment penalty collections to a securitization trust, my concern would have been around our ability to timely and accurately report and remit those prepay penalties to essentially the recipient of the penalties. Q. What's the basis for your statement that it's important to note
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MICHAEL W. SCHLOESSMANN Q. And pointing your attention to the attachment, under "policy status," it states "draft"; correct? A. It does. Q. Do you know whether this document was ever finalized? A. I can't say definitively. Q. Under "purpose," it states "the purpose of this policy," this is in the second paragraph under purpose, "the purpose of this policy is to create a comprehensive protocol for the receipt, review and final resolution of repurchase claims made against Countrywide and relating to transactions involving CSC and/or CAMCO." What does that refer to? A. Just it was, it essentially defines, you know, the scope of the policy. This was not a policy intended to cover the broader repurchase activity of the entirety of Countrywide, but only those that CSC had involvement in. Q. And when you say only those
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MICHAEL W. SCHLOESSMANN that there is no prepayment penalties as to any of the HELOC loans, so far as I know, and specifically the MBIA transactions? A. Well, as this matter relates specifically to fifteen HELOC transactions, I'm not sure what significance the prepayment penalty issue would have on those, any of those fifteen transactions. Q. Why is that? A. There were no prepayment penalties on the type of product that were securitized in these fifteen transactions. Q. Now, let's go to 583. This is an email from yourself to Debora Brown, Rex Malott, Michael Nadeau, dated August 12, 2006. A. Okay. Q. And do you recall Mr. Selendy asking you some questions about this email and the attachment to this email? A. I do.
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MICHAEL W. SCHLOESSMANN that CSC had involvement in, what do you mean by that? A. I think I tried to state that in the second paragraph of the email. But where we bought and sold loans as principal or were otherwise involved in the sale of loans, even if they may have been Countrywide loans, but sale of those whole loans to our investors. Q. Would this policy extend to the fifteen HELOC and CES securitizations at issue in this case? A. I think I had stated earlier in my testimony that, while the email may be somewhat ambiguous, it was my understanding that it would not have been covered under deals that Countrywide acted merely as an underwriter as opposed to a principal in the securitization. Principal or, I mean that more in the context of sponsor. Q. If you turn to the second page under 4.0, "procedure." And there is a 4.1.1. It states "the repurchase process
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MICHAEL W. SCHLOESSMANN is initiated when a repurchase request is received by the TMG post-closing risk management group. The repurchase request may come from various sources, such as the seller, the buyer, the loan servicing area, the security investor, et cetera." Is that right? A. Yes. Q. Is one of the sources referred to here from which a repurchase request could come a monoline insurer? A. No. Q. Why is that? A. Pardon me? Q. Why is that? A. I mean, in 2006 there were no monoline repurchases, and nor were any contemplated. And to reiterate what I had said before, I do not believe it was our intent to bring that within the purview of the policy, since we would have only underwritten those transactions as opposed to sponsored them.
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MICHAEL W. SCHLOESSMANN the FICO distributions be for prime versus subprime? MS. CONCANNON: Objection. A. I don't know what the specific FICO range is. I think if you were to look at, they were distinctly different products, I believe first of all that there were -- we did not have a loan program for subprime HELOCs, they were subprime closed ended seconds, I believe. And the loan programs in terms of FICOs would have been distinctly different relative to our HELOC seconds program, most of which are in the fifteen deals that are referenced in the complaint. Q. For a given time period are you capable of saying that above a certain FICO score is prime and below that is subprime, with respect to the HELOC securitizations in dispute? MS. CONCANNON: Objection. A. I'm not prepared to say that. I am prepared to say if you looked at a distribution of FICO scores, because you
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MICHAEL W. SCHLOESSMANN MS. CONCANNON: Thank you. I have nothing more at this time. MR. SELENDY: Okay. I have two questions for you. CONTINUED EXAMINATION BY MR. SELENDY: Q. First, with respect to your comment on subprime loans and FICO distribution, where do you draw a line between prime and subprime based on FICO scores? MS. CONCANNON: Objection. A. You would have to look at the loan program, there was obviously a distinct difference in terms of the FICO profile for a subprime loan program as opposed to a prime HELOC program. Q. You said that the prime and subprime can be readily distinguished based on the FICO score distribution. How would you do that? MS. CONCANNON: Objection. Q. As of the time period for the securitizations in dispute, where would
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MICHAEL W. SCHLOESSMANN can always have outliers, but if you looked at a distribution of FICO scores and FICO score concentration and weighted average, there would be distinct differences between the subprime seconds product and the HELOC and prime closed ended seconds that we securitized. Q. Can you describe any of those differences? A. Just in terms of the distribution? Just on FICO score alone, you would see a weighted average FICO score as well as a FICO score distribution that is distinctly lower in the subprime seconds loan program than you would in the, either the prime HELOC or prime closed ended second programs. Q. Is it your testimony that there are no subprime loans in any of the fifteen MBIA securitizations in dispute? MS. CONCANNON: Objection. A. Well, I would say that my guess is that there is over 100,000 loans that were securitized in the fifteen MBIA
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MICHAEL W. SCHLOESSMANN transactions, or something in that order, let's call it a very large number. Q. Over 360,000. A. I will not say that there is not a single loan that could have been mistakenly allocated. But I can say confidently that there is no material, you know, concentration of subprime seconds in those fifteen deals, as far as I know. Q. So the subprime seconds, to the extent they show up in those fifteen securitizations, would have been mistakenly allocated to those deals? MS. CONCANNON: Objection; mischaracterizes. A. I don't know that. MR. SELENDY: I have no further questions. Are we all set? MS. CONCANNON: I think we are all set. MR. SELENDY: Thank you very much. MS. CONCANNON: You have
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MICHAEL W. SCHLOESSMANN THE VIDEOGRAPHER: This concludes today's testimony of Michael Schloessmann. The time on the record is 5:54 p.m., this also concludes tape No. 12. (Time noted: 5:54 p.m.) _______________________ MICHAEL W. SCHLOESSMANN Subscribed and sworn to before me this _____ day of _________, 2011. __________________________________ Notary Public
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MICHAEL W. SCHLOESSMANN stated on the record that you intend to hold this deposition open pending your motion to compel repurchase documents. We understand your position, of course we reserve our right to object to any reopening of this deposition on that ground. Also note that it was completely your choice to proceed with Mr. Schloessmann's deposition while that motion was pending, whereas you, for example, declined to take a second day of Mr. Kurzban's testimony while that motion was pending. MR. SELENDY: I will note that it was your decision to interpose the objections, we think her meritless. We have reserved our position in that regard. And subject to that, the outcome of that motion, we're done for the day. Thank you.
MICHAEL W. SCHLOESSMANN STATE OF NEW YORK ) ss: COUNTY OF NEW YORK ) I wish to make the following changes, for the following reasons: PAGE LINE ____ ____ CHANGE ______________________ REASON:______________________ ____ ____ CHANGE ______________________ REASON:______________________ ____ ____ CHANGE ______________________ REASON:______________________ ____ ____ CHANGE ______________________ REASON:______________________ ____ ____ CHANGE ______________________ REASON:______________________ ____ ____ CHANGE ______________________ REASON:______________________ ____ ____ CHANGE ______________________ REASON:______________________ ____ ____ CHANGE ______________________ REASON:______________________ ____ ____ CHANGE ______________________ REASON:______________________ ____ ____ CHANGE ______________________ REASON:______________________ _______________________ MICHAEL W. SCHLOESSMANN Subscribed and sworn to before me this _____ day of _________, 2011. _________________________________ Notary Public
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MICHAEL W. SCHLOESSMANN CERTIFICATE STATE OF NEW YORK ) : ss. COUNTY OF NEW YORK ) I, ERIC J. FINZ, a Shorthand Reporter and Notary Public within and for the State of New York, do hereby certify: That MICHAEL W. SCHLOESSMANN, the witness whose continued deposition is hereinbefore set forth (pages 454 through 813) was previously duly sworn, and that such continued deposition is a true record of the testimony of said witness. I further certify that I am not related to any of the parties to this action by blood or marriage, and that I am in no way interested in the outcome of this matter. IN WITNESS WHEREOF, I have hereunto set my hand this ____ day of _________, 2011. _____________________ ERIC J. FINZ
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MICHAEL W. SCHLOESSMANN E X H I B I T S (Continued) DESCRIPTION PAGE (Plaintiff's Exhibit 577 for 526 identification, document entitled "notes document entitled ID099D2520D33CC8D 8852575840003631E," production numbers CWMBIA 15897317 through CWMBIA 15897347.) (Plaintiff's Exhibit 578 for 528 identification, email dated June 22, 2006, production numbers CWMBIA 13132210 through CWMBIA 13132215.) (Plaintiff's Exhibit 579 for 532 identification, CSC executive summary for CWHEQ 2006-E, production numbers CW 0000013833 through CW 0000013839.)
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MICHAEL W. SCHLOESSMANN EXHIBITS DESCRIPTION PAGE (Plaintiff's Exhibit 574 for 471 identification, email dated May 25, 2006, production numbers CWMBIA 9549475 through CWMBIA 9549480.) (Plaintiff's Exhibit 575 for 500 identification, email dated June 6, 2006, production numbers CWMBIA 0011019994 through CWMBIA 0011019996.) (Plaintiff's Exhibit 576 for 507 identification, email dated June 7, 2006, production numbers CWMBIA 10372346 through CWMBIA 10372356.)
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MICHAEL W. SCHLOESSMANN E X H I B I T S (Continued) DESCRIPTION PAGE (Plaintiff's Exhibit 580 for 534 identification, email dated July 24, 2006, production numbers CWMBIA 11029957 through CWMBIA 11029962.) (Plaintiff's Exhibit 581 for 541 identification, email dated August 9, 2006, production numbers CWMBIA 8782496 through CWMBIA 8782501.) (Plaintiff's Exhibit 582 for 545 identification, email dated August 12, 2006, production numbers CWMBIA 11035434 through CWMBIA 11035438.) (Plaintiff's Exhibit 583 for 548 identification, email dated August 12, 2006, with attachment, production numbers CWMBIA 00100425061 through CWMBIA 00100425073.)
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MICHAEL W. SCHLOESSMANN E X H I B I T S (Continued) DESCRIPTION PAGE (Plaintiff's Exhibit 584 for 574 identification, minutes of the meeting of the credit risk management committee, September 28, 2006, production numbers CWMBIA 8743084 through CWMBIA 8743091.) (Plaintiff's Exhibit 585 for 581 identification, document entitled "notes document ID FF860549D092CE3385257693006E89E8 ," production numbers CWMBIA 10828824 through CWMBIA 10828826.) (Plaintiff's Exhibit 586 for 585 identification, document entitled "enterprise wide asset securitization," dated September 29, 2006, production numbers CWMBIA-G81387 through CWMBIA-G81398.)
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MICHAEL W. SCHLOESSMANN E X H I B I T S (Continued) DESCRIPTION PAGE (Plaintiff's Exhibit 591 for 640 identification, email dated January 8, 2007, production numbers CWMBIA-G88567 through CWMBIA-G88571.) (Plaintiff's Exhibit 592 for 648 identification, email dated February 9, 2007, with attachments, production numbers CWMBIA 13222164 through CWMBIA 13222182.) (Plaintiff's Exhibit 593 for 662 identification, email dated March 6, 2007, with attachment, production numbers CWMBIA 0008084603 through CWMBIA 0008084606.)
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MICHAEL W. SCHLOESSMANN E X H I B I T S (Continued) DESCRIPTION PAGE (Plaintiff's Exhibit 587 for 602 identification, email dated September 29, 2006, production numbers CWMBIA 11053508 through CWMBIA 11053512.) (Plaintiff's Exhibit 588 for 617 identification, email dated October 30, 2006, production numbers CWMBIA 9553311 through CWMBIA 9553315.) (Plaintiff's Exhibit 589 for 623 identification, email dated November 22, 2006, production numbers CWMBIA 11068600 through CWMBIA 11068603.) (Plaintiff's Exhibit 590 for 633 identification, email dated December 26, 2006, production numbers CWMBIA 8947488 through CWMBIA 8947489.)
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MICHAEL W. SCHLOESSMANN E X H I B I T S (Continued) DESCRIPTION PAGE (Plaintiff's Exhibit 594 for 683 identification, email dated March 30, 2007, with attachment, production numbers CWMBIA 10722613 through CWMBIA 10722615.) (Plaintiff's Exhibit 595 for 695 identification, email dated March 30, 2007, with the attachments.) (Plaintiff's Exhibit 596 for 706 identification, email dated April 6, 2007, production numbers MBIA 15817067 through MBIA 15817069.) (Plaintiff's Exhibit 597 for 709 identification, email dated April 13, 2007, with attachment, production numbers CWMBIA 10750120 through CWMBIA 10750126.)
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MICHAEL W. SCHLOESSMANN E X H I B I T S (Continued) DESCRIPTION PAGE (Plaintiff's Exhibit 598 for 712 identification, email dated May 22, 2007, production numbers CWMBIA 11132065 through CWMBIA 11132070.) (Plaintiff's Exhibit 599 for 723 identification, email dated May 29, 2007, production numbers CWMBIA 14123986 through CWMBIA 14123992.) (Plaintiff's Exhibit 600 for 729 identification, minutes of the meeting of the credit risk management committee, May 29, 2007, production numbers CWMBIA 15974470 through CWMBIA 15974478.) (Plaintiff's Exhibit 601 for 748 identification, email dated June 13, 2007, production numbers CWMBIA 11141425 through CWMBIA 11141427.)
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MICHAEL W. SCHLOESSMANN E X H I B I T S (Continued) DESCRIPTION PAGE (Plaintiff's Exhibit 602 for 770 identification, email dated July 18, 2008, production numbers CWMBIA 12863199 through CWMBIA 12863201.) (Plaintiff's Exhibit 603 for 773 identification, document entitled "Countrywide Financial Corporation repurchase operations committee charter," production numbers BACMBIA-A92326 through BACMBIA-A92328.)
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FILED: NEW YORK COUNTY CLERK 11/21/2012

NYSCEF DOC. NO. 3288

INDEX NO. 602825/2008 RECEIVED NYSCEF: 11/21/2012

In The Matter Of:

MICHAEL W. SCHLOESSMANN - 3/24/2011

-----------------------------------x VOLUME 2 March 24, 2011 9:35 a.m.

Merrill Corporation - New York 1-800-325-3376 www.merrillcorp.com/law

MICHAEL W. SCHLOESSMANN - 3/24/2011

ALSO PRESENT: JONATHAN POPHAM, Videographer

09:09:31 09:09:38 09:09:41 09:09:43 09:09:45 09:09:47

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