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In re RFC and RESCAP Liquidating Trust Actions

United States District Court, D. Minnesota

June 30, 2017

In Re RFC and RESCAP Liquidating Trust Actions

          ORDER REGARDING PLAINTIFFS' AMENDED AVM METHODOLOGY

          SUSAN RICHARD NELSON United States District Judge.

         This order addresses a dispute involving the ability of Plaintiffs to utilize a type of Automated Valuation Model (“AVM”) different than previously identified, and to add new AVM-based and appraisal-based breach allegations. The parties' positions are set forth in the letters of March 14, 2017 [Doc. Nos. 2311 & 2317], Plaintiffs' Memorandum in Support of Reliance on Amended AVM Breach Lists [Doc. No. 2361], the Declaration of Sascha N. Rand Regarding Plaintiffs' AVM Breach List Disclosures [Doc. No. 2362], and the Opt-In Defendants' Response Memorandum [Doc. No. 2376].

         I. BACKGROUND

         A. AVM Methodology

         In support of Plaintiffs' position with respect to their use of an amended AVM methodology, Plaintiffs have submitted the Declaration of Sascha N. Rand, a partner at Quinn Emanuel Urquhart & Sullivan, LLP, counsel for Plaintiffs. Ms. Rand has experience in representing clients with claims involving the sale and securitization of residential mortgage loans. (Rand Decl. ¶ 4 [Doc. No. 2362].) In particular, she has represented the Federal Housing Finance Authority (“FHFA”) in actions against various financial institutions and served as trial counsel in FHFA v. Nomura Holding America, Inc. See Nomura, 104 F.Supp.3d 441 (S.D.N.Y. 2015). Ms. Rand was responsible for prosecuting FHFA's appraisal breaches in Nomura, which involved work on the AVM analysis. (Rand Decl. ¶ 4.)

         Ms. Rand explains that a loan-to-value ratio compares the market value of a residential property that provides collateral for the loan against the actual loan amount. (Id. ¶ 5) (citing Nomura, 104 F.Supp.3d at 497). Once the loan-to-value ratio nears 100% or more, the home is worth as much as, or less than, the amount of the mortgage, which can harm a borrower's ability and incentive to continue making mortgage payments. (Id.) An inflated appraisal may serve to increase the “value” element of the loan-to-value ratio, and, as a result, depress the loan-to-value ratio. (Id. ¶ 6.) This may give a loan the appearance of complying with a contractual representation regarding the loan-to-value ratio when, in fact, the loan is not in compliance. (Id.) (citing Nomura, 104 F.Supp.3d at 517-18.)

         Ms. Rand identifies two methods of determining the value of a loan-to-value ratio. (Id. ¶¶ 7-8.) First, the value may be determined through an appraisal conducted by a licensed residential appraiser. (Id. ¶ 7.) The court in Nomura found evidence from which to infer that residential appraisers were under substantial pressure to inflate the value estimate of residential mortgage loans in the time period in question. (Id.) (citing Nomura, 104 F.Supp.3d at 517-18.) Second, the value of a loan-to-value ratio may be determined by the use of AVMs-“data-driven analytical models used to predict the market value of real estate properties.” (Id. ¶ 8.) Although the supporting methodology of an AVM may vary, an AVM generally “compares the characteristics of an at-issue property (the ‘subject' property) to the characteristics of comparable properties in the geographical area of the subject property that were sold at or around the relevant point in time (the ‘comparable sales').” (Id.) Experts then analyze the property characteristics and comparable sales, often using a regression analysis, to predict the market value of the property at the relevant time. (Id.)

         As to AVM methodologies, litigants may use commercially-available, off-the-shelf “black-box” AVMs, offered by real estate data and analysis firms and used in the residential mortgage loan underwriting industry (Id. ¶ 9.) For a nominal fee, commercial AVMs can quickly return property value estimates based only on a property address. (Id. ¶ 10.) But, Ms. Rand states that because commercial AVMs are proprietary, the AVM providers generally do not publicly reveal information about the AVMs' design, operation, limitations, analyses, algorithms, coding, data, or validation. (Id.) Ms. Rand states that “commercial AVM providers are generally unwilling to produce individuals knowledgeable about the inner workings of a commercial AVM to answer technical questions, or to give deposition testimony.” (Id.) (citing Nomura, 104 F.Supp.3d at 503.) Alternatively, litigants can hire an expert with his or her own AVM model or access to a third party's AVM model that can be adapted for the use of a particular case. (Id. ¶ 11.) Ms. Rand asserts that while such models may not have the same black-box limitations of commercial AVMs, “they typically require substantial time and effort to customize and implement for use in litigation and, to the extent they have not been used commercially and are not industry-recognized, can be more difficult to validate.” (Id.)

         Ms. Rand identifies the Greenfield AVM (“GAVM”) as one such non-commercial AVM, developed by Dr. John Kilpatrick in connection with work performed for his consulting firm, Greenfield Advisors, LLC. (Id. ¶ 12.) As noted, in contrast to commercial AVMs, securing the data necessary to implement the GAVM in a given case takes considerable time. (Id.) Instead of simply using an address to generate a property value estimate, the GAVM requires the collection of data-sometimes collected manually-about the subject property from, among other sources, the appraisal and other mortgage-related documents, and is a “process [that] can take many months.” (Id. ¶ 13.) In the Nomura litigation, Dr. Kilpatrick used the GAVM as part of his methodology to identify inflated appraisals. (¶ 15.) He used the GAVM to provide an “objective retrospective assessment of the value of the relevant properties, ” and an appraisal review to “support[ ] the reliability of the GAVM and evaluate[ ] whether the appraisal was properly performed and whether the appraisal opinion was supported.” (Id. ¶ 16) (citing Nomura, 104 F.Supp.3d at 503.)

         B. AVM Disclosures in this Litigation

         Here, prior to the consolidation of the cases, and as part of Plaintiffs' Rule 26(a) disclosures, Plaintiffs were required to provide Defendants with two types of lists identifying the loans alleged to be defective, within a 28-day period: (1) AVM breach lists, identifying loans for which an AVM, retrospectively run by Plaintiffs, produced property values different from those used at origination; and (b) re-underwriting defect lists, listing allegedly breached loans that were identified by Plaintiffs' re-underwriting vendors. (Rand Decl. ¶ 17; Defs.' 3/14/17 Letter at 2.) Particularly in light of the short time table, Plaintiffs used a commercial, black-box AVM methodology to prepare the initial AVM breach lists. (Rand Decl. ¶ 17.)

         The original consolidated case management order (the “CMO”) acknowledged that Plaintiffs had produced initial re-underwriting disclosures, including an AVM breach list, a re-underwriting defect list, and a loan list. (CMO, § II(A) [Doc. No. 277].) The CMO also recognized that Defendants sought supplementation of these disclosures and directed Plaintiffs to supplement their disclosures on a rolling basis and provide a status report at the monthly case management conferences. (Id.) In addition, the CMO permitted Plaintiffs to modify and supplement their disclosures thereafter “(1) on the basis of newly acquired information; (2) or for good cause shown, with leave of Court, on the basis of information within their possession or control.” (CMO, § II(B).) The CMO required Defendants to serve on Plaintiffs rebuttals to the re-underwriting disclosures, but stated that the rebuttals “need not respond to the AVM Breach List.” (Id., § III(A)-(B).)

         Plaintiffs served several sets of AVM results during the course of this litigation. (See Pls.' Letter of 3/14/17 at 3 [Doc. No. 2317].) Plaintiffs contend that their lists and supplements stated that their expert analysis was ongoing and the AVM results were therefore subject to change. (Id.) As contemplated by the CMO, Defendants have not served rebuttal reports to the AVM lists. (Id.)

         In the summer of 2016, however, Plaintiffs assert that based on recent developments in an RMBS-related case, U.S. Bank, National Association v. UBS Real Estate Securities Inc., No. 12-7322 (S.D.N.Y.) (“MARM”)[1], they considered using a new expert AVM methodology in this consolidated action, (Pls.' Letter of 3/14/17 at 2), as they stated at the June 2016 case management conference. (H'rg Tr. of 6/23/16 at 127-28 [Doc. No. 127-28].) Because the MARM defendants had criticized the black-box AVM methodology in that case, arguing that it was unavailable for their examination, Plaintiffs here anticipated that Defendants would similarly challenge their AVM ...


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