Federal Housing Financial Agency vs. Merrill Lynch Complaint

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

FEDERAL HOUSING FINANCE AGENCY,

AS CONSERVATOR FOR THE FEDERAL

ATIONAL MORTGAGE ASSOCIATION

AND THE FEDERAL HOME LOAN

MORTGAGE CORPORATION,

Plaintiff,

-against-

MERRILL LYNCH & CO., INC.; MERRILL

LYNCH, PIERCE, FENNER & SMITH INC.;

MERRILL LYNCH MORTGAGE

LENDING, INC.; MERRILL LYNCH

MORTGAGE CAPITAL INC.; FIRST

FRANKLIN FINANCIAL CORP.; MERRILL

LYNCH MORTGAGE INVESTORS, INC.;

MERRILL LYNCH GOVERNMENT

SECURITIES, INC.; MATTHEW WHALEN;

BRIAN T. SULLIVAN; MICHAEL M.

MCGOVERN; DONALD J. PUGLISI; PAUL

PARK; and DONALD C. HAN,

Defendants.

___ CIV. ___ (___)

COMPLAINT

JURY TRIAL DEMANDED

TABLE OF CONTENTS

NATURE OF ACTION ...................................................................................................................1

PARTIES .........................................................................................................................................8

The Plaintiff and the GSEs ...................................................................................................8

The Defendants ....................................................................................................................9

The Non-Party Originators ................................................................................................12

JURISDICTION AND VENUE ....................................................................................................12

FACTUAL ALLEGATIONS ........................................................................................................13

I. THE SECURITIZATIONS ................................................................................................13

A. Residential Mortgage-Backed Securitizations In General .....................................13

B. The Securitizations At Issue In This Case .............................................................15

C. The Securitization Process .....................................................................................22

1. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage

Capital, and First Franklin Financial Grouped Mortgage Loans in

Special Purpose Trusts ...............................................................................22

2. The Trusts Issue Securities Backed by the Loans ......................................23

II. THE DEFENDANTS’ PARTICIPATION IN THE SECURITIZATION

PROCESS ..........................................................................................................................30

A. The Role of Each of the Defendants ......................................................................30

1. First Franklin Financial ..............................................................................31

2. Merrill Lynch Mortgage Capital ................................................................32

3. Merrill Lynch Mortgage Lending ..............................................................33

4. Merrill Lynch Mortgage Investors .............................................................34

5. Merrill Lynch, Pierce, Fenner & Smith .....................................................34

6. Merrill Lynch Government Securities .......................................................35

7. Merrill Lynch & Co. ..................................................................................35

8. The Individual Defendants .........................................................................36

B. Defendant’s Failure To Conduct Proper Due Diligence ........................................38

III. THE REGISTRATION STATEMENTS AND THE PROSPECTUS

SUPPLEMENTS................................................................................................................41



A. Compliance With Underwriting Guidelines ..........................................................41

B. Statements Regarding Occupancy Status of Borrower ..........................................44

C. Statements Regarding Loan to Value Ratios .........................................................48

D. Statements Regarding Credit Ratings ....................................................................52

IV. FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND

PROSPECTUS SUPPLEMENTS ......................................................................................57



A. The Statistical Data Provided in the Prospectus Supplements Concerning

Owner Occupancy and LTV Ratios Was Materially False ....................................57

1. Owner Occupancy Data Was Materially False ..........................................57

2. Loan to Value Data Was Materially False .................................................61

B. The Originators of the Underlying Mortgage Loans Systematically

Disregarded Their Underwriting Guidelines .........................................................66

1. Government Investigations Have Confirmed That the Originators

of the Loans in the Securitizations Systematically Failed to Adhere

to Their Underwriting Guidelines ..............................................................67

2. The Collapse of the Certificates’ Credit Ratings Further Indicates

that the Mortgage Loans were not Originated in Adherence to the

Stated Underwriting Guidelines .................................................................74



3. The Surge in Mortgage Delinquency and Default Further

Demonstrates that the Mortgage Loans Were Not Originated in

Adherence to the Stated Underwriting Guidelines ....................................77



V. MERRILL LYNCH KNEW THAT ITS REPRESENTATIONS WERE FALSE ............80

A. Evidence Regarding Merrill Lynch’s Due Diligence ............................................81

1. Merrill Lynch’s Due Diligence Benefitted From a Direct Window

Into the Originators’ Practices ...................................................................81



2. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage

Capital, First Franklin Financial, Merrill Lynch Mortgage

iii

Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill

Lynch Government Securities Intentionally Misrepresented the

Risks Inherent in the Securitizations ..........................................................84

3. Merrill Lynch Recognized the Problems With Its RMBS and

Developed “De-Risking” and “Mitigation” Strategies While

Marketing Similar Securitizations to the GSEs .........................................91



VI. THE GSES JUSTIFIABLY RELIED ON MERRILL LYNCH’S

REPRESENTATIONS ......................................................................................................93

VII. FANNIE MAE’S AND FREDDIE MAC’S PURCHASES OF THE GSE

CERTIFICATES AND THE RESULTING DAMAGES .................................................95



FIRST CAUSE OF ACTION ......................................................................................................102

SECOND CAUSE OF ACTION .................................................................................................106

THIRD CAUSE OF ACTION .....................................................................................................110

FOURTH CAUSE OF ACTION .................................................................................................114

FIFTH CAUSE OF ACTION ......................................................................................................117

SIXTH CAUSE OF ACTION .....................................................................................................121

SEVENTH CAUSE OF ACTION ...............................................................................................125

EIGHTH CAUSE OF ACTION ..................................................................................................129

NINTH CAUSE OF ACTION .....................................................................................................133

TENTH CAUSE OF ACTION ....................................................................................................136

PRAYER FOR RELIEF ..............................................................................................................139

JURY TRIAL DEMANDED .......................................................................................................140

Plaintiff Federal Housing Finance Agency (“FHFA”), as conservator of The Federal

National Mortgage Association (“Fannie Mae”) and The Federal Home Loan Mortgage

Corporation (“Freddie Mac”), by its attorneys, Quinn Emanuel Urquhart & Sullivan, LLP, for its

Complaint herein against Merrill Lynch & Co., Inc. (“Merrill Lynch & Co.”), Merrill Lynch,

Pierce, Fenner & Smith Inc. (“Merrill Lynch, Pierce, Fenner & Smith”), Merrill Lynch Mortgage

Lending, Inc. (“Merrill Lynch Mortgage Lending”), Merrill Lynch Mortgage Capital Inc.

(“Merrill Lynch Mortgage Capital”), First Franklin Financial Corp. (“First Franklin Financial”),

Merrill Lynch Mortgage Investors, Inc. (“Merrill Lynch Mortgage Investors”), Merrill Lynch

Government Securities, Inc. (“Merrill Lynch Government Securities”) (collectively, “Merrill

Lynch”), Matthew Whalen, Brian T. Sullivan, Michael M. McGovern, Donald J. Puglisi, Paul

Park, and Donald C. Han (the “Individual Defendants”) (together with Merrill Lynch, the

“Defendants”) alleges as follows:

NATURE OF ACTION

1. This action arises out of Defendants’ actionable conduct in connection with the

offer and sale of certain residential mortgage-backed securities to Fannie Mae and Freddie Mac

(collectively, the “Government Sponsored Enterprises” or “GSEs”). These securities were sold

pursuant to registration statements, including prospectuses and prospectus supplements that

formed part of those registration statements, which contained materially false or misleading

statements and omissions. Defendants falsely represented that the underlying mortgage loans

complied with certain underwriting guidelines and standards, including representations that

significantly overstated the ability of the borrowers to repay their mortgage loans. These

representations were material to the GSEs, as reasonable investors, and their falsity violates

Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. § 77a et seq., Section 13.1-

522(A)(ii) and 13.1-522(C) of the Virginia Code, Sections 31-5606.05(a)(1)(B) and

31.5606.05(c) of the District of Columbia Code, and constitutes negligent misrepresentation,

common law fraud, and aiding and abetting fraud.

2. Between September 29, 2005 and October 10, 2007, Fannie Mae and Freddie Mac

purchased over $24.853 billion in residential mortgage-backed securities (the “GSE

Certificates”) issued in connection with 72 Merrill Lynch related entity-sponsored and/or Merrill

Lynch, Pierce, Fenner & Smith underwritten securitizations.

The GSE Certificates purchased

by Fannie Mae, along with the date and amount of the purchases, are listed infra in Table 12.

The GSE Certificates purchased by Freddie Mac, along with the date and amount of the

purchases, are listed infra in Table 13. The 72 securitizations (from which the GSEs purchased a

total of 88 Certificates) at issue are:

Table 1

Full Name Abbreviation

ARGENT SECURITIES INC., ASSET-BACKED PASS-THROUGH

CERTIFICATES, SERIES 2005-W4

ARSI 2005-W4

ARGENT SECURITIES INC., ASSET-BACKED PASS-THROUGH

CERTIFICATES, SERIES 2006-M1

ARSI 2006-M1

C-BASS MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES

2006-CB8

CBASS 2006-CB8

MERRILL LYNCH FIRST FRANKLIN MORTGAGE LOAN TRUST

MORTGAGE LOAN ASSET - BACKED CERTIFICATES, SERIES 2007-1

FFMER 2007-1

MERRILL LYNCH FIRST FRANKLIN MORTGAGE LOAN TRUST

MORTGAGE LOAN ASSET - BACKED CERTIFICATES, SERIES 2007-2

FFMER 2007-2

MERRILL LYNCH FIRST FRANKLIN MORTGAGE LOAN TRUST

MORTGAGE LOAN ASSET - BACKED CERTIFICATES, SERIES 2007-3

FFMER 2007-3

MERRILL LYNCH FIRST FRANKLIN MORTGAGE LOAN TRUST,

MORTGAGE LOAN ASSET - BACKED CERTIFICATES, SERIES 2007-4

FFMER 2007-4

MERRILL LYNCH FIRST FRANKLIN MORTGAGE LOAN TRUST

MORTGAGE LOAN ASSET - BACKED CERTIFICATES, SERIES 2007-5

FFMER 2007-5

MERRILL LYNCH FIRST FRANKLIN MORTGAGE LOAN TRUST

MORTGAGE LOAN ASSET - BACKED CERTIFICATES, SERIES 2007-H1

FFMER 2007-H1

FIRST FRANKLIN MORTGAGE LOAN TRUST MORTGAGE LOAN

ASSET-BACKED CERTIFICATES, SERIES 2005-FF12

FFML 2005-FF12

FIRST FRANKLIN MORTGAGE LOAN TRUST MORTGAGE LOAN

ASSET-BACKED CERTIFICATES, SERIES 2006-FF18

FFML 2006-FF18

For purposes of this Complaint, the securities issued under the Registration Statements

(as defined in note 3 below) are referred to as “Certificates,” while the particular Certificates that

Fannie Mae and Freddie Mac purchased are referred to as the “GSE Certificates.” Holders of

Certificates are referred to as “Certificateholders.”

Full Name Abbreviation

FIRST FRANKLIN MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET

- BACKED CERTIFICATES, SERIES 2007-FF1

FFML 2007-FF1

FIRST FRANKLIN MORTGAGE LOAN TRUST MORTGAGE LOAN

ASSET-BACKED CERTIFICATES, SERIES 2006-FF2

FFML 2007-FF2

FIELDSTONE MORTGAGE INVESTMENT TRUST MORTGAGE-BACKED

NOTES, SERIES 2006-3

FMIC 2006-3

INDYMAC INDX MORTGAGE LOAN TRUST MORTGAGE PASS-

THROUGH CERTIFICATES, SERIES 2005-AR33

INDX 2005-AR33

INDYMAC INDX MORTGAGE LOAN TRUST MORTGAGE PASS-

THROUGH CERTIFICATES, SERIES 2006-AR5

INDX 2006-AR5

INDYMAC INDX MORTGAGE LOAN TRUST MORTGAGE PASS-

THROUGH CERTIFICATES, SERIES 2006-AR7

INDX 2006-AR7

INDYMAC INDX MORTGAGE LOAN TRUST, SERIES 2007-FLX4 INDX 2007-FLX4

INDYMAC INDX MORTGAGE LOAN TRUST, SERIES 2007-FLX5 INDX 2007-FLX5

INDYMAC INDX MORTGAGE LOAN TRUST, SERIES 2007-FLX6 INDX 2007-FLX6

MERRILL LYNCH ALTERNATIVE NOTE ASSET TRUST, SERIES 2007-A1 MANA 2007-A1

MERRILL LYNCH ALTERNATIVE NOTE ASSET TRUST, SERIES 2007-A2 MANA 2007-A2

MERRILL LYNCH ALTERNATIVE NOTE ASSET TRUST, SERIES 2007-A3 MANA 2007-A3

MERRILL LYNCH MORTGAGE INVESTORS TRUST, MORTGAGE LOAN

ASSET-BACKED CERTIFICATES, SERIES 2005-A8

MLMI 2005-A8

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET BACKED CERTIFICATES, SERIES 2005-AR-1

MLMI 2005-AR1

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET BACKED CERTIFICATES, SERIES 2005-HE2

MLMI 2005-HE2

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET BACKED CERTIFICATES, SERIES 2005-HE3

MLMI 2005-HE3

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE PASS-

THROUGH CERTIFICATES, SERIES 2006-A3

MLMI 2006-A3

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE PASS-

THROUGH CERTIFICATES, SERIES 2006-AF2

MLMI 2006-AF2

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET-BACKED CERTIFICATES, SERIES 2006-AHL1

MLMI 2006-AHL1

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET-BACKED CERTIFICATES, SERIES 2006-AR1

MLMI 2006-AR1

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET-BACKED CERTIFICATES, SERIES 2006-FF1

MLMI 2006-FF1

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET-BACKED CERTIFICATES, SERIES 2006-FM1

MLMI 2006-FM1

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET-BACKED CERTIFICATES, SERIES 2006-HE1

MLMI 2006-HE1

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET-BACKED CERTIFICATES, SERIES 2006-HE4

MLMI 2006-HE4

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET-BACKED CERTIFICATES, SERIES 2006-HE5

MLMI 2006-HE5

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET-BACKED CERTIFICATES, SERIES 2006-HE6

MLMI 2006-HE6

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET-BACKED CERTIFICATES, SERIES 2006-MLN1

MLMI 2006-MLN1

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET-BACKED CERTIFICATES, SERIES 2006-OPT1

MLMI 2006-OPT1

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET -- BACKED CERTIFICATES, SERIES 2006-RM1

MLMI 2006-RM1

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET -- BACKED CERTIFICATES, SERIES 2006-RM2

MLMI 2006-RM2

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET -- BACKED CERTIFICATES, SERIES 2006-RM3

MLMI 2006-RM3

Full Name Abbreviation

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET -- BACKED CERTIFICATES, SERIES 2006-RM4

MLMI 2006-RM4

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET -- BACKED CERTIFICATES, SERIES 2006-RM5

MLMI 2006-RM5

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET-BACKED CERTIFICATES, SERIES 2006-WMC1

MLMI 2006-WMC1

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET-BACKED CERTIFICATES, SERIES 2006-WMC2

MLMI 2006-WMC2

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET BACKED CERTIFICATES, SERIES 2007-HE1

MLMI 2007-HE1

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET BACKED CERTIFICATES, SERIES 2007-HE2

MLMI 2007-HE2

MERRILL LYNCH MORTGAGE INVESTORS TRUST MORTGAGE LOAN

ASSET BACKED CERTIFICATES, SERIES 2007-MLN1

MLMI 2007-MLN1

OPTION ONE MORTGAGE LOAN TRUST ASSET-BACKED

CERTIFICATES, SERIES 2007-1

OOMLT 2007-1

OWNIT MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET BACKED

CERTIFICATES, SERIES 2005-4

OWNIT 2005-4

OWNIT MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET BACKED

CERTIFICATES, SERIES 2005-5

OWNIT 2005-5

OWNIT MORTGAGE LOAN TRUST LOAN ASSET-BACKED

CERTIFICATES, SERIES 2006-1

OWNIT 2006-1

OWNIT MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET-BACKED

CERTIFICATES, SERIES 2006-2

OWNIT 2006-2

OWNIT MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET-BACKED

CERTIFICATES, SERIES 2006-3

OWNIT 2006-3

OWNIT MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET-BACKED

CERTIFICATES, SERIES 2006-4

OWNIT 2006-4

OWNIT MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET-BACKED

CERTIFICATES, SERIES 2006-5

OWNIT 2006-5

OWNIT MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET-BACKED

CERTIFICATES, SERIES 2006-6

OWNIT 2006-6

OWNIT MORTGAGE LOAN TRUST MORTGAGE LOAN ASSET-BACKED

CERTIFICATES, SERIES 2006-7

OWNIT 2006-7

SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST

MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2005- AB3

SURF 2005-AB3

SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST

MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2005- BC3

SURF 2005-BC3

SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST

MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2005- BC4

SURF 2005-BC4

SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST

MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-AB2

SURF 2006-AB2

SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST

MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006- AB3

SURF 2006-AB3

SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST

MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006- BC1

SURF 2006-BC1

SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST

MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006- BC2

SURF 2006-BC2

SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST

MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006- BC3

SURF 2006-BC3

SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST

MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006- BC4

SURF 2006-BC4

SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST

MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2006- BC5

SURF 2006-BC5

SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST

MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2007- AB1

SURF 2007-AB1

SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST

MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2007- BC1

SURF 2007-BC1

Full Name Abbreviation

SPECIALTY UNDERWRITING AND RESIDENTIAL FINANCE TRUST

MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2007- BC2

SURF 2007-BC2

(collectively, the “Securitizations”).

3. The Certificates were offered for sale pursuant to one of ten shelf registration

statements (the “Shelf Registration Statements”) filed with the Securities and Exchange

Commission (the “SEC”). Defendant Merrill Lynch Mortgage Investors filed three Shelf

Registration Statements that pertained to 62 of the 72 Securitizations at issue in this action. The

Individual Defendants signed one or more of the three Shelf Registration Statements, and, the

amendments thereto. Argent Securities Inc., IndyMac MBS Inc., Fieldstone Mortgage

Investment Corp., and Option One Mortgage Acceptance Corp. each filed one or more of the

seven remaining Shelf Registration Statements. With respect to all of the Securitizations, Merrill

Lynch, Pierce, Fenner & Smith was the lead underwriter or co-lead underwriter. With respect to

the Certificates purchased by Freddie Mac, all but one were purchased from Merrill Lynch,

Pierce, Fenner & Smith; and, with respect to the Certificates purchased by Fannie Mae, all but

one were purchased from Merrill Lynch Government Securities.

4. For each Securitization, a prospectus (“Prospectus”) and prospectus supplement

(“Prospectus Supplement”) were filed with the SEC as part of the Registration Statement

for

that Securitization. The GSE Certificates were marketed and sold to Fannie Mae and Freddie

Mac pursuant to the Registration Statements, including the Shelf Registration Statements and the

corresponding Prospectuses and Prospectus Supplements.

The term “Registration Statement,” as used herein, incorporates the Shelf Registration

Statement, the Prospectus, and the Prospectus Supplement for each referenced Securitization,

except where otherwise indicated.

5. The Registration Statements contained statements about the characteristics and

credit quality of the mortgage loans underlying the Securitizations, the creditworthiness of the

borrowers of those underlying mortgage loans, and the origination and underwriting practices

used to make and approve the loans. Such statements were material to a reasonable investor’s

decision to invest in mortgage-backed securities by purchasing the Certificates. Unbeknownst to

Fannie Mae and Freddie Mac, these statements were materially false, as significant percentages

of the underlying mortgage loans were not originated in accordance with the represented

underwriting standards and origination practices, and had materially poorer credit quality than

what was represented in the Registration Statements.

6. The Registration Statements also contained statistical summaries of the groups of

mortgage loans in each Securitization, such as the percentage of loans secured by owner-

occupied properties and the percentage of the loan group’s aggregate principal balance with

loan-to-value ratios within specified ranges. This information was also material to reasonable

investors. However, a loan level analysis of a sample of loans for each Securitization – a review

that encompassed thousands of mortgages across all of the Securitizations – has revealed that

these statistics were also false and omitted material facts due to widespread falsification of

borrowers’ incomes and debts, inflated property values and misstatements of other key

characteristics of the mortgage loans.

7. For example, the percentage of owner-occupied properties is a material risk factor

to the purchasers of Certificates, such as Fannie Mae and Freddie Mac, since a borrower who

lives in a mortgaged property is generally less likely to stop paying his or her mortgage and more

likely to take better care of the property. The loan level review reveals that the true percentage

of owner-occupied properties for the loans supporting the GSE Certificates was materially lower

than what was stated in the Prospectus Supplements. Likewise, the Prospectus Supplements

misrepresented other material factors, including the true value of the mortgaged properties

relative to the amount of the underlying loans, and the actual ability of the individual mortgage

holders to satisfy their debts.

8. Defendants Merrill Lynch, Pierce, Fenner & Smith (which lead underwrote or co-

lead underwrote the Certificates, and sold the Certificates to Freddie Mac), Merrill Lynch

Government Securities (which sold the Certificates to Fannie Mae), Merrill Lynch Mortgage

Investors (which acted as the depositor in 62 of the Securitizations), and the Individual

Defendants (who signed the Registration Statements with respect to 62 of the Securitizations) are

directly responsible for the misstatements and omissions of material fact contained in the

Registration Statements because they prepared, signed, filed, and/or used these documents to

market and sell the Certificates to Fannie Mae and Freddie Mac.

9. Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,

First Franklin Financial, and Merrill Lynch & Co. are also responsible for the misstatements and

omissions of material fact contained in the Registration Statements by virtue of their direction

and control over Defendants Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government

Securities, and Merrill Lynch Mortgage Investors. Merrill Lynch & Co. directly participated in

and exercised dominion and control over the business operations of Defendants Merrill Lynch,

Pierce, Fenner & Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage

Investors.

10. Fannie Mae and Freddie Mac purchased over $24.853 billion of the Certificates

pursuant to the Registration Statements filed with the SEC. These documents contained

misstatements and omissions of material facts concerning the quality of the underlying mortgage

loans, the creditworthiness of the borrowers, and the practices used to originate such loans. As a

result of Defendants’ misstatements and omissions of material fact, Fannie Mae and Freddie Mac

have suffered substantial losses as the value of their holdings has significantly deteriorated.

11. FHFA, as Conservator of Fannie Mae and Freddie Mac, brings this action against

the Defendants for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15

U.S.C. §§ 77k, 77(a)(2), 77o, Section 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code,

Sections 31-5606.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, and for

negligent misrepresentation, common law fraud, and aiding and abetting fraud.

PARTIES

The Plaintiff and the GSEs

12. The Federal Housing Finance Agency is a federal agency located at 1700 G

Street, NW in Washington, D.C. FHFA was created on July 30, 2008 pursuant to the Housing

and Economic Recovery Act of 2008 (“HERA”), Pub. L. No. 110-289, 122 Stat. 2654 (2008)

(codified at 12 U.S.C. § 4617), to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan

Banks. On September 6, 2008, under HERA, the Director of FHFA placed Fannie Mae and

Freddie Mac into conservatorship and appointed FHFA as conservator. In that capacity, FHFA

has the authority to exercise all rights and remedies of the GSEs, including but not limited to, the

authority to bring suits on behalf of and/or for the benefit of Fannie Mae and Freddie Mac. 12

U.S.C. § 4617(b)(2).

13. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by

Congress with a mission to provide liquidity, stability and affordability to the United States

housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac invested in

residential mortgage-backed securities. Fannie Mae is located at 3900 Wisconsin Avenue, NW

in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia.

The Defendants

14. Defendant Merrill Lynch & Co., is the ultimate parent corporation of all of the

Merrill Lynch Defendants. It is a Delaware corporation with its principal executive office

located at 4 World Financial Center, 250 Vesey Street, New York, New York 10080. It is a

holding company that, through its subsidiaries, purports to be a leading global trader and

underwriter of securities and derivatives across a broad range of asset classes and serves as a

strategic advisor to corporations, governments, institutions and individuals worldwide. On

January 1, 2009, Merrill Lynch & Co. became a wholly owned subsidiary of Bank of America

Corporation.

15. Defendant Merrill Lynch Mortgage Lending, is a Delaware corporation with its

principal place of business located at 4 World Financial Center, 250 Vesey Street, New York,

New York 10080. It is a wholly owned subsidiary of Merrill Lynch Mortgage Capital. It is

engaged in the business of, among other things, acquiring residential mortgage loans and selling

those loans through Securitization programs. It acted as the sponsor or co-sponsor for 55 of the

Securitizations at issue.

16. Defendant Merrill Lynch Mortgage Capital is a Delaware corporation with its

principal place of business located at One Bryant Park, New York, New York 10036. It is a

wholly owned subsidiary of Merrill Lynch & Co. It is engaged in the business of, among other

things, acquiring residential mortgage loans and selling those loans through Securitization

programs. It acted as the co-sponsor for one of the Securitizations at issue in this action.

17. Defendant First Franklin Financial is a Georgia corporation with its principal

place of business located at 2150 North 1

Street, San Jose, California 95131. It is a wholly

owned subsidiary of Merrill Lynch Mortgage Capital. First Franklin Financial regularly engaged

in business in New York including, without limitation, extending loans. It is engaged in the

business of, among other things, acquiring residential mortgage loans and selling those loans

through Securitization programs. It acted as the sponsor for five of the Securitizations at issue in

this action.

18. Defendant Merrill Lynch, Pierce, Fenner & Smith is a Delaware corporation and

registered broker-dealer with its principal place of business located at 4 World Financial Center,

250 Vesey Street, New York, New York 10080. Merrill Lynch, Pierce, Fenner & Smith acted as

the lead underwriter or co-lead underwriter for each Securitization, and as the underwriter

participated in the drafting and dissemination of the Offering Materials pursuant to which the

Certificates were sold to Fannie Mae and Freddie Mac. Defendant Merrill Lynch, Pierce, Fenner

& Smith was the lead underwriter or co-lead underwriter for each of the 72 Securitizations, and

was intimately involved in the offerings. Furthermore, Freddie Mac purchased 47 of the GSE

Certificates from Merrill Lynch, Pierce, Fenner & Smith.

19. Defendant Merrill Lynch Mortgage Investors, is a Delaware corporation and an

indirect subsidiary of Merrill Lynch & Co., with its principal place of business located at 4

World Financial Center, 250 Vesey Street, New York, New York 10080. It was the depositor for

62 of the Securitizations at issue here, the registrant for three of the Registration Statements filed

with the SEC, and the issuer for certain of the offerings at issue in this action. The depositor is

considered the issuer of the Certificates within the meaning of Section 2(a)(4) of the Securities

Act of 1933, 15 U.S.C. § 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. § 77k(a).

Merrill Lynch Mortgage Investors, as depositor, was also responsible for preparing and filing

reports required under the Securities Exchange Act of 1934.

20. Defendant Merrill Lynch Government Securities, is a Delaware corporation with

its principal place of business located at One Bryant Park, New York, NY 10036. It is a wholly

owned subsidiary of Merrill Lynch & Co. Fannie Mae purchased 39 of the GSE Certificates

from Merrill Lynch Government Securities.

21. Defendant Matthew Whalen served at the time of the Securitizations as President

and Chairman of the Board of Directors of Merrill Lynch Mortgage Investors, and worked in

New York. Defendant Whalen signed two of the Shelf Registration Statements and the

amendments thereto that are at issue in this action, and did so in New York.

22. Defendant Brian T. Sullivan served at the time of the Securitizations as the Vice

President, Treasurer (Principal Financial Officer), and Controller of Merrill Lynch Mortgage

Investors, and worked in New York. Defendant Sullivan signed three of the Shelf Registration

Statements and two of the amendments thereto that are at issue in this action, and did so in New

York.

23. Defendant Michael M. McGovern served at the time of the Securitizations as a

Director of Merrill Lynch Mortgage Investors and Senior Counsel of Merrill Lynch, and worked

in New York. Defendant McGovern signed three of the Shelf Registration Statements and the

amendments thereto that are at issue in this action, and did so in New York.

24. Defendant Donald J. Puglisi served at the time of the Securitizations as a Director

of Merrill Lynch Mortgage Investors, and worked in New York. Defendant Puglisi signed three

of the Shelf Registration Statements and the amendments thereto that are at issue in this action,

and did so in New York.

25. Defendant Paul Park served at the time of the Securitizations as the President and

Chairman of the Board of Directors of Merrill Lynch Mortgage Investors, and worked in New

The two remaining GSE Certificates were purchased by Fannie Mae and Freddie Mac

from Lehman Brothers, Inc.

York. Defendant Park signed one of the Shelf Registration Statements and the amendments

thereto that are at issue in this action, and did so in New York.

26. Defendant Donald C. Han served at the time of the Securitizations as the

Treasurer of Merrill Lynch Mortgage Investors, and worked in New York. Defendant Han

signed one of the Shelf Registration Statements that is at issue in this action., and did so in New

York

The Non-Party Originators

27. The loans underlying the Certificates were acquired by the sponsor for each

Securitization from non-party mortgage originators.

The originators principally responsible for

the loans underlying the Certificates were First NLC Financial Services, LLC. (“First NLC”);

ResMAE Mortgage Corporation (“ResMAE”); WMC Mortgage Corp. (“WMC”); GreenPoint

Mortgage Funding, Inc. (“GreenPoint”); Fremont Investment & Loan (“Fremont”); National City

Mortgage Co. (“National City”); and Option One Mortgage Corporation (“Option One”).

JURISDICTION AND VENUE

28. Jurisdiction of this Court is founded upon 28 U.S.C. § 1345, which gives federal

courts original jurisdiction over claims brought by FHFA in its capacity as conservator of Fannie

Mae and Freddie Mac.

29. Jurisdiction of this Court is also founded upon 28 U.S.C. § 1331 because the

Securities Act claims asserted herein arise under Sections 11, 12(a)(2), and 15 of the Securities

Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and

First Franklin Financial were the sponsors for 60 of the 72 Securitizations. The remaining 12

Securitizations had sponsors who are not parties. Ameriquest Mortgage Company, Credit-Based

Asset Servicing and Securitization LLC, Fieldstone Investment Corp., IndyMac Bank F.S.B, and

Option One Mortgage Corp. each were the sponsors for one or more of those 12 Securitizations.

Act of 1933, 15 U.S.C. §§ 77k, 77l(a)(2), and 77o. This Court further has jurisdiction over the

Securities Act claims pursuant to Section 22 of the Securities Act of 1933, 15 U.S.C. § 77v.

30. This Court has jurisdiction over the statutory claims of violations of Sections

13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code and Sections 31-5606.05(a)(1)(B) and 31-

5606.05(c) of the District of Columbia Code pursuant to this Court’s supplemental jurisdiction

under 28 U.S.C. § 1367(a). This Court also has jurisdiction over the common law claims of

negligent misrepresentation, fraud, and aiding and abetting fraud pursuant to this Court’s

supplemental jurisdiction under 28 U.S.C. § 1367(a).

31. Venue is proper in this district pursuant to Section 22 of the Securities Act of

1933, 15 U.S.C. § 77v, and 28 U.S.C. § 1391(b). The Merrill Lynch Defendants do business in

or derive substantial revenue from activities carried out in New York and all but one of the

Merrill Lynch Defendants, including the parent company Merrill Lynch & Co., have their

principal place of business in the state. Many of the acts and transactions alleged herein,

including the preparation and dissemination of the Registration Statements, occurred in

substantial part in the State of New York. Additionally, the GSE Certificates were actively

marketed and sold from this State, and several of the Defendants can be found and transact

business in this District. Defendants are also subject to personal jurisdiction in this District.

FACTUAL ALLEGATIONS

I. THE SECURITIZATIONS

A. Residential Mortgage-Backed Securitizations In General

32. Asset-backed securitization distributes risk by pooling cash-producing financial

assets and issuing securities backed by those pools of assets. In residential mortgage-backed

securitizations, the cash-producing financial assets are residential mortgage loans.

33. The most common form of securitization of mortgage loans involves a sponsor –

the entity that acquires or originates the mortgage loans and initiates the securitization – and the

creation of a trust, to which the sponsor directly or indirectly transfers a portfolio of mortgage

loans. The trust is established pursuant to a Pooling and Servicing Agreement entered into by,

among others, the “depositor” for that securitization. In many instances, the transfer of assets to

a trust “is a two-step process: the financial assets are transferred by the sponsor first to an

intermediate entity, often a limited purpose entity created by the sponsor . . . and commonly

called a depositor, and then the depositor will transfer the assets to the [trust] for the particular

asset-backed transactions.” Asset-Backed Securities, Securities Act Release No. 33-8518,

Exchange Act Release No. 34-50905, 84 SEC Docket 1624 (Dec. 22, 2004).

34. Residential mortgage-backed securities are backed by the underlying mortgage

loans. Some residential mortgage-backed securitizations are created from more than one cohort

of loans called collateral groups, in which case the trust issues securities backed by different

groups. For example, a securitization may involve two groups of mortgages, with some

securities backed primarily by the first group, and others primarily by the second group.

Purchasers of the securities acquire an ownership interest in the assets of the trust, which in turn

owns the loans. Within this framework, the purchasers of the securities acquire rights to the

cash-flows from the designated mortgage group, such as homeowners’ payments of principal and

interest on the mortgage loans held by the related trust.

35. Residential mortgage-backed securities are issued pursuant to registration

statements filed with the SEC. These registration statements include prospectuses, which explain

the general structure of the investment, and prospectus supplements, which contain detailed

descriptions of the mortgage groups underlying the certificates. Certificates are issued by the

trust pursuant to the registration statement and the prospectus and prospectus supplement.

Underwriters sell the certificates to investors.

36. A mortgage servicer is necessary to manage the collection of proceeds from the

mortgage loans. The servicer is responsible for collecting homeowners’ mortgage loan

payments, which the servicer remits to the trustee after deducting a monthly servicing fee. The

servicer’s duties include making collection efforts on delinquent loans, initiating foreclosure

proceedings, and determining when to charge off a loan by writing down its balance. The

servicer is required to report key information about the loans to the trustee. The trustee (or trust

administrator) administers the trust’s funds and delivers payments due each month on the

certificates to the investors.

B. The Securitizations At Issue In This Case

37. This case involves the 72 Securitizations listed in paragraph 2 supra, 60 of which

were sponsored by Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First

Franklin Financial Corporation and all of which were underwritten by Merrill Lynch, Pierce,

Fenner & Smith. For each of the 72 Securitizations, Table 2 identifies: (1) the sponsor; (2) the

depositor; (3) the lead underwriter; (4) the principal amount issued for the tranches

purchased

by the GSEs; (5) the date of issuance; and (6) the loan group or groups backing the GSE

Certificate for that Securitization (referred to as the “Supporting Loan Groups”).

Table 2

Transaction Tranche Sponsor/Seller Depositor Lead

Underwriter

Principal

Amount

Issued ($)

Date of

Issuance

Supporting

Loan

Group(s)

ARSI 2005-

A1B Ameriquest

Mortgage

Company

Argent

Securities,

Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$344,465,000 November

22, 2005

Group 1

A tranche is one of a series of certificates or interests created and issued as part of the

same transaction.

Transaction Tranche Sponsor/Seller Depositor Lead

Underwriter

Principal

Amount

Issued ($)

Date of

Issuance

Supporting

Loan

Group(s)

ARSI 2005-

A1A2 Ameriquest

Mortgage

Company

Argent

Securities,

Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$687,112,000 November

22, 2005

Group 1

ARSI 2005-

A1A3 Ameriquest

Mortgage

Company

Argent

Securities,

Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$151,807,000 November

22, 2005

Group 1

ARSI 2006-

A1 Ameriquest

Mortgage

Company

Argent

Securities,

Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$1,401,905,000 June 28,

2006

Group 1

CBASS

2006-CB8

A1 Credit-Based

Asset Servicing

and

Securitization,

LLC

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$183,951,000 October 30,

2006

Group I

FFMER

2007-1

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$725,544,000 On or about

March 27,

2007

Group I

FFMER

2007-2

A1 First Franklin

Financial

Corporation

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$588,366,000 April 26,

2007

Group I

FFMER

2007-3

A1A First Franklin

Financial

Corporation

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$285,760,000 May 30,

2007

Group I

FFMER

2007-3

A1C First Franklin

Financial

Corporation

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$205,174,000 May 30,

2007

Group I

FFMER

2007-3

A1D First Franklin

Financial

Corporation

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$33,199,000 May 30,

2007

Group I

FFMER

2007-3

M11 First Franklin

Financial

Corporation

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$35,135,000 May 30,

2007

Group I

FFMER

2007-3

M21 First Franklin

Financial

Corporation

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$28,590,000 May 30,

2007

Group I

FFMER

2007-3

M31 First Franklin

Financial

Corporation

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$7,922,000 May 30,

2007

Group I

FFMER

2007-3

M41 First Franklin

Financial

Corporation

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$9,989,000 May 30,

2007

Group I

FFMER

2007-4

1A First Franklin

Financial

Corporation

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$509,625,000 June 26,

2007

Group I

Transaction Tranche Sponsor/Seller Depositor Lead

Underwriter

Principal

Amount

Issued ($)

Date of

Issuance

Supporting

Loan

Group(s)

FFMER

2007-4

1M1 First Franklin

Financial

Corporation

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$34,062,000 June 26,

2007

Group I

FFMER

2007-4

1M2 First Franklin

Financial

Corporation

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$23,356,000 June 26,

2007

Group I

FFMER

2007-4

1M3 First Franklin

Financial

Corporation

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$12,327,000 June 26,

2007

Group I

FFMER

2007-5

1A First Franklin

Financial

Corporation

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$241,175,000 October 10,

2007

Group I

FFMER

2007-H1

1A1 First Franklin

Financial

Corporation

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$295,640,000 October 9,

2007

Group I

FFML 2005-

FF12

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$663,543,000 December

28, 2005

Group I

FFML 2006-

FF18

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$689,394,000 December

28, 2006

Group I

FFML 2007-

FF1

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$608,774,000 January 26,

2007

Group I

FFML 2007-

FF2

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$1,021,839,000 February

28, 2007

Group I

FMIC 2006-

1A Fieldstone

Investment

Corporation

Fieldstone

Mortgage

Investment

Corporation

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$221,277,000 October 27,

2006

Group 1

INDX 2005-

AR33

2A1 IndyMac Bank,

F.S.B

IndyMac

MBS, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$234,872,000 December

29, 2005

Group 2

INDX 2006-

AR5

1A1 IndyMac Bank,

F.S.B

IndyMac

MBS, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$210,047,000 March 30,

2006

Group 1

INDX 2006-

AR7

2A1 IndyMac Bank,

F.S.B

IndyMac

MBS, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$341,217,000 March 30,

2006

Group 2

INDX 2007-

FLX4

1A1 IndyMac Bank,

F.S.B

IndyMac

MBS, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$127,861,000 May 30,

2007

Group 1

Transaction Tranche Sponsor/Seller Depositor Lead

Underwriter

Principal

Amount

Issued ($)

Date of

Issuance

Supporting

Loan

Group(s)

INDX 2007-

FLX5

1A1 IndyMac Bank,

F.S.B

IndyMac

MBS, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$96,711,000 June 27,

2007

Group 1

INDX 2007-

FLX6

1A1 IndyMac Bank,

F.S.B

IndyMac

MBS, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$94,391,000 July 30,

2007

Group 1

MANA

2007-A1

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$68,226,000 February 9,

2007

Group I

MANA

2007-A2

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$180,475,000 March 30,

2007

Group I

MANA

2007-A2

A2A Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$165,226,000 March 30,

2007

Group 2

MANA

2007-A3

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$189,695,000 April 30,

2007

Group 1

MLMI 2005-

A2A Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$182,596,000 November

15, 2005

Group 2

MLMI 2005-

A2B1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$178,723,000 November

15, 2005

Group 2

MLMI 2005-

AR1

A2 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$250,727,000 September

29, 2005

Group 2

MLMI 2005-

HE2

A1A Merrill Lynch

Mortgage

Capital, Inc. and

Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$236,060,000 November

30, 2005

Group 1

MLMI 2005-

HE2

A1B Merrill Lynch

Mortgage

Capital, Inc. and

Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$59,015,000 November

30, 2005

Group 1

MLMI 2005-

HE3

A1A Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$335,591,000 December

28, 2005

Group 1

MLMI 2006-

IIA1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$89,730,000 May 31,

2006

Group 2

Transaction Tranche Sponsor/Seller Depositor Lead

Underwriter

Principal

Amount

Issued ($)

Date of

Issuance

Supporting

Loan

Group(s)

MLMI 2006-

AF2

AV1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$125,408,000 October 30,

2006

Group 2

MLMI 2006-

AHL1

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$160,748,000 June 29,

2006

Group I

MLMI 2006-

AR1

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$333,038,000 April 27,

2006

Group I

MLMI 2006-

FF1

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$1,098,020,000 December

27, 2006

Group I

MLMI 2006-

FM1

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$204,693,000 June 30,

2006

Group I

MLMI 2006-

HE1

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$355,063,000 February 7,

2006

Group I

MLMI 2006-

HE4

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$125,624,000 July 25,

2006

Group I

MLMI 2006-

HE5

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$169,018,000 September

28, 2006

Group I

MLMI 2006-

HE6

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$250,830,000 December

28, 2006

Group I

MLMI 2006-

MLN1

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$316,858,000 September

29, 2006

Group I

MLMI 2006-

OPT1

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$469,721,000 September

26, 2006

Group I

MLMI 2006-

RM1

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$171,181,000 March 21,

2006

Group I

MLMI 2006-

RM2

A1A Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$411,649,000 May 31,

2006

Group I

MLMI 2006-

RM3

A1A Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$227,029,000 June 30,

2006

Group I

Transaction Tranche Sponsor/Seller Depositor Lead

Underwriter

Principal

Amount

Issued ($)

Date of

Issuance

Supporting

Loan

Group(s)

MLMI 2006-

RM4

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$176,227,000 September

27, 2006

Group I

MLMI 2006-

RM5

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$138,699,000 October 27,

2006

Group I

MLMI 2006-

WMC1

A1A Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$419,318,000 On or about

February

14, 2006

Group I

MLMI 2006-

WMC2

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$493,651,000 March 30,

2006

Group I

MLMI 2007-

HE1

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$354,933,000 March 8,

2007

Group 1

MLMI 2007-

HE2

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$431,956,000 March 30,

2007

Group 1

MLMI 2007-

MLN1

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$415,943,000 April 26,

2007

Group 1

OOMLT

2007-1

IA2 Option One

Mortgage

Corporation

Option One

Mortgage

Acceptance

Corporation

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$ 259,609,000 January 24,

2007

Group 1

OOMLT

2007-1

IA1 Option One

Mortgage

Corporation

Option One

Mortgage

Acceptance

Corporation

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$ 259,610,000 January 24,

2007

Group 1

OWNIT

2005-4

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$285,517,000 October 28,

2005

Group 1

OWNIT

2005-5

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$205,391,000 December

28, 2005

Group 1

OWNIT

2006-1

AV Credit-Based

Asset Servicing

and

Securitization,

LLC

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$225,112,000 January 30,

2006

Group 1

OWNIT

2006-2

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$221,310,000 March 9,

2006

Group 1

OWNIT

2006-3

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$180,115,000 On or about

April 13,

2006

Group 1

Transaction Tranche Sponsor/Seller Depositor Lead

Underwriter

Principal

Amount

Issued ($)

Date of

Issuance

Supporting

Loan

Group(s)

OWNIT

2006-4

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$243,564,000 June 26,

2006

Group 1

OWNIT

2006-5

A1B Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$27,738,000 July 27,

2006

Group 1

OWNIT

2006-5

A1A Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$110,953,000 July 27,

2006

Group 1

OWNIT

2006-6

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$113,153,000 September

28, 2006

Group 1

OWNIT

2006-7

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$184,746,000 November

3, 2006

Group 1

SURF 2005-

AB3

A1A Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$135,861,000 December

28, 2005

Group 1

SURF 2005-

BC3

A1A Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$302,990,000 September

29, 2005

Group 1

SURF 2005-

BC4

A1A Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$470,632,000 December

20, 2005

Group 1

SURF 2006-

AB2

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$194,773,000 May 31,

2006

Group I

SURF 2006-

AB3

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$190,723,000 September

26, 2006

Group 1

SURF 2006-

BC1

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$583,827,000 On or about

February

21, 2006

Group 1

SURF 2006-

BC2

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$173,248,000 March 30,

2006

Group 1

SURF 2006-

BC3

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$384,110,000 June 27,

2006

Group 1

SURF 2006-

BC4

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$439,858,000 September

27, 2006

Group 1

Transaction Tranche Sponsor/Seller Depositor Lead

Underwriter

Principal

Amount

Issued ($)

Date of

Issuance

Supporting

Loan

Group(s)

SURF 2006-

BC5

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$258,105,000 November

28, 2006

Group 1

SURF 2007-

AB1

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$127,954,000 March 26,

2007

Group 1

SURF 2007-

BC1

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$294,133,000 January 24,

2007

Group 1

SURF 2007-

BC2

A1 Merrill Lynch

Mortgage

Lending, Inc.

Merrill Lynch

Mortgage

Investors, Inc.

Merrill

Lynch,

Pierce, Fenner

& Smith, Inc.

$174,640,000 April 24,

2007

Group 1

C. The Securitization Process

1. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,

and First Franklin Financial Grouped Mortgage Loans in Special

Purpose Trusts

38. As the sponsors for 60 of the 72 Securitizations, Merrill Lynch Mortgage

Lending, Merrill Lynch Mortgage Capital, and First Franklin Financial purchased the mortgage

loans underlying the Certificates for those 60 Securitizations after the loans were originated,

either directly from the originators or through affiliates of the originators.

39. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, and First

Franklin Financial then sold the mortgage loans for the 60 Securitizations that they sponsored to

a depositor, which was a Merrill Lynch affiliated entity: Merrill Lynch Mortgage Investors.

With respect to two of the remaining 12 Securitizations, non-party sponsor Credit-Based Asset

Servicing and Securitization LLC sold the mortgage loans to Defendant Merrill Lynch Mortgage

Investors, as depositor. With respect to the remaining ten Securitizations, non-party sponsors

Non-party sponsors Ameriquest Mortgage Company, Credit-Based Asset Servicing

and Securitization LLC, Fieldstone Investment Corp., IndyMac Bank F.S.B, and Option One

Mortgage Corp. were each a Sponsor of one or more of the remaining 12 Securitizations. The

sponsor for each Securitization is included in Table 2, supra at paragraph 37.

sold the mortgage loans to non-party depositors, as reflected in Table 2, supra at paragraph 37;

Defendant Merrill Lynch, Pierce, Fenner & Smith was the lead underwriter or co-lead

underwriter for those ten Securitizations and sold three of those Securitizations to Freddie Mac,

while Defendant Merrill Lynch Government Securities sold seven of those ten Securitizations to

Fannie Mae.

40. Merrill Lynch Mortgage Investors, is a wholly-owned, subsidiary of Merrill

Lynch & Co. The sole purpose of Merrill Lynch Mortgage Investors as depositor was to act as a

conduit through which loans acquired by the sponsors can be securitized and interests in those

loans sold to investors.

41. As depositors for 62 of the Securitizations, Merrill Lynch Mortgage Investors,

transferred the relevant mortgage loans to the trusts. As part of each of the Securitizations, the

trustee, on behalf of the Certificateholders, executed a Pooling and Servicing Agreement

(“PSA”) with the relevant depositor and the parties responsible for monitoring and servicing the

mortgage loans in that Securitization. The trust, administered by the trustee, held the mortgage

loans pursuant to the related PSA and issued Certificates, including the GSE Certificates, backed

by such loans. The GSEs purchased the GSE Certificates, through which they obtained an

ownership interest in the assets of the trust including the mortgage loans.

2. The Trusts Issue Securities Backed by the Loans

42. Once the mortgage loans were transferred to the trusts in accordance with the

PSAs, each trust issued Certificates backed by the underlying mortgage loans. The Certificates

were then sold to investors like Fannie Mae and Freddie Mac, which thereby acquired an

ownership interest in the assets of the corresponding trust. Each Certificate entitles its holder to

The two remaining GSE Certificates were purchased by Fannie Mae and Freddie Mac

from Lehman Brothers, Inc.

a specified portion of the cashflows from the underlying mortgages in the Supporting Loan

Group. The level of risk inherent in the Certificates is a function of the capital structure of the

related transaction and the credit quality of those underlying mortgages.

43. The Certificates were issued pursuant to one of ten Shelf Registration Statements

filed with the SEC on a Form S-3. The Shelf Registration Statements were amended by one or

more Forms S-3/A filed with the SEC. Each Individual Defendant signed one or more of the

three Shelf Registration Statements, including any amendments thereto, which were filed by

Merrill Lynch Mortgage Investors. The SEC filing number, registrants, signatories and filing

dates for the ten Shelf Registration Statements and amendments thereto, as well as the

Certificates covered by each Shelf Registration Statement, are reflected in Table 3 below.

Table 3

SEC File

Number

Date

Registration

Statement

Filed

Date(s)

Amended

Registration

Statements

Filed

Registrant(s) Covered Certificates Signatories of

Registration

Statement

Signatories of

Amendments

333-130545 12/21/2005 2/24/2006,

3/21/2006,

3/28/2006

Merrill Lynch

Mortgage

Investors, Inc.

CBASS 2006-CB8,

FFML 2006-FF18,

FFML 2007-FF1,

FFML 2007-FF2,

MANA 2007-A1,

MLMI 2006-A3,

MLMI 2006-AF2,

MLMI 2006-AHL1,

MLMI 2006-AR1,

MLMI 2006-FF1,

MLMI 2006-FM1,

MLMI 2006-HE4,

MLMI 2006-HE5,

MLMI 2006-HE6,

MLMI 2006-MLN1,

MLMI 2006-OPT1,

MLMI 2006-RM2,

MLMI 2006-RM3,

MLMI 2006-RM4,

MLMI 2006-RM5,

MLMI 2007-HE1,

OWNIT 2006-3,

OWNIT 2006-4,

OWNIT 2006-5,

OWNIT 2006-6,

OWNIT 2006-7,

SURF 2006-AB2,

SURF 2006-AB3,

SURF 2006-BC3,

SURF 2006-BC4,

SURF 2006-BC5,

SURF 2007-AB1,

SURF 2007-BC1

Matthew

Whalen, Brian

T. Sullivan,

Michael M.

McGovern,

Donald J.

Puglisi

Matthew Whalen,

Brian T. Sullivan,

Michael M.

McGovern,

Donald J. Puglisi

333-140436 2/2/2007 3/7/2007 Merrill Lynch

Mortgage

Investors, Inc.

FFMER 2007-1,

FFMER 2007-2,

FFMER 2007-3,

FFMER 2007-4,

FFMER 2007-5,

FFMER 2007-H1,

MANA 2007-A2,

MANA 2007-A3,

MLMI 2007-HE2,

MLMI 2007-MLN1,

SURF 2007-BC2

Paul Park, Brian

T. Sullivan,

Michael M.

McGovern,

Donald J.

Puglisi

Paul Park, Brian

T. Sullivan,

Michael M.

McGovern,

Donald J. Puglisi

SEC File

Number

Date

Registration

Statement

Filed

Date(s)

Amended

Registration

Statements

Filed

Registrant(s) Covered Certificates Signatories of

Registration

Statement

Signatories of

Amendments

333-127233 8/5/2005 8/17/2005 Merrill Lynch

Mortgage

Investors, Inc.

FFML 2005-FF12,

MLMI 2005-A8,

MLMI 2005-AR1,

MLMI 2005-HE2,

MLMI 2005-HE3,

MLMI 2006-HE1,

MLMI 2006-RM1,

MLMI 2006-WMC1,

MLMI 2006-WMC2,

OWNIT 2005-4,

OWNIT 2005-5,

OWNIT 2006-1,

OWNIT 2006-2,

SURF 2005-AB3,

SURF 2005-BC3,

SURF 2005-BC4,

SURF 2006-BC1,

SURF 2006-BC2

Matthew

Whalen, Donald

C. Han, Michael

M. McGovern,

Donald J.

Puglisi

Matthew Whalen,

Brian T. Sullivan,

Michael M.

McGovern,

Donald J. Puglisi

333-131895 2/16/2006 3/17/2006 Argent

Securities,

Inc.

ARSI 2006-M1 Adam J. Bass,

John P. Grazer

and Andrew L.

Stidd

Adam J. Bass,

John P. Grazer

and Andrew L.

Stidd

333-127556 8/15/2005 Not

applicable

IndyMac

MBS, Inc.

INDX 2006-AR5,

INDX 2005-AR33,

INDX 2006-AR7

John Olinski, S.

Blair Abernathy,

Lynnette Antosh

and Samir

Grover

Not applicable

333-132444 3/15/2006 5/8/2006,

5/31/2006

Fieldstone

Mortgage

Investment

Corporation

FMIC 2006-3 John C. Kendall,

Michael J.

Sonnenfeld,

Nayan V.

Kisnadwala

5/8/2006: John C.

Kendall, Michael

J. Sonnenfeld,

Nayan V.

Kisnadwala;

5/31/2006: John

C. Kendall,

Michael J.

Sonnenfeld,

Nayan V.

Kisnadwala

333-121782 12/30/2004 1/12/2006 Argent

Securities,

Inc.

ARSI 2005-W4 Adam J. Bass,

John P. Grazer,

and Andrew L.

Stidd

Adam J. Bass,

John P. Grazer,

and Andrew L.

Stidd

SEC File

Number

Date

Registration

Statement

Filed

Date(s)

Amended

Registration

Statements

Filed

Registrant(s) Covered Certificates Signatories of

Registration

Statement

Signatories of

Amendments

333-132042 2/24/2006 3/29/2006,

4/13/2006,

6/5/2007

IndyMac

MBS, Inc.

INDX 2007-FLX4 John Olinski, S.

Blair Abernathy,

Raphael Bostic,

Samir Grover

and Victor H.

Woodworth

3/29/2006: Simon

Heyrick, Victor

H. Woodworth,

John Olinski, S.

Blair Abernathy

and Raphael

Bostic;

4/13/2006: Victor

H. Woodworth,

John Olinski, S.

Blair Abernathy,

Simon Heyrick

and Raphael

Bostic; 6/5/2007

Victor H.

Woodworth, John

Olinski, S. Blair

Abernathy, Simon

Heyrick and

Raphael Bostic

333-140726 2/14/2007 3/1/2007,

6/6/2007,

6/19/2007

IndyMac

MBS, Inc.

INDX 2007-FLX5,

INDX 2007-FLX6

John Olinski, S.

Blair Abernathy,

Raphael Bostic,

Simon Heyrick,

Victor H.

Woodworth

John Olinski, S.

Blair Abernathy,

Raphael Bostic,

Simon Heyrick,

Victor H.

Woodworth

333-130870 1/5/2006 3/31/2006,

3/30/2006,

3/17/2006,

3/02/2006,

2/10/2006

Option One

Mortgage

Acceptance

Corporation

OOMLT 2007-1 Robert E.

Dubrish, Steven

L. Nadon and

William L.

O’Neill

Robert E.

Dubrish, Steven

L. Nadon and

William L.

O’Neill

44. The Prospectus Supplement for each Securitization describes the underwriting

guidelines that purportedly were used in connection with the origination of the underlying

mortgage loans. In addition, the Prospectus Supplements purport to provide accurate statistics

regarding the mortgage loans in each group, including the ranges of and weighted average FICO

credit scores of the borrowers, the ranges of and weighted average loan-to-value ratios of the

loans, the ranges of and weighted average outstanding principal balances of the loans, the debt-

to-income ratios, the geographic distribution of the loans, the extent to which the loans were for

purchase or refinance purposes, and information concerning whether the loans were secured by a

property to be used as a primary residence, second home, or investment property; and

information concerning whether the loans were delinquent.

45. The Prospectus Supplements associated with each Securitization were filed with

the SEC as part of the Registration Statements. The Form 8-Ks attaching the PSAs for the

majority of the Securitizations were also filed with the SEC. The date on which the Prospectus

Supplement and Form 8-K were filed for each Securitization, as well as the filing number of the

Shelf Registration Statement related to each, are set forth in Table 4 below.

Table 4

Transaction Date Prospectus

Supplement Filed

Date Form 8-K Attaching

PSA Filed

Filing Number of Related

Registration Statement

ARSI 2005-W4 11/22/2005 12/7/2005 333-121782

ARSI 2006-M1 6/23/2006 7/21/2006 333-131895

CBASS 2006-CB8 11/1/2006 11/14/2006 333-130545

FFMER 2007-1 3/27/2007 Not applicable 333-140436

FFMER 2007-2 4/27/2007 5/11/2007 333-140436

FFMER 2007-3 5/30/2007 6/14/2007 333-140436

FFMER 2007-4 6/26/2007 7/11/2007 333-140436

FFMER 2007-5 10/10/2007 10/25/2007 333-140436

FFMER 2007-H1 10/11/2007 10/24/2007 333-140436

FFML 2005-FF12 1/6/2006 1/12/2006 333-127233

FFML 2006-FF18 12/26/2006 1/12/2007 333-130545

FFML 2007-FF1 1/25/2007 2/12/2007 333-130545

FFML 2007-FF2 2/28/2007 3/15/2007 333-130545

FMIC 2006-3 10/26/2006 11/7/2006 333-132444

INDX 2005-AR33 12/30/2005 1/30/2006 333-127556

INDX 2006-AR5 4/3/2006 4/14/2006 333-127556

INDX 2006-AR7 4/3/2006 4/14/2006 333-127556

INDX 2007-FLX4 6/4/2007 6/20/2007 333-132042

INDX 2007-FLX5 7/2/2007 7/13/2007 333-140726

INDX 2007-FLX6 8/1/2007 8/17/2007 333-140726

MANA 2007-A1 2/12/2007 2/26/2007 333-130545

MANA 2007-A2 4/2/2007 4/16/2007 333-140436

MANA 2007-A3 4/30/2007 5/15/2007 333-140436

MLMI 2005-A8 11/15/2005 11/30/2005 333-127233

MLMI 2005-AR1 9/28/2005 10/14/2005 333-127233

MLMI 2005-HE2 12/1/2005 12/12/2005 333-127233

Transaction Date Prospectus

Supplement Filed

Date Form 8-K Attaching

PSA Filed

Filing Number of Related

Registration Statement

MLMI 2005-HE3 12/27/2005 1/12/2006 333-127233

MLMI 2006-A3 5/31/2006 6/15/2006 333-130545

MLMI 2006-AF2 10/31/2006 11/15/2006 333-130545

MLMI 2006-AHL1 6/29/2006 7/14/2006 333-130545

MLMI 2006-AR1 4/26/2006 5/12/2006 333-130545

MLMI 2006-FF1 12/22/2006 1/11/2007 333-130545

MLMI 2006-FM1 6/29/2006 7/14/2006 333-130545

MLMI 2006-HE1 2/7/2006 2/22/2006 333-127233

MLMI 2006-HE4 7/26/2006 8/9/2006 333-130545

MLMI 2006-HE5 9/28/2006 10/13/2006 333-130545

MLMI 2006-HE6 12/27/2006 1/12/2007 333-130545

MLMI 2006-MLN1 9/28/2006 10/16/2006 333-130545

MLMI 2006-OPT1 9/26/2006 10/11/2006 333-130545

MLMI 2006-RM1 3/21/2006 4/5/2006 333-127233

MLMI 2006-RM2 5/31/2006 6/15/2006 333-130545

MLMI 2006-RM3 6/27/2006 7/14/2006 333-130545

MLMI 2006-RM4 9/28/2006 10/10/2006 333-130545

MLMI 2006-RM5 10/27/2006 11/13/2006 333-130545

MLMI 2006-WMC1 2/14/2006 Not applicable 333-127233

MLMI 2006-WMC2 3/30/2006 4/14/2006 333-127233

MLMI 2007-HE1 3/8/2007 3/23/2007 333-130545

MLMI 2007-HE2 4/2/2007 4/16/2007 333-140436

MLMI 2007-MLN1 4/27/2007 5/11/2007 333-140436

OOMLT 2007-1 1/24/2007 2/8/2007 333-130870

OWNIT 2005-4 10/28/2005 11/14/2005 333-127233

OWNIT 2005-5 12/23/2005 1/12/2006 333-127233

OWNIT 2006-1 1/30/2006 2/14/2006 333-127233

OWNIT 2006-2 3/9/2006 3/24/2006 333-127233

OWNIT 2006-3 4/13/2006 Not applicable 333-130545

OWNIT 2006-4 6/26/2006 7/11/2006 333-130545

OWNIT 2006-5 7/26/2006 8/11/2006 333-130545

OWNIT 2006-6 9/22/2006 10/13/2006 333-130545

OWNIT 2006-7 11/2/2006 11/20/2006 333-130545

SURF 2005-AB3 12/23/2005 1/11/2006 333-127233

SURF 2005-BC3 9/29/2005 10/14/2005 333-127233

SURF 2005-BC4 12/20/2005 1/3/2006 333-127233

SURF 2006-AB2 5/31/2006 6/15/2006 333-130545

SURF 2006-AB3 9/25/2006 10/11/2006 333-130545

SURF 2006-BC1 2/17/2006 Not applicable 333-127233

SURF 2006-BC2 3/29/2006 4/14/2006 333-127233

Transaction Date Prospectus

Supplement Filed

Date Form 8-K Attaching

PSA Filed

Filing Number of Related

Registration Statement

SURF 2006-BC3 6/23/2006 7/12/2006 333-130545

SURF 2006-BC4 9/26/2006 10/11/2006 333-130545

SURF 2006-BC5 11/24/2006 12/13/2006 333-130545

SURF 2007-AB1 3/26/2007 4/10/2007 333-130545

SURF 2007-BC1 1/24/2007 2/8/2007 333-130545

SURF 2007-BC2 4/24/2007 5/8/2007 333-140436

46. The Certificates were issued pursuant to the PSAs, and Defendants Merrill Lynch

Government Securities and Merrill Lynch, Pierce, Fenner & Smith offered and sold the GSE

Certificates to Fannie Mae and Freddie Mac, respectively, pursuant to the Registration

Statements, which, as noted previously, included the Prospectuses and Prospectus Supplements.

II. THE DEFENDANTS’ PARTICIPATION IN THE SECURITIZATION PROCESS

A. The Role of Each of the Defendants

47. Each of the Defendants, including the Individual Defendants, had a role in the

securitization process and the marketing for some or all of the Certificates, which included

purchasing the mortgage loans from the originators, arranging the Securitizations, selling the

mortgage loans to the depositor, transferring the mortgage loans to the trustee on behalf of the

Certificateholders, underwriting the public offering of the Certificates, structuring and issuing

the Certificates, and marketing and selling the Certificates to investors such as Fannie Mae and

Freddie Mac.

48. With respect to each Securitization, the depositor, underwriter, selling entity, and

Individual Defendants who signed the Registration Statement, as well as the Defendants who

exercised control over their activities, are liable, jointly and severally, as participants in the

Together Merrill Lynch Government Securities and Merrill Lynch, Pierce, Fenner &

Smith sold to the GSEs 86 of the GSE Certificates; for the remaining 2 GSE Certificates, the

seller was a non-party underwriter. The entity that sold each Certificate to the GSEs is reflected

at Tables 12 and 13, infra at paragraphs 169 through 170.

registration, issuance and offering of the Certificates, including issuing, causing, or making

materially misleading statements in the Registration Statements, and omitting material facts

required to be stated therein or necessary to make the statements contained therein not

misleading.

1. First Franklin Financial

49. Defendant First Franklin Financial is a wholly owned subsidiary of Merrill Lynch

Mortgage Capital. First Franklin Financial was the sponsor for five of the 72 Securitizations. In

that capacity First Franklin Financial initiated the Securitizations, determined their structure,

purchased the mortgage loans to be securitized, determined distribution of principal and interest,

and provided data to the rating agencies to secure investment grade ratings for the GSE

Certificates. First Franklin Financial also selected Merrill Lynch Mortgage Investors as the

special purpose vehicle that would be used to transfer the mortgage loans from First Franklin

Financial to the trusts, and selected Merrill Lynch, Pierce, Fenner & Smith as the lead

underwriter or co-lead underwriter for the Securitizations. In its role as sponsor, First Franklin

Financial knew and intended that the mortgage loans it purchased would be sold in connection

with the securitization process, and that certificates representing interests in such loans would be

issued by the relevant trusts.

50. For the five Securitizations that it sponsored First Franklin Financial also

conveyed the mortgage loans to Defendant Merrill Lynch Mortgage Investors, as depositor,

pursuant to a mortgage loan purchase agreement, mortgage loan sale and assignment agreement,

pooling and servicing agreement, or another substantially similar agreement. In these

agreements, First Franklin Financial made certain representations and warranties to Merrill

Lynch Mortgage Investors regarding the groups of loans collateralizing the Certificates. These

representations and warranties were assigned by Merrill Lynch Mortgage Investors to the

trustees for the benefit of the Certificateholders.

2. Merrill Lynch Mortgage Capital

51. Defendant Merrill Lynch Mortgage Capital is a wholly owned subsidiary of

Merrill Lynch & Co. Merrill Lynch Mortgage Capital was the co-sponsor for one of the 72

Securitizations. In that capacity, Merrill Lynch Mortgage Capital determined the structure of the

Securitization, initiated the Securitization, purchased the mortgage loans to be Securitized,

determined distribution of principal and interest, and provided data to the rating agencies to

secure investment grade ratings for the Certificates. Merrill Lynch Mortgage Capital also

selected Merrill Lynch Mortgage Investors as the special purpose vehicle that would be used to

transfer the mortgage loans from Merrill Lynch Mortgage Capital to the trusts, and selected

Merrill Lynch, Pierce, Fenner & Smith as the lead underwriter or co-lead underwriter for the

Securitization. In its role as co-sponsor, Merrill Lynch Mortgage Capital knew and intended that

the mortgage loans it purchased would be sold in connection with the securitization process, and

that certificates representing interests in such loans would be issued by the relevant trusts.

52. For the Securitization that it co-sponsored Merrill Lynch Mortgage Capital also

conveyed the mortgage loans to Defendant Merrill Lynch Mortgage Investors, as depositor,

pursuant to a mortgage loan purchase agreement, mortgage loan sale and assignment agreement,

pooling and servicing agreement, or other substantially similar agreement. In these agreements,

Merrill Lynch Mortgage Capital made certain representations and warranties to Merrill Lynch

Mortgage Investors regarding the group of loans collateralizing the Certificates. These

representations and warranties were assigned by Merrill Lynch Mortgage Investors to the

trustees for the benefit of the Certificateholders.

3. Merrill Lynch Mortgage Lending

53. Defendant Merrill Lynch Mortgage Lending is a wholly owned subsidiary of

Merrill Lynch Mortgage Capital. It is engaged in the business of, among other things, acquiring

mortgage loans and selling those loans through securitization programs. Merrill Lynch

Mortgage Lending was the sponsor or co-sponsor for 55 of the 72 Securitizations. In that

capacity, Merrill Lynch Mortgage Lending determined the structure of the Securitizations,

initiated the Securitizations, purchased the mortgage loans to be Securitized, determined

distribution of principal and interest, and provided data to the rating agencies to secure

investment grade ratings for the Certificates. Merrill Lynch Mortgage Lending also selected

Merrill Lynch Mortgage Investors as the special purpose vehicle that would be used to transfer

the mortgage loans from Merrill Lynch Mortgage Lending to the trusts, and selected Merrill

Lynch, Pierce, Fenner & Smith as the lead underwriter or co-lead underwriter for the

Securitizations. In its role as sponsor, Merrill Lynch Mortgage Lending knew and intended that

the mortgage loans it purchased would be sold in connection with the securitization process, and

that certificates representing interests in such loans would be issued by the relevant trusts.

54. For the 55 Securitizations that it sponsored or co-sponsored, Merrill Lynch

Mortgage Lending also conveyed the mortgage loans to Defendant Merrill Lynch Mortgage

Investors, as depositor, pursuant to a mortgage loan purchase agreement, mortgage loan sale and

assignment agreement, pooling and servicing agreement, or other substantially similar

agreement. In these agreements, Merrill Lynch Mortgage Lending made certain representations

and warranties to Merrill Lynch Mortgage Investors regarding the group of loans collateralizing

the Certificates. These representations and warranties were assigned by Merrill Lynch Mortgage

Investors to the trustees for the benefit of the Certificateholders.

4. Merrill Lynch Mortgage Investors

55. Defendant Merrill Lynch Mortgage Investors is an indirect subsidiary of Merrill

Lynch & Co. Merrill Lynch Mortgage Investors was the depositor for 62 of the Securitizations.

In its capacity as depositor, Merrill Lynch Mortgage Investors purchased the mortgage loans

from First Franklin Financial, Merrill Lynch Mortgage Capital, and Merrill Lynch Mortgage

Lending (as sponsors) pursuant to a mortgage loan purchase agreement, mortgage loan sale and

assignment agreement, pooling and servicing agreement, or other substantially similar

agreement.

Merrill Lynch Mortgage Investors then sold, transferred, or otherwise conveyed the

mortgage loans to be securitized to the trusts. Merrill Lynch Mortgage Investors, together with

the other Defendants, was also responsible for preparing and filing the Registration Statements

pursuant to which the Certificates were offered for sale. The trusts in turn held the mortgage

loans for the benefit of the Certificateholders, and issued the Certificates in public offerings for

sale to investors such as Fannie Mae and Freddie Mac.

5. Merrill Lynch, Pierce, Fenner & Smith

56. Defendant Merrill Lynch, Pierce, Fenner & Smith is an investment bank, and was,

at all relevant times, a registered broker/dealer. Merrill Lynch, Pierce, Fenner & Smith was the

lead underwriter or co-lead underwriter for each of the Securitizations. In that role, it was

responsible for managing the offer of the Certificates for Fannie Mae and Freddie Mac, and the

sale of the Certificates to Freddie Mac. Merrill Lynch, Pierce, Fenner & Smith was also

obligated to conduct meaningful due diligence to ensure that the Registration Statements did not

First Franklin Financial, Merrill Lynch Mortgage Capital, and Merrill Lynch Mortgage

Lending served as the sponsors for 60 of the 62 Securitizations for which Merrill Lynch

Mortgage Investors was the depositor. For the two remaining Securitizations, Credit-Based

Asset Servicing and Securitization, LLC served as the sponsor.

contain any material misstatements or omissions, including as to the manner in which the

underlying mortgage loans were originated and sold.

6. Merrill Lynch Government Securities

57. Defendant Merrill Lynch Government Securities is a wholly owned subsidiary of

Merrill Lynch & Co. Merrill Lynch Government Securities sold Certificates to Fannie Mae in 39

of the Securitizations. Merrill Lynch Government Securities was also obligated to conduct

meaningful due diligence to ensure that the Registration Statements did not contain any material

misstatements or omissions, including as to the manner in which the underlying mortgage loans

were originated, transferred and underwritten.

7. Merrill Lynch & Co.

58. Defendant Merrill Lynch & Co. employed its wholly-owned subsidiaries, First

Franklin Financial, Merrill Lynch Mortgage Capital, Merrill Lynch Mortgage Lending, Merrill

Lynch Mortgage Investors, and Merrill Lynch, Pierce, Fenner & Smith, in the key steps of the

securitization process. Unlike typical arm’s length transactions, the Securitizations here

involved various Merrill Lynch subsidiaries and affiliates at virtually each step of the process.

With respect to all but 12 of the Securitizations, the sponsor was First Franklin Financial, Merrill

Lynch Mortgage Capital, or Merrill Lynch Mortgage Lending; the depositor was Merrill Lynch

Mortgage Investors; the lead underwriter was Merrill Lynch, Pierce, Fenner & Smith; and the

entity that sold the Certificates to the GSEs was Merrill Lynch Government Securities or Merrill

Lynch, Pierce, Fenner & Smith. As to the remaining deals, Merrill Lynch, Pierce, Fenner &

Smith was the lead underwriter in ten instances and sold three of the Certificates to Freddie Mac;

Merrill Lynch Government Securities sold seven of the Certificates to the GSEs; and in two

instances Merrill Lynch Mortgage Investors was the depositor.

59. As the corporate parent of First Franklin Financial, Merrill Lynch Mortgage

Capital, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Investors, Merrill Lynch,

Pierce, Fenner & Smith, and Merrill Lynch Government Securities, Merrill Lynch & Co. had the

practical ability to direct and control the actions of First Franklin Financial, Merrill Lynch

Mortgage Capital, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Investors, Merrill

Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities related to the

Securitizations.

8. The Individual Defendants

60. Defendant Matthew Whalen served at the time of the Securitizations as President

and Chairman of the Board of Directors of Merrill Lynch Mortgage Investors, Inc. Mr. Whalen

signed the Merrill Lynch Mortgage Investors Shelf Registration Statement under file number

333-130545 filed with the SEC on December 21, 2005 and the related pre-effective amendments

on Form S-3/A filed with the SEC on February 24, 2006, March 21, 2006 and March 28, 2006.

Mr. Whalen further signed the Merrill Lynch Mortgage Investors Shelf Registration Statement

under file number 333-127233 filed with the SEC on August 5, 2005 and the related pre-

effective amendments on Form S-3/A filed with the SEC on August 17, 2005.

61. Defendant Brian T. Sullivan served at the time of the Securitizations as the Vice

President, Treasurer (Principal Financial Officer), and Controller of Merrill Lynch Mortgage

Investors, Inc. Mr. Sullivan signed the Merrill Lynch Mortgage Investors Shelf Registration

Statement under file number 333-130545 filed with the SEC on December 21, 2005 and the

related pre-effective amendments on Form S-3/A filed with the SEC on February 24, 2006,

March 21, 2006 and March 28, 2006. Mr. Sullivan further signed the Merrill Lynch Mortgage

Investors Shelf Registration Statement under file number 333-140436 filed with the SEC on

February 2, 2007 and signed through a power of attorney the related pre-effective amendments

on Form S-3/A filed with the SEC on March 7, 2007. Mr. Sullivan also signed the Merrill Lynch

Mortgage Investors related pre-effective amendments on Form S-3/A filed on August 17, 2005

for the Shelf Registration Statement under file number 333-1273233, which was filed with the

SEC on August 5, 2005.

62. Defendant Michael M. McGovern served at the time of the Securitizations as a

Director of Merrill Lynch Mortgage Investors, Inc. and Senior Counsel of Merrill Lynch. Mr.

McGovern signed the Merrill Lynch Mortgage Investors Shelf Registration Statement under file

number 333-130545 filed with the SEC on December 21, 2005 and the related pre-effective

amendments on Form S-3/A filed with the SEC on February 24, 2006, March 21, 2006 and

March 28, 2006. Mr. McGovern further signed the Merrill Lynch Mortgage Investors Shelf

Registration Statement under file number 333-140436 filed with the SEC on February 2, 2007

and signed through a power of attorney the related pre-effective amendments on Form S-3/A

filed with the SEC on March 7, 2007. Mr. McGovern additionally signed the Merrill Lynch

Mortgage Investors Shelf Registration Statement under file 333-127233 filed with the SEC on

August 5, 2005 and the related pre-effective amendments on Form S-3/A filed with the SEC on

August 17, 2005.

63. Defendant Donald J. Puglisi served at the time of the Securitizations as a Director

of Merrill Lynch Mortgage Investors, Inc. Mr. Puglisi signed the Merrill Lynch Mortgage

Investors Shelf Registration Statement under file number 333-130545 filed with the SEC on

December 21, 2005 and the related pre-effective amendments on Form S-3/A filed with the SEC

on February 24, 2006, March 21, 2006 and March 28, 2006. Mr. Puglisi further signed the

Merrill Lynch Mortgage Investors Shelf Registration Statement under file number 333-140436

filed with the SEC on February 2, 2007 and signed through a power of attorney the related pre-

effective amendments on Form S-3/A filed with the SEC on March 7, 2007. Mr. Puglisi

additionally signed the Merrill Lynch Mortgage Investors Shelf Registration Statement under file

333-127233 filed with the SEC on August 5, 2005 and the related pre-effective amendments on

Form S-3/A filed with the SEC on August 17, 2005.

64. Defendant Paul Park served at the time of the Securitizations as the President and

Chairman of the Board of Directors of Merrill Lynch Mortgage Investors, Inc. Mr. Park signed

the Merrill Lynch Mortgage Investors Shelf Registration Statement under file number 333-

140436 filed with the SEC on February 2, 2007 and signed, in both his individual capacity and

with a power of attorney on behalf of Defendant Brian T. Sullivan, Defendant Michael M.

McGovern, and Defendant Donald J. Puglisi, the related pre-effective amendments on Form S-

3/A filed with the SEC on March 7, 2007.

65. Defendant Donald C. Han served at the time of the Securitizations as the

Treasurer of Merrill Lynch Mortgage Investors, Inc. Mr. Han signed the Merrill Lynch

Mortgage Investors Shelf Registration Statement under file 333-127233 filed with the SEC on

August 5, 2005.

B. Defendant’s Failure To Conduct Proper Due Diligence

66. The Defendants failed to conduct adequate and sufficient due diligence to ensure

that the mortgage loans underlying the Securitizations complied with the statements in the

Registration Statements.

67. During the time period during which the Certificates were issued, approximately

2005 through 2007, Merrill Lynch’s involvement in the mortgage-backed securitization market

was rapidly expanding. In an effort to increase revenue and profits, Merrill Lynch, at the

direction of its corporate parent, Merrill Lynch & Co., vastly expanded the volume of mortgage-

backed securities it securitized. Merrill Lynch Mortgage Investors securitized a relatively small

volume of mortgage loans in 2000 as measured against the years that followed, $14.3 billion. In

2001, the volume of mortgage loans securitized nearly doubled, from $14.3 billion to $24.2

billion, and was $26.1 billion in 2002. In 2003, the volume of mortgage loans that Merrill Lynch

Mortgage Investors securitized almost doubled again, to $43.7 billion, and was $45.9 billion in

2004. In 2005, the volume of Merrill Lynch Mortgage Investors’ securitizations rose to $57.9

billion and nearly doubled, to $97.4 billion, in 2006. In 2007, the volume of securitization

surpassed $100 billion, Merrill Lynch Mortgage Investors’ highest volume of residential

mortgage loans. In fact, Merrill Lynch was the fourth largest issuer of subprime mortgage-

backed securities from 2005 to 2007, and by 2007, Merrill Lynch was the second largest issuer

of subprime mortgage-backed securities. Merrill Lynch’s ascent towards the top of the league

tables was aided by its acquisition, in late 2006 at the height of the market, of First Franklin

Financial, a leading originator and sponsor of residential mortgages, and its servicer subsidiary,

Home Loan Services.

68. Defendants had enormous financial incentives to complete as many offerings as

quickly as possible without regard to ensuring the accuracy or completeness of the Registration

Statements, or conducting adequate and reasonable due diligence. For example, Merrill Lynch

Mortgage Investors, as the depositor, was paid a percentage of the total dollar amount of the

offerings upon completion of the Securitizations. Merrill Lynch, Pierce, Fenner & Smith, as the

underwriter and as the entity that sold the Certificates purchased by Freddie Mac, and Merrill

Lynch Government Securities, as the entity that sold the Certificates purchased by Fannie Mae,

were each paid a commission based on the amount they received from the sale of the

Certificates.

69. The push to securitize large volumes of mortgage loans contributed to the absence

of controls needed to prevent the inclusion of untrue statements of material facts and omissions

of material facts in the Registration Statements. In particular, Defendants failed to conduct

adequate diligence or otherwise to ensure the accuracy of the statements in the Registration

Statements pertaining to the Securitizations.

70. For instance, Merrill Lynch retained third-parties, including Clayton

Holdings, Inc. (“Clayton”) and The Bohan Group, Inc. (“Bohan”), to analyze the loans it was

considering placing in its securitizations, but waived a significant number of loans into the

securitizations that these firms had recommended for exclusion, and did so without taking

adequate steps to ensure that these loans had in fact been underwritten in accordance with

applicable guidelines or had compensating factors that excused the loans’ non-compliance with

those guidelines. On January 27, 2008, Clayton revealed that it had entered into an agreement

with the New York Attorney General (the “NYAG”) to provide documents and testimony

regarding its due diligence reports, including copies of the actual reports provided to its clients.

According to The New York Times, as reported on January 27, 2008, Clayton told the NYAG

“that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump

in lending expectations,” and “some investment banks directed Clayton to halve the sample of

loans it evaluated in each portfolio.”

71. Merrill Lynch was negligent in allowing into the securitizations a substantial

number of mortgage loans that, as reported to Merrill Lynch by third-party due diligence firms,

did not conform to the underwriting standards stated in the Registration Statements pursuant to

which they made offerings, including the Prospectuses and Prospectus Supplements that formed

part of those Registration Statements.

72. Clayton’s trending reports revealed that in the period from the first quarter of

2006 to the second quarter of 2007, 23 percent of the mortgage loans that Merrill Lynch

submitted to Clayton to review in residential mortgage-backed securities groups were rejected by

Clayton as falling outside the applicable underwriting guidelines. Of the mortgage loans that

Clayton found defective, 32 percent of the loans were subsequently waived in by Merrill Lynch

without proper consideration and analysis of compensating factors and included in

securitizations such as the ones in which Fannie Mae and Freddie Mac invested. See Clayton

Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-impact-of-the-

financial-crisis-sacramento#documents.

73. Merrill Lynch’s underwriting and due diligence practices with respect to

mortgage-backed securities are being investigated by the SEC. In October 2007, the SEC

launched an informal investigation into Merrill Lynch’s underwriting of mortgage-backed

securities. See, e.g., Associated Press, Merrill Lynch Acknowledges SEC Investigation, Nov. 7,

2007 (available at http://www.msnbc.msn.com/id/21680312/ns/business-us_business/t/merrill-

lynch-acknowledges-sec-investigation/#.TkDMnmEniSo). That investigation was upgraded, and

became formal in early 2008. See, e.g., Amir Efrati, Susan Pulliam, Kara Scannel and Craig

Karmin, Prosecutors Widen Probes Into Subprime – U.S. Attorney’s Office Seeks Merrill

Material; SEC Upgrades Inquiry, Wall St. J., Feb. 8, 2008.

III. THE REGISTRATION STATEMENTS AND THE PROSPECTUS

SUPPLEMENTS

A. Compliance With Underwriting Guidelines

74. The Prospectus Supplements for each Securitization describe the mortgage loan

underwriting guidelines pursuant to which the mortgage loans underlying the related

Securitizations were to have been originated. These guidelines were intended to assess the

creditworthiness of the borrower, the ability of the borrower to repay the loan, and the adequacy

of the mortgaged property as security for the loan.

75. The statements made in the Prospectus Supplements, which, as discussed, formed

part of the Registration Statement for each Securitization, were material to a reasonable

investor’s decision to purchase and invest in the Certificates because the failure to originate a

mortgage loan in accordance with the applicable guidelines creates a higher risk of delinquency

and default by the borrower, as well as a risk that losses upon liquidation will be higher thus

resulting in a greater economic risk to an investor such as Fannie Mae or Freddie Mac.

76. The Prospectus Supplements for the Securitizations contained several key

statements with respect to the underwriting standards of the entities that originated the loans in

the Securitizations. For example, the Prospectus Supplement for the MLMI 2006-OPT1

Securitization, for which Option One was the originator, Merrill Lynch, Pierce, Fenner & Smith

was the underwriter, and Merrill Lynch Mortgage Investors was the depositor, stated that: “The

Mortgage Loans will have been originated generally in accordance with Option One’s Non-

Prime Guidelines (the ‘Option One Underwriting Guidelines’)” and that “the Option One

Underwriting Guidelines are primarily intended to assess the value of the mortgaged property, to

evaluate the adequacy of such property as collateral for the mortgage loan and to assess the

applicant’s ability to repay the mortgage loan.”

77. The MLMI 2006-OPT1 Prospectus Supplement stated that exceptions to the

Option One Underwriting Guidelines (including “a debt-to-income ratio exception, a pricing

exception, a loan-to-value exception, a credit score exception or an exception from certain

requirements of a particular risk category”) are made on a “case-by-case basis,” but emphasized

that exceptions “are made where compensating factors exist.”

78. With respect to the information evaluated by the originator, the MLMI 2006-

OPT1 Prospectus Supplement stated that: “Each mortgage loan applicant completes an

application that includes information with respect to the applicant’s liabilities, income, credit

history, employment history and personal information. The Option One Underwriting

Guidelines require a credit report and, if available, a credit score on each applicant from a credit-

reporting agency. The credit report typically contains information relating to such matters as

credit history with local and national merchants and lenders, installment debt payments and any

record of defaults, bankruptcies, repossessions or judgments.”

79. The MLMI 2006-OPT1 Prospectus Supplement further stated that: “The Option

One Underwriting Guidelines require that mortgage loans be underwritten in a standardized

procedure which complies with applicable federal and state laws and regulations and require

Option One’s underwriters to be satisfied that the value of the property being financed, as

indicated by an appraisal, supports the loan balance.”

80. The Prospectus and Prospectus Supplement for each of the Securitizations had

similar representations to those quoted above. The relevant representations in the Prospectus and

Prospectus Supplement pertaining to originating entity underwriting standards for each

Securitization are reflected in Appendix A to this Complaint. As discussed below in paragraphs

108 through 124, in fact, the originators of the mortgage loans in the Supporting Loan Groups for

the Securitizations did not adhere to their stated underwriting guidelines, thus rendering the

description of those guidelines in the Prospectus and Prospectus Supplements false and

misleading.

81. Further, for the vast majority of the Securitizations, the Prospectus and Prospectus

Supplement described or referenced additional representations and warranties in the PSA by the

originator concerning the mortgage loans underlying the Securitizations. Such representations

and warranties, which are described more fully for each Securitization in Appendix A, included:

(i) the mortgage loans were underwritten in accordance with the sellers’ underwriting guidelines

in effect at the time of origination, subject to only limited exceptions; and, (ii) the origination and

collection practices used by the originator with respect to each mortgage note and mortgage have

been in all respects legal, proper, prudent and customary in the mortgage origination and

servicing business.

82. The inclusion of these representations in the Prospectuses and Prospectus

Supplements had the purpose and effect of providing additional assurances to investors regarding

the quality of the mortgage collateral underlying the Securitizations and the compliance of that

collateral with the underwriting guidelines described in the Prospectuses and Prospectus

Supplements. These representations were material to a reasonable investor’s decisions to

purchase the Certificates.

B. Statements Regarding Occupancy Status of Borrower

83. The Prospectus Supplements contained collateral group-level information about

the occupancy status of the borrowers of the loans in the Securitizations. Occupancy status

refers to whether the property securing a mortgage is to be the primary residence of the

borrower, a second home, or an investment property. The Prospectus Supplements for each of

the Securitizations presented this information in tabular form, usually in a table entitled

“Occupancy Status” or “Occupancy Types of the Group Mortgage Loans.” This table divided all

the loans in the collateral group by occupancy status, e.g., into the following categories:

(i) ”Primary,” or “Owner Occupied;” (ii) ”Second Home,” or “Secondary”; and

(iii) ”Investment” or “Non-Owner.” For each category, the table stated the number of loans in

that category. Occupancy statistics for the Supporting Loan Groups for each Securitization were

reported in the Prospectus Supplements as follows:

Table 5

Transaction Tranche Supporting

Loan Group

Primary or

Owner Occupied

Second

Home/Secondary

Investor %

ARSI 2005-W4 A1B Group 1 90.26 1.02 8.72

ARSI 2005-W4 A1A2 Group 1 90.26 1.02 8.72

ARSI 2005-W4 A1A3 Group 1 90.26 1.02 8.72

ARSI 2006-M1 A1 Group 1 87.69 1.07 11.24

CBASS 2006-CB8 A1 Group I 92.19 1.31 6.50

FFMER 2007-1 A1 Group I 96.10 0.21 3.70

FFMER 2007-2 A1 Group I 93.36 0.60 6.04

FFMER 2007-3 A1A Group I 92.43 0.74 6.83

FFMER 2007-3 A1C Group I 92.43 0.74 6.83

FFMER 2007-3 A1D Group I 92.43 0.74 6.83

FFMER 2007-3 M11 Group I 92.43 0.74 6.83

FFMER 2007-3 M21 Group I 92.43 0.74 6.83

FFMER 2007-3 M31 Group I 92.43 0.74 6.83

FFMER 2007-3 M41 Group I 92.43 0.74 6.83

FFMER 2007-4 1A Group I 92.22 0.96 6.83

FFMER 2007-4 1M1 Group I 92.22 0.96 6.83

FFMER 2007-4 1M2 Group I 92.22 0.96 6.83

FFMER 2007-4 1M3 Group I 92.22 0.96 6.83

FFMER 2007-5 1A Group I 90.81 0.29 8.90

FFMER 2007-H1 1A1 Group I 99.96 0.04 0.00

FFML 2005-FF12 A1 Group I 93.87 0.90 5.22

FFML 2006-FF18 A1 Group I 97.41 0.28 2.31

FFML 2007-FF1 A1 Group I 93.81 0.79 5.40

FFML 2007-FF2 A1 Group I 94.05 0.71 5.24

FMIC 2006-3 1A Group 1 93.17 0.69 6.14

INDX 2005-AR33 2A1 Group 2 85.92 5.00 9.08

INDX 2006-AR5 1A1 Group 1 86.41 2.15 11.44

INDX 2006-AR7 2A1 Group 2 82.87 3.71 13.42

INDX 2007-FLX4 1A1 Group 1 81.93 3.12 14.95

INDX 2007-FLX5 1A1 Group 1 81.84 2.63 15.54

Each Prospectus Supplement provided the total number of loans and the number of

loans in the following categories: owner occupied, investor, and second home. These numbers

have been converted to percentages.

Transaction Tranche Supporting

Loan Group

Primary or

Owner Occupied

Second

Home/Secondary

Investor %

INDX 2007-FLX6 1A1 Group 1 83.52 1.11 15.37

MANA 2007-A1 A1 Group I 76.77 4.84 18.39

MANA 2007-A2 A1 Group I 69.60 6.74 23.66

MANA 2007-A2 A2A Group 2 82.21 3.94 13.85

MANA 2007-A3 A1 Group 1 56.24 6.70 37.07

MLMI 2005-A8 A2A Group 2 47.42 3.13 49.45

MLMI 2005-A8 A2B1 Group 2 47.42 3.13 49.45

MLMI 2005-AR1 A2 Group 2 86.22 1.55 12.22

MLMI 2005-HE2 A1A Group 1 92.22 0.74 7.04

MLMI 2005-HE2 A1B Group 1 92.22 0.74 7.04

MLMI 2005-HE3 A1A Group 1 93.99 1.87 4.14

MLMI 2006-A3 IIA1 Group 2 92.03 7.97 0.00

MLMI 2006-AF2 AV1 Group 2 68.85 6.26 24.89

MLMI 2006-AHL1 A1 Group I 86.96 0.76 12.28

MLMI 2006-AR1 A1 Group I 86.61 1.09 12.30

MLMI 2006-FF1 A1 Group I 88.71 0.84 10.45

MLMI 2006-FM1 A1 Group I 93.73 0.85 5.43

MLMI 2006-HE1 A1 Group I 91.16 0.79 8.04

MLMI 2006-HE4 A1 Group I 90.79 0.59 8.63

MLMI 2006-HE5 A1 Group I 87.83 1.33 10.84

MLMI 2006-HE6 A1 Group I 88.37 0.56 11.07

MLMI 2006-MLN1 A1 Group I 96.35 0.75 2.91

MLMI 2006-OPT1 A1 Group I 93.40 0.73 5.87

MLMI 2006-RM1 A1 Group I 87.80 1.42 10.79

MLMI 2006-RM2 A1A Group I 94.78 0.79 4.43

MLMI 2006-RM3 A1A Group I 96.87 0.47 2.66

MLMI 2006-RM4 A1 Group I 91.62 1.12 7.26

MLMI 2006-RM5 A1 Group I 89.39 1.39 9.22

MLMI 2006-WMC1 A1A Group I 95.74 2.93 1.33

MLMI 2006-WMC2 A1 Group I 94.47 3.27 2.26

MLMI 2007-HE1 A1 Group 1 90.72 1.87 7.41

MLMI 2007-HE2 A1 Group 1 93.67 0.69 5.64

MLMI 2007-MLN1 A1 Group 1 89.47 2.05 8.48

OOMLT 2007-1 IA2 Group 1 87.02 1.25 11.73

OOMLT 2007-1 IA1 Group 1 87.02 1.25 11.73

OWNIT 2005-4 A1 Group 1 92.79 0.86 6.35

OWNIT 2005-5 A1 Group 1 91.38 1.20 7.42

OWNIT 2006-1 AV Group 1 96.44 0.69 2.87

OWNIT 2006-2 A1 Group 1 94.48 0.31 5.21

Transaction Tranche Supporting

Loan Group

Primary or

Owner Occupied

Second

Home/Secondary

Investor %

OWNIT 2006-3 A1 Group 1 94.88 0.41 4.71

OWNIT 2006-4 A1 Group 1 96.01 0.28 3.70

OWNIT 2006-5 A1B Group 1 97.62 0.23 2.15

OWNIT 2006-5 A1A Group 1 97.62 0.23 2.15

OWNIT 2006-6 A1 Group 1 96.49 0.27 3.24

OWNIT 2006-7 A1 Group 1 96.19 0.38 3.43

SURF 2005-AB3 A1A Group 1 77.64 4.28 18.08

SURF 2005-BC3 A1A Group 1 96.89 0.51 2.59

SURF 2005-BC4 A1A Group 1 97.31 0.47 2.21

SURF 2006-AB2 A1 Group I 84.60 0.82 14.58

SURF 2006-AB3 A1 Group 1 75.39 2.57 22.04

SURF 2006-BC1 A1 Group 1 97.64 0.43 1.94

SURF 2006-BC2 A1 Group 1 98.57 0.10 1.33

SURF 2006-BC3 A1 Group 1 96.37 0.19 3.43

SURF 2006-BC4 A1 Group 1 93.81 1.22 4.97

SURF 2006-BC5 A1 Group 1 96.79 0.76 2.44

SURF 2007-AB1 A1 Group 1 78.03 2.78 19.19

SURF 2007-BC1 A1 Group 1 95.29 0.71 3.99

SURF 2007-BC2 A1 Group 1 96.06 0.47 3.46

84. As Table 5 makes clear, the Prospectus Supplements for each Securitization, with

the exception of MLMI 2005-A8, reported that the majority (typically more than 90%) of the

mortgage loans in the Supporting Loan Groups were owner occupied, while only a small

percentage were reported as non-owner occupied (i.e., a second home or investor property).

85. The statements about occupancy status were material to a reasonable investor’s

decision to invest in the Certificates. Information about occupancy status is an important factor

in determining the credit risk associated with a mortgage loan and, therefore, the securitization

that it collateralizes. Because borrowers who reside in mortgaged properties are less likely to

default than borrowers who purchase homes as second homes or investments and live elsewhere,

and are more likely to care for their primary residence, the percentage of loans on owner-

occupied properties in the supporting loan group is an important measure of the risk of the

certificates sold in that securitization.

86. Other things being equal, the higher the percentage of loans not secured by

owner-occupied residences, the greater the risk of loss to the certificateholders. Even small

differences in the percentages of primary/owner-occupied, second home/secondary, and

investment properties in the collateral group of a securitization can have a significant effect on

the risk of each certificate sold in that securitization, and thus, are important to the decision of a

reasonable investor whether to purchase any such certificate. As discussed below at paragraphs

98 through 101, the Registration Statement for each Securitization materially overstated the

percentage of loans in the Supporting Loan Groups that were owner occupied, thereby

misrepresenting the degree of risk of the GSE Certificates.

C. Statements Regarding Loan to Value Ratios

87. The loan-to-value ratio of a mortgage loan, or LTV ratio, is the ratio of the

balance of the mortgage loan to the value of the mortgaged property when the loan is made.

88. The denominator in the LTV ratio is the value of the mortgaged property, and is

generally the lower of the purchase price or the appraised value of the property. In a refinancing

or home-equity loan, there is no purchase price to use as the denominator, so the denominator is

often equal to the appraised value at the time of the origination of the refinanced loan.

Accordingly, an accurate appraisal is essential to an accurate LTV ratio. In particular, an inflated

appraisal will understate, sometimes greatly, the credit risk associated with a given loan.

89. The Prospectus Supplements for each Securitization also contained group-level

information about the LTV ratio for the underlying group of loans as a whole. The percentage of

loans with an LTV ratio at or less than 80 percent and the percentage of loans with an LTV ratio

greater than 100 percent as reported in the Prospectus Supplements for the Supporting Loan

Groups are reflected in Table 6 below.

Table 6

Transaction Tranche Supporting Loan

Group

Percentage of loans, by

aggregate principal

balance, with LTV less

than or equal to 80%

Percentage of loans, by

aggregate principal

balance, with LTV

greater than 100%

ARSI 2005-W4 A1B Group 1 65.49 0.00

ARSI 2005-W4 A1A2 Group 1 65.49 0.00

ARSI 2005-W4 A1A3 Group 1 65.49 0.00

ARSI 2006-M1 A1 Group 1 53.77 0.00

CBASS 2006-CB8 A1 Group I 34.83 0.00

FFMER 2007-1 A1 Group I 59.35 0.00

FFMER 2007-2 A1 Group I 49.68 0.00

FFMER 2007-3 A1A Group I 42.71 0.00

FFMER 2007-3 A1C Group I 42.71 0.00

FFMER 2007-3 A1D Group I 42.71 0.00

FFMER 2007-3 M11 Group I 42.71 0.00

FFMER 2007-3 M21 Group I 42.71 0.00

FFMER 2007-3 M31 Group I 42.71 0.00

FFMER 2007-3 M41 Group I 42.71 0.00

FFMER 2007-4 1A Group I 33.18 0.00

FFMER 2007-4 1M1 Group I 33.18 0.00

FFMER 2007-4 1M2 Group I 33.18 0.00

FFMER 2007-4 1M3 Group I 33.18 0.00

FFMER 2007-5 1A Group I 40.24 0.00

FFMER 2007-H1 1A1 Group I 60.30 0.00

FFML 2005-FF12 A1 Group I 72.38 0.00

FFML 2006-FF18 A1 Group I 57.54 0.00

FFML 2007-FF1 A1 Group I 56.98 0.00

FFML 2007-FF2 A1 Group I 63.91 0.00

FMIC 2006-3 1A Group 1 34.12 0.00

INDX 2005-AR33 2A1 Group 2 95.47 0.00

INDX 2006-AR5 1A1 Group 1 99.33 0.00

As used in this Complaint, “LTV” refers to the original loan-to-value ratio for first

lien mortgages and for properties with second liens that are subordinate to the lien that was

included in the securitization (i.e., only the securitized lien is included in the numerator of the

LTV calculation). Where the securitized lien is junior to another loan, the more senior lien has

been added to the securitized one to determine the numerator in the LTV calculation (this later

calculation is sometimes referred to as the combined-loan-to-value ratio, or “CLTV”).

Transaction Tranche Supporting Loan

Group

Percentage of loans, by

aggregate principal

balance, with LTV less

than or equal to 80%

Percentage of loans, by

aggregate principal

balance, with LTV

greater than 100%

INDX 2006-AR7 2A1 Group 2 97.79 0.00

INDX 2007-FLX4 1A1 Group 1 98.96 0.00

INDX 2007-FLX5 1A1 Group 1 98.46 0.00

INDX 2007-FLX6 1A1 Group 1 99.17 0.00

MANA 2007-A1 A1 Group I 93.49 0.00

MANA 2007-A2 A1 Group I 93.66 0.00

MANA 2007-A2 A2A Group 2 93.50 0.00

MANA 2007-A3 A1 Group 1 96.26 0.00

MLMI 2005-A8 A2A Group 2 79.66 0.00

MLMI 2005-A8 A2B1 Group 2 79.66 0.00

MLMI 2005-AR1 A2 Group 2 18.76 0.00

MLMI 2005-HE2 A1A Group 1 58.96 0.00

MLMI 2005-HE2 A1B Group 1 58.96 0.00

MLMI 2005-HE3 A1A Group 1 63.86 0.00

MLMI 2006-A3 IIA1 Group 2 95.71 0.00

MLMI 2006-AF2 AV1 Group 2 78.02 0.00

MLMI 2006-AHL1 A1 Group I 54.48 0.00

MLMI 2006-AR1 A1 Group I 50.90 0.00

MLMI 2006-FF1 A1 Group I 86.35 0.00

MLMI 2006-FM1 A1 Group I 69.85 0.00

MLMI 2006-HE1 A1 Group I 57.48 0.00

MLMI 2006-HE4 A1 Group I 55.51 0.00

MLMI 2006-HE5 A1 Group I 64.41 0.00

MLMI 2006-HE6 A1 Group I 35.81 0.00

MLMI 2006-MLN1 A1 Group I 72.92 0.00

MLMI 2006-OPT1 A1 Group I 62.41 0.00

MLMI 2006-RM1 A1 Group I 60.45 0.00

MLMI 2006-RM2 A1A Group I 67.91 0.00

MLMI 2006-RM3 A1A Group I 68.99 0.00

MLMI 2006-RM4 A1 Group I 62.43 0.00

MLMI 2006-RM5 A1 Group I 46.50 0.00

MLMI 2006-WMC1 A1A Group I 73.03 0.00

MLMI 2006-WMC2 A1 Group I 74.94 0.00

MLMI 2007-HE1 A1 Group 1 53.86 0.00

MLMI 2007-HE2 A1 Group 1 40.89 0.00

MLMI 2007-MLN1 A1 Group 1 48.44 0.00

OOMLT 2007-1 IA2 Group 1 51.10 0.00

OOMLT 2007-1 IA1 Group 1 51.10 0.00

OWNIT 2005-4 A1 Group 1 66.50 0.00

Transaction Tranche Supporting Loan

Group

Percentage of loans, by

aggregate principal

balance, with LTV less

than or equal to 80%

Percentage of loans, by

aggregate principal

balance, with LTV

greater than 100%

OWNIT 2005-5 A1 Group 1 57.51 0.00

OWNIT 2006-1 AV Group 1 84.23 0.00

OWNIT 2006-2 A1 Group 1 74.79 0.00

OWNIT 2006-3 A1 Group 1 75.47 0.00

OWNIT 2006-4 A1 Group 1 73.60 0.00

OWNIT 2006-5 A1B Group 1 78.75 0.00

OWNIT 2006-5 A1A Group 1 78.75 0.00

OWNIT 2006-6 A1 Group 1 74.84 0.00

OWNIT 2006-7 A1 Group 1 64.66 0.00

SURF 2005-AB3 A1A Group 1 61.80 0.00

SURF 2005-BC3 A1A Group 1 54.56 0.00

SURF 2005-BC4 A1A Group 1 56.65 0.00

SURF 2006-AB2 A1 Group I 59.44 0.00

SURF 2006-AB3 A1 Group 1 63.64 0.00

SURF 2006-BC1 A1 Group 1 59.27 0.00

SURF 2006-BC2 A1 Group 1 63.07 0.00

SURF 2006-BC3 A1 Group 1 55.65 0.00

SURF 2006-BC4 A1 Group 1 50.89 0.00

SURF 2006-BC5 A1 Group 1 52.16 0.00

SURF 2007-AB1 A1 Group 1 59.45 0.00

SURF 2007-BC1 A1 Group 1 47.33 0.00

SURF 2007-BC2 A1 Group 1 47.53 0.00

90. As Table 6 makes clear, the Prospectus Supplements for most of the

Securitizations reported that many or most of the mortgage loans in the Supporting Loan Groups

had an LTV ratio of 80 percent or less, and that the Prospectus Supplement for all of the

Securitizations reported that zero mortgage loans in the Supporting Loan Group had an LTV

ratio over 100 percent.

91. The LTV ratio is among the most important measures of the risk of a mortgage

loan, and thus, it is one of the most important indicators of the default risk of the mortgage loans

underlying the Certificates. The lower the ratio, the less likely that a decline in the value of the

property will wipe out an owner’s equity, and thereby give an owner an incentive to stop making

mortgage payments and abandon the property. This ratio also predicts the severity of loss in the

event of default. The lower the LTV, the greater the “equity cushion,” so the greater the

likelihood that the proceeds of foreclosure will cover the unpaid balance of the mortgage loan.

92. Thus, LTV ratio is a material consideration to a reasonable investor in deciding

whether to purchase a certificate in a securitization of mortgage loans. Even small differences in

the LTV ratios of the mortgage loans in the collateral group of a securitization have a significant

effect on the likelihood that the collateral groups will generate sufficient funds to pay

certificateholders in that securitization, and thus are material to the decision of a reasonable

investor whether to purchase any such certificate. As discussed infra at paragraphs 102 through

107, the Registration Statements for the Securitizations materially overstated the percentage of

loans in the Supporting Loan Groups with an LTV ratio at or less than 80 percent and materially

understated the percentage of loans in the Supporting Loan Groups with an LTV ratio over 100

percent, thereby misrepresenting the degree of risk of the Certificates.

D. Statements Regarding Credit Ratings

93. Credit ratings are assigned to the tranches of mortgage-backed securitizations by

the credit rating agencies, including Moody’s Investors Service, Standard & Poor’s, and Fitch

Ratings. Each credit rating agency uses its own scale with letter designations to describe various

levels of risk. In general, AAA, or its equivalent, ratings are at the top of the credit rating scale

and are intended to designate the safest investments. C and D ratings are at the bottom of the

scale and refer to investments that are currently in default and exhibit little or no prospect for

recovery. At the time the GSEs purchased the GSE Certificates, investments with AAA, or its

equivalent, ratings historically experienced a loss rate of less than .05 percent. Investments with

BBB ratings historically experienced a loss rate of less than 1 percent. As a result, securities

with credit ratings between AAA, or its equivalent, through BBB-, or its equivalent, were

generally referred to as “investment grade.”

94. Ratings agencies determine the credit rating for each tranche of mortgage-backed

securitization by comparing the likelihood of contractual principal and interest repayment to the

“credit enhancements” available to protect investors. Ratings agencies determine the likelihood

of repayment by estimating cash flows based on the quality of the underlying mortgages by using

sponsor provided loan level data. Credit enhancements, such as subordination, represent the

amount of “cushion” or protection from loss incorporated into a given securitization.

This

cushion is intended to improve the likelihood that the holders of highly rated certificates receive

the interest and principal to which they are contractually entitled. The level of credit

enhancement offered is based on the make-up of the loans in the underlying collateral group and

entire securitization. Riskier loans underlying the securitization necessitate higher levels of

credit enhancement to insure payment to senior certificate holders. If the collateral within the

deal is of a higher quality, then rating agencies require less credit enhancement for AAA, or its

equivalent, rating.

95. Credit ratings have been an important tool to gauge risk when making investment

decisions. For almost a hundred years, investors like pension funds, municipalities, insurance

companies, and university endowments have relied heavily on credit ratings to assist them in

distinguishing between safe and risky investments. Fannie Mae and Freddie Mac’s respective

internal policies limited their purchases of private label residential mortgage-backed securities to

“Subordination” refers to the fact that the certificates for a mortgage-backed

securitization are issued in a hierarchical structure, from senior to junior. The junior certificates

are “subordinate” to the senior certificates in that, should the underlying mortgage loans become

delinquent or default, the junior certificates suffer losses first. These subordinate certificates

thus provide a degree of protection to the senior certificates from losses on the underlying loans.

those rated AAA (or its equivalent), and in very limited instances, AA or A bonds (or their

equivalent).

96. Each tranche of the Securitizations received a credit rating upon issuance, which

purported to describe the riskiness of that tranche. The Defendants reported the credit ratings for

each tranche in the Prospectus Statements. The credit ratings provided for the GSE Certificates

were primarily “AAA” and were always “investment grade;” the lowest rated was “A1/A+,” as

identified in Table 7 below.

Fannie Mae and Freddie Mac relied on the accuracy of these

ratings in making the investment decision to purchase the Certificates. As set forth in Table 10,

infra at paragraph 128, the ratings for the Securitizations were inflated as a result of Defendants’

provision of incorrect data concerning the attributes of the underlying mortgage collateral to the

ratings agencies, and, as a result, Defendants sold and marketed the GSE Certificates, in almost

all cases, as AAA (or its equivalent) when, in fact they were not.

Table 7

Transaction Tranche Ratings at Issuance

(Moody’s/S&P/Fitch)

ARSI 2005-W4 A1B -/AAA/AAA

ARSI 2005-W4 A1A2 -/AAA/AAA

ARSI 2005-W4 A1A3 -/AAA/AAA

ARSI 2006-M1 A1 Aaa/AAA/AAA

CBASS 2006-CB8 A1 Aaa/AAA/AAA

FFMER 2007-1 A1 Aaa/AAA/-

FFMER 2007-2 A1 Aaa/AAA/-

FFMER 2007-3 A1A Aaa/AAA/-

FFMER 2007-3 A1C Aaa/AAA/-

FFMER 2007-3 A1D Aaa/AAA/-

FFMER 2007-3 M11 Aa1/AA+/-

FFMER 2007-3 M21 Aa2/AA/-

FFMER 2007-3 M31 Aa3/AA-/-

Applicable ratings are shown in sequential order separated by forward slashes:

Moody’s/S&P/Fitch. A hyphen between forward slashes indicates that the relevant agency did

not provide a rating at issuance.

Transaction Tranche Ratings at Issuance

(Moody’s/S&P/Fitch)

FFMER 2007-3 M41 A1/A+/-

FFMER 2007-4 1A Aaa/AAA/-

FFMER 2007-4 1M1 Aa1/AA+/-

FFMER 2007-4 1M2 Aa2/AA/-

FFMER 2007-4 1M3 Aa3/AA-/-

FFMER 2007-5 1A Aaa/AAA/-

FFMER 2007-H1 1A1 Aaa/AAA/AAA

FFML 2005-FF12 A1 Aaa/AAA/-

FFML 2006-FF18 A1 Aaa/AAA/-

FFML 2007-FF1 A1 Aaa/AAA/-

FFML 2007-FF2 A1 Aaa/AAA/-

FMIC 2006-3 1A Aaa/AAA/-

INDX 2005-AR33 2A1 Aaa/AAA/-

INDX 2006-AR5 1A1 Aaa/AAA/-

INDX 2006-AR7 2A1 Aaa/AAA/-

INDX 2007-FLX4 1A1 Aaa/AAA/-

INDX 2007-FLX5 1A1 Aaa/AAA/-

INDX 2007-FLX6 1A1 Aaa/AAA/-

MANA 2007-A1 A1 Aaa/AAA/-

MANA 2007-A2 A1 Aaa/AAA/-

MANA 2007-A2 A2A Aaa/AAA/-

MANA 2007-A3 A1 Aaa/AAA/-

MLMI 2005-A8 A2A Aaa/AAA/-

MLMI 2005-A8 A2B1 Aaa/AAA/-

MLMI 2005-AR1 A2 Aaa/AAA/-

MLMI 2005-HE2 A1A -/AAA/AAA

MLMI 2005-HE2 A1B -/AAA/AAA

MLMI 2005-HE3 A1A -/AAA/AAA

MLMI 2006-A3 IIA1 Aaa/AAA/-

MLMI 2006-AF2 AV1 Aaa/AAA/-

MLMI 2006-AHL1 A1 Aaa/AAA/-

MLMI 2006-AR1 A1 Aaa/AAA/-

MLMI 2006-FF1 A1 Aaa/AAA/-

MLMI 2006-FM1 A1 Aaa/AAA/-

MLMI 2006-HE1 A1 Aaa/AAA/-

MLMI 2006-HE4 A1 Aaa/AAA/-

MLMI 2006-HE5 A1 Aaa/AAA/-

MLMI 2006-HE6 A1 Aaa/AAA/-

MLMI 2006-MLN1 A1 Aaa/AAA/-

MLMI 2006-OPT1 A1 Aaa/AAA/-

Transaction Tranche Ratings at Issuance

(Moody’s/S&P/Fitch)

MLMI 2006-RM1 A1 Aaa/AAA/-

MLMI 2006-RM2 A1A Aaa/AAA/-

MLMI 2006-RM3 A1A Aaa/AAA/-

MLMI 2006-RM4 A1 Aaa/AAA/-

MLMI 2006-RM5 A1 Aaa/AAA/-

MLMI 2006-WMC1 A1A Aaa/AAA/-

MLMI 2006-WMC2 A1 Aaa/AAA/-

MLMI 2007-HE1 A1 Aaa/AAA/-

MLMI 2007-HE2 A1 Aaa/AAA/-

MLMI 2007-MLN1 A1 Aaa/AAA/-

OOMLT 2007-1 IA2 Aaa/AAA/-

OOMLT 2007-1 IA1 Aaa/AAA/-

OWNIT 2005-4 A1 Aaa/AAA/-

OWNIT 2005-5 A1 Aaa/AAA/-

OWNIT 2006-1 AV Aaa/AAA/-

OWNIT 2006-2 A1 Aaa/AAA/-

OWNIT 2006-3 A1 Aaa/AAA/-

OWNIT 2006-4 A1 Aaa/AAA/-

OWNIT 2006-5 A1B Aaa/AAA/-

OWNIT 2006-5 A1A Aaa/AAA/-

OWNIT 2006-6 A1 Aaa/AAA/-

OWNIT 2006-7 A1 Aaa/AAA/-

SURF 2005-AB3 A1A Aaa/AAA/-

SURF 2005-BC3 A1A Aaa/AAA/-

SURF 2005-BC4 A1A Aaa/AAA/-

SURF 2006-AB2 A1 Aaa/AAA/-

SURF 2006-AB3 A1 Aaa/AAA/-

SURF 2006-BC1 A1 Aaa/AAA/-

SURF 2006-BC2 A1 Aaa/AAA/-

SURF 2006-BC3 A1 Aaa/AAA/-

SURF 2006-BC4 A1 Aaa/AAA/-

SURF 2006-BC5 A1 Aaa/AAA/-

SURF 2007-AB1 A1 Aaa/AAA/-

SURF 2007-BC1 A1 Aaa/AAA/-

SURF 2007-BC2 A1 Aaa/AAA/-

IV. FALSITY OF STATEMENTS IN THE REGISTRATION STATEMENTS AND

PROSPECTUS SUPPLEMENTS

A. The Statistical Data Provided in the Prospectus Supplements Concerning

Owner Occupancy and LTV Ratios Was Materially False

97. A review of loan level data was conducted in order to assess whether the

statistical information provided in the Prospectus Supplements was true and accurate. For each

Securitization, the sample consisted of 1,000 randomly selected loans per Supporting Loan

Group, or all of loans in the group if there were fewer than 1,000 loans in the Supporting Loan

Group. The sample data confirms, on a statistically-significant basis, material misrepresentations

of underwriting standards and of certain key characteristics of the mortgage loans across the

Securitizations. The data review demonstrates that the data concerning owner occupancy and

LTV ratios was materially false and misleading.

1. Owner Occupancy Data Was Materially False

98. The data review has revealed that the owner occupancy statistics reported in the

Prospectus Supplements were materially false and inflated. In fact, far fewer underlying

properties were occupied by their owners than disclosed in the Prospectus Supplements, and

more correspondingly were held as second homes or investment properties.

99. To determine whether a given borrower actually occupied the property as

claimed, a number of tests were conducted, including, inter alia, whether, months after the loan

closed, the borrower’s tax bill was being mailed to the property or to a different address; whether

the borrower had claimed a tax exemption on the property; and whether the mailing address of

the property was reflected in the borrower’s credit reports, tax records, or lien records. Failing

two or more of these tests is a strong indication that the borrower did not live at the mortgaged

property and instead used it as a second home or an investment property, both of which make it

much more likely that a borrower will not repay the loan.

100. A significant number of the loans failed two or more of these tests, indicating that

the owner occupancy statistics provided to Fannie Mae and Freddie Mac were materially false

and misleading. For example, for the SURF 2006-BC1 Securitization, for which Merrill Lynch

Mortgage Lending was the sponsor, and Merrill Lynch, Pierce, Fenner & Smith was the

underwriter, the Prospectus Supplement stated that 2.36 percent of the underlying properties by

loan count in the Supporting Loan Group were not owner-occupied. But the data review

revealed that, for 11.94 percent of the properties represented as owner-occupied, the owners

lived elsewhere, indicating that the true percentage of non-owner occupied properties was 14.02

percent, nearly six times the percentage reported in the Prospectus Supplement.

101. The data review revealed that for each Securitization, the Prospectus Supplement

misstated the percentage of non-owner occupied properties. The true percentage of non-owner

occupied properties, as determined by the data review, versus the percentage stated in the

Prospectus Supplement for each Securitization, is reflected in Table 8 below. Table 8

demonstrates that the Prospectus Supplements for each Securitization understated the percent of

non-owner occupied properties by at least 6 percentage points, and for many Securitizations by

10 percentage points or more.

This conclusion is arrived at by summing (a) the stated non-owner-occupied

percentage in the Prospectus Supplement (here, 2.36 percent), and (b) the product of (i) the stated

owner-occupied percentage (here, 97.64 percent) and (ii) the percentage of the properties

represented as owner-occupied in the sample that showed strong indications that their owners in

fact lived elsewhere (here, 11.94 percent).

Table 8

Transaction Tranche Supporting

Loan

Group(s)

Reported

Percentage

of Non-

Owner

Occupied

Properties

Percentage of

Properties Reported

as Owner-Occupied

With Strong

Indication of Non-

Owner Occupancy

Actual

Percentage

of Non-

Owner

Occupied

Properties

Prospectus

Percentage

Understatement

of Non-Owner

Occupied

Properties

ARSI 2005-W4 A1B Group 1 9.74 11.26 19.90 10.17

ARSI 2005-W4 A1A2 Group 1 9.74 11.26 19.90 10.17

ARSI 2005-W4 A1A3 Group 1 9.74 11.26 19.90 10.17

ARSI 2006-M1 A1 Group 1 12.31 9.37 20.53 8.21

CBASS 2006-CB8 A1 Group I 7.81 10.72 17.69 9.88

FFMER 2007-1 A1 Group I 3.90 11.51 14.97 11.06

FFMER 2007-2 A1 Group I 6.64 11.06 16.97 10.33

FFMER 2007-3 A1A Group I 7.57 9.88 16.69 9.13

FFMER 2007-3 A1C Group I 7.57 9.88 16.69 9.13

FFMER 2007-3 A1D Group I 7.57 9.88 16.69 9.13

FFMER 2007-3 M11 Group I 7.57 9.88 16.69 9.13

FFMER 2007-3 M21 Group I 7.57 9.88 16.69 9.13

FFMER 2007-3 M31 Group I 7.57 9.88 16.69 9.13

FFMER 2007-3 M41 Group I 7.57 9.88 16.69 9.13

FFMER 2007-4 1A Group I 7.78 10.11 17.11 9.33

FFMER 2007-4 1M1 Group I 7.78 10.11 17.11 9.33

FFMER 2007-4 1M2 Group I 7.78 10.11 17.11 9.33

FFMER 2007-4 1M3 Group I 7.78 10.11 17.11 9.33

FFMER 2007-5 1A Group I 9.19 11.20 19.37 10.17

FFMER 2007-H1 1A1 Group I 0.04 12.49 12.52 12.48

FFML 2005-FF12 A1 Group I 6.13 10.45 15.93 9.81

FFML 2006-FF18 A1 Group I 2.59 7.97 10.36 7.77

FFML 2007-FF1 A1 Group I 6.19 9.52 15.12 8.93

FFML 2007-FF2 A1 Group I 5.95 12.76 17.95 12.00

FMIC 2006-3 1A Group 1 6.83 12.07 18.07 11.24

INDX 2005-AR33 2A1 Group 2 14.08 11.34 23.82 9.75

INDX 2006-AR5 1A1 Group 1 13.59 13.59 25.33 11.74

INDX 2006-AR7 2A1 Group 2 17.13 12.61 27.58 10.45

INDX 2007-FLX4 1A1 Group 1 18.07 13.99 29.53 11.46

INDX 2007-FLX5 1A1 Group 1 18.16 13.89 29.53 11.37

INDX 2007-FLX6 1A1 Group 1 16.48 12.64 27.04 10.56

MANA 2007-A1 A1 Group I 23.23 16.74 36.08 12.85

MANA 2007-A2 A1 Group I 30.40 15.15 40.95 10.55

MANA 2007-A2 A2A Group 2 17.79 15.53 30.56 12.77

MANA 2007-A3 A1 Group 1 43.76 17.05 53.35 9.59

Transaction Tranche Supporting

Loan

Group(s)

Reported

Percentage

of Non-

Owner

Occupied

Properties

Percentage of

Properties Reported

as Owner-Occupied

With Strong

Indication of Non-

Owner Occupancy

Actual

Percentage

of Non-

Owner

Occupied

Properties

Prospectus

Percentage

Understatement

of Non-Owner

Occupied

Properties

MLMI 2005-A8 A2A Group 2 52.58 13.72 59.09 6.51

MLMI 2005-A8 A2B1 Group 2 52.58 13.72 59.09 6.51

MLMI 2005-AR1 A2 Group 2 13.78 14.20 26.02 12.24

MLMI 2005-HE2 A1A Group 1 7.78 14.11 20.79 13.02

MLMI 2005-HE2 A1B Group 1 7.78 14.11 20.79 13.02

MLMI 2005-HE3 A1A Group 1 6.01 11.57 16.88 10.87

MLMI 2006-A3 IIA1 Group 2 7.97 15.18 21.94 13.97

MLMI 2006-AF2 AV1 Group 2 31.15 10.68 38.50 7.35

MLMI 2006-AHL1 A1 Group I 13.04 15.12 26.19 13.14

MLMI 2006-AR1 A1 Group I 13.39 10.62 22.59 9.20

MLMI 2006-FF1 A1 Group I 11.29 10.67 20.76 9.46

MLMI 2006-FM1 A1 Group I 6.27 15.98 21.25 14.98

MLMI 2006-HE1 A1 Group I 8.84 11.14 18.99 10.15

MLMI 2006-HE4 A1 Group I 9.21 11.68 19.81 10.60

MLMI 2006-HE5 A1 Group I 12.17 9.41 20.43 8.27

MLMI 2006-HE6 A1 Group I 11.63 11.61 21.89 10.26

MLMI 2006-MLN1 A1 Group I 3.65 9.85 13.14 9.49

MLMI 2006-OPT1 A1 Group I 6.60 10.42 16.33 9.73

MLMI 2006-RM1 A1 Group I 12.20 14.22 24.69 12.48

MLMI 2006-RM2 A1A Group I 5.22 12.51 17.08 11.86

MLMI 2006-RM3 A1A Group I 3.13 14.26 16.94 13.81

MLMI 2006-RM4 A1 Group I 8.38 12.82 20.13 11.75

MLMI 2006-RM5 A1 Group I 10.61 12.69 21.95 11.34

MLMI 2006-WMC1 A1A Group I 4.26 13.08 16.78 12.52

MLMI 2006-WMC2 A1 Group I 5.53 11.84 16.72 11.19

MLMI 2007-HE1 A1 Group 1 9.28 11.03 19.29 10.01

MLMI 2007-HE2 A1 Group 1 6.33 12.39 17.94 11.61

MLMI 2007-MLN1 A1 Group 1 10.53 8.26 17.92 7.39

OOMLT 2007-1 IA2 Group 1 12.98 10.44 22.07 9.09

OOMLT 2007-1 IA1 Group 1 12.98 10.44 22.07 9.09

OWNIT 2005-4 A1 Group 1 7.21 10.75 17.18 9.97

OWNIT 2005-5 A1 Group 1 8.62 9.11 16.95 8.33

OWNIT 2006-1 AV Group 1 3.56 7.81 11.08 7.53

OWNIT 2006-2 A1 Group 1 5.52 9.13 14.14 8.63

OWNIT 2006-3 A1 Group 1 5.12 7.85 12.57 7.45

OWNIT 2006-4 A1 Group 1 3.99 7.97 11.63 7.65

OWNIT 2006-5 A1B Group 1 2.38 10.47 12.60 10.22

Transaction Tranche Supporting

Loan

Group(s)

Reported

Percentage

of Non-

Owner

Occupied

Properties

Percentage of

Properties Reported

as Owner-Occupied

With Strong

Indication of Non-

Owner Occupancy

Actual

Percentage

of Non-

Owner

Occupied

Properties

Prospectus

Percentage

Understatement

of Non-Owner

Occupied

Properties

OWNIT 2006-5 A1A Group 1 2.38 10.47 12.60 10.22

OWNIT 2006-6 A1 Group 1 3.51 10.99 14.12 10.61

OWNIT 2006-7 A1 Group 1 3.81 12.73 16.05 12.24

SURF 2005-AB3 A1A Group 1 22.36 14.91 33.94 11.58

SURF 2005-BC3 A1A Group 1 3.11 11.42 14.18 11.07

SURF 2005-BC4 A1A Group 1 2.69 10.45 12.85 10.17

SURF 2006-AB2 A1 Group I 15.40 12.41 25.90 10.50

SURF 2006-AB3 A1 Group 1 24.61 11.62 33.37 8.76

SURF 2006-BC1 A1 Group 1 2.36 11.94 14.02 11.66

SURF 2006-BC2 A1 Group 1 1.43 15.65 16.85 15.42

SURF 2006-BC3 A1 Group 1 3.63 10.42 13.67 10.04

SURF 2006-BC4 A1 Group 1 6.19 10.82 16.34 10.15

SURF 2006-BC5 A1 Group 1 3.21 10.39 13.26 10.06

SURF 2007-AB1 A1 Group 1 21.97 12.80 31.96 9.98

SURF 2007-BC1 A1 Group 1 4.71 11.14 15.32 10.61

SURF 2007-BC2 A1 Group 1 3.94 11.40 14.88 10.95

2. Loan to Value Data Was Materially False

102. The data review has further revealed that the LTV ratios disclosed in the

Prospectus Supplements were materially false and understated, as more specifically set out

below. For each of the sampled loans, an industry standard automated valuation model

(“AVM”) was used to calculate the value of the underlying property at the time the mortgage

loan was originated. AVMs are routinely used in the industry as a way of valuing properties

during prequalification, origination, portfolio review and servicing. AVMs rely upon similar

data as appraisers—primarily county assessor records, tax rolls, and data on comparable

properties. AVMs produce independent, statistically-derived valuation estimates by applying

modeling techniques to this data.

103. Applying the AVM to the available data for the properties securing the sampled

loans shows that the appraised value given to such properties was significantly higher than the

actual value of such properties. The result of this overstatement of property values is a material

understatement of LTV. That is, if a property’s true value is significantly less than the value

used in the loan underwriting, then the loan represents a significantly higher percentage of the

property’s value. This, of course, increases the risk a borrower will not repay the loan and the

risk of greater losses in the event of a default. As stated in the Prospectus Supplement for SURF

2007-BC2: “Mortgage loans with higher combined loan-to-value ratios may present a greater

risk of loss than mortgage loans with combined loan-to-value ratios of 80 percent or below.”

104. For example, for the MLMI 2006-MLN1 Securitization, which was sponsored by

Merrill Lynch Mortgage Lending and underwritten by Merrill Lynch, Pierce, Fenner & Smith,

the Prospectus Supplement stated that no LTV ratios for the Supporting Loan Group were above

100 percent. In fact, 20.65 percent of the sample of loans included in the data review had LTV

ratios above 100 percent. In addition, the Prospectus Supplement stated that 72.92 percent of the

loans had LTV ratios at or below 80 percent. The data review indicated that only 34.75 percent

of the loans had LTV ratios at or below 80 percent.

105. The data review revealed that for each Securitization, the Prospectus Supplement

misstated the percentage of loans with an LTV ratio that were above 100 percent, as well as the

percentage of the loans that had an LTV ratio at or below 80 percent. Table 9 reflects (i) the true

percentage of mortgages in the Supporting Loan Group with LTV ratios above 100 percent,

versus the percentage reported in the Prospectus Supplement; and (ii) the true percentage of

mortgages in the Supporting Loan Group with LTV ratio at or below 80 percent, versus the

percentage reported in the Prospectus Supplement. The percentages listed in Table 9 were

calculated by aggregated principal balance.

Table 9

Transaction Tranche Supporting

Loan

Group

PROSPECTUS DATA

REVIEW

PROSPECTUS DATA

REVIEW

Percentage of

Loans Reported

to Have LTV

Ratios At Or

Less Than 80%

True

Percentage of

Loans LTV

Ratios At Or

Less Than 80%

Percentage of

Loans Reported

to Have LTV

Ratios Over

100%

True

Percentage of

Loans With

LTV Ratios

Over 100%

ARSI 2005-W4 A1B Group 1 65.49 43.07 0.00 12.56

ARSI 2005-W4 A1A2 Group 1 65.49 43.07 0.00 12.56

ARSI 2005-W4 A1A3 Group 1 65.49 43.07 0.00 12.56

ARSI 2006-M1 A1 Group 1 53.77 37.26 0.00 14.71

CBASS 2006-

CB8

A1 Group I 34.83 24.35 0.00 30.82

FFMER 2007-1 A1 Group I 59.35 31.45 0.00 23.07

FFMER 2007-2 A1 Group I 49.68 28.97 0.00 25.75

FFMER 2007-3 A1A Group I 42.71 26.08 0.00 29.37

FFMER 2007-3 A1C Group I 42.71 26.08 0.00 29.37

FFMER 2007-3 A1D Group I 42.71 26.08 0.00 29.37

FFMER 2007-3 M11 Group I 42.71 26.08 0.00 29.37

FFMER 2007-3 M21 Group I 42.71 26.08 0.00 29.37

FFMER 2007-3 M31 Group I 42.71 26.08 0.00 29.37

FFMER 2007-3 M41 Group I 42.71 26.08 0.00 29.37

FFMER 2007-4 1A Group I 33.18 21.19 0.00 31.80

FFMER 2007-4 1M1 Group I 33.18 21.19 0.00 31.80

FFMER 2007-4 1M2 Group I 33.18 21.19 0.00 31.80

FFMER 2007-4 1M3 Group I 33.18 21.19 0.00 31.80

FFMER 2007-5 1A Group I 40.24 23.49 0.00 29.92

FFMER 2007-H1 1A1 Group I 60.30 28.30 0.00 24.16

FFML 2005-FF12 A1 Group I 72.38 50.36 0.00 10.97

FFML 2006-FF18 A1 Group I 57.54 35.30 0.00 18.18

FFML 2007-FF1 A1 Group I 56.98 32.82 0.00 22.05

FFML 2007-FF2 A1 Group I 63.91 33.37 0.00 16.61

FMIC 2006-3 1A Group 1 34.12 26.56 0.00 18.24

INDX 2005-

AR33

2A1 Group 2 95.47 57.99 0.00 6.35

INDX 2006-AR5 1A1 Group 1 99.33 66.37 0.00 5.10

INDX 2006-AR7 2A1 Group 2 97.79 52.07 0.00 6.09

INDX 2007-

FLX4

1A1 Group 1 98.96 56.77 0.00 12.54

INDX 2007-

FLX5

1A1 Group 1 98.46 51.50 0.00 12.38

INDX 2007-

FLX6

1A1 Group 1 99.17 56.26 0.00 14.68

MANA 2007-A1 A1 Group I 93.49 56.17 0.00 12.92

MANA 2007-A2 A1 Group I 93.66 47.35 0.00 12.24

Transaction Tranche Supporting

Loan

Group

PROSPECTUS DATA

REVIEW

PROSPECTUS DATA

REVIEW

Percentage of

Loans Reported

to Have LTV

Ratios At Or

Less Than 80%

True

Percentage of

Loans LTV

Ratios At Or

Less Than 80%

Percentage of

Loans Reported

to Have LTV

Ratios Over

100%

True

Percentage of

Loans With

LTV Ratios

Over 100%

MANA 2007-A2 A2A Group 2 93.50 45.42 0.00 9.02

MANA 2007-A3 A1 Group 1 96.26 50.69 0.00 12.60

MLMI 2005-A8 A2A Group 2 79.66 53.42 0.00 9.64

MLMI 2005-A8 A2B1 Group 2 79.66 53.42 0.00 9.64

MLMI 2005-AR1 A2 Group 2 18.76 16.01 0.00 23.24

MLMI 2005-HE2 A1A Group 1 58.96 43.73 0.00 11.76

MLMI 2005-HE2 A1B Group 1 58.96 43.73 0.00 11.76

MLMI 2005-HE3 A1A Group 1 63.86 34.48 0.00 14.99

MLMI 2006-A3 IIA1 Group 2 95.71 48.29 0.00 5.49

MLMI 2006-AF2 AV1 Group 2 78.02 51.22 0.00 8.67

MLMI 2006-

AHL1

A1 Group I 54.48 34.46 0.00 19.60

MLMI 2006-AR1 A1 Group I 50.90 30.75 0.00 18.13

MLMI 2006-FF1 A1 Group I 86.35 59.67 0.00 4.32

MLMI 2006-FM1 A1 Group I 69.85 39.42 0.00 17.87

MLMI 2006-HE1 A1 Group I 57.48 35.89 0.00 15.18

MLMI 2006-HE4 A1 Group I 55.51 32.06 0.00 20.55

MLMI 2006-HE5 A1 Group I 64.41 44.78 0.00 13.33

MLMI 2006-HE6 A1 Group I 35.81 26.53 0.00 25.20

MLMI 2006-

MLN1

A1 Group I 72.92 34.75 0.00 20.65

MLMI 2006-

OPT1

A1 Group I 62.41 40.00 0.00 15.81

MLMI 2006-RM1 A1 Group I 60.45 43.32 0.00 13.54

MLMI 2006-RM2 A1A Group I 67.91 38.26 0.00 15.35

MLMI 2006-RM3 A1A Group I 68.99 38.72 0.00 13.79

MLMI 2006-RM4 A1 Group I 62.43 42.27 0.00 18.11

MLMI 2006-RM5 A1 Group I 46.50 31.59 0.00 19.65

MLMI 2006-

WMC1

A1A Group I 73.03 41.99 0.00 16.20

MLMI 2006-

WMC2

A1 Group I 74.94 41.86 0.00 14.39

MLMI 2007-HE1 A1 Group 1 53.86 33.49 0.00 25.33

MLMI 2007-HE2 A1 Group 1 40.89 24.57 0.00 26.98

MLMI 2007-

MLN1

A1 Group 1 48.44 26.56 0.00 28.42

OOMLT 2007-1 IA2 Group 1 51.10 34.40 0.00 20.76

OOMLT 2007-1 IA1 Group 1 51.10 34.40 0.00 20.76

OWNIT 2005-4 A1 Group 1 66.50 43.89 0.00 8.31

OWNIT 2005-5 A1 Group 1 57.51 40.28 0.00 12.96

Transaction Tranche Supporting

Loan

Group

PROSPECTUS DATA

REVIEW

PROSPECTUS DATA

REVIEW

Percentage of

Loans Reported

to Have LTV

Ratios At Or

Less Than 80%

True

Percentage of

Loans LTV

Ratios At Or

Less Than 80%

Percentage of

Loans Reported

to Have LTV

Ratios Over

100%

True

Percentage of

Loans With

LTV Ratios

Over 100%

OWNIT 2006-1 AV Group 1 84.23 52.07 0.00 8.80

OWNIT 2006-2 A1 Group 1 74.79 46.59 0.00 11.03

OWNIT 2006-3 A1 Group 1 75.47 49.15 0.00 10.35

OWNIT 2006-4 A1 Group 1 73.60 45.59 0.00 11.75

OWNIT 2006-5 A1B Group 1 78.75 49.78 0.00 10.77

OWNIT 2006-5 A1A Group 1 78.75 49.78 0.00 10.77

OWNIT 2006-6 A1 Group 1 74.84 42.44 0.00 13.08

OWNIT 2006-7 A1 Group 1 64.66 38.84 0.00 17.67

SURF 2005-AB3 A1A Group 1 61.80 42.99 0.00 13.75

SURF 2005-BC3 A1A Group 1 54.56 40.80 0.00 14.61

SURF 2005-BC4 A1A Group 1 56.65 48.03 0.00 10.47

SURF 2006-AB2 A1 Group I 59.44 34.57 0.00 17.95

SURF 2006-AB3 A1 Group 1 63.64 39.75 0.00 18.28

SURF 2006-BC1 A1 Group 1 59.27 41.53 0.00 13.96

SURF 2006-BC2 A1 Group 1 63.07 40.25 0.00 15.70

SURF 2006-BC3 A1 Group 1 55.65 35.73 0.00 19.93

SURF 2006-BC4 A1 Group 1 50.89 32.24 0.00 20.91

SURF 2006-BC5 A1 Group 1 52.16 32.65 0.00 19.85

SURF 2007-AB1 A1 Group 1 59.45 32.35 0.00 20.98

SURF 2007-BC1 A1 Group 1 47.33 25.53 0.00 22.37

SURF 2007-BC2 A1 Group 1 47.53 31.00 0.00 23.04

106. As Table 9 demonstrates, the Prospectus Supplements for all of the

Securitizations reported that none of the mortgage loans in the Supporting Loan Groups had an

LTV ratio over 100 percent. In contrast, the data review revealed that at least 4.32 percent of the

mortgage loans for each Securitization had an LTV ratio over 100 percent, and for most

Securitizations this figure was much larger. Indeed, for 63 of the Securitizations, the data review

revealed that more than 10 percent of the mortgages in the Supporting Loan Group had a true

LTV ratio over 100 percent. For 20 Securitizations, the data review revealed that more than 20

percent of the mortgages in the Supporting Loan Group had a true LTV ratio over 100 percent.

107. These inaccuracies with respect to reported LTV ratios also indicate that the

representations in the Registration Statements relating to appraisal practices were false, and that

the appraisers themselves, in many instances, furnished appraisals that they understood were

inaccurate and that they knew bore no reasonable relationship to the actual value of the

underlying properties. Indeed, independent appraisers following proper practices, and providing

genuine estimates as to valuation, would not systematically generate appraisals that deviate so

significantly (and so consistently upward) from the true values of the appraised properties. This

conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission

(“FCIC”), which identified “inflated appraisals” as a pervasive problem during the period of the

Securitizations, and determined through its investigation that appraisers were often pressured by

mortgage originators, among others, to produce inflated results. See Financial Crisis Inquiry

Commission, Final Report of the National Commission on the Causes of the Financial and

Economic Crisis in the United States, at 91 (January 2011).

B. The Originators of the Underlying Mortgage Loans Systematically

Disregarded Their Underwriting Guidelines

108. The Registration Statements contained material misstatements and omissions

regarding compliance with underwriting guidelines. Indeed, the originators for the loans

underlying the Securitizations systematically disregarded their respective underwriting

guidelines in order to increase production and profits derived from their mortgage lending

business. This is confirmed by the systematically misreported owner occupancy and LTV

statistics, discussed above, and by (1) government investigations into originators’ underwriting

practices, which have revealed widespread abandonment of originators’ reported underwriting

guidelines during the relevant period; (2) the collapse of the Certificates’ credit ratings; and

(3) the surge in delinquency and default in the mortgages in the Securitizations.

1. Government Investigations Have Confirmed That the Originators of

the Loans in the Securitizations Systematically Failed to Adhere to

Their Underwriting Guidelines

109. The abandonment of underwriting guidelines is confirmed by several government

reports and investigations that have described rampant underwriting failures throughout the

period of the Securitizations, and, more specifically, have described underwriting failures by the

very originators whose loans were included by the Defendants in the Securitizations.

110. For instance, in November 2008, the Office of the Comptroller of the Currency,

an office within the United States Department of the Treasury, issued a report identifying the

“Worst Ten” mortgage originators in the “Worst Ten” metropolitan areas. The worst originators

were defined as those with the largest number of non-prime mortgage foreclosures for 2005-

2007 originations. Option One, Fremont, IndyMac, WMC, and GreenPoint, which originated

many of the loans for the Securitization at issue here, were all on that list. See, “Worst Ten in

the Worst Ten,” Office of the Comptroller of the Currency Press Release, (Nov. 13, 2008),

available at http://www.occ.treas.gov/news-issuances/news-releases/2009/nr-occ-2009-112b.pdf.

111. Option One, which originated the loans for three of the Securitizations, has been

identified through multiple reports and investigations for its faulty underwriting. On June 3,

2008, for instance, the Attorney General for the Commonwealth of Massachusetts filed an action

against Option One (the “Option One Complaint”), and its past and present parent companies, for

their unfair and deceptive origination and servicing of mortgage loans. See Complaint,

Commonwealth v. H&R Block, Inc., CV NO. 08-2474-BLS (Mass. Super. Ct. June. 3, 2008).

According to the Massachusetts Attorney General, since 2004, Option One had “increasingly

disregarded underwriting standards … and originated thousands of loans that [Option One] knew

or should have known the borrowers would be unable to pay, all in an effort to increase loan

origination volume so as to profit from the practice of packaging and selling the vast majority of

[Option One’s] residential subprime loans to the secondary market.” See Option One Complaint.

The Massachusetts Attorney General alleged that Option One’s agents and brokers “frequently

overstated an applicant’s income and/or ability to pay, and inflated the appraised value of the

applicant’s home,” and that Option One “avoided implementing reasonable measures that would

have prevented or limited these fraudulent practices.” Option One’s “origination policies …

employed from 2004 through 2007 have resulted in an explosion of foreclosures.” Id. at 1. On

November 24, 2008, the Superior Court of Massachusetts granted a preliminary injunction that

prevented Option One from foreclosing on thousands of its loans issued to Massachusetts

residents. Commonwealth v. H&R Block, Inc., No. 08-2474-BLS1, 2008 WL 5970550 (Mass.

Super. Ct. Nov. 24, 2008). On October 29, 2009, the Appeals Court of Massachusetts affirmed

the preliminary injunction. See Commonwealth v. Option One Mortgage Co., No. 09-P-134,

2009 WL 3460373 (Mass. App. Ct. Oct. 29, 2009).

112. On August 9, 2011, the Massachusetts Attorney General announced that H&R

Block, Inc., Option One’s parent company, had agreed to settle the suit for approximately $125

million. See Massachusetts Attorney General Press Release, “H&R Block Mortgage Company

Will Provide $125 Million in Loan Modifications and Restitutions,” Aug. 9, 2011. Media

reports noted that the suit was being settled amidst ongoing discussions among multiple states’

attorneys general, federal authorities, and five major mortgage servicers, aimed at resolving

investigations of the lenders’ foreclosure and mortgage-servicing practices. The Massachusetts

Attorney General released a statement saying that no settlement should include a release for

conduct relating to the lenders’ packaging of mortgages into securitizations. See, e.g.,

Bloomberg.com, H&R Block, Massachusetts Reach $125 Million Accord in State Mortgage

Suit, Aug. 9, 2011.

113. On October 4, 2007, the Commonwealth of Massachusetts, through its Attorney

General, brought an enforcement action against Fremont, which originated loans for two of the

Securitizations, for an array of “unfair and deceptive business conduct,” “on a broad scale.” See

Complaint, Commonwealth v. Fremont Investment & Loan and Fremont General Corp., No. 07-

4373 (Mass. Super. Ct.) (the “Fremont Complaint”). According to the Massachusetts Attorney

General’s complaint, Fremont “approve[ed] borrowers without considering or verifying the

relevant documentation related to the borrower’s credit qualifications, including the borrower’s

income”; “approv[ed] borrowers for loans with inadequate debt-to-income analyses that do not

properly consider the borrowers’ ability to meet their overall level of indebtedness and common

housing expenses”; “failed to meaningfully account for [ARM] payment adjustments in

approving and selling loans”; “approved borrowers for these ARM loans based only on the initial

fixed ‘teaser’ rate, without regard for borrowers’ ability to pay after the initial two year period”;

“consistently failed to monitor or supervise brokers’ practices or to independently verify the

information provided to Fremont by brokers”; and “ma[de] loans based on information that

Fremont knew or should have known was inaccurate or false, including, but not limited to,

borrowers’ income, property appraisals, and credit scores.” See Fremont Complaint.

114. On December 9, 2008, the Supreme Judicial Court of Massachusetts affirmed a

preliminary injunction that prevented Fremont from foreclosing on thousands of its loans issued

to Massachusetts residents. As a basis for its unanimous ruling, the Supreme Judicial Court

found that the record supported the lower court’s conclusions that “Fremont made no effort to

determine whether borrowers could ‘make the scheduled payments under the terms of the loan,’”

and that “Fremont knew or should have known that [its lending practices and loan terms] would

operate in concert essentially to guarantee that the borrower would be unable to pay and default

would follow.” Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 556 (Mass. 2008).

The terms of the preliminary injunction were made permanent by a settlement reached on June 9,

2009.

115. IndyMac, which originated the loans for six of the Securitizations, was the subject

of a February 26, 2009 report issued by the Office of Inspector General (“OIG”) of the U.S.

Department of Treasury entitled “Safety and Soundness: Material Loss Review of IndyMac

Bank, FSB” (the “OIG Report”). The OIG Report found that IndyMac Bank had “embarked on a

path of aggressive growth” that was supported by its high risk business strategy of “originating

… Alt-A loans on a large scale” and then “packag[ing] them together in securities” and selling

“them on the secondary market” to investors. OIG Report at 2, 6, 7. The OIG Report further

stated that: “To facilitate this level of [loan] production … IndyMac often did not perform

adequate underwriting.” Id. at 2.

116. A June 30, 2008 report issued by the Center for Responsible Lending (“CRL”)

also found that IndyMac Bank often ignored its stated underwriting and appraisal standards and

encouraged its employees to approve loans regardless of the borrower’s ability to repay them.

See IndyMac: What Went Wrong? How an ‘Alt-A’ Leader Fueled its Growth with Unsound and

Abusive Mortgage Lending (the “CRL Report”). For example, the CRL Report noted that

IndyMac Bank “engaged in unsound and abusive lending practices” and “allowed outside

mortgage brokers and in-house sales staffers to inflate applicants’ [financial information] … [to]

make them look like better credit risks.” See CRL Report at 2, 8.

117. WMC, which originated the loans for two of the Securitizations, employed

reckless underwriting standards and practices, as described more fully below, that resulted in a

huge amount of foreclosures, ranking WMC fourth in the report presented to the FCIC in April

2010 identifying the “Worst Ten” mortgage originators in the “Worst Ten” metropolitan areas.

See “Worst Ten in the Worst Ten,” Office of the Comptroller of the Currency Press Release,

November 13, 2008. General Electric, which had purchased WMC in 2004, closed down

operations at WMC in late 2007 and took a $1.4 billion charge in the third quarter of that year.

See, e.g., Diane Brady, Adventures of a Subprime Survivor, Bloomberg Businessweek, Oct. 29,

2007 (available at http://www.businessweek.com/magazine/content/07_44/b4056074.htm).

118. WMC’s reckless loan originating practices were noticed by regulatory authorities.

In June 2008, the Washington State Department of Financial Institutions, Division of Consumer

Services filed a Statement of Charges and Notice of Intention to Enter an Order to Revoke

License, Prohibit From Industry, Impose Fine, Order Restitution and Collect Investigation Fees

(the “Statement of Charges”) against WMC Mortgage and its principal owners individually. See

Statement of Charges, No. C-07-557-08-SC01, Jun. 4, 2008. The Statement of Charges included

86 loan files, which revealed that at least 76 loans were defective or otherwise in violation of

Washington state law. Id. Among other things, the investigation uncovered that WMC had

originated loans with unlicensed or unregistered mortgage brokers, understated amounts of

finance charges on loans, understated amounts of payments made to escrow companies,

understated annual percentage rates to borrowers and committed many other violations of

Washington State deceptive and unfair practices laws. Id.

119. GreenPoint, which originated the loans for four of the Securitizations,

systematically disregarded its underwriting standards, granted exceptions in the absence of

compensating factors, required less documentation, and granted no-documentation or limited-

documentation loans to individuals without sound credit histories. In November 2008, Business

Week Magazine reported that GreenPoint’s employees and independent mortgage brokers

targeted borrowers who were less able to afford the loan payments they were required to make,

and many had no realistic ability to pay back the loans. GreenPoint’s parent corporation, Capital

One Financial Corp., eventually liquidated GreenPoint in December 2008, taking an $850

million write-down due to mortgage-related losses associated with GreenPoint’s origination

business.

120. GreenPoint’s pervasive disregard of underwriting standards resulted in its

inclusion among the worst ten originators in the 2008 “Worst Ten in the Worst Ten” Report.

GreenPoint was identified 7th worst in Stockton, California, and 9th worst in both Sacramento,

California, and Las Vegas, Nevada. In the 2009 “Worst Ten in the Worst Ten” Report,

GreenPoint was listed as 3rd worst in Modesto, California, 4th worst in Stockton, Merced, and

Vallejo-Fairfield-Napa, California, 6th worst in Las Vegas, Nevada; and 9th in Reno, Nevada.

121. GreenPoint is now a defendant in numerous lawsuits alleging misrepresentations

regarding the quality of the loans GreenPoint underwrote and originated. For example, in U.S.

Bank Nat’l Ass’n v. GreenPoint Mortgage Funding, Inc., No. 09-600352 (N.Y. Sup. Ct. filed

Apr. 22, 2009), a consultant’s investigation concluded that 93 percent of the loans that

GreenPoint sold contained errors, omissions, misrepresentations, and negligence related to

origination and underwriting. The investigation found that GreenPoint loans suffered from

serious defects including:



Pervasive misrepresentations and/or negligence with respect to the statement of

the income, assets or employment of the borrower.

Violations of GreenPoint’s own underwriting guidelines and prudent mortgage

lending practices, including loans made to borrowers (i) who made unreasonable

claims as to their income, (ii) with multiple, unverified social security numbers,

(iii) with credit scores below the required minimum, (iv) with debt-to-income

and/or loan-to-value ratios above the allowed maximum, or (v) with relationships

to GreenPoint or other non-arm’s-length relationships.

 Misrepresentations of the borrower’s intent to occupy the property as the

borrower’s residence and subsequent failure to so occupy the property.

 Inflated appraisal values.

122. On March 3, 2010, the court denied GreenPoint’s motion to dismiss this claim,

holding that discovery would be required to determine whether GreenPoint would be required

under the parties’ contract to repurchase all 30,000 loans based on the deficiencies in individual

loans identified by U.S. Bank.

123. The originators of the mortgage loans underlying the Securitizations went beyond

the systematic disregard of their own underwriting guidelines. Indeed, as the FCIC has

confirmed, mortgage loan originators throughout the industry pressured appraisers, during the

period of the Securitizations, to issue inflated appraisals that met or exceeded the amount needed

for the subject loans to be approved, regardless of the accuracy of such appraisals, and especially

when the originators aimed at putting the mortgages into a package of mortgages that would be

sold for securitization. This resulted in lower LTV ratios, discussed supra, which in turn made

the loans appear to the investors less risky than they were.

124. As described by Patricia Lindsay, a former wholesale lender who testified before

the FCIC in April 2010, appraisers “fear[ed]” for their “livelihoods,” and therefore cherry-picked

data “that would help support the needed value rather than finding the best comparables to come

up with the most accurate value.” See Written Testimony of Patricia Lindsay to the FCIC, April

7, 2010, at 5. Likewise, Jim Amorin, President of the Appraisal Institute, confirmed in his

testimony that “[i]n many cases, appraisers are ordered or severely pressured to doctor their

reports and to convey a particular, higher value for a property, or else never see work for those

parties again. . . [T]oo often state licensed and certified appraisers are forced into making a

‘Hobson’s Choice.’” See Testimony of Jim Amorin to the FCIC, available at

www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRA-

NAIFATestimonyonMortgageReform042309final.pdf. Faced with this choice, appraisers

systematically abandoned applicable guidelines and over-valued properties in order to facilitate

the issuance of mortgages that could then be collateralized into mortgage-backed securitizations.

2. The Collapse of the Certificates’ Credit Ratings Further Indicates

that the Mortgage Loans were not Originated in Adherence to the

Stated Underwriting Guidelines

125. The total collapse in the credit ratings of the GSE Certificates, typically from

AAA or its equivalent to non-investment grade is further evidence of the originators’ systematic

disregard of underwriting guidelines, indicating that the GSE Certificates were impaired from the

start.

126. A significant number of the GSE Certificates that Fannie Mae and Freddie Mac

purchased were originally assigned credit ratings of AAA, or its equivalent, which purportedly

reflected the description of the mortgage loan collateral and underwriting practices set forth in

the Registration Statements. The rest of the GSE Certificates were rated investment grade, with

a minimum rating of “A1” or its equivalent. These ratings were artificially inflated, however, as

a result of the very same misrepresentations that the Defendants made to investors in the

Prospectus Supplements.

127. Merrill Lynch provided or caused to be provided loan level information to the

rating agencies that they relied upon in order to calculate the Certificates’ assigned ratings,

including the borrower’s LTV ratio, debt-to-income ratio, owner occupancy status, and other

loan level information described in aggregation reports in the Prospectus Supplements. Because

the information that Merrill Lynch provided or caused to be provided was false, the ratings were

inflated, and the level of subordination that the ratings agencies required for the sale of

certificates rated between AAA and A1 (or their equivalents) was inadequate to provide

investors with the level of protection that those ratings signified. As a result, the GSEs paid

Defendants inflated prices for Certificates that, in almost all cases, were sold and marketed as

AAA (or their equivalents), unaware that those certificates actually carried a severe risk of loss

and carried inadequate credit enhancement.

128. Since the issuance of the Certificates, the ratings agencies have

dramatically downgraded their ratings to reflect the revelations regarding the true underwriting

practices used to originate the mortgage loans, and the true value and credit quality of the

mortgage loans. Table 10 details the extent of the downgrades.

Table 10

Transaction Tranche Ratings at Issuance

(Moody’s/S&P/Fitch)

Ratings as of 7/31/2011

(Moody’s/S&P/Fitch)

ARSI 2005-W4 A1B -/AAA/AAA -/CCC/C

ARSI 2005-W4 A1A2 -/AAA/AAA -/BB+/BB

ARSI 2005-W4 A1A3 -/AAA/AAA -/CCC/CC

ARSI 2006-M1 A1 Aaa/AAA/AAA Caa2/CCC/C

CBASS 2006-CB8 A1 Aaa/AAA/AAA Caa3/CCC/CC

FFMER 2007-1 A1 Aaa/AAA/- Ca/CCC/-

FFMER 2007-2 A1 Aaa/AAA/- Ca/CCC/-

FFMER 2007-3 A1A Aaa/AAA/- Caa1/B+/-

FFMER 2007-3 A1C Aaa/AAA/- Ca/CCC/-

FFMER 2007-3 A1D Aaa/AAA/- Ca/CCC/-

FFMER 2007-3 M11 Aa1/AA+/- C/CCC/-

FFMER 2007-3 M21 Aa2/AA/- C/D/-

FFMER 2007-3 M31 Aa3/AA-/- C/D/-

FFMER 2007-3 M41 A1/A+/- C/D/-

FFMER 2007-4 1A Aaa/AAA/- Caa3/CCC/-

FFMER 2007-4 1M1 Aa1/AA+/- C/D/-

FFMER 2007-4 1M2 Aa2/AA/- C/D/-

FFMER 2007-4 1M3 Aa3/AA-/- C/D/-

FFMER 2007-5 1A Aaa/AAA/- Caa3/CCC/-

FFMER 2007-H1 1A1 Aaa/AAA/AAA Caa1/BB-/CCC

Applicable ratings are shown in sequential order separated by forward slashes:

Moody’s/S&P/Fitch. A hyphen between forward slashes indicates that the relevant agency did

not provide a rating at issuance.

Transaction Tranche Ratings at Issuance

(Moody’s/S&P/Fitch)

Ratings as of 7/31/2011

(Moody’s/S&P/Fitch)

FFML 2005-FF12 A1 Aaa/AAA/- Ba2/AAA/-

FFML 2006-FF18 A1 Aaa/AAA/- Caa3/CCC/-

FFML 2007-FF1 A1 Aaa/AAA/- Caa3/CCC/-

FFML 2007-FF2 A1 Aaa/AAA/- Ca/CCC/-

FMIC 2006-3 1A Aaa/AAA/- B3/BBB-/-

INDX 2005-AR33 2A1 Aaa/AAA/- Ca/D/-

INDX 2006-AR5 1A1 Aaa/AAA/- Caa3/CCC/-

INDX 2006-AR7 2A1 Aaa/AAA/- Ca/D/-

INDX 2007-FLX4 1A1 Aaa/AAA/- Caa3/CCC/-

INDX 2007-FLX5 1A1 Aaa/AAA/- Caa3/CC/-

INDX 2007-FLX6 1A1 Aaa/AAA/- Caa2/CC/-

MANA 2007-A1 A1 Aaa/AAA/- Ca/CCC/-

MANA 2007-A2 A1 Aaa/AAA/- Ca/CCC/-

MANA 2007-A2 A2A Aaa/AAA/- Ca/CCC/-

MANA 2007-A3 A1 Aaa/AAA/- Ca/CCC/-

MLMI 2005-A8 A2A Aaa/AAA/- Caa1/AA/-

MLMI 2005-A8 A2B1 Aaa/AAA/- Caa1/AA/-

MLMI 2005-AR1 A2 Aaa/AAA/- A1/AAA/-

MLMI 2005-HE2 A1A -/AAA/AAA -/A+/AA

MLMI 2005-HE2 A1B -/AAA/AAA -/A+/A

MLMI 2005-HE3 A1A -/AAA/AAA -/BB/BB

MLMI 2006-A3 IIA1 Aaa/AAA/- Ca/CC/-

MLMI 2006-AF2 AV1 Aaa/AAA/- Caa3/CCC/-

MLMI 2006-AHL1 A1 Aaa/AAA/- Ca/CCC/-

MLMI 2006-AR1 A1 Aaa/AAA/- Ca/CCC/-

MLMI 2006-FF1 A1 Aaa/AAA/- Baa3/AAA/-

MLMI 2006-FM1 A1 Aaa/AAA/- Ca/CCC/-

MLMI 2006-HE1 A1 Aaa/AAA/- Ba1/BB+/-

MLMI 2006-HE4 A1 Aaa/AAA/- Ca/CCC/-

MLMI 2006-HE5 A1 Aaa/AAA/- Ca/CCC/-

MLMI 2006-HE6 A1 Aaa/AAA/- Ca/CCC/-

MLMI 2006-MLN1 A1 Aaa/AAA/- Ca/CCC/-

MLMI 2006-OPT1 A1 Aaa/AAA/- Caa3/BBB-/-

MLMI 2006-RM1 A1 Aaa/AAA/- Ca/CC/-

MLMI 2006-RM2 A1A Aaa/AAA/- Ca/CCC/-

MLMI 2006-RM3 A1A Aaa/AAA/- Ca/CCC/-

MLMI 2006-RM4 A1 Aaa/AAA/- Ca/CC/-

MLMI 2006-RM5 A1 Aaa/AAA/- C/CCC/-

MLMI 2006-WMC1 A1A Aaa/AAA/- Caa3/CCC/-

MLMI 2006-WMC2 A1 Aaa/AAA/- Ca/CCC/-

Transaction Tranche Ratings at Issuance

(Moody’s/S&P/Fitch)

Ratings as of 7/31/2011

(Moody’s/S&P/Fitch)

MLMI 2007-HE1 A1 Aaa/AAA/- Ca/CCC/-

MLMI 2007-HE2 A1 Aaa/AAA/- Ca/CCC/-

MLMI 2007-MLN1 A1 Aaa/AAA/- Ca/CCC/-

OOMLT 2007-1 IA2 Aaa/AAA/- Caa3/CCC/-

OOMLT 2007-1 IA1 Aaa/AAA/- Caa3/CCC/-

OWNIT 2005-4 A1 Aaa/AAA/- Aaa/AAA/-

OWNIT 2005-5 A1 Aaa/AAA/- Aa2/AAA/-

OWNIT 2006-1 AV Aaa/AAA/- Caa2/CCC/-

OWNIT 2006-2 A1 Aaa/AAA/- Caa2/BBB+/-

OWNIT 2006-3 A1 Aaa/AAA/- Caa2/AA-/-

OWNIT 2006-4 A1 Aaa/AAA/- Caa3/BB/-

OWNIT 2006-5 A1B Aaa/AAA/- C/B-/-

OWNIT 2006-5 A1A Aaa/AAA/- Caa1/BBB-/-

OWNIT 2006-6 A1 Aaa/AAA/- Caa3/B-/-

OWNIT 2006-7 A1 Aaa/AAA/- Ca/CCC/-

SURF 2005-AB3 A1A Aaa/AAA/- Caa2/BBB/-

SURF 2005-BC3 A1A Aaa/AAA/- Aaa/AAA/-

SURF 2005-BC4 A1A Aaa/AAA/- Baa3/AA+/-

SURF 2006-AB2 A1 Aaa/AAA/- Ca/CCC/-

SURF 2006-AB3 A1 Aaa/AAA/- Ca/CCC/-

SURF 2006-BC1 A1 Aaa/AAA/- Ba1/AA+/-

SURF 2006-BC2 A1 Aaa/AAA/- Ca/CCC/-

SURF 2006-BC3 A1 Aaa/AAA/- Caa3/CCC/-

SURF 2006-BC4 A1 Aaa/AAA/- Caa3/CCC/-

SURF 2006-BC5 A1 Aaa/AAA/- Ca/CCC/-

SURF 2007-AB1 A1 Aaa/AAA/- Ca/CCC/-

SURF 2007-BC1 A1 Aaa/AAA/- Ca/CCC/-

SURF 2007-BC2 A1 Aaa/AAA/- Ca/CCC/-

3. The Surge in Mortgage Delinquency and Default Further

Demonstrates that the Mortgage Loans Were Not Originated in

Adherence to the Stated Underwriting Guidelines

129. Even though the Certificates purchased by Fannie Mae and Freddie Mac were

supposed to represent long-term, stable investments, a significant percentage of the mortgage

loans backing the Certificates have defaulted, have been foreclosed upon, or are delinquent,

resulting in massive losses to the Certificateholders. The overall poor performance of the

mortgage loans is a direct consequence of the fact that they were not underwritten in accordance

with applicable underwriting guidelines as represented in the Registration Statements.

130. Loan groups that were properly underwritten and contained loans with the

characteristics represented in the Registration Statements would have experienced substantially

fewer payment problems and substantially lower percentages of defaults, foreclosures, and

delinquencies than occurred here. Table 11 reflects the percentage of loans in the Supporting

Loan Groups that are in default, have been foreclosed upon, or are delinquent as of July 2011.

Table 11

Transaction Tranche Supporting Loan Group Percentage of Loans that are

Delinquent/Defaulted/Foreclosed

ARSI 2005-W4 A1B Group 1 38.94

ARSI 2005-W4 A1A2 Group 1 38.94

ARSI 2005-W4 A1A3 Group 1 38.94

ARSI 2006-M1 A1 Group 1 41.63

CBASS 2006-CB8 A1 Group I 48.01

FFMER 2007-1 A1 Group I 57.92

FFMER 2007-2 A1 Group I 57.98

FFMER 2007-3 A1A Group I 56.97

FFMER 2007-3 A1C Group I 56.97

FFMER 2007-3 A1D Group I 56.97

FFMER 2007-3 M11 Group I 56.97

FFMER 2007-3 M21 Group I 56.97

FFMER 2007-3 M31 Group I 56.97

FFMER 2007-3 M41 Group I 56.97

FFMER 2007-4 1A Group I 61.04

FFMER 2007-4 1M1 Group I 61.04

FFMER 2007-4 1M2 Group I 61.04

FFMER 2007-4 1M3 Group I 61.04

FFMER 2007-5 1A Group I 57.94

FFMER 2007-H1 1A1 Group I 63.21

FFML 2005-FF12 A1 Group I 49.34

FFML 2006-FF18 A1 Group I 51.02

FFML 2007-FF1 A1 Group I 54.82

FFML 2007-FF2 A1 Group I 57.29

FMIC 2006-3 1A Group 1 46.23

INDX 2005-AR33 2A1 Group 2 39.98

INDX 2006-AR5 1A1 Group 1 30.36

Transaction Tranche Supporting Loan Group Percentage of Loans that are

Delinquent/Defaulted/Foreclosed

INDX 2006-AR7 2A1 Group 2 35.12

INDX 2007-FLX4 1A1 Group 1 30.91

INDX 2007-FLX5 1A1 Group 1 34.58

INDX 2007-FLX6 1A1 Group 1 40.95

MANA 2007-A1 A1 Group I 44.90

MANA 2007-A2 A1 Group I 44.80

MANA 2007-A2 A2A Group 2 46.87

MANA 2007-A3 A1 Group 1 46.63

MLMI 2005-A8 A2A Group 2 31.51

MLMI 2005-A8 A2B1 Group 2 31.51

MLMI 2005-AR1 A2 Group 2 60.09

MLMI 2005-HE2 A1A Group 1 53.40

MLMI 2005-HE2 A1B Group 1 53.40

MLMI 2005-HE3 A1A Group 1 72.59

MLMI 2006-A3 IIA1 Group 2 40.64

MLMI 2006-AF2 AV1 Group 2 34.58

MLMI 2006-AHL1 A1 Group I 65.89

MLMI 2006-AR1 A1 Group I 67.93

MLMI 2006-FF1 A1 Group I 31.46

MLMI 2006-FM1 A1 Group I 74.70

MLMI 2006-HE1 A1 Group I 58.07

MLMI 2006-HE4 A1 Group I 66.39

MLMI 2006-HE5 A1 Group I 64.85

MLMI 2006-HE6 A1 Group I 67.27

MLMI 2006-MLN1 A1 Group I 67.09

MLMI 2006-OPT1 A1 Group I 43.39

MLMI 2006-RM1 A1 Group I 69.71

MLMI 2006-RM2 A1A Group I 74.09

MLMI 2006-RM3 A1A Group I 34.30

MLMI 2006-RM4 A1 Group I 65.30

MLMI 2006-RM5 A1 Group I 67.99

MLMI 2006-WMC1 A1A Group I 62.85

MLMI 2006-WMC2 A1 Group I 66.82

MLMI 2007-HE1 A1 Group 1 66.39

MLMI 2007-HE2 A1 Group 1 53.16

MLMI 2007-MLN1 A1 Group 1 64.46

OOMLT 2007-1 IA2 Group 1 46.72

OOMLT 2007-1 IA1 Group 1 46.72

OWNIT 2005-4 A1 Group 1 46.92

OWNIT 2005-5 A1 Group 1 42.73

OWNIT 2006-1 AV Group 1 41.51

OWNIT 2006-2 A1 Group 1 48.49

Transaction Tranche Supporting Loan Group Percentage of Loans that are

Delinquent/Defaulted/Foreclosed

OWNIT 2006-3 A1 Group 1 37.37

OWNIT 2006-4 A1 Group 1 49.24

OWNIT 2006-5 A1B Group 1 48.42

OWNIT 2006-5 A1A Group 1 48.42

OWNIT 2006-6 A1 Group 1 52.68

OWNIT 2006-7 A1 Group 1 45.71

SURF 2005-AB3 A1A Group 1 47.05

SURF 2005-BC3 A1A Group 1 51.03

SURF 2005-BC4 A1A Group 1 61.37

SURF 2006-AB2 A1 Group I 55.29

SURF 2006-AB3 A1 Group 1 49.55

SURF 2006-BC1 A1 Group 1 65.78

SURF 2006-BC2 A1 Group 1 68.24

SURF 2006-BC3 A1 Group 1 65.58

SURF 2006-BC4 A1 Group 1 66.46

SURF 2006-BC5 A1 Group 1 65.62

SURF 2007-AB1 A1 Group 1 56.23

SURF 2007-BC1 A1 Group 1 63.97

SURF 2007-BC2 A1 Group 1 62.42

131. The confirmed misstatements concerning owner occupancy and LTV ratios; the

confirmed systematic underwriting failures by the originators responsible for the mortgage loans

across the Securitizations; and the extraordinary drop in credit rating and rise in delinquencies

across those Securitizations all confirm that the mortgage loans in the Supporting Loan Groups,

contrary to the representations in the Registration Statements, were not originated in accordance

with the stated underwriting guidelines.

V. MERRILL LYNCH KNEW THAT ITS REPRESENTATIONS WERE FALSE

132. The allegations in this Section V are made in support of Plaintiff’s common law

fraud claim, and not in support of Plaintiff’s claims under (i) Sections 11, 12(a)(2), and 15 of the

Securities Act, (ii) Sections 13.1-522(A)(ii) and 13.1-522(C) of the Virginia Code, (iii) Sections

31-5605.05(a)(1)(B) and 31-5606.05(c) of the District of Columbia Code, or (iv) negligent

misrepresentation, which are based solely on strict liability and negligence.

133. The same evidence discussed above not only shows that the representations were

untrue, but also that Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First

Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith,

and Merrill Lynch Government Securities knew, or were reckless in not knowing, that they were

falsely representing the credit quality of the mortgage loans that collateralized the GSE

Certificates. As discussed above, such evidence includes:

 The pervasive misrepresentations relating to basic information about the

underlying mortgage loans, such as owner occupancy and LTV ratios;

 Third-party due diligence providers such as Clayton and Bohan informed Merrill

Lynch that significant percentages of loans in the pools did not adhere to

underwriting guidelines. For example, Clayton admitted that in the period from

the first quarter of 2006 to the second quarter of 2007, 23 percent of the mortgage

loans that Merrill Lynch submitted to Clayton to review in RMBS pools were

rejected by Clayton as falling outside the applicable underwriting guidelines.

 Of the 23 percent of mortgage loans that Clayton found defective, 32 percent were

subsequently waived in by Merrill Lynch without proper consideration and

analysis of compensating factors and included in securitizations such as the ones

in which Fannie Mae and Freddie Mac invested here. Merrill Lynch’s waiver of

nearly a third of the defective loans shows that Merrill Lynch knew of or

recklessly disregarded the systemic failure in underwriting and the fraudulent

misrepresentations in the offering materials received by the GSEs.

A. Evidence Regarding Merrill Lynch’s Due Diligence

1. Merrill Lynch’s Due Diligence Benefitted From a Direct Window Into

the Originators’ Practices

134. Merrill Lynch acquired the loans underlying the Securitizations through bulk

acquisitions in the secondary market. In connection with its purchase from the loan originators

of the underlying mortgage loans in the 60 Securitizations that it sponsored, Merrill Lynch

performed due diligence to determine the quality of the loans that it was purchasing. Merrill

Lynch also conducted due diligence on the originators from whom it was purchasing loans, and

on the loans included in each offering to determine whether such loans complied with the

applicable underwriting guidelines.

135. Merrill Lynch’s offering materials represented that Merrill Lynch conducted due

diligence on the lender who originated the loans, and that it carefully inspected their

underwriting standards:

Prior to acquiring any residential mortgage loans, MLML conducts a review of

the related mortgage loan seller that is based upon the credit quality of the selling

institution. MLML’s review process may include reviewing select financial

information for credit and risk assessment and conducting an underwriting

guideline review, senior level management discussion and/or background checks.

The scope of the mortgage loan due diligence varies based on the credit quality of

the mortgage loans.

MLMI 2006-HE1 Prospectus Supplement, at S-38 (filed Feb. 7, 2006).

136. The Prospectus Supplements further provided that:

The underwriting guideline review entails a review of the mortgage loan

origination processes and systems. In addition, such review may involve a

consideration of corporate policy and procedures relating to state and federal

predatory lending, origination practices by jurisdiction, historical loan level loss

experience, quality control practices, significant litigation and/or material

investors.

Id. Similar representations are made in the Prospectus Supplements for the other GSE

Certificates.

137. The initial step, in many of the Securitizations, was often done with Merrill

Lynch’s funds, as Merrill Lynch provided “warehouse” lines of credit to originators. In other

words, Merrill Lynch provided money to originators to fund the mortgages they were

originating. Merrill Lynch’s warehouse loan was then repaid when the originator’s loan pool

was sold to Merrill Lynch for securitization. As the FCIC Found:

In September 2006…Merrill announced it would acquire a subprime lender, First

Franklin Financial Corp., from National City Corp. for 1.3 billion…Merrill

already had a 100 million ownership position in Ownit Mortgage Solutions Inc.,

for which it provided a warehouse line of credit; it also provided a line of credit to

Mortgage Lenders Network.

FCIC Report, at 204.

138. As a result of Merrill Lynch’s longstanding relationships with the problematic

loan originators, and its various roles at each step of the securitization process, Merrill Lynch

was uniquely positioned to know that the originators had abandoned their underwriting

guidelines.

139. Merrill Lynch’s position as a source of “warehouse” lines of credit gave it unique

knowledge of the conditions under which mortgage loans were originated. The information that

was available to Merrill Lynch as a warehouse lender gave Merrill Lynch an inside look into the

true credit quality of the loans it was including for securitization. As one industry publication

explained, warehouse lenders like Merrill Lynch have “detailed knowledge of the lender’s

operations.” Kevin Conner, Wall Street and the Making of the Subprime Disaster, at 11 (2007).

140. These warehouse lines gave Merrill Lynch the inside track on acquiring those

loans that were generated using Merrill Lynch’s funds. Because of its financial arrangements

with warehouse lenders, Merrill Lynch was essentially committed to buying the loans that

secured its warehouse lines regardless of their credit quality and the results of Merrill Lynch’s

due diligence reviews. Indeed, Merrill Lynch needed to purchase the loans with little or no

objection so as to keep the lenders supplied with capital to pay fees and interest owed on the

lines of credit. It was also important to Merrill Lynch that it protect its business relationships

with warehouse lenders in order to ensure a steady flow of loans for securitization.

141. Therefore, Merrill Lynch was incentivized to allow defective mortgages to be

included in the securitizations because: (1) mortgage originators would not maintain a

relationship with a bank that consistently kicked out large numbers of loans; and (2) the

securitization became smaller as loans were kicked out, thus decreasing the underwriting fees

and other fees.

2. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,

First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill

Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government

Securities Intentionally Misrepresented the Risks Inherent in the

Securitizations

142. As discussed above, all of the GSE Certificates have significantly

underperformed. This underperformance was inevitable given the stated policies and goals of

Merrill Lynch as well as the misrepresentations, detailed above, concerning the owner-

occupancy statistics, LTV ratios, and underwriting guidelines. In fact, the data review revealed

that for the majority of the Securitizations at issue Merrill Lynch overstated both the owner-

occupancy and LTV ratios by more than 10 percent The pervasiveness and degree of the

overstatement evidences an intentional misrepresentation of the risks inherent in the

Securitizations by Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First

Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith,

and Merrill Lynch Government Securities to Fannie Mae and Freddie Mac.

143. Beginning in 2004, Merrill Lynch, at the direction of then Chief Executive Officer

Stanley O’Neal, set out to climb from a middling player in residential mortgage backed

securitizations to the top of the league tables. Paul Moulo & Matthew Padilla, Chain of Blame:

How Wall Street Caused the Mortgage and Credit Crisis, at 189 (2008). Due to the crowded and

competitive marketplace, and Merrill Lynch’s late entry, it offered more to purchase loans than

the other investment banks, used its operations such as warehouse financing as a loss leader,

“To entice Bill Dallas and other subprime executives into selling their loans to

Merrill, its salesmen offered them a deal: If you agree to sell your loans to us, we’ll offer

warehouse financing for next to nothing. Merrill’s warehouse chief was Jim Cason, who had

been with the firm for a couple of years. With O’Neal’s edict to grow the subprime business,

eviscerated the rules regarding what loans it would purchase, and exhibited a willingness to

purchase loans that did not comply with underwriting guidelines and that were extended to

borrowers who were unlikely to be able to repay them. Id, at 189-97. Given their roles as the

sponsor, depositor, underwriter, and entity that sold the GSE Certificates to the GSEs, Merrill

Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill

Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch

Government Securities were aware of, and participated in, the decision to purchase and

repackage loans that should have been, and previously would have been, rejected.

144. As detailed above in paragraph 67, over the course of a few years, Merrill Lynch

was able to ascend toward the top of the league tables. Along with the high prices that Merrill

Lynch was willing to pay for questionable loans, its rise was also aided by its vertical integration

strategy that ensured it with a steady supply of loans to securitize. First, in 2005 Merrill Lynch

acquired a stake in Ownit Mortgage Solutions, Inc. (“Ownit”), a subprime lender. Then, in late

2006, Merrill Lynch acquired First Franklin Corp. (“First Franklin”), a second subprime lender.

O’Neal, Merrill Lynch’s former CEO, told the FCIC during a September 2010 interview that

First Franklin was purchased in order “to control our [own] source of origination.” (O’Neal Tr.

87:5-21, Sept. 16, 2010).

145. Through these acquisitions, Merrill Lynch controlled each step in the

securitization process—origination of the mortgage loans, securitization of the mortgage loans,

and sale of the certificates collateralized by such mortgage loans. By virtue of its control over

Cason’s unit, by 2005, became one of the largest warehouse lenders to nonbank residential

lenders in the nation. ‘The idea was to create a one-stop shopping place for subprime lenders,’

said one warehouse executive familiar with Merrill’s efforts. ‘Merrill would make no money on

the warehouse business, but it would do it to get the securitization business.’ As George Davies,

the head trader later admitted: ‘The idea was to secure product [mortgages].’” Chain of Blame,

at 190.

each step in the securitization process, Merrill had actual knowledge of the true characteristics

and credit quality of the mortgage loans.

146. An October 21, 2007 Merrill Lynch presentation to the company’s board of

directors, recently published by the FCIC, underscores this model. A flow chart in the

presentation shows that Merrill Lynch’s “Primary Activities” in the RMBS market were “Whole

Loan Origination & Purchase → Financing → Securitization→ Distribution → Investing.” This

vertical integration model, which was in place since at least mid-2006, ensured that Merrill

Lynch had knowledge of problems in the mortgage market generally, and in the mortgage loans

underlying the Securitizations in particular. Despite this knowledge, Merrill Lynch Mortgage

Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage

Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government Securities

failed to disclose material facts relating to the true characteristics and credit quality of the

underlying mortgage loans.

147. As described by former CEO Stanley O’Neal in his September 2010 interview

with the FCIC, Merrill Lynch also conducted “spot checks” of the mortgages that it purchased

from third parties to ensure that they complied with the applicable written underwriting

guidelines. (O’Neal Tr. 84:18, Sept. 16, 2010). Jeff Kronthal, the former head of Merrill

Lynch’s structured-products division, likewise told the FCIC that Merrill Lynch performed due

diligence on the mortgages it purchased from Ownit. (Kronthal Tr. 94:1-5, Sept. 14, 2010).

148. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin

Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and

Merrill Lynch Government Securities did not disclose Clayton’s findings, detailed in paragraphs

70 through 72, to the GSEs, nor did they reveal their knowledge, as part of a vertically integrated

loan originator and securitizer, that there were rampant misrepresentations and underwriting

failures in the subprime mortgage sector.

149. Unlike Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First

Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith,

and Merrill Lynch Government Securities, the GSEs and other investors did not have access to

Clayton’s analysis or the analysis of other third-party due diligence companies. The GSEs also

did not have access to the individual loan files for the defective mortgages. These startling

disclosures only came to light in September 2010 through FCIC testimony. By then, Merrill

Lynch’s executives were willing to admit problems with the mortgage collateral on Merrill

Lynch’s books. During his September 2010 interview with the FCIC, Jeff Kronthal blamed the

credit crisis, in part, on “the level of fraud that was being committed . . . in the mortgage

origination process.” (Kronthal Tr. 91:10-13, Sept. 14, 2010).

150. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin

Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and

Merrill Lynch Government Securities’ misrepresentations concerning the owner-occupancy

statistics, LTV ratios, and underwriting guidelines were so extensive, and so uniformly resulted

in making the Securitizations appear less risky than they in fact were, that they could not have

been the result of human error. Instead, Merrill Lynch Mortgage Lending, Merrill Lynch

Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch,

Pierce, Fenner & Smith, and Merrill Lynch Government Securities were intentionally ignoring

sound underwriting methodology by including loans in the Securitizations that they knew would

not be repaid, and concealing those risks from investors such as Fannie Mae and Freddie Mac.

In their roles as sponsor, depositor, underwriter, and entity that sold the Certificates to the GSEs,

Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial,

Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch

Government Securities knew that their inclusion of mortgage loans in the securitizations that

failed to conform with underwriting guidelines, and their inclusion of loans with falsely inflated

owner-occupancy statistics and falsely suppressed LTV ratios, would result in a much riskier

securitization and accompanying certificates than represented to the GSEs. At the very least,

such conduct was reckless.

151. Merrill Lynch, however, failed to disclose that the Certificates’ credit ratings were

false and misleading because Merrill Lynch fed the rating agencies the same false loan level data

regarding loan-to-value ratios, owner-occupancy status, home values, and debt-to-income ratios

that they provided to investors in aggregate form in the Prospectuses and Prospectus

Supplements. The rating agencies then input this false data into their quantitative models to

assess the credit risk associated with the RMBS, project likely future defaults, and ultimately,

determine the ratings on Merrill Lynch’s RMBS products. As a result, the Merrill Lynch

essentially pre-determined the ratings by feeding bad data into the ratings system. In testimony

before the Senate Permanent Subcommittee on Investigations, Susan Barnes, the North

American Practice Leader for RMBS at S&P from 2005 to 2008, confirmed that the rating

agencies relied upon investment banks to provide accurate information about the loan pools:

The securitization process relies on the quality of the data generated about the

loans going into the securitizations. S&P relies on the data produced by others

and reports to both S&P and investors about those loans…S&P does not

receive the original loan files for the loans in the pool. Those files are

reviewed by the arranger or sponsor of the transaction, who is also responsible for

reporting accurate information about the loans in the deal documents and offering

documents to potential investors.

Senate Homeland Security and Governmental Affairs Subcommittee on Investigations, Hearings

on Wall Street and the Financial Crisis: The Role of Credit Rating Agencies, Apr. 23, 2010

(emphasis added). As a result, the ratings themselves failed to reflect accurately the actual risk

underlying the Certificates because the ratings agencies were really analyzing a mortgage pool

that had no relation to the pool that actually backed the Certificates purchased by the GSEs.

152. This is further supported by the discussion regarding Clayton in paragraphs 70

through 72. As detailed above, Merrill Lynch outsourced the task of performing due diligence

on its purchases to third parties such as Clayton and the Bohan group. According to the Clayton

Trending Report, detailed above, during the period from the first quarter of 2006 to the second

quarter of 2007, 23 percent of the mortgage loans that Merrill Lynch submitted to Clayton to

review were rejected by Clayton as falling outside the applicable underwriting guidelines. See

Clayton Trending Reports, available at http://fcic.law.stanford.edu/hearings/testimony/the-

impact-of-the-financial-crisis-sacramento#documents. Of the mortgage loans that Clayton found

defective, 32 percent of the loans were subsequently waived in by Merrill Lynch, without proper

consideration and analysis of compensating factors, and included in securitizations such as the

ones in which Fannie Mae and Freddie Mac invested. Id.

153. There were also significant problems at Bohan, another third-party due diligence

firm used by Merrill Lynch. One former Bohan loan reviewer has revealed that “the pressure

was so intense to approve as many loans as quickly as possible” that a supervisor would stand on

a desk screaming at the loan reviewers. Paul Moulo & Matthew Padilla, Chain of Blame at 197.

The same Bohan loan reviewer, in reference to the fraudulent approval and securitization of non-

compliant loans, stated that Merrill Lynch “perpetuated the whole thing,” and that if she

identified a loan as failing to comply with the applicable underwriting guidelines, “a Merrill

supervisor would find a way to get the loan approved.” Id. Merrill Lynch failed to disclose to

the GSEs its practice of waiving into the securitizations loans that were rejected by the third

party due diligence firm and that did not have compensating factors.

154. Merrill Lynch was well aware of the results of the third-party due diligence

reviews. Vicki Beal, the Vice President of Clayton, testified to the FCIC on September 23, 2010

that Clayton’s “exception reports” were provided to the sponsor, Merrill Lynch Mortgage

Investors, as well as the underwriter, Merrill Lynch, Pierce, Fenner & Smith. (Beal Tr. 43:17-25,

44:1-11). Due to the vertically integrated structure of Merrill Lynch, each Merrill Lynch

entity—including Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First

Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith,

and Merrill Lynch Government Securities—was fully aware that a significant percentage of the

mortgage loans that were included in the Securitizations did not meet the applicable underwriting

guidelines.

155. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin

Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and

Merrill Lynch Government Securities’ also incentivized unscrupulous conduct by originators

such as Ownit and First Franklin. William Dallas, the Chief Executive Officer of Ownit, told the

New York Times that Merrill Lynch, along with other investment banks, paid a higher price for

“no-income-verification loans [] than…[for] full documentation loans.” Vikas Baja & Christine

Hougheny, Tremors at the Door, New York Times, Jan. 26, 2007. These no-income-verification

loans are referred to in the industry as “liar loans,” because the borrower is not required to

provide as much information to support his or her claimed incomes and assets. These “liar

loans” invite fraud from borrowers. By using increased compensation to incentivize Ownit to

accept “liar loans,” Merrill Lynch rewarded Ownit to originate such loans without adequate

controls to ensure the borrowers were truthful in their applications. Because Merrill Lynch

Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, Merrill Lynch

Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government

Securities were aware of, and complicit in, these practices, they knew that loans underlying the

Securitizations were riskier than what was represented to the GSEs.

156. Even the very payment structure of Merrill Lynch’s relationships with the

originators promoted fraud. The compensation received by the originators was based solely on

the quantity of loans that they supplied, and the quality of the loans was ignored. Former Merrill

Lynch CEO John Thain accurately described the problem to the FCIC in September 2010:

when you have a system where you pay someone for originating mortgages

simply on volume and nothing happens to them if the credit quality is bad, and

nothing happens to them if the borrower is fraudulent on his loan application, and

nothing happens to him if the appraisal’s fraudulent, then that’s probably not a

very smart system.

Thain Tr. 98:7-14, Sept. 17, 2010. Apart from Thain’s understanding of how the system

incentivized poor credit quality and fraud, Merrill Lynch Mortgage Lending, Merrill Lynch

Mortgage Capital, First Franklin Financial, Merrill Lynch Mortgage Investors, Merrill Lynch,

Pierce, Fenner & Smith, and Merrill Lynch Government Securities, in their roles as the sponsor,

depositor, underwriter, and entity that sold the Certificates to the GSEs, were particularly well

aware of the origination practices employed by entities that it owned such as Ownit, First

Franklin, and Specialty Under Writing and Residential Finance. All three of those entities

underwrote multiple Securitizations underlying the GSE Certificates.

3. Merrill Lynch Recognized the Problems With Its RMBS and

Developed “De-Risking” and “Mitigation” Strategies While

Marketing Similar Securitizations to the GSEs

157. Merrill Lynch’s headlong rush into the mortgage-related business led the

company to take on an enormous amount of risk. In particular, CEO Stanley O’Neal had

increased profitability by having Merrill Lynch take on an increasing amount of risk through its

CDO and RMBS exposure. In 2007, Merrill Lynch’s assets equaled more than 27 times its

equity, such that a mere 4 percent decline in the value of its assets would erase all of its capital.

During a September 2010 interview with the FCIC, Mr. O’Neal admitted that there were “no

good answers” for why the company’s exposure to mortgages had grown so large in late 2006

and early 2007.

158. Merrill Lynch eventually came to the conclusion that the enormous pool of

mortgages and CDOs it had collected on its books was becoming a liability. To rid itself of its

toxic mortgage inventory—including, on information and belief, RMBS similar to the

Securitizations—Merrill Lynch resorted to repackaging the most problematic RMBS and CDO

positions in its inventory into new CDOs. As the FCIC reported:

To keep its CDO business going, Merrill pursued three strategies, all of which

involved repackaging riskier mortgages more attractively or buying its own

products when no one else would . . . . Merrill increasingly retained for its own

portfolio substantial portions of the CDOs it was creating, mainly the super-senior

tranches, and it increasingly repackaged the hard-to-sell BBB-rated and other

low-rated tranches of its CDOs into its other CDOs; it used the cash sitting in its

synthetic CDOs to purchase other CDO tranches.

FCIC Report, at 202.

159. Dow Kim, the former co-president of global markets and investment banking at

Merrill Lynch, told the FCIC that Merrill Lynch’s retention of super-senior tranches in its CDO

positions was “part of a strategy begun in late 2006 to reduce the firm’s inventory of subprime

and Alt-A mortgages. Sell the lower-rated CDO tranches, retain the super-senior tranches: those

had been his instructions to his managers at the end of 2006, Kim recalled.” FCIC Report, at

257. Merrill Lynch also entered into credit default swaps on CDO notes that it retained to off-

load the risk of loss on its toxic collateral to unsuspecting counterparties.

160. Merrill Lynch’s newly-disclosed October 2007 presentation to its board of

directors revealed that in the second half of 2006, “[i]n order to execute deals, [Merrill Lynch]

continue[d] to take down senior tranches into inventory.” FCIC Report, at 257. In other words,

the company was being forced to hold more of its toxic CDO and RMBS collateral on its books,

since it was increasingly unable to sell the securities to investors. For example, the presentation

reports that during the March to May 2007 time period, Merrill Lynch undertook an “[a]ctive

risk-mitigation strategy” consisting of an “[a]ttempt to actively reduce the warehouse by printing

deals” (emphasis added). “Printing deals” meant that Merrill Lynch was creating new CDOs to

repackage its toxic, fraudulent collateral as quickly as possible

161. This trend began in 2006 and continued into 2007, during the same period in

which Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin

Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and

Merrill Lynch Government Securities were marketing the Securitizations to the GSEs.

162. Merrill Lynch recognized and reported internally on the severe risks posed by its

RMBS and CDO collateral, but failed to disclose those risks to the GSEs and other investors.

Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial,

Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch

Government Securities sold the GSE Certificates to the GSEs knowing that the underlying

mortgages were defective at origination, were deteriorating in value, and were certain to suffer

severe losses.

VI. THE GSES JUSTIFIABLY RELIED ON MERRILL LYNCH’S

REPRESENTATIONS

163. Fannie Mae and Freddie Mac purchased the GSE Certificates based upon the

representations by Merrill Lynch as the sponsor, depositor, and lead and selling underwriter in all

60 of the Merrill Lynch entity-sponsored Securitizations. Merrill Lynch, Pierce, Fenner & Smith

and Merrill Lynch Government Securities provided term sheets to the GSEs that contained

critical data as to the Securitizations, including with respect to anticipated credit ratings by the

credit rating agencies, loan-to-value and combined loan-to-value ratios for the underlying

collateral, and owner occupancy statistics. This data was subsequently incorporated into

Prospectus Supplements that were received by the GSEs upon the close of each Securitization.

164. The GSEs relied upon the accuracy of the data transmitted to them and

subsequently reflected in the Prospectus Supplements. In particular, the GSEs relied upon the

credit ratings that the credit rating agencies indicated they would bestow on the Certificates

based on the information provided by Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch

Government Securities and Merrill Lynch Mortgage Investors relating to the collateral quality of

the underlying loans and the structure of the Securitization. These credit ratings represented a

determination by the credit rating agencies that the GSE Certificates, in almost all cases, were

“AAA” quality (or its equivalent) – meaning the Certificates had an extremely strong capacity to

meet the payment obligations described in the respective PSAs.

165. Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin

Financial, Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and

Merrill Lynch Government Securities, as sponsor, depositor, and lead and selling underwriter in

all 60 of the Merrill Lynch entity-sponsored Securitizations, provided detailed information about

the underlying collateral and structure of each Securitization they sponsored to the credit rating

agencies. The credit rating agencies based their ratings on the information provided to them by

Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial,

Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch

Government Securities, and the agencies’ anticipated ratings of the Certificates were dependent

on the accuracy of that information. The GSEs relied on the accuracy of the anticipated credit

ratings and the actual credit ratings assigned to the Certificates by the credit rating agencies, and

upon the accuracy of the representations in the term sheets and Prospectus Supplements made by

Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial,

Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch

Government Securities.

166. In addition, the GSEs relied on the fact that the originators of the mortgage loans

in the Securitizations had acted in conformity with their underwriting guidelines, which were

described in the Prospectus Supplements. Compliance with the underwriting guidelines was a

precondition to the GSEs purchase of the GSE Certificates in that the GSEs’ decision to purchase

the Certificates was directly premised on their reasonable belief that the originators complied

with applicable underwriting guidelines and standards.

167. In purchasing the GSE Certificates, the GSEs justifiably relied on false

representations and omissions of material fact detailed above, including the misstatements and

omissions in the term sheets about the underlying collateral, which were reflected in the

Prospectus Supplements.

168. But for the above misrepresentations and omissions, the GSEs would not have

purchases or acquired the Certificates as they ultimately did, because those representations and

omissions were material to their decision to acquire the GSE Certificates, as described above.

VII. FANNIE MAE’S AND FREDDIE MAC’S PURCHASES OF THE GSE

CERTIFICATES AND THE RESULTING DAMAGES

169. In total, between September 29, 2005 and October 10, 2007, Fannie Mae and

Freddie Mac purchased over $24.853 billion in residential mortgage-backed securities issued in

connection with the Securitizations. Table 12 reflects each of Fannie Mae’s purchases of the

Certificates.

Table 12

Transaction Tranche CUSIP Settlement Date of

Purchase by

Fannie Mae

Initial Unpaid

Principal Balance

Purchase

Price (%

of Par)

Seller to

Fannie Mae

ARSI 2005-W4 A1B 040104QJ3 November 22, 2005 $344,465,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

ARSI 2005-W4 A1A2 040104QG9 November 22, 2005 $687,112,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

ARSI 2005-W4 A1A3 040104QH7 November 22, 2005 $151,807,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

FFMER 2007-1 A1 59023LAA0 March 27, 2007 $725,544,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

FFMER 2007-2 A1 59024QAA8 April 26, 2007 $588,366,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

FFMER 2007-3 A1A 59024VAA7 May 30, 2007 $285,760,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

FFMER 2007-3 A1C 59024VAC3 May 30, 2007 $205,174,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

FFMER 2007-3 A1D 59024VAD1 May 30, 2007 $33,199,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

FFMER 2007-3 M11 59024VAJ8 May 30, 2007 $35,135,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

FFMER 2007-3 M21 59024VAL3 May 30, 2007 $28,590,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

FFMER 2007-3 M31 59024VAN9 May 30, 2007 $7,922,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

FFMER 2007-3 M41 59024VAQ2 May 30, 2007 $9,989,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

FFMER 2007-4 1A 59025CAA8 June 26, 2007 $509,625,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

FFMER 2007-4 1M1 59025CAF7 June 26, 2007 $34,062,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

FFMER 2007-4 1M2 59025CAH3 June 26, 2007 $23,356,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

Purchases of securities in Table 12 and 13 are stated in terms of unpaid principal

balance of the relevant Certificates. Purchase prices are stated in terms of percentage of par.

Transaction Tranche CUSIP Settlement Date of

Purchase by

Fannie Mae

Initial Unpaid

Principal Balance

Purchase

Price (%

of Par)

Seller to

Fannie Mae

FFMER 2007-4 1M3 59025CAK6 June 26, 2007 $12,327,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

FFMER 2007-5 1A 59025RAW7 October 10, 2007 $241,175,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

FFML 2006-FF18 A1 32029AAA5 December 28, 2006 $689,394,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

FFML 2007-FF2 A1 32029GAA2 February 28, 2007 $1,021,839,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

INDX 2005-AR33 2A1 45660L4Y2 December 29, 2005 $191,511,000.00 100.8438 Merrill Lynch

Government

Securities, Inc.

$43,361,000.00 100.9219

INDX 2006-AR7 2A1 45661ECY8 March 30, 2006 $341,217,000.00 101.1094 Merrill Lynch

Government

Securities, Inc.

INDX 2007-FLX4 1A1 456687AA0 May 30, 2007 $127,861,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

INDX 2007-FLX5 1A1 45669WAA4 June 29, 2007 $96,711,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

INDX 2007-FLX6 1A1 45670PAA6 July 31, 2007 $94,391,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

MANA 2007-A1 A1 59023MAA8 February 9, 2007 $68,226,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

MANA 2007-A2 A2A 59024FAB0 March 30, 2007 $165,226,000.00 99.9766 Merrill Lynch

Government

Securities, Inc.

MLMI 2005-A8 A2B1 59020UP90 November 15, 2005 $175,884,832.29 100.0000 Merrill Lynch

Government

Securities, Inc.

MLMI 2005-HE3 A1A 59020UY66 December 28, 2005 $335,591,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

MLMI 2006-A3 IIA1 59023CAB8 May 31, 2006 $89,730,000.00 100.1680 Merrill Lynch

Government

Securities, Inc.

MLMI 2006-AHL1 A1 590210AA8 June 29, 2006 $160,748,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

MLMI 2006-AR1 A1 59020VAS2 April 27, 2006 $333,038,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

MLMI 2006-FF1 A1 59023WAH1 December 27, 2006 $1,098,020,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

MLMI 2006-FM1 A1 59021AAP3 June 30, 2006 $204,693,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

Transaction Tranche CUSIP Settlement Date of

Purchase by

Fannie Mae

Initial Unpaid

Principal Balance

Purchase

Price (%

of Par)

Seller to

Fannie Mae

MLMI 2006-MLN1 A1 59023AAA4 September 29, 2006 $316,858,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

MLMI 2006-OPT1 A1 59022VAA9 September 26, 2006 $469,721,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

MLMI 2006-RM2 A1A 590216AA5 May 31, 2006 $411,649,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

MLMI 2006-RM3 A1A 590217AA3 June 29, 2006 $227,029,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

MLMI 2006-WMC1 A1A 59020U4L6 February 14, 2006 $419,318,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

MLMI 2006-WMC2 A1 59020U6H3 March 30, 2006 $493,651,000.00 100.0000 Merrill Lynch

Government

Securities, Inc.

OOMLT 2007-1 IA1 68400DAA2 January 24, 2007 $259,610,000.00 100.0000 Lehman

Brothers, Inc.

170. Table 13 reflects each of Freddie Mac’s purchases of the Certificates:

Table 13

Transaction Tranche CUSIP Settlement Date of

Purchase by

Freddie Mac

Initial Unpaid

Principal Balance

Purchase

Price (%

of Par)

Seller to

Freddie Mac

ARSI 2006-M1 A1 04012MAM1 June 28, 2006 $1,401,905,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

CBASS 2006-CB8 A1 1248P1AA2 October 30, 2006 $183,951,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

FFMER 2007-H1 1A1 59025TAA1 October 9, 2007 $295,640,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

FFML 2005-FF12 A1 32027NXS5 December 28, 2005 $663,543,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

FFML 2007-FF1 A1 32028TAA5 January 26, 2007 $608,774,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

FMIC 2006-3 1A 316599AA7 October 27, 2006 $221,277,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

INDX 2006-AR5 1A1 45661ECK8 March 31, 2006 $111,172,000.00 100.4063 Merrill Lynch,

Pierce, Fenner

& Smith

MANA 2007-A2 A1 59024FAA2 March 30, 2007 $180,475,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

MANA 2007-A3 A1 59024HAA8 April 30, 2007 $189,695,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

Transaction Tranche CUSIP Settlement Date of

Purchase by

Freddie Mac

Initial Unpaid

Principal Balance

Purchase

Price (%

of Par)

Seller to

Freddie Mac

MLMI 2005-A8 A2A 59020UP82 November 16, 2005 $182,558,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

MLMI 2005-AR1 A2 59020UF67 September 29, 2005 $250,727,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

MLMI 2005-HE2 A1A 59020UR72 November 30, 2005 $236,060,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

MLMI 2005-HE2 A1B 59020UR80 November 30, 2005 $59,015,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

MLMI 2006-AF2 AV1 59023NAA6 October 31, 2006 $125,408,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

MLMI 2006-HE1 A1 59020U2Z7 February 7, 2006 $355,063,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

MLMI 2006-HE4 A1 59023EAA6 July 25, 2006 $125,624,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

MLMI 2006-HE5 A1 59022QAA0 September 28, 2006 $169,018,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

MLMI 2006-HE6 A1 59023XAA4 December 28, 2006 $250,830,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

MLMI 2006-RM1 A1 59020U5B7 March 21, 2006 $171,181,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

MLMI 2006-RM4 A1 59023QAA9 September 27, 2006 $176,227,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

MLMI 2006-RM5 A1 59023FAS4 October 27, 2006 $138,699,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

MLMI 2007-HE1 A1 59024EAA5 March 8, 2007 $354,933,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

MLMI 2007-HE2 A1 59024LAA9 March 30, 2007 $431,956,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

MLMI 2007-MLN1 A1 59024UAA9 April 26, 2007 $415,943,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

OOMLT 2007-1 IA2 68400DAB0 January 24, 2007 $259,609,000.00 100.0000 Lehman

Brothers

OWNIT 2005-4 A1 69121PAT0 October 28, 2005 $285,517,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

OWNIT 2005-5 A1 69121PBR3 December 28, 2005 $205,391,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

OWNIT 2006-1 AV 69121PDB6 January 30, 2006 $225,112,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

100

Transaction Tranche CUSIP Settlement Date of

Purchase by

Freddie Mac

Initial Unpaid

Principal Balance

Purchase

Price (%

of Par)

Seller to

Freddie Mac

OWNIT 2006-2 A1 69121PDC4 March 9, 2006 $221,310,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

OWNIT 2006-3 A1 69121PDU4 April 13, 2006 $180,115,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

OWNIT 2006-4 A1 69121QAA9 June 26, 2006 $243,564,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

OWNIT 2006-5 A1B 69121EAB4 July 27, 2006 $27,738,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

OWNIT 2006-5 A1A 69121EAA6 July 27, 2006 $110,953,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

OWNIT 2006-6 A1 69121TAA3 September 28, 2006 $113,153,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

OWNIT 2006-7 A1 69121UAA0 November 3, 2006 $184,746,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

SURF 2005-AB3 A1A 84751PJD2 December 28, 2005 $135,861,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

SURF 2005-BC3 A1A 84751PGU7 September 29, 2005 $302,990,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

SURF 2005-BC4 A1A 84751PHR3 December 20, 2005 $470,632,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

SURF 2006-AB2 A1 84751VAA4 May 31, 2006 $194,773,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

SURF 2006-AB3 A1 84751XAA0 September 26, 2006 $190,723,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

SURF 2006-BC1 A1 84751PJX8 February 21, 2006 $583,827,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

SURF 2006-BC2 A1 84751PLK3 March 31, 2006 $173,248,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

SURF 2006-BC3 A1 84751WAA2 June 27, 2006 $384,110,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

SURF 2006-BC4 A1 84751YAA8 September 27, 2006 $439,858,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

SURF 2006-BC5 A1 84751NAA2 November 28, 2006 $258,105,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

SURF 2007-AB1 A1 84752CAA5 March 26, 2007 $127,954,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

SURF 2007-BC1 A1 84752BAA7 January 24, 2007 $294,133,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

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Transaction Tranche CUSIP Settlement Date of

Purchase by

Freddie Mac

Initial Unpaid

Principal Balance

Purchase

Price (%

of Par)

Seller to

Freddie Mac

SURF 2007-BC2 A1 84752EAA1 April 24, 2007 $174,640,000.00 100.0000 Merrill Lynch,

Pierce, Fenner

& Smith

171. The statements and assurances in the Registration Statements regarding the credit

quality and characteristics of the mortgage loans underlying the GSE Certificates, and the

origination and underwriting practices pursuant to which the mortgage loans were originated,

which were summarized in such documents, were material to a reasonable investor’s decision to

purchase the GSE Certificates.

172. The false statements of material facts and omissions of material facts in the

Registration Statements, including the Prospectuses and Prospectus Supplements, directly caused

Fannie Mae and Freddie Mac to suffer billions of dollars in damages, including, without

limitation, the depreciation in the value of the securities. The mortgage loans underlying the

GSE Certificates experienced defaults and delinquencies at a much higher rate than they would

have had the loan originators adhered to the underwriting guidelines set forth in the Registration

Statements, and the payments to the trusts were therefore much lower than they would have been

had the loans been underwritten as described in the Registration Statements.

173. Fannie Mae’s and Freddie Mac’s losses have been much greater than they would

have been if the mortgage loans had the credit quality represented in the Registration Statements.

174. Merrill Lynch’s misstatements and omissions in the Registration Statements

regarding the true characteristics of the loans were the proximate cause of Fannie Mae’s and

Freddie Mac’s losses relating to their purchase of the GSE Certificates.

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175. Based upon sales of the Certificates or similar certificates in the secondary

market, Merrill Lynch proximately caused billions of dollars in damages to Fannie Mae and

Freddie Mac in an amount to be determined at trial.

FIRST CAUSE OF ACTION

Violation of Section 11 of the Securities Act of 1933

(Against Defendants Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner &

Smith, Merrill Lynch Government Securities, Matthew Whalen; Brian T. Sullivan;

Michael M. McGovern; Donald J. Puglisi; Paul Park; and Donald C. Han)

176. Plaintiff realleges each allegation in paragraphs 1 through 131 above as well as

paragraphs 163 through 175 as if fully set forth herein, except to the extent that Plaintiff

expressly excludes any allegation that could be construed as alleging fraud.

177. This claim is brought by Plaintiff pursuant to Section 11 of the Securities Act of

1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE

Certificates issued pursuant to the Registration Statements for the securities listed in paragraph 2.

178. This claim is predicated upon Defendants Merrill Lynch, Pierce, Fenner &

Smith’s and Merrill Lynch Government Securities’ strict liability for making false and materially

misleading statements in each of the Registration Statements for the Securitizations and for

omitting facts necessary to make the facts stated therein not misleading. Defendant Merrill

Lynch Mortgage Investors and the Individual Defendants are strictly liable for making false and

materially misleading statements in the Registration Statements filed by Defendant Merrill

Lynch Mortgage Investors, which are applicable to 62 of the 72 Securitizations (as specified in

Table 2, supra at paragraph 37), and for omitting facts necessary to make the facts stated therein

not misleading.

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179. Defendant Merrill Lynch, Pierce, Fenner & Smith served as underwriter of each

of the Securitizations, and sold 47 of the Certificates to Freddie Mac, and as such, is liable for

the misstatements and omissions in the Registration Statements under Section 11 of the

Securities Act.

180. Defendant Merrill Lynch Government Securities sold 39 of the Certificates to

Fannie Mae, and as such, is liable for the misstatements and omission in the Registration

Statements under Section 11 of the Securities Act.

181. Defendant Merrill Lynch Mortgage Investors filed three Registration Statements

under which 62 of the 72 Securitizations were carried out. As depositor, Defendant Merrill

Lynch Mortgage Investors was the issuer of the GSE Certificates issued pursuant to the

Registration Statements they filed within the meaning of Section 2(a)(4) of the Securities Act, 15

U.S.C. § 77b(a)(4), and in accordance with Section 11(a), 15 U.S.C. § 77k(a). As such, they are

liable for the misstatements and omissions in those Registration Statements under Section 11 of

the Securities Act.

182. At the time Defendant Merrill Lynch Mortgage Investors filed three Registration

Statements applicable to 62 of the Securitizations, the Individual Defendants were officers and/or

directors of Merrill Lynch Mortgage Investors. In addition, the Individual Defendants signed

those Registration Statements and either signed or authorized another to sign on their behalf the

amendments to those Registration Statements. As such, the Individual Defendants are liable for

the misstatements and omissions in those Registration Statements under Section 11 of the

Securities Act.

183. At the time that they became effective, each of the Registration Statements

contained material misstatements of fact and omitted information necessary to make the facts

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stated therein not misleading, as set forth above. The facts misstated or omitted were material to

a reasonable investor reviewing the Registration Statements.

184. The untrue statements of material facts and omissions of material fact in the

Registration Statements are set forth above in Section IV and pertain to compliance with

underwriting guidelines, occupancy status, loan-to-value ratios, and the accuracy of the assigned

credit ratings.

185. Fannie Mae and Freddie Mac purchased or otherwise acquired the GSE

Certificates pursuant to the false and misleading Registration Statements. Fannie Mae and

Freddie Mac made these purchases in the primary market. At the time they purchased the GSE

Certificates, Fannie Mae and Freddie Mac did not know of the facts concerning the false and

misleading statements and omissions alleged herein, and if the GSEs would have known those

facts, they would not have purchased the GSE Certificates.

186. Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Government Securities,

owed to Fannie Mae, Freddie Mac, and other investors a duty to make a reasonable and diligent

investigation of the statements contained in the Registration Statements at the time they became

effective to ensure that such statements were true and correct and that there were no omissions of

material facts required to be stated in order to make the statements contained therein not

misleading. Merrill Lynch Mortgage Investors and the Individual Defendants owed the same

duty with respect to the three Registration Statements that they signed, which are applicable to

62 of the Securitizations.

187. Merrill Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith,

Merrill Lynch Government Securities, and the Individual Defendants did not exercise such due

diligence and failed to conduct a reasonable investigation. In the exercise of reasonable care,

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these Defendants should have known of the false statements and omissions contained in or

omitted from the Registration Statements filed in connection with the Securitizations, as set forth

herein. In addition, Merrill Lynch Mortgage Investors, though subject to strict liability without

regard to whether it performed diligence, also failed to take reasonable steps to ensure the

accuracy of the representations.

188. Fannie Mae and Freddie Mac sustained substantial damages as a result of the

misstatements and omissions in the Registration Statements.

189. The time period from April 10, 2009 through August 30, 2011 has been tolled for

statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae,

Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Mortgage Investors, Merrill Lynch & Co,

Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial,

Bank of America Corporation, and Bank of America, N.A. In addition, this action is brought

within three years of the date that FHFA was appointed as Conservator of Fannie Mae and

Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(12).

190. By reason of the conduct herein alleged, Merrill Lynch Mortgage Investors,

Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities, and the Individual

Defendants are jointly and severally liable for their wrongdoing in connection with the depositor

Defendant Registration Statements.

106

SECOND CAUSE OF ACTION

Violation of Section 12(a)(2) of the Securities Act of 1933

(Against Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities,

and Merrill Lynch Mortgage Investors)

191. Plaintiff realleges each allegation in paragraphs 1 through 131 above as well as

paragraphs 163 through 175 as if fully set forth herein, except to the extent that Plaintiff

expressly excludes any allegation that could be construed as alleging fraud.

192. This claim is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities

Act of 1933 and is asserted on behalf of Fannie Mae and Freddie Mac, which purchased the GSE

Certificates issued pursuant to the Registration Statements in the Securitizations listed in

paragraph 2.

193. This claim is predicated upon Merrill Lynch, Pierce, Fenner & Smith’s and

Merrill Lynch Government Securities’ negligence for making false and materially misleading

statements in the Prospectuses (as supplemented by the Prospectus Supplements, hereinafter

referred to in this Section as “Prospectuses”) for each of the Securitizations listed in paragraph 2,

other than the OOMLT 2007-1 Securitization, for which neither Merrill Lynch, Pierce, Fenner &

Smith nor Merrill Lynch Government Securities was the entity that sold the Certificates to the

GSEs and as to which the allegations in this section do not apply. Defendant Merrill Lynch

Mortgage Investors acted negligently in making false and materially misleading statements in the

Prospectus for the Securitizations carried out under the Registration Statements they filed, which

were applicable to 62 Securitizations.

194. Merrill Lynch, Pierce, Fenner & Smith offered and sold the GSE Certificates to

Freddie Mac, and Merrill Lynch Government Securities offered and sold the GSE Certificates to

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Fannie Mae by means of the Prospectuses, which contained untrue statements of material facts

and omitted to state material facts necessary to make the statements, in light of the circumstances

under which they were made, not misleading. Merrill Lynch, Pierce, Fenner & Smith and

Merrill Lynch Government Securities reviewed and participated in drafting the Prospectuses.

195. Merrill Lynch, Pierce, Fenner & Smith successfully solicited Freddie Mac’s

purchases of the GSE Certificates. Merrill Lynch Government Securities successfully solicited

Fannie Mae’s purchases of the GSE Certificates. As the sellers, Merrill Lynch, Pierce, Fenner &

Smith and Merrill Lynch Government Securities obtained substantial commissions based upon

the amount received from the sale of the Certificates.

196. Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Government Securities

offered the GSE Certificates for sale, sold them, and distributed them by the use of means or

instruments of transportation and communication in interstate commerce.

197. Merrill Lynch Mortgage Investors is prominently identified in the Prospectuses

for the Securitizations carried out under the Registration Statements that they filed. These

Prospectuses were the primary documents each used to sell Certificates for the 62 Securitizations

under those Defendant Registration Statements. Merrill Lynch Mortgage Investors offered the

Certificates publically and actively solicited their sale, including to Fannie Mae and Freddie Mac

the GSE Certificates.

198. With respect to the 62 Securitizations for which they filed Registration

Statements, Merrill Lynch Mortgage Investors offered the GSE Certificates pursuant to Fannie

Mae and Freddie Mac by means of the Prospectuses which contained untrue statements of

material facts and omitted to state material facts necessary to make the statements, in light of the

108

circumstances under which they were made, not misleading. Upon information and belief,

Merrill Lynch Mortgage Investors reviewed and participated in drafting the Prospectuses.

199. Merrill Lynch Mortgage Investors offered the GSE Certificates for sale by the use

of means or instruments of transportation and communication in interstate commerce.

200. Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities,

and Merrill Lynch Mortgage Investors actively participated in the solicitation of the GSEs’

purchase of the GSE Certificates, and did so in order to benefit themselves. Such solicitation

included assisting in preparing the Registration Statements, filing the Registration Statements,

and assisting in marketing the GSE Certificates.

201. Each of the Prospectuses contained material misstatements of fact and omitted

information necessary to make the facts stated therein not misleading. The facts misstated and

omitted were material to a reasonable investor reviewing the Prospectuses.

202. The untrue statements of material facts and omissions of material fact in the

Registration Statements, which include the Prospectuses, are set forth above in Section IV, and

pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and

the accuracy of the assigned credit ratings.

203. Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities,

and Merrill Lynch Mortgage Investors offered and sold the GSE Certificates offered pursuant to

the Registration Statements directly to Fannie Mae and Freddie Mac pursuant to the false and

misleading Prospectuses.

204. Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Government Securities

owed to Fannie Mae and Freddie Mac, as well as to other investors in these trusts, a duty to make

a reasonable and diligent investigation of the statements contained in the Prospectuses, to ensure

109

that such statements were true, and to ensure that there was no omission of a material fact

required to be stated in order to make the statements contained therein not misleading. Merrill

Lynch Mortgage Investors owed the same duty with respect to the Prospectuses for the

Securitizations carried out under the three Registration Statements filed by them.

205. Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities,

and Merrill Lynch Mortgage Investors failed to exercise such reasonable care. These defendants

in the exercise of reasonable care should have known that the Prospectuses contained untrue

statements of material facts and omissions of material facts at the time of the Securitizations as

set forth above.

206. In contrast, Fannie Mae and Freddie Mac did not know, and in the exercise of

reasonable diligence could not have known, of the untruths and omissions contained in the

Prospectuses at the time they purchased the GSE Certificates. If the GSEs would have known of

those untruths and omissions, they would not have purchased the GSE Certificates.

207. Fannie Mae and Freddie Mac acquired the GSE Certificates in the primary market

pursuant to the Prospectuses.

208. Fannie Mae and Freddie Mac sustained substantial damages in connection with

their investments in the GSE Certificates and have the right to rescind and recover the

consideration paid for the GSE Certificates, with interest thereon.

209. The time period from April 10, 2009 through August 30, 2011 has been tolled for

statute of limitations purposes by virtue of a tolling agreement entered into between Fannie Mae,

Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Mortgage Investors, Merrill Lynch & Co,

Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial,

Bank of America Corporation, and Bank of America, N.A. In addition, this action is brought

110

within three years of the date that FHFA was appointed as Conservator of Fannie Mae and

Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(12).

THIRD CAUSE OF ACTION

Violation of Section 15 of the Securities Act of 1933

(Against Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First

Franklin Financial, Merrill Lynch & Co., and the Individual Defendants)

210. Plaintiff realleges each allegation in paragraphs 1 through 131 above as well as

paragraphs 163 through 175 as if fully set forth herein, except to the extent that Plaintiff

expressly excludes any allegation that could be construed as alleging fraud.

211. This claim is brought under Section 15 of the Securities Act of 1933, 15 U.S.C.

§77o (“Section 15”), against Merrill Lynch & Co., Merrill Lynch Mortgage Lending, Merrill

Lynch Mortgage Capital, First Franklin Financial, and the Individual Defendants for controlling-

person liability with regard to the Section 11 and Section 12(a)(2) causes of actions set forth

above.

212. The Individual Defendants at all relevant times participated in the operation and

management of Merrill Lynch Mortgage Investors and their related subsidiaries, and conducted

and participated, directly and indirectly, in the conduct of Merrill Lynch Mortgage Investors’

business affairs. Defendant Matthew Whalen was the President and Chairman of the Board of

Director of Merrill Lynch Mortgage Investors. Defendant Brian T. Sullivan was the Vice

President, Treasurer, and Controller of Merrill Lynch Mortgage Investors. Defendant Michael

M. McGovern was a Director of Merrill Lynch Mortgage Investors. Defendant Donald J. Puglisi

served as a Director of Merrill Lynch Mortgage Investors. Defendant Paul Park served as

President and Chairman of the Board of Directors of Merrill Lynch Mortgage Investors.

Defendant Donald C. Han was the Treasurer of Merrill Lynch Mortgage Investors.

111

213. Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,

and First Franklin Financial were the sponsors for 60 of the Securitizations carried out under the

three Registration Statements filed by Merrill Lynch Mortgage Investors, and culpably

participated in the violations of Sections 11 and 12(a)(2) set forth above with respect to the

offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage

loans to be securitized, determining the structure of the Securitizations, selecting Merrill Lynch

Mortgage Investors as the special purpose vehicle, and selecting Merrill Lynch, Pierce, Fenner &

Smith as underwriter. In their roles as sponsor, Merrill Lynch Mortgage Lending, Merrill Lynch

Mortgage Capital, and First Franklin Financial knew and intended that the mortgage loans they

purchased would be sold in connection with the securitization process, and that certificates

representing the ownership interests of investors in the cashflows would be issued by the relevant

trusts.

214. Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,

and First Franklin Financial also acted as the seller of the mortgage loans for 60 the

Securitizations carried out under the three Registration Statements filed by Defendant Merrill

Lynch Mortgage Investors, in that they conveyed such mortgage loans to Merrill Lynch

Mortgage Investors pursuant to a mortgage loan purchase agreement, mortgage loan sale and

assignment agreement, pooling and servicing agreement, or other substantially similar

agreement.

215. Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,

and First Franklin Financial also controlled all aspects of the business of Merrill Lynch Mortgage

Investors, as Merrill Lynch Mortgage Investors was merely a special purpose entity created for

the purpose of acting as a pass-through for the issuance of the Certificates. In addition, because

112

of their positions as sponsors, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage

Capital, and First Franklin Financial were able to, and did in fact, control the contents of the

three Registration Statements filed by Merrill Lynch Mortgage Investors, including the

Prospectuses and Prospectus Supplements, which pertained to 62 Securitizations and which

contained material misstatements of fact and omitted facts necessary to make the facts stated

therein not misleading.

216. Defendant Merrill Lynch & Co. controlled the business operations of Merrill

Lynch Mortgage Investors, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch

Government Securities. Defendant Merrill Lynch & Co. is the corporate parent of Merrill Lynch

Mortgage Investors, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First

Franklin Financial, Merrill Lynch, Pierce, Fenner & Smith, and Merrill Lynch Government

Securities. As the sole corporate parent of Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch

Government Securities and Merrill Lynch Mortgage Investors, Merrill Lynch & Co. had the

practical ability to direct and control the actions of Merrill Lynch, Pierce, Fenner & Smith,

Merrill Government Securities, and Merrill Lynch Mortgage Investors in issuing and selling the

Certificates, and in fact, exercised such direction and control over the activities of Merrill Lynch,

Pierce, Fenner & Smith, Merrill Lynch Government Securities, and Merrill Lynch Mortgage

Investors in connection with the issuance and sale of the Certificates.

217. Merrill Lynch & Co. expanded its share of the residential mortgage-backed

securitization market in order to increase revenue and profits. The push to securitize large

volumes of mortgage loans contributed to the inclusion of untrue statements of material facts and

omissions of material facts in the Registration Statements.

113

218. Merrill Lynch & Co. culpably participated in the violations of Section 11 and

12(a)(2) set forth above. It oversaw the actions of its subsidiaries and allowed them to

misrepresent the mortgage loans’ characteristics in the Registration Statements and established

special-purpose financial entities such as Merrill Lynch Mortgage Investors and the issuing trusts

to serve as conduits for the mortgage loans.

219. Merrill Lynch & Co, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage

Capital, First Franklin Financial, and the Individual Defendants are controlling persons within

the meaning of Section 15 by virtue of their actual power over, control of, ownership of, and/or

directorship of Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Government Securities,

and Merrill Lynch Mortgage Investors at the time of the wrongs alleged herein and as set forth

herein, including their control over the content of the Registration Statements.

220. Fannie Mae and Freddie Mac purchased in the primary market Certificates issued

pursuant to the Registration Statements, including the Prospectuses and Prospectus Supplements,

which, at the time they became effective, contained material misstatements of fact and omitted

facts necessary to make the facts stated therein not misleading. The facts misstated and omitted

were material to a reasonable investor reviewing the Registration Statements.

221. Fannie Mae and Freddie Mac did not know of the misstatements and omissions in

the Registration Statements; had the GSEs known of those misstatements and omissions, they

would not have purchased the GSE Certificates.

222. Fannie Mae and Freddie Mac have sustained damages as a result of the

misstatements and omissions in the Registration Statements, for which they are entitled to

compensation.

114

223. The time period from April 10, 2009 through August 30, 2011 has been tolled for

statutes of limitations purposes by virtue of a tolling agreement entered into between Fannie

Mae, Merrill Lynch, Pierce, Fenner & Smith, Merrill Lynch Mortgage Investors, Merrill Lynch

& Co, Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin

Financial, Bank of America Corporation, and Bank of America, N.A. In addition, this action is

brought within three years of the date that FHFA was appointed as Conservator of Fannie Mae

and Freddie Mac and is thus timely under 12 U.S.C. § 4617(b)(12).

FOURTH CAUSE OF ACTION

Primary Violations of the Virginia Securities Act

(Against Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Mortgage Investors)

224. Plaintiff realleges each allegation in paragraphs 1 through 131 above as well as

paragraphs 163 through 175 as if fully set forth herein, except to the extent that Plaintiff

expressly excludes any allegation that could be construed as alleging fraud.

225. This claim is brought by Plaintiff pursuant to Section 13.1-522(A)(ii) of the

Virginia Code and is asserted on behalf of Freddie Mac. The allegations set forth below in this

cause of action pertain to only those GSE Certificates identified in Table 13 above that were

purchased by Freddie Mac on or after September 6, 2006.

226. This claim is predicated upon Merrill Lynch, Pierce, Fenner & Smith’s negligence

for making false and materially misleading statements in the Prospectuses (as supplemented by

the Prospectus Supplements, hereinafter referred to in this Section as “Prospectuses”) for each of

the Securitizations listed in paragraph 2, other than the OOMLT 2007-1 Securitization, for which

Merrill Lynch, Pierce, Fenner & Smith was not the entity that sold the Certificates to Freddie

Mac and as to which the allegations in this section do not apply. Defendant Merrill Lynch

Mortgage Investors acted negligently in making false and materially misleading statements in the

115

Prospectus for the Securitizations carried out under the Registration Statements they filed, which

were applicable to 62 Securitizations.

227. Merrill Lynch, Pierce, Fenner & Smith offered and sold the GSE Certificates to

Freddie Mac by means of the Prospectuses, which contained untrue statements of material facts

and omitted to state material facts necessary to make the statements, in light of the circumstances

under which they were made, not misleading. Merrill Lynch, Pierce, Fenner & Smith reviewed

and participated in drafting the Prospectuses.

228. Merrill Lynch, Pierce, Fenner & Smith successfully solicited Freddie Mac’s

purchases of the GSE Certificates. As the seller, Merrill Lynch, Pierce, Fenner & Smith

obtained substantial commissions based upon the amount received from the sale of the

Certificates.

229. Merrill Lynch, Pierce, Fenner & Smith offered the GSE Certificates for sale, sold

them and distributed them to Freddie Mac in the State of Virginia.

230. Merrill Lynch Mortgage Investors is prominently identified in the Prospectuses

for the Securitizations carried out under the Registration Statements that they filed. These

Prospectuses were the primary documents each used to sell Certificates for the 62 Securitizations

under those Defendant Registration Statements. Merrill Lynch Mortgage Investors offered the

Certificates publically and actively solicited their sale, including to Freddie Mac the GSE

Certificates.

231. With respect to the 62 Securitizations for which they filed Registration

Statements, Merrill Lynch Mortgage Investors offered the GSE Certificates pursuant to Freddie

Mac by means of the Prospectuses which contained untrue statements of material facts and

omitted to state material facts necessary to make the statements, in light of the circumstances

116

under which they were made, not misleading. Upon information and belief, Merrill Lynch

Mortgage Investors reviewed and participated in drafting the Prospectuses.

232. Both of Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Mortgage

Investors actively participated in the solicitation of Freddie Mac’s purchase of the GSE

Certificates, and did so in order to benefit themselves. Such solicitation included assisting in

preparing the Registration Statements, filing the Registration Statements, and assisting in

marketing the GSE Certificates.

233. Each of the Prospectuses contained material misstatements of fact and omitted

information necessary to make the facts stated therein not misleading. The facts misstated and

omitted were material to a reasonable investor reviewing the Prospectuses.

234. The untrue statements of material facts and omissions of material fact in the

Registration Statements, which include the Prospectuses, are set forth above in Section IV, and

pertain to compliance with underwriting guidelines, occupancy status, loan-to-value ratios, and

the accuracy of the assigned credit ratings.

235. Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Mortgage Investors

offered and sold the GSE Certificates offered pursuant to the Registration Statements directly to

Freddie Mac, pursuant to the false and misleading Prospectuses.

236. Merrill Lynch, Pierce, Fenner & Smith owed to Freddie Mac, as well as to other

investors in these trusts, a duty to make a reasonable and diligent investigation of the statements

contained in the Prospectuses, to ensure that such statements were true, and to ensure that there

was no omission of a material fact required to be stated in order to make the statements

contained therein not misleading. Merrill Lynch Mortgage Investors owed the same duty with

117

respect to the Prospectuses for the Securitizations carried out under the three Registration

Statements it filed.

237. Merrill Lynch, Pierce, Fenner & Smith and Merrill Lynch Mortgage Investors

failed to exercise such reasonable care. These defendants in the exercise of reasonable care

should have known that the Prospectuses contained untrue statements of material facts and

omissions of material facts at the time of the Securitizations as set forth above.

238. In contrast, Freddie Mac did not know, and in the exercise of reasonable diligence

could not have known, of the untruths and omissions contained in the Prospectuses at the time it

purchased the GSE Certificates. If Freddie Mac would have known of those untruths and

omissions, it would not have purchased the GSE Certificates.

239. Freddie Mac sustained substantial damages in connection with its investments in

the GSE Certificates and has the right to rescind and recover the consideration paid for the GSE

Certificates, with interest thereon.

240. This action is brought within three years of the date that FHFA was appointed as

Conservator of Freddie Mac, and is thus timely under 12 U.S.C. § 4617(b)(12).

FIFTH CAUSE OF ACTION

Violation of Section 13.1-522(C) of the Virginia Code

(Against Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First

Franklin Financial, Merrill Lynch & Co., and the Individual Defendants)

241. Plaintiff realleges each allegation in paragraphs 1 through 131 above as well as

paragraphs 163 through 175 as if fully set forth herein, except to the extent that Plaintiff

expressly excludes any allegation that could be construed as alleging fraud.

242. This claim is brought under Section 13.1-522(C) of the Virginia Code and is

asserted on behalf of Freddie Mac. The allegations set forth below in this cause of action pertain

118

only to those GSE Certificates identified in Table 13 above that were purchased by Freddie Mac

on or after September 6, 2006. This claim is brought against Merrill Lynch & Co., Merrill

Lynch Mortgage Lending, Merrill Lynch Mortgage Capital, First Franklin Financial, and the

Individual Defendants for controlling-person liability with regard to the Fourth Cause of Action

set forth above.

243. The Individual Defendants at all relevant times participated in the operation and

management of Merrill Lynch Mortgage Investors and its related subsidiaries, and conducted and

participated, directly and indirectly, in the conduct of Merrill Lynch Mortgage Investors’

business affairs. Defendant Matthew Whalen was the President and Chairman of the Board of

Director of Merrill Lynch Mortgage Investors. Defendant Brian T. Sullivan was the Vice

President, Treasurer, and Controller of Merrill Lynch Mortgage Investors. Defendant Michael

M. McGovern was a Director of Merrill Lynch Mortgage Investors. Defendant Donald J. Puglisi

served as a Director of Merrill Lynch Mortgage Investors. Defendant Paul Park served as

President and Chairman of the Board of Directors of Merrill Lynch Mortgage Investors.

Defendant Donald C. Han was the Treasurer of Merrill Lynch Mortgage Investors.

244. Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,

and First Franklin Financial were the sponsors for 60 of the Securitizations carried out under the

three Registration Statements filed by Merrill Lynch Mortgage Investors, and culpably

participated in the violations of Section 13.1-522(A)(ii) set forth above with respect to the

offering of the GSE Certificates by initiating these Securitizations, purchasing the mortgage

loans to be securitized, determining the structure of the Securitizations, selecting Merrill Lynch

Mortgage Investors as the special purpose vehicle, and selecting Merrill Lynch, Pierce, Fenner &

Smith as underwriter. In their roles as sponsor, Merrill Lynch Mortgage Lending, Merrill Lynch

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Mortgage Capital, and First Franklin Financial knew and intended that the mortgage loans they

purchased would be sold in connection with the securitization process, and that certificates

representing the ownership interests of investors in the cashflows would be issued by the relevant

trusts.

245. Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,

and First Franklin Financial also acted as the seller of the mortgage loans for 60 the

Securitizations carried out under the three Registration Statements filed by Defendant Merrill

Lynch Mortgage Investors, in that they conveyed such mortgage loans to Merrill Lynch

Mortgage Investors pursuant to a mortgage loan purchase agreement, mortgage loan sale and

assignment agreement, pooling and servicing agreement, or other substantially similar

agreement.

246. Defendants Merrill Lynch Mortgage Lending, Merrill Lynch Mortgage Capital,