Statistics Expert Allowed to Testify in Real Estate Backed Securities Dispute

CMFG Life Insurance Co., et al. v. RBS Securities, Inc., No. 12-cv-037-wmc, U.S. District Court, Western District of Wisconsin; July 23, 2014

Background:

Plaintiffs CMFG Life Insurance Company and its subsidiaries (CUNA Mutual) seek to rescind the purchase of fifteen residential mortgage-backed securities (RMBS) certificates sold to it by defendant RBS Securities (RBS). The RMBS purchases occurred between 2004 and 2007. For each deal, RBS presented CUNA Mutual with documents that disclosed the owner-occupancy rate; the loan-to-value ratio (LTV); a credit rating for each certificate; the combined loan-to-value ratio (CLTV); and the underwriting guidelines to which the originators adhered in approving the underlying mortgages.

The loans backing the RMBS began to default at high rates. CUNA Mutual commissioned a forensic investigation by CoreLogic, Inc. that revealed that the third-party originators had systematically abandoned their underwriting standards when issuing the loans backing the RMBS. It alleges that but for these misrepresentations in the offering documents, it would not have purchased the certificates.

CUNA Mutual subsequently filed numerous claims, including for rescission based on misrepresentation and unjust enrichment.

Real Estate Statistics Expert:

RBS moved to exclude CUNA Mutual’s statistics expert, Dr. Charles Cowan under Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharm., Inc. (509 U.S. 579 [1993]). CUNA Mutual offers Cowan’s testimony to support its theory that RBS misrepresented the LTV and CLTV ratios of the loans underlying the RMBS. Therefore, Cowan would opine, among other things, that appraisals of the underlying properties were artificially inflated, resulting in understated LTV and CLTV ratios.

To support this opinion, CUNA Mutual employed CoreLogic’s ValuePoint 4 automated valuation model, or AVM software, to generate alternative value estimates. Cowan performed statistical analyses of the original appraised values in light of the AVM-generated value estimates. He concluded that the values used to calculate the LTVs and CLTVs were biased in the direction of overvaluation to a 95% statistical likelihood.

RBS argues that statistics expert, Cowan, is not qualified to opine on the accuracy of real estate appraisals because he lacks training, experience or certification in appraisal and in the creation of AVMs.

Admissibility of Real Estate Statistics Expert:

“But this reasoning assumes that Cowan is testifying as an expert in those fields,” U.S. District Judge William M. Conley for the Western District of Wisconsin said. “He is not. His opinion is based on his specialized knowledge as a statistician. This is a discipline in which RBS does not dispute he is qualified. Rather than on individual real estate appraisals or on AVM algorithms. If anything, RBS’s argument seems to imply that a statistician must be an expert not only in statistics but also in the subject matter underlying the data he analyzes. Neither Rule 702 nor Daubert sets such a high bar.”

In RBS’s view, the fact that Cowan relies on the AVM outputs in performing his analysis means he is vouching for the accuracy of those outputs. Consequently, the court said that Cowan cannot opine that the AVM outputs themselves are correct; he lacks the qualifications to offer such an opinion. However, he may use the AVM outputs to perform a statistical analysis, so long as he employs a reliable methodology in that analysis, the judge said.

RBS also argues that the AVM outputs themselves are inadmissible and thus Cowan’s opinions fail for lack of foundation.

“While RBS now argues that the AVM outputs are not data upon which an expert would reasonably rely, it also concedes having itself used ValuePoint4 to produce current property value estimates,” the judge noted. “Provided that it can lay the requisite foundation, the court agrees that CUNA Mutual can offer Dr. Cowan’s testimony. Of course, to lay that foundation, CUNA Mutual will have to provide testimony as to what it retained CoreLogic to do and what information was provided by CoreLogic.”

Finally, RBS contends that Cowan failed to meet Rule 702 requirements because he did not review sufficient facts or data. The judge found RBS presented no evidence Cowan’s statistical analysis is flawed in any way.