Credit Default Swaps: Effect on Foreclosure Litigation

The actual certificates of asset backed securities (ABS) and in particular mortgage backed securities (MBS) were sold to investors. And they weren’t just sold, they “sold forward.” This is a form of short selling wherein the investment bank sells the security first and THEN waits until it can get the underlying mortgage and note at the cheapest possible price to fulfill the description in the indenture of  the mortgage backed security (bond). It is exactly the reverse of what is portrayed by government and the press. They say it starts with the loan — not true. They say first the loan then the pooling, then the securitizing, then the sale to investors. It is exactly the reverse.

The Toxic assets everyone is talking about are NEITHER the MBS nor the mortgages and notes. The toxic assets are credit default swaps — which are a device by which anyone can receive a fee in exchange for their promise to pay if the underlying obligation goes into default. Under the current and old rules which Obama has now proposed changing, if you wanted to sell a credit default swaps you were not required to have any amount of capital or reserves. The pizza delivery kid could have sold these. AIG sold hundreds of billions of these without the capital to back it up. Bear Stearns and the rest of the investment banks were selling like crazy to each other in order to artificially raise reported earnings and thus raise the price of their stock.

So the TARP money (Troubled Asset Relief Program) probably never acquired a single toxic asset unless it did so under subrogation or equitable trust. The insurance products, including credit default swaps and cross collateralization agreements frequently had subrogation clauses. The significance of that is the transfer of interests in credit default swaps was in fact the transfer of an interest in real estate without recording it in accordance with state law. The interest in real estate was the interest in a security instrument wherein the property was real estate. Not even MERS kept track of the trading in CDS or for that matter the secondary trading of MBS.

So for your MERS related claim you have (a) notice (right in the Deed of Trust or Mortgage) to the world that there are going to be transfers off record in violation of state law and (b) withholding the information on the recipients of those interests. Hence at the moment of closing of the “loan” transaction (which I maintain is actually a thinly veiled securities transaction wherein the borrower is the unwitting issuer of a “negotiable” instrument where the instrument is actually (a) non-negotiable and (b) sold without the borrower’s knowledge (identity theft) as an unregulated security under false pretenses to “qualified” investors who be definition had access to the true information but never bothered to use it because of the AAA rating and the AIG insurance.

It is an inescapable conclusion that the mere closing of these “loans” in this manner creates an immediate cloud on title rendering the deed unmarketable. This raises the spectre of claims against the Title Insurance carrier who will no doubt claim that there is no coverage because of fraud. That will be difficult for them to maintain in view of the fact that MERS is right there in the deed, but even if they succeed, they are proving your case in chief.

Tags: bankruptcy, borrower, disclosure, foreclosure defense, foreclosure offense, fraud, Lender Liability, rescission, securitization
Posted in Corruption, Eviction, Modification, securities fraud, Servicer |