KISS – Keep It Simple Stupid: Why Brad Conducts Part of the Workshops

See also provident-bank-v-silverman-super-duper-explanation-of-ucc-transferres-holders-and-holders-in-due-course-and-perfecting-title-to-note-or-mortgage

 KISS – Keep It Simple Stupid

Totaled Cars and Totaled Mortgages – Credit Default Swaps – CDS – 101

By Brad Keiser

OK this article is for those newer readers and tenured Livinglies devotees as well as those who have attended Al Pacino’s(oops I mean Neil Garfield’s ) workshops and are not quite yet fluent in Garfieldeese or Wall Street Pig Latin. You have  heard him rant about derivative securities, credit default swaps, insurance products and co-obligors, etc….and why/how they come into play with the securitization process with respect to the argument that the party bringing the foreclosure action against you has already been paid.  Trial lawyers who use expert witness testimony realize that the success of expert testimony often hinges less on impressing the jury with degrees or credentials of the expert witness than on the ability of the expert witness to effectively communicate with a jury or judge and often simplify complex subject matter and put them into the context of the case at hand. The same is true for lawyers or Pro Se litigants. Allow me to break down the credit default swap elephant into bite size pieces

First, a credit default swap(CDS) can be defined in layman’s terms as “an insurance policy.” The objective of my car insurance policy is to protect a physical asset I own or replace the vehicle if it is totaled without having to take the cash out of my pocket. In the case of my life insurance policy, the benefit is a lump sum of money that theoretically would replace the “income stream” my family depends on if I die. The rationale for insurance is that it is easier for me to budget $500 every six months for car insurance than suddenly have to come up with $30,000 at once to replace my wife’s totaled minivan. In both instances beside the financial benefit I also derive the additional benefit of peace of mind.

In the securitization process, typically the Special Purpose Entity (SPE) or Trust that issued the mortgage backed securities (MBS) purchased an insurance policy (CDS) on the assets they were holding for the same reasons. In the event the mortgage was “totaled” the insurance carrier (we’ll call them AIG in this instance) paid out on the policy and made the SPE or Trust whole so they could continue to pay the investors they sold the securities to their periodic return on investment(ROI). As with the car and life insurance above, there was a similar “non-financial benefit” called peace of mind. The presence of this “insurance” gave the investors in the securities peace of mind and no doubt contributed to the peace of mind of the ratings agencies (Moody’s, Fitch, S&P) who gave these securities AAA ratings. The triggering events in each of the above examples are respectively an accident, a death or a default.


Totaled Car, Totaled Mortgage Pretty Simple Judge

So when my wife totaled the minivan, a vehicle I might add that had a properly RECORDED lien noted on my vehicle title, the insurance carrier issued a check to the bank that held the lien and paid off the note on the car OR put another way satisfied the obligation. The check did not come from me, it came from the insurance company, the bank obviously did not care where the money came from, the obligation was satisfied and the lien on the minivan was released. So did the bank, after getting paid by the insurance company, get to keep the damaged minivan ALSO and take it to an auto auction (READ: foreclosure sale) and keep the proceeds of auctioning off the wrecked minivan?  Noooo… Did I, the owner, of the minivan get to keep the wrecked minivan and sell it for additional $$$ beyond the benefit of the proceeds of the insurance policy paying off the loan at the bank? Noooo…

Based on the terms of the typical auto insurance policy who ends up with the title on the totaled minivan? It sure isn’t the bank that got paid off by the insurance company. The point is that absent someone’s sworn testimony, who can attest to personal knowledge about your specific loan and/or irrefutable evidence that your mortgage was a) not sold or securitized or b) not subject to an “insurance policy” we cannot be sure that the parties in court today have any authority.

KISS – Just win the argument of the day. Judge we are not saying this closing never occurred, we are not saying that a note was never signed; we are not saying the note wasn’t funded. We are saying the  material dispute before the court today is whether or not the parties here today bringing this action have already been paid and/or whether or not they are even the right parties with authority to bring this action against my client… We simply want the case to be heard on the merits.

By the way my wife now drives a monster, gas guzzling Chevy Suburban ,not that I am anti-environment or anything, just protecting the most valuable cargo I have in this world …the Keiser kids.

7 Responses

  1. Brad K. You said – In the securitization process, typically the Special Purpose Entity (SPE) or Trust that issued the mortgage backed securities (MBS) purchased . . .

    an insurance policy (CDS) on the assets they were holding . . . paid out on the policy and made the SPE or Trust whole so they could continue to pay the investors they sold ….

    The assets transferred and were not PURCHASED never SOLD. Asset were aquired and levered to aquire more assets from an FSB. Never were bought and never were sold. See FAS FAB 140.

    How would that affect the insurance angle?


  2. Thats right folks! Keep it Simple…

    Call these folks bluff!

    Keep the burden of proof on Them!

    We are already winning!

    Allan Hennessey

  3. 1. In another Ohio ruling on November 14th, State District Judge Kathleen Mc Donald O’Malley dismissed 32 more foreclosures for lack of “documentation”. Read the ruling /files/89778-78388/Deutsche_Bank_Foreclosure_Ruling.pdf”>Deutsche Ruling, we reported on the Judge Boyko decision in which he dismissed 14 Deutsche Bank foreclosures and then was followed up by Judge Rose throwing out another 27 foreclosures the following day for lack of documentation.

    Thi s will continue to prove to be a huge issue for securitized trusts to properly prove ownership with the legal documentation of these loans. Now, it appears that some homeowners (and judges) have caught on and it is expected that many more of these cases will be thrown out of courts across America.

    While the very question of legality of the trusts’ methods is the one under debate here, the core point of our article series on the matter is that some Federal judges in Ohio are now agreeing that these practices are illegal and putting a stop to foreclosures that employ them.

    Meanwhile we can only presume the lenders’ counsel in these cases played their own version of “Where’s Waldo” all weekend in preparation for their appeals, as they search for the necessary proof of ownership/assignment.
    2. Once homeowners defending their home against foreclosure in court have received additional time by filing a Motion for Extension for Time, the next step is to begin researching their options for the actual defense. But if the bank has committed certain errors in attempting to establish their ability to sue at all, borrowers should hold off on filing their answer until a Motion to Dismiss is decided upon by the judge in the case.

    However, there are only a handful of strong reasons for filing a Motion to Dismiss which can stop foreclosure before the merits of case are even seriously considered. These defenses have much to do with the legal ability of the bank to sue the borrowers in the first place, or its inability to follow the necessary foreclosure laws and comply with notice requirements. But these can often be the most tricky requirements to meet, and any failure can be used against the bank to throw the lawsuit out of court.

    Especially if the homeowners know that their loan has been sold around to various lenders and servicing companies, they should contest who actually owns the mortgage at the time of the foreclosure. Banks may be unable to show an assignment of the loan from one company to the next, especially if the lawsuit is being pursued by a large lender or servicer.

    One clear indication of this deficiency is if the bank does not attach the note or mortgage to the complaint, either attaching a copy or admitting it does not have possession of the note. It is difficult to establish that a contract has been breached between two parties if the party suing for breach of contract can not even produce the original contract. This is the problem banks run into when they attempt to foreclose on a home but have not done the homework necessary to establish their ownership of that mortgage.

    Also, if the borrowers have reason to suspect that the bank did not follow the state and county foreclosure laws dictating how notice of the foreclosure lawsuit must be given, a Motion to Dismiss for Insufficiency of Process may be filed in lieu of an answer to the complaint. Obviously, if the lender has not even fully complied with the requirements to bring a lawsuit in the first place, there is little worth defending, and the homeowners may be able to have the suit thrown out.

    The bank will have to restart the foreclosure process all over again, but having the case thrown out the first time will give borrowers extra time to find alternative solutions to foreclosure. Having filed a successful Motion to Dismiss because of the bank’s attorneys’ mistakes in filing the suit to begin with will also drive up the costs of the foreclosure altogether and may help persuade the mortgage company to come to the negotiating table with a reasonable offer.

    Possibly the best aspect of the Motion to Dismiss is that it will drag out the foreclosure for another few weeks at the most and potentially over a month or more. The courts have stated that defendants do not have to file an answer to the complaint until a Motion to Dismiss has been ruled upon. When borrowers file an extension for time, followed by a Motion to Dismiss, the bank’s attempts to take the home quickly are put on hold. Although this may cost the homeowner more in the long run in interest and late fees, it also provides a much needed opportunity to look into other defenses or methods to save the home.

    For the last few years, the mortgage industry has entered a state of disrepair, with hundreds of lenders going out of business, mortgage securitization firms filing bankruptcy or entering mergers or receiving federal bailouts, and even the nations two largest mortgage buyers, Fannie Mae and Freddie Mac, being nationalized. With all of this going on in addition to an alarming foreclosure crisis, banks may have a difficult time proving they can even sue families for foreclosure. But unless the owners try to have these lawsuits dismissed before they can be ruled upon, banks will continue to be able to steal homes .

    Defending a Foreclosure
    Step 1: Figure Out What You Want
    Step 2: Play By The Rules
    Step 3: Get More Time
    Step 4: Research Your Options
    Step 5: Who Owns the Loan and TILA
    Step 6: Have the Lawsuit Dismissed
    Step 7: Answer the Complaint
    Step 8: The Discovery Process
    Step 9: Summary Judgment
    Step 10: Go to Trial
    Step 11: Lose, Win, or Appeal

  4. Well, on the CDS coverage it will depend….some cover 10%-50% of the loan balance, some may be purchased by the SPV, some may have been purchased by the “lender” who never “sold” the loan, but has BEEN PAID IN FULL by the CDS contract(we need a copy Judge)….which is the next point….”Judge, unless we are allowed to move forward with some discovery, interogatorries, and document production we can’t really ascertain the parties and the facts to this case. I mean the stuff we are asking for, production of the original note and a legitimate validation of the debt should be pretty easy if the parties here in court are the right parties…..absent those basic things it supports our assertions with regard to their authority to bring the action here today…”

  5. Hi Brad:

    Great article. I supposed the Keiser kids have to be protected on their way to basketball practice. Thanks for the explanation.

  6. Very nice simplification, makes it easier to understand.

    I have a few questions that maybe somebody here can answer:

    Does the default swap occur for the entire group of pooled mortgages or only for the individual assets within the pool that fail to perform?

    For example, a piece of my mortgage gets tossed into a mix with a 1000 pieces of other mortgages. The SPE buys a CDS to “insure” it. 100 of the pieces go into default.

    Is the CDS cashed in on the entire thing or only on those 100 pieces?

    will a new “claim” have to be filed on the CDS every time an additional piece fails to perform?

    What percentage of the principle of the typical CDS usually cover?

    At what time is the CDS typically cashed in? at foreclosure? after foreclosure? at delinquency?

  7. Brad,
    Excellent article. This makes it very simple to understand a credit default swap.

    Dan Edstrom

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