Comments: Everyone now has heard of credit default swaps but very few
people understand what they mean and fewer still understand their
importance in connection with the securitization of residential
mortgage loans and other types of loans.
The importance of understanding the operation of a CDS contract in the context of foreclosure defense cannot be understated.
In summary, a CDS
is insurance even though it is defined as not being insurance by
Federal Law. In fact, Federal Law allows these instruments to be traded
as unregulated securities and treats them as though they were not
Anyone can buy a
CDS. In the securitization of loans, anybody can “bet” against a
derivative security ( like mortgage backed bonds) by purchasing a CDS.
FURTHER THEY CAN PURCHASE MULTIPLE BETS (CDS) AGAINST THE SAME
SECURITY. In the mortgage meltdown, Goldman and other insiders created
the mortgage backed bonds to fail — collecting a commission and profit
in the process — and using the proceeds of sales of mortgage backed securities to purchase CDS contracts for
themselves. So they were betting against the value of the security they
had just sold to investors. The investors (pension funds, sovereign
wealth funds etc.) of course knew nothing of this practice until long
after they had purchased the bonds.
The bonds were
represented to be “backed” by mortgage loans that collectively received
a Triple AAA rating from the rating agencies who were obviously in
acting in concert with the investment bankers who issued and sold the
bonds. There were also other contracts that were purchased using the
proceeds of the sale of the bonds that performed the same function —
i.e., when the bonds were downgraded or failed, there was a payoff to
the lucky investment banker who issued them or the lucky “trader” or
bought the insurance or CDS. Sometimes the proceeds were used to pacify
the investors and sometimes they were not.
significance of this in foreclosure defense, is that while the
investors were getting bonds for their investment, the bonds
incorporated the mortgage loans, which is another way of saying that
the investors were funding the loans through a series of steps starting
with their purchase of mortgage backed bonds. Thus
it was the investor who was the ONLY creditor in the transaction that
funded a homeowner’s loan (at least initially before bailouts and
payoffs of insurance and proceeds of CDS contracts).
The other item of
significance is that the securities did not need to actually fail for
the CDS to pay off. That is precisely why AIG got into an argument with
Goldman Sachs that eventually led to the bailout. All that was needed
was for the issuer or some other “trustworthy” source to downgrade the
value of the bonds or announce that a substantial number of the loans
in the pool were in danger of default, and that was enough to claim
payment on the CDS contract.
translation of that is that even if your loan was paid up or only
slightly behind, someone was getting paid on a CDS contract in which a
series of mortgage backed bonds were marked down in value. This
payment was received by the investment banker who was the central
figure in the securitization chain. And, as stated above, sometimes
these proceeds were shared with investors and sometimes they were not —
which is why identification of the creditor and getting a complete
accounting is so important.
But the issue goes deeper than that. The
investment banker was acting as the agent or conduit for both the
actual creditor “investor) who was lending the money and the debtor
(borrower or homeowner) who was borrowing the money. Therefore the payment of proceeds in a CDS may have accomplished one or more of the following:
- Cure of any default by the debtor as far as the creditor was concerned, since the investor or its agent received the money.
- Satisfaction through payment of all or part of the borrower’s obligation.
- Obfuscation of the real accounting for the money that exchanged hands
- Payment of an
excess amount above the amount owed by the debtor which might be a
liability to the debtor under TILA, a liability to the investor, or
both, plus treble damages, rescission rights, and attorneys fees.
- Opening the door
for non-creditors to step into the shoes of the actual creditor who has
been paid, and claim that the debtor’s non-payment created a default
even though the creditor or his agents is holding money paid on the
obligation that either cures the default, satisfies the obligation in
full, creates excess proceeds which under the note and applicable law
should be returned to the debtor.
- Creates an opportunity for some party to get a “free house.” In
the current environment nearly all of the houses obtained without
investment or funding of one dime is going to these intermediaries whom
I have dubbed pretender lenders. Note
that the financial services industry has taken control of the narrative
and framed it such that homeowners are claiming a free home when they
borrowed money fair and square. But at least homeowners have put
SOME money into the deal through payments, down payments, or lending
their credit to these dubious transactions. The
free house, as things now stand is going to parties who never invested
a penny in the funding of the home and who stand to lose nothing if
denied the right to foreclose.
FROM WIKIPEDIA —–The article below comes from www.wikipedia.com
A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) undergoes a defined ‘Credit Event‘, often described as a default
(fails to pay). However the contract typically construes a Credit Event
as being not only ‘Failure to Pay’ but also can be triggered by the
‘Reference Credit’ undergoing restructuring, bankruptcy, or even (much less common) by having its credit rating downgraded.
CDS contracts have been compared with insurance, because the buyer
pays a premium and, in return, receives a sum of money if one of the
events specified in the contract occurs. However, there are a number of
differences between CDS and insurance, for example:
- The buyer of a CDS does not need to own the underlying security or other form of credit exposure; in fact the buyer does not even have to suffer a loss from the default event. In contrast, to purchase insurance, the insured is generally expected to have an insurable interest such as owning a debt obligation;
- the seller need not be a regulated entity;
- the seller is not required to maintain any reserves to pay off
buyers, although major CDS dealers are subject to bank capital
- insurers manage risk primarily by setting loss reserves based on the Law of large numbers,
while dealers in CDS manage risk primarily by means of offsetting CDS
(hedging) with other dealers and transactions in underlying bond
- in the United States CDS contracts are generally subject to mark to market accounting, introducing income statement and balance sheet volatility that would not be present in an insurance contract;
- Hedge accounting may not be available under US Generally Accepted Accounting Principles (GAAP) unless the requirements of FAS 133 are met. In practice this rarely happens.
However the most important difference between CDS and Insurance is
simply that an insurance contract provides an indemnity against the
losses actually suffered by the policy holder, whereas the CDS provides an equal payout to all holders, calculated using an agreed, market-wide method.
There are also important differences in the approaches used to
pricing. The cost of insurance is based on actuarial analysis. CDSs are
derivatives whose cost is determined using financial models and by
arbitrage relationships with other credit market instruments such as
loans and bonds from the same ‘Reference Entity’ to which the CDS
Insurance contracts require the disclosure of all risks involved.
CDSs have no such requirement, and, as we have seen in the recent past,
many of the risks are unknown or unknowable. Most significantly, unlike
insurance companies, sellers of CDSs are not required to maintain any
capital reserves to guarantee payment of claims. In that respect, a CDS
is insurance that insures nothing.
Filed under: CDO, CORRUPTION, Eviction, GTC | Honor, Investor, Mortgage, bubble, currency, foreclosure, securities fraud | Tagged: accounting, CDS, credit default swaps, creditor, DEBTOR, default, delinquency, downgrade, excess proceeds, loss reserves, non-payment, payment, pretender lender, TILA | Leave a Comment »
TRUSTEE SAYS “Chase filed documents that appear to be patently false or misleading”
As pointed out in this article, 95% of
foreclosures are NOT scrutinized. This is why homeowners need to go to
forensic analysts, experts and lawyers. Most people are walking away
from homes they still own on the basis of a claim by a party who is NOT
a creditor. The TILA Audit, if it includes conclusions drawn from an
analysis of the securitization of the transaction, will provide the
homeowner with ample ammunition to raise issues of fact and require
proof from the pretender lender.
As in many cases, careful scrutinization will reveal that
the assignment and other documents are fabricated, forged and/or
improperly notarized. The most obvious example is shown here where the
document was signed in Florida and notarized in Buffalo, NY at the
offices of the foreclosure mill (Baum law offices).
This type of scrutiny and research on the securitization of
the loan is an essential part of the forensic analysis. If ignored, the
“audit” becomes a vehicle for potential recovery of a minor amount of
damages, plus attorney fees. If used properly the damages rise and the
potential for principal reduction or even elimination of the
obligation, note and mortgage if the other side can’t come up with the
real party in interest.
By RICHARD WILNER, NY POST
Last Updated: 12:01 PM, February 28, 2010
Posted: 12:54 AM, February 28, 2010
throughout New York State, one company in the center of the storm had
all the business it could handle.The little-known law firm of Steven J. Baum PC
, which is based in suburban Buffalo, NY, and represents dozens of banks in matters of failed mortgages, last year filed a staggering 12,551 foreclosure lawsuits in New York City
and the suburbs, which works out to about 48 a day.The foreclosure mill
is one of a handful of super-regional law firms used by the country’s
banks — and its lawyers appear to have practiced in every county
courthouse and bankruptcy court from Staten Island to Plattsburgh and
from Montauk to Niagara Falls.
But as the volume of its workload increased, so did complaints from
opposing lawyers and judges that some of the thousands of lawsuits
contained questionable legal work.
One bank caught in the crosshairs is JPMorgan Chase Bank, one of the largest mortgage lenders in the city.
Last month, Diana Adams, the US Trustee in Manhattan, filed
papers in court supporting punitive financial sanctions against the
bank for a string of bad behavior, including seeking to foreclose on
homes after they rejected the attempts to make on-time payments and for
failing to prove they own the mortgage on a home even as they move to
Chase filed documents that appear to be patently false or misleading, Adams said in the filing.
Although Chase has recently taken steps to address concerns
expressed by courts in connection with other cases, based on Chase’s
past and current conduct it needs to be sanctioned, Adams wrote.
A spokesperson for Chase had no comment on the US Trustee’s action.
The complaints against Baum — on the record during hearings, in
legal pleadings and, eventually, borne out in judges’ decisions —
* Not divulging mortgage payments: In the White
Plains bankruptcy of Blanca Garcia, Baum’s firm filed papers claiming
Garcia was in arrears — when she actually made payments and showed the
court her receipts, but they were not credited to her account. When
Garcia’s lawyer complained, Baum’s firm answered the claim but, the
lawyer said in court papers, ignored the receipts and continued to
claim the mortgage was in arrears.
* Creating questionable assignments: A Suffolk County judge took it upon himself
to investigate a filing by Baum’s firm when it attempted to foreclose
on the home of Gloria E. Marsh. “A careful review,” the judge wrote in
a four-page order, “reveals a number of glaring discrepancies and
unexplained issues of substance.”
The judge found that Baum filed the action before the date it claimed its client took ownership of the mortgage.
* Botched legal papers: In the bankruptcy of Matthew Austin, Baum’s firm tried to prove that its client owned the mortgage backing Austin’s house by filing
an assignment of that mortgage from a Florida company signed by an
executive of that company — but it was notarized in Buffalo, NY.
“To the extent assignor flew to upstate New York to appear
before a notary in the law offices of Steven J. Baum, PC, defies all
logic,” the lawyer said in court papers. “Clearly this is a
manufactured document intended to defraud the Court.” The bank and Austin, in hopes of settling the matter, are discussing a mortgage modification.
The Baum firm has not been found to have committed any fraud. It did not return calls for comment.
Those lawyers’ complaints appear to have gained critical traction.
Judges are taking action. A few, like Justice Jeffrey Spinner in a
widely reported case in Suffolk last November, are ripping up mortgages
and tossing entire cases brought by Baum after it couldn’t prove its
Second, the US Trustee, the arm of the Department of Justice charged
with keeping the country’s bankruptcy courts free from malpractice, has
had its Manhattan office monitoring cases involving the Baum firm.
And just last month, a New York bankruptcy judge said he now has
“probable cause” to believe that lawyers for the Baum firm acted
The problems involving Baum and others highlight the increasingly nasty foreclosure problem in the US after
banks started the profitable (for them) system of securitizing
mortgages and then slicing and dicing pieces of the loans and selling
them around the world. Little attention was paid to having an easy-to-use system tracking mortgage ownership. (MERS ANYONE?)
Now, as foreclosure actions clog the country’s courts, some lawyers are fighting back and asking bank lawyers or mortgage servicers to provide proof they own the mortgage.
In most instances, it can’t be done.
“In 85 percent of the cases I handle, the paperwork submitted by the
bank or mortgage service company is not in order,” said Linda Tirelli,
a consumer bankruptcy lawyer based in White Plains and Stamford, CT.
For example, she said, one mortgage servicer recently filed paperwork to prove it owned a mortgage and it said it was assigned ownership by Lehman Brothers in October 2009.
“Now everyone knows there was no Lehman last October,” Tirelli said.
For clients with aggressive lawyers, pushing back against banks —
and forcing them to realize that they can’t prove they own the mortgage
and therefore will not be able to foreclose — often result in the banks
offering a mortgage modification.
Tirelli said the case of the faulty Lehman assignment resulted in
her client getting the interest rate on her mortgage cut to 3 percent
and $15,000 being cut from her principal.
“And she was denied a mortgage modification by the bank twice before
that,” Tirelli said. “If we didn’t fight back she would have lost her
David Shaev, who also represents consumers in bankruptcy court, concurs that most claims filed by banks are defective.
“I mean as the court and everyone in the country knows, the number
of foreclosures has increased exponentially, and the volume — I think
frankly — had an impact on the quality of the work that was done and
submissions to the court,” Jay Teitelbaum, a lawyer for JPMorgan Chase
Bank, said in a Jan. 7 court hearing.
Chase hired Teitelbaum after debtors raised questions about the quality of work by the Baum firm.
Steven J. Baum, 41, took over his father’s sleepy Buffalo law
practice several years ago, moved it to suburban Amherst and
super-sized it. It now has about 500 employees, according to an ad it
placed on an online jobs site, plus has started Pillar Processing, a
legal-document processing company. Pillar, too, has gotten the
attention of judges.
One judge blasted Baum for trying to distance himself from a bad
courtroom gambit by having a non-lawyer employed by Pillar file a
motion canceling the request.
Last year, Baum filed 5,312 foreclosure actions in New York City,
according to state court online records: 2,231 cases in Queens, 1,592
cases in Brooklyn, 692 cases in Staten Island, 678 cases in the Bronx
and 119 cases in Manhattan.
One bank executive told a judge during a hearing in a Poughkeepsie
court hearing that the bank pays law firms $650 for every referral —
presumably just to file the foreclosure action. Additional pleadings
would be extra.
And Baum counts nearly every bank that provided a mortgage in The
Big Apple as a client — Bank of America, Chase, Wells Fargo, HSBC, US
Bank, GMAC Mortgage, Deutsche Bank, Sovereign Bank, Citibank, OneWest,
M&T Bank, Bank of New York Mellon, to name just a dozen, according
to court records.
While embattled homeowners with aggressive lawyers like Tirelli and
Shaev fight the banks and lawyers and end up with mortgage
modifications. most of Baum’s 5,312 cases in NYC last year were fought
against no legal opponent. Usually, delinquent homeowners can’t afford
to hire lawyers. The result is a slam-dunk win for Baum — and the
foreclosure of another house — in what amounts to a legal heavyweight
picking a fight with a 98-pound legal weakling.
There’s no telling how many houses could have been saved
from foreclosure, how many homeowners would still be in their homes and
how far down the recovery road the housing market would have been had
each embattled homeowner fought back against a broken foreclosure
The case of Sylvia Nuer, a Bronx home health care aide, is one exam
ple. Nuer owns a one-bedroom Parkchester condo and moved to buy a
larger two-bedroom unit in the same building. After her lawyer, who
also represented the seller and collected a commission on the sale,
messed up some paperwork, Nuer was unable to take possession of the
She had to pay two mortgages on her modest salary and soon was
forced to file bankruptcy. But Nuer was lucky. She hired a lawyer and
fought the bank, which at first refused to simply take back the larger
apartment Nuer knew she couldn’t afford to pay for and not live in.
The bank filed costly motion after costly motion.
Finally, Manhattan Bankruptcy Judge Robert E. Gerber had hadenough and told the bank’s lawyer to work out a deal with Nuer.
Alluding to those fighting foreclosure actions without a lawyer,
Gerber said: “There must be hundreds, if not thousands of [Nuers] . . .
who get this stuff done to them all the time.”
Shaev, of Shaev & Fleischman, citing a recent study, said more
than 95 percent of claims in foreclosure cases are not scrutinized.
Until that changes, homeowners are going to be needlessly tossed from
Playing with house money
JPMorgan Chase Bank, under CEO Jamie Dimon, and the law firm of
Steven Baum are drawing unwanted attention from bankruptcy judges who
are upset over how they are handling some foreclosure actions. Federal authorities are asking for punitive monetary sanctions to be levied against Chase, citing these three cases:
Name: Christopher and Bobbi Ann Schuessler
Home: $299K Sullivan County home with $120K equity.
Wrong: Chase refused to accept payment made at bank branch, then
moved to foreclose on house after falsely claiming debtor was two
months in arrears and that no equity existed in the home.
Result: Bank backs down, pays Schuesslers’ costs.
Judge: “The system utilized by [Chase] constitutes an abuse of the
bankruptcy process.” Court’s action should “serve as warning to all
Name: William R. Pawson
Home: $1.5M Midtown Manhattan Co-op with $220K mortgage.
Wrong: Chase refused online payments then went after apartment because Pawson was delinquent.
Result: Chase paid $50K to settle after Pawson complained.
Judge: “But what concerns me is, after reading Schuessler case [and]
having seen [Chase’s] papers here, it’s kind of two strikes. Three
strikes and you’re out, frankly.”
Name: Sylvia Nuer
Home: $39K Bronx condo plus $104K second property lien.
Wrong: Chase wrongly claims it owns the mortgage to condo; its own witness couldn’t explain bank’s paperwork.
Result: US Trustee joins Nuer’s lawyer’s move for punitive monetary sanctions against Chase.
Judge: “There must be hundreds, if not thousands of [Nuers] . . . who get this stuff done to them all the time.”
Steven J. Baum’s law firm filed 12,551 foreclosure actions in the New York area last year.
Staten Isl. 692
ALL NYC: 5,312 or 102/week
SUBURBS: 7,239 or 139/week
NYC & SUBURBS: 12,551 or 241/week or 48/day
Source: Official Web site, New York State Courts
Filed under: CDO, CORRUPTION, Eviction, GTC | Honor, Investor, Mortgage, bubble, currency, foreclosure, securities fraud | Tagged: Baum, Diana Adams, forensic analysis, JP Morgan Chase, Judge Robert E Gerber, NY POST, ownership of the mortgage, questionable assignments, Richard Wilner, securitization, Shaev and Fleischman, TILA audit