Insurance/Credit Default Swaps

Posted by kevin on July 21, 2015 under Foreclosure Blog | Comments are off for this article

A fundamental rule of law is that a plaintiff could only be paid once for an injury. So, if your lender has been paid the amount of the mortgage note, it should be correct that that lender cannot file a foreclosure action and take your house. Why? Because the lender is not owed anything/

If you read the prospectuses and pooling and servicing agreements of many of the NY securitized trusts that were prevalent from 2002-2007, you will note that the higher tranches (most conservative investments) contained a insurance component whether it be straight out insurance against default or a credit default swap (CDS). Moreover, the lower tranches were wiped out if a certain percentage of loans failed.

In discovery in most of my foreclosure cases, I request copies of all letters from the trustee to the investors. I want to know how many defaults have occurred with trust, and how the trustee is dealing with the various tranches. I also ask whether the trust had procured any insurance or CDS’s. Based on the unpublished Gomez case in NJ which relies on a 1st Circuit BAP case that was effectively overruled by a later 1st Cir. case, I never get that discovery. But the fact remains, if the plaintiff in your case has been paid, how can he come into court and ask to be paid again.

Last week, I had the opportunity to talk with a person who worked for a “too big to fail” bank and an investment house that was very active in the securitized mortgage business. She confirmed that whenever a loan went into default, the first thing that her employer did was to make an insurance claim. And her employer was paid on those claims.

A basic tenet of insurance law is that if the insurer pays a claim, then the insurer steps into the shoes of the insured and can go after the wrongdoer (in this case, the borrower). This is called subrogation.

Two questions? If a plaintiff is being paid twice, isn’t that against the law? And, why are the courts not interested in what amounts to a) fraud on the court, b) consumer fraud, c) theft d) criminal activity? (take your pick). The answer you get is that the borrower took the money, the borrower owes the money. However, in the above scenario, the borrower does not owe the money to the plaintiff, but to the insurer. So, why pay the plaintiff twice?