They May Not Be Able To Foreclose On Your House

By Kenneth Gibert

The news is full of strange terms like “CDOs” and “CDSs,” and although you may not know it, if you are a homeowner, these things may affect you. The bottom line is that although Your Legal Leg Up Litigation Manual was not designed to deal with mortgage defense, you may find it provides you with much help in your efforts to keep from losing your house.

“CDO” is short for Certified Debt Obligation, and “CDS” is short for Credit Default Swaps. Basically, CDOs and CDS are ways that banks get debts that are owed to them off their balance sheets. They sell the rights to payments from them to anyone they can in “bundles” or packages. Normally these payment rights would be credit-rated according to the credit ratings of the people who borrowed the money, but not in high finance. Instead, the bundles are “insured” by certain supposedly credit-worthy insurers, and then the bundles of loans take the ratings of the insurers rather than the borrowers.

The debt bundles can be packaged and repackaged in several ways, creating an unbelievable maze of paperwork and electronic trails. This is all touted as a way to “assign risk” to the people best able to tolerate it (a new-finance “efficiency”). Since so many of these debt instruments have ended up in employee pension funds, in reality it appears to have been a way to foist nearly worthless debt onto the unsuspecting and relatively unsophisticated. A fraud, in other words.

While these financial “instruments” are fascinating, outrageous, and almost impossible to understand in many ways, their potential significance in the debt collection arena is not that complicated. In the debt collection arena, the issues are relatively simple: you must prove (1) you own the debt obligation in question; (2) the amount owed; (3) that payments have not been made; and (4) certain procedural requirements have been met. If you can prove these things, you can seize collateral on non-paying loans. You can foreclose on the house and take it, in other words.

When the bank owns and holds the mortgage, proving all these things is pretty simple and easy. The bank holds all the appropriate documents and controls the people necessary to present the documents as evidence the courts will recognize.

On the other hand, when the loan has been packaged for sale to retired school teachers in the third world, proving the requirements for foreclosure becomes far more difficult. The total amount of CDOs and CDSs is said to be approximately 45 trillion dollars, and they have been spread far and wide.

Your Legal Leg Up Litigation Manual has addressed third-party debt collectors suing on old consumer (primarily credit card) debt. The original creditors have given up on the debtors and sold the debt to these debt collectors for a tiny fraction of the “face-amount” (amount owed). They do it in such large quantities that the documents supporting the debt are almost never included in the transaction, and it’s anybody’s guess whether they even continue to exist in the normal course of events. I believe the supportive documents are frequently destroyed.

When the debt collectors sue the debtors, they rely on the fear most people have of being sued, and the vast majority of people sued by debt collectors on credit card debt give up. It should be clear they don’t have to do that: people would often, if not always, win the suits brought against them by the debt collectors if they would stand up for themselves. Your Legal Leg Up exists to encourage people to stand up for themselves and to provide them the information they need to do so.

With debts of the astronomical amounts involved with CDOs and CDSs, all the same questions involved in third-party debt collection of credit card debt come up in the foreclosure process. It may not be possible for the holders of the CDOs and CDSs to foreclose on the loans that make up their bundles. Many of the debts may be unenforceable.

This has enormous consequences for the financial world, since the amount involved is more than the entire value of everything in the world and because so many institutions have carried them on their balance sheets as assets. The potential catastrophe of unenforceable CDOs and CDS is therefore much larger than the “subprime” lending disaster.

It’s so much larger that the question may arise: will the courts enforce normal legal rules in the face of the economic chaos which might spring from doing so? At this point, some things are not clear. It is not clear exactly how many of these CDOs and CDSs are unenforceable because of the loss of supportive documentation, and it is not clear whether a significant proportion of homeowners facing foreclosure will put the debt collectors to the test. I believe that the principles behind Your Legal Leg Up will apply to foreclosure cases.

These issues have arisen in Ohio, and numerous foreclosure actions have been defeated. In October 2007, in a case entitled In Re Foreclosure Cases, No. 1:07CV2282 (etc.), the United States District Court for the Northern District of Ohio dismissed numerous foreclosure cases because the alleged lenders could not prove that they possessed the loans in question. To do this in the law, the plaintiff must prove a chain of ownership going back to the original title which gives the right to foreclose. This is done by linking all the owners who have “assigned” the rights away. The alleged creditor, the Deutsche Bank of Germany, was not able to unravel the complicated chain of titles and prove that it owned the loans. This is exactly the problem faced by so many credit card collectors, and of course proof of amount owed and not paid is probably of nightmarish complexity for the holders of CDOs.

The bank argued that because it had been operated on such a great scale for so long in the way the court found unacceptable that the court should allow it to collect on the debts it could not prove. The court’s response was a classic.

“Fluidity of the market” – “X” dollars,

“Contractual arrangements between institutions and counsel” – “X” dollars,

“purchasing mortgages in bulk and securitizing” – “X” dollars. . .

“the jurisdictional integrity of the United States District Court” – “Priceless.”

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