Foreclosure-Gate: Housing And Fraud

08-29-2011 • Market-ticker.org

There's a general principle under the law when one desires to bring a lawsuit - the principle of injury. That is, you can't sue me because you think I'm ugly. You need to show actual economic damage in order to obtain the relief you seek. There are many examples where civil courts have reached a conclusion that indeed the facts support the case but there's been no showing of economic harm and thus the plaintiff gets awarded one penny. There has been an astounding lack of credulity on this matter of economic injury in these foreclosure suits. In fact, I've yet to see a foreclosure complaint that alleges actual economic injury. Instead, they all allege it's cousin, lack of payment. But lack of payment isn't necessarily economic injury. Let's say that you hit me in your car. You have insurance and so do I. My medical treatment costs $20,000, and you're ruled entirely at fault in the collision. We'll assume for the moment I have no "pain and suffering" damages nor lost time at work and thus no lost income - that is, we have a neat and tidy case where the total economic harm is $20,000. I cannot sue you unless my economic injuries are not paid for through some other means. If your insurance company pays the medical bill, I no longer have economic harm, thus I cannot win anything in a lawsuit. Likewise if my insurance company covers the bill (unless it jacks up my insurance rates or somehow otherwise damages me.) Finally, you might just hand me $20,000, which moots my pending lawsuit immediately as once again, I have no economic harm. When a mortgage loan is packaged into one of these "securities" and then all sorts of protection and credit enhancement are taken against it, it is no longer a simple matter of saying that because you didn't pay, there are economic damages in the amount of your lack of payment. In fact, there may be no economic damage sustained by the entity that is suing you at all! Take the instance of a "credit default swap." Remember that a CDS is not an insurance contract. That is, it typically will not contain things like a right of subrogation or set-aside (the ability to go after the cause(s) of the payment under the CDS contract or pursue other assets of the defaulter in court) but rather is a pure "payment for event" sort of agreement. Well, if that CDS payment moots the economic damage, does the alleged foreclosing party still have standing to eject you from your house? Let's follow this through an MBS. For simplicity sake we will assume it is comprised of 1,000 loans. Let us further presume that 10% of those loans default. Ok, can you foreclose on those homeowners? Remember, to be able to sue for a remedy in civil court, you must show economic harm. A breach without economic harm brings no right of recovery! Being*****ed off is not economic harm, and neither is non-payment unless the party suing you, directly or through an agent, suffers a loss. Well, in the base case you'd probably say "yes". But who can sue? Normally the PSA delegates this authority to the servicer or their agent. Again, however, the underlying facts to be pled in a lawsuit that permit recovery must demonstrate economic harm. The key question: Were the certificate holders economically harmed when all of the payment flows are accurately accounted for?

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Foreclosure-Gate: Housing And Fraud

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