Commercial Litigation and Arbitration

Credit Default Swap on Home Mortgage Purchased by Mortgagee Does Not Inure to the Benefit of Mortgagor or Relieve Mortgagor’s Debt

From Dumont v. HSBC Mortgage Corp., USA, 2010 U.S. Dist. LEXIS 77805 (D. Ariz. July 30, 2010):

In their fourth claim for relief, Plaintiffs' allege that HSBC or another heretofore unknown party may have purchased or collected proceeds available under one or more credit-default swaps of which Plaintiffs' mortgage might have been a part, and that if they did, then it is likely Plaintiffs' mortgage has been paid off and any debt owed by the Plaintiffs has been extinguished. This claim, however, is based entirely on speculation, as Plaintiffs admit they do not know if HSBC purchased a credit-default swap. Additionally, a credit-default swap does not work in the manner suggested by Plaintiff. It is merely a financial instrument, akin to insurance, used by corporations to transfer credit risk from one party to another. See PBS: Frontline: Inside the Meltdown: Glossary of Financial Terms: Credit Default Swap, (last visited, July 8, 2010). To the extent a credit-default swap might technically pay off the money owed to a bank when a homeowner defaults on his mortgage, the benefit most certainly does not accrue to the homeowner who defaulted, which is the plain suggestion of Plaintiffs' claim. Id. Accordingly, the Court must deny Plaintiffs' claim 4 for Payment / Cancellation of Mortgage.

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