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Mortgage Law Update

Mortgage-related cases settle, continue

June 22, 2007

WASHINGTON correspondent for MortgageDaily.com

Mortgage-related litigation continued to move through the courts, with one subprime lender seeing much of the action. A California mortgage broker who was blacklisted because he was giving yield spread premiums to his borrowers lost his lawsuit.

But first, the National Association of Mortgage Brokers announced Thursday it promoted Nikita M. Pastor to vice president and counsel, government affairs.

Pastor will manage NAMB's federal and state legislative and regulatory efforts in her new role as well as the group's interests before regulatory agencies and Congress, the statement said.

NovaStar Financial Inc. recently settled a lawsuit over allegations it failed to disclose yield-spread premium but still faces litigation over claims of false advertising and antitrust violations in California and discrimination in Washington, D.C.

The case, Pierce v. NovaStar Mortgage Inc., settled this month.

Hours before the trial, NovaStar agreed to pay $5.1 million to resolve the claims of about 1,600 homeowners who say they were charged higher interest rates because their mortgage brokers allegedly did not disclose the YSP in violation of state and federal law. The plaintiffs will receive $3.3 million, while attorneys get $1.8 million.

A judge in the United States District Court, Western District of Washington at Tacoma certified the class action status of homeowners.

NovaStar, a subprime lender, settled the case to avoid further legal costs and to allow it to move forward, NovaStar spokesman Richard Johnson told MortgageDaily.com.

He said the company does not admit or concede there was any merit to the homeowners' accusations. In fact, he continued, NovaStar contends that it "appropriately disclosed the yield spread premiums to the borrowers and that the borrowers did not suffer any actual damages because without a yield spread premium, the borrowers would have paid the brokers more fees ... out of their own pockets."

John Phillips, the lead trial lawyer for the class, said, "We are delighted with the result. This case signals to the industry that they cannot treat important borrower disclosures as a nuisance to be avoided or minimized. Home loans are confusing enough. The least lenders can do is to tell borrowers the critical information that affects their interest rate and closing costs."

NovaStar had fought the request to grant class action, contending that a borrower on verbal notice of the YSP is in the same bargaining position as a borrower whose good faith estimate lists the premium. The lender also argued to the trial court that the loans were made under a state law exemption for affiliates of real estate trusts.

In an interview with MortgageDaily.com before the settlement, plaintiffs' attorney Ari Brown said his firm's investigation of the plaintiffs' claims found three scenarios regarding disclosure of the YSP. In the first, the good faith estimate is completely silent as to the yield spread premium; in the second, there is a "cryptic" notation saying the yield spread premium ranges from zero to three percent; and in the third, the yield spread premium lists zero to three percent but then has $0 listed.

"Our payment of yield spread premiums followed standard practices in the mortgage industry that comply with the law and applicable regulations," the company said in a statement. "We feel strongly that NovaStar was responsible and fair in our lending in the state of Washington."

Further down the coast, NovaStar Home Mortgage, Amerisave Mortgage Corp. and Mountain States Mortgage Center Inc. are awaiting a California state judge's determination whether to triple damages in a recent jury decision against them.

In the case, American Interbanc Mortgage v. NovaStar Home Mortgage, et al., in the Superior Court for the State of California, Orange County, a jury found that NovaStar and the other two lenders were guilty of false advertising and antirust violations on bankrate.com and hit them with a $15.9 million verdict.

American Interbanc claimed the trio used "bait-and-switch" advertisements and then conspired to get it kicked off the site after American Interbanc complained about the alleged tactics.

Bankrate settled out of the case for $3 million.

After the jury made its decision, William Claster, American Interbanc's attorney, asked the judge to triple the jury verdict, arguing that California state law requires trebling trial court awards in cases where anti-trust violations are found.

Claster's request is still awaiting the judge's signature. A decision is expected any day now.

NovaStar Financial Inc. and subsidiary NovaStar Mortgage Inc. were recently sued in U.S. District Court in the District of Columbia for violations of the Federal Fair Housing Act. The National Community Reinvestment Coalition filed the lawsuit, claiming NovaStar discriminated against minorities seeking housing in row house neighborhoods and those seeking financing for properties in American Indian Reservations and urban areas for adult foster care.

NovaStar spokesman Richard Johnson told MortgageDaily.com the accusations have no merit and that the company will vigorously defend itself against the charges.

Another subprime lender, Ameriquest Mortgage Co., has settled in the case Wayne Lee v. Ameriquest Capital Corp.

Bernard L. LeSage, the plaintiff's Los Angeles attorney, did not divulge further details and saucily said his lips are "legally sealed" as the settlement terms are confidential.

Lee filed a 12-page complaint in the Superior Court of the State of California in Orange County, claiming that he stepped down from the reins of the mortgage lender and its affiliated companies after a brief stint because his authority to run Ameriquest was usurped by Roland Arnall, Ameriquest's billionaire owner.

Lee claimed Ameriquest Capital Corp. breached its agreement to pay him a total of $50 million over five-years for consulting services after he resigned.

Also in California, Laguna Hills mortgage broker Mark Gallagher, who hit upon the innovative and lucrative plan of sharing YSPs with his borrowers as an inducement to get them to refinance, has lost the first round of his case against Freddie Mac -- which blacklisted the broker after discovering his scheme.

At one point, Gallagher said he was making 200 such mortgages a month and bringing in about $200,000 from the loans. Industry attorneys have said Gallagher's plan is not illegal under California and other state laws. After Freddie put Mark Gallagher's company, Park Place Funding, on its exclusionary list, Gallagher sued, claiming that he had been defamed.

A spokesman for Freddie said the secondary lender won at the trial level. The court upheld the exclusionary list and the right to put Gallagher on it, noting the action wasn't defamatory.

Gallagher has appealed the trial court's decision to the Ninth Circuit.

Fannie Mae shareholders who sued on behalf of the government-sponsored enterprise to hold its board members and former executives personally responsible for a multi-billion dollar accounting scandal have lost their bid in court.

A federal trial judge dismissed the lawsuit because the shareholders did not first petition the litigation-deluged company to sue its board members and executives on its own.

But other Fannie lawsuits continue.

Franklin Raines, Fannie's former erstwhile chief executive officer, wants the Office of Federal Housing Enterprise Oversight to turn over documents that he claims will show a deliberate attempt on the agency's part to drive down the company's stock price. OFHEO, which is a division of the U.S. Department of Housing and Urban Development, is Fannie's regulator.

Raines made the allegations in a recent court filing in federal court in Washington, D.C. OFHEO filed civil charges against Raines and two other former top executives seeking hundreds of millions of dollars from the trio.

Lisa D. Burden is a legal analyst for MortgageDaily.com and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.

e-mail Lisa at: [email protected]

Yield Spread Premiums
Yield spread premium issues, studies and lawsuits. Mortgage wholesaler YSPs paid to mortgage brokers.

GSE News | Fannie/Freddie Share Statistics
Fannie, Freddie and FHLB news. Coverage of government sponsored enterprise regulation, operations and litigation.

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