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YSP, Shareholder Litigation Update

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YSP, Shareholder Litigation UpdateRecent activity on previously covered mortgage cases

October 8, 2007

By LISA D. BURDEN
WASHINGTON correspondent for MortgageDaily.com

The failure to disclose yield spread premiums paid to brokers by a subprime lender cost the company more than $5 million. In other litigation, investor class actions filed against mortgage lenders moved forward while three partners at a major class action law firm that has sued several lenders may be headed to jail.A federal trial court approved on Sept. 28 a settlement in Pierce v. NovaStar Mortgage Inc., a class action lawsuit against NovaStar Mortgage. The court awarded Washington state borrowers $5.1 million over claims that NovaStar failed to disclose yield spread premium payments to mortgage brokers.

The average award was $2,000. Individual awards range from $25 to $20,000, according to the attorneys who filed the lawsuit. Under the settlement, borrowers will obtain a full recovery of the expenses they paid attributable to the payment.

NovaStar will also pay $1.8 million to the law firms — Law Office of Ari Brown and Phillips Law Group — that handled the case.

After achieving that settlement, the same attorneys filed similar claims in federal court in San Francisco on behalf of California borrowers who claim the subprime mortgage lender charged them a higher interest rate on their loans because their mortgage brokers did not disclose the payment of yield spread premiums.

Kubiak, et al. v. NovaStar Mortgage was filed in the U.S. District Court for the Northern District of California early this summer.

NovaStar has denied that the company acted inappropriately, explaining that it disclosed the broker payment in accord with industry practices.

On the other hand, another federal circuit court that considered the issue reaffirmed its ruling in favor of the payments to mortgage brokers at about the same time the Washington state case settled.

The 11th Circuit Court of Appeals ruled in June in Culpepper v. Irwin Mortgage Corp. that yield spread premiums paid to mortgage brokers are proper unless consumers can prove the amount is excessive.

The appeals court cautioned that cases should be evaluated on an individual basis and that courts should use the U.S. Department of Housing and Urban Development’s two-part test in evaluating the premiums. Under HUD’s 1999 Statement of Policy, whether goods or services were actually performed for the compensation paid and whether the payments were reasonably related to the value of the goods or services furnished or performed is key.

The 11th circuit includes Alabama, Georgia and Florida.

YSPs are also receiving scrutiny on Capitol Hill.

Several bills banning the practice have been introduced in the both House of Representatives and the Senate. At an April hearing before the Senate Banking Committee, one senator declared the practice to be an excuse for “ripping off” borrowers.

Shareholder lawsuits against brokers are certainly starting to heat up.

A California federal judge has dismissed claims by shareholders of Impac Mortgage Holdings Inc. who purchased securities of the nonprime lender from May 13, 2005 through Aug. 9, 2005.

The shareholders filed the lawsuit against the California-based real estate investment trust in January 2006, claiming corporate executives mislead them about the true financial condition of the company. The plaintiffs alleged in suit papers that company executives withheld negative news about the company’s finances in order to inflate the stock price.

But the claims in the litigation aren’t dead as language in the dismissal allows the plaintiffs to file the case again. Impac has said it will defend itself if an amended complaint is filed.

More recently, Schiffrin Barroway Topaz & Kessler LLP said it filed a class action lawsuit in the United States District Court for the Central District of California against Impac on behalf of investors who bought Impac securities from May 10, 2006, through August 15, 2007.

In Abrams v. Impac Mortgage Holdings, Inc., the lender is being accused of failing to disclose or misrepresenting material adverse facts about its financial condition.

While the credit rating agencies have recently been grilled by Congress for apparent conflicts of interest, a major legal player in securities and mortgage industry lawsuits has also been contending with such claims.

In May 2006, Milberg, Weiss Bershad & Schulman, the law firm that accused several mortgage lenders of wrongdoing, and three of its partners were indicted for allegedly sharing legal fees with clients to induce them to serve as plaintiffs in class action and shareholder lawsuits. Payouts to the alleged participants ranged from $8,000 up to $250,000, according to an indictment posted on the U.S. Department of Justice’s Web site.

Milberg denied paying kickbacks but also pointed out that it had achieved “remarkable results on behalf of investors, consumers and other victims of corporate misconduct.” The government argued that the alleged payments created a conflict of interest that led to class members being defrauded.

William Lerach is expected to plead guilty on Oct. 29, while Steven G. Schulman is expected to plead guilty this week and David J. Bershad pleaded guilty this summer.

The working deal for sentencing is that Lerach will pay a fine of about $8 million and could face jail time of as much as two years.

A status conference for the case is also set for Oct. 15 in Los Angeles.

The firm reportedly made more than $200 million on the scheme over the past 20 years. Milberg Weiss class action lawsuits have included cases against mortgage-related entities such as Fannie Mae, New York Community Bancorp, RBC Centura Bank, First Southern Bank and the Friedman Billings Ramsey Group.


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