Mortgage Daily Logo
mortgage news from industry experts

Stated Income at Issue in MI Lawsuit

Stated Income at Issue in MI LawsuitPMI claims NovaStar misrepresenting ‘no ratio’ loans as ‘stated income’

May 5, 2005


A lawsuit between a mortgage insurance company and a subprime lender has taken a turn — with testimony from a key executive leading to new accusations from the defendant in the case. At the heart of the latest action is the distinction between “stated income” and “no ratio” loans.

PMI Mortgage Insurance Co. filed a counter-complaint against NovaStar Financial Inc. alleging the lender fraudulently obtained mortgage insurance for “stated income loans” by misrepresenting that it would use stated income data to underwrite the loans.

The counter-complaint and NovaStar’s opposition are just some of the many actions between the two companies that have stemmed from NovaStar’s October 2003 lawsuit, which alleged that PMI had breached its contract by rescinding coverage on 10 loans that were not paid in full. Since then, that number of loans has increased to a total 22, of which 10 are stated income loans.

Reasons PMI has given NovaStar for refusing to cover claims on disputed stated income loans, include that the income was false, incorrectly stated and overstated, according to initial complaint.

But now PMI said it “recently learned” that it was misled by NovaStar to insure 6,300 “stated income loans,” which require borrowers to truthfully state their income without providing documentation. The loans, made between 2000 to 2002, were allegedly underwritten under terms different than NovaStar represented it would follow when it was seeking insurance from PMI, according to the counter-complaint filed early May in the U.S. District Court for the district of Kansas.

“It has become clear that the loans that NovaStar represented were Stated Income loans actually were a different type of loan that had a higher risk,” the mortgage insurer said. “What PMI believed were Stated Income loans were more akin to ‘No-Ratio’ loans and other types of loans that require less documentation to qualify.”

While PMI and the Missouri-based lender have been in litigation since October 2003, PMI says it was until this March that a NovaStar executive “admitted that its representations were untrue.” In a deposition testimony, he informed that NovaStar did not use or rely on the incomes borrowers stated on applications to qualify the borrower for a stated income loan, according to court documents.

The executive, NovaStar President Lance Anderson, said the company looks “at the income they’re stating, if it seems reasonable, then we’re comfortable not verifying it and not using it in our underwriting decision,” according to PMI.

“It’s not a material part of the underwriting decision,” he continued. ” You’re using other factors like loan-to-value ratio, FICO score, those type of things.”

PMI stated in the counter-complaint that had it “known that NovaStar was not using borrowers’ stated incomes to qualify them for NovaStar’s Stated Income loan program, PMI would not have insured” the mortgages.

Additionally, PMI said that NovaStar also misrepresented that the debt-to-income ratio was an essential element in stated income loans. Anderson allegedly testified that the lender does not consider the ratio in its underwriting decisions, rather, it is just calculated.

NovaStar allegedly provided underwriting guidelines and matrices to PMI in which it “explicitly and implicitly represented that NovaStar would use the income stated on a borrower’s loan application to qualify the borrower for a Stated Income loan” — representations PMI relied on “in agreeing to insure the Stated Income loans and in setting premium rates,” PMI said in the lawsuit.

In a memorandum filing Monday opposing PMI’s counter-complaint, NovaStar said that “when the statements from the guidelines are taken in context and the testimony of Lance Anderson about those guidelines is considered in full, it is apparent that Mr. Anderson’s testimony is not contrary to the guidelines at all. Instead, PMI is attempting to generate a misrepresentation through a strained reading of the guidelines.”

“Ignoring for the moment the illogical bent of such a suggestion — that NovaStar would rely on information that had not been verified, rather than employment and credit information that was verified — PMI’s contention that it just “recently learned” that this was not so in depositions taken in March is demonstrably wrong,” the lender added.

NovaStar has also been subject of class action lawsuits from shareholders who accused it of artificially inflating shares, creating the illusion that its number of branches was increasing and that record results would follow. Allegations that were dismissed by NovaStar attorney, Lanny Davis, who called the lawsuits “false and misleading” and said he was confident that the suits would be dismissed “on their face” without the need for trial.

NovaStar announced earlier this month that a judge had denied the company’s motion to dismiss a class-action shareholder suit in the U.S. District Court for the Western District of Missouri that generally alleges real estate investment trust made misleading statements for failing to disclose certain regulatory and licensing matters in 2003 and 2004.

“The Court’s decision assumed the truth of the allegations in the complaint and viewed them in the light most favorable to plaintiffs,” Davis said in the announcement. “Plaintiffs’ allegations survived the motion to dismiss only because the Court made this assumption in plaintiffs’ favor.”

Coco Salazar is an assistant editor and staff writer for

Popular posts

How Long Does It Take to Refinance a Mortgage
How Long Does It Take to Refinance a Mortgage

So, you’re interested in refinancing your mortgage. Maybe you want some extra capital to do that home project you’ve always dreamed of, interest rates are nearing record lows, or you want to start consolidating debt. Regardless of the motivation behind the refinance,...

How Does Refinancing a Mortgage Work
How Does Refinancing a Mortgage Work

A home purchase is considered an investment, and a robust one at that. Savvy owners are constantly looking for new ways to reduce debt, save money, pay less in interest, and ultimately build equity. Refinancing is one way to leverage your investment and do just that....

What Does It Mean to Refinance Your Home
What Does It Mean to Refinance Your Home

You can think of refinancing your mortgage as a debt redo. Essentially, you’ll swap out the existing loan for a new one - ideally with better terms and conditions. Only this time it could help you save money on high mortgage payments, rather than just borrow it....

Setting up the Utilities in My New House
Setting up the Utilities in My New House

All the tedious, time-consuming home closing documents have been signed, sealed, and delivered. Your belongings are packed into what seems like a million boxes and you have a solid plan to haul all your existing furniture to the new place. Just as your boxes and...

When Is My First Mortgage Payment Due?
When Is My First Mortgage Payment Due?

Navigating your way through a brand new mortgage loan can be a difficult task, especially for first time homeowners. After handing over a large sum of money for the down payment and closing costs, it’s important to pay attention to the timing of your first mortgage...


Don’t worry, we don’t spam

calculate your monthly mortgage payment

Related Topics

Helpful Links

Daily mortgage rate trends

Best mortgage lenders

First-time homebuyers programs by state

Loan limits by state

Types of mortgages

APR vs interest rate

Understanding PMI

Related Posts