Subprime Loans Become Legal Liabilities
The lax lending standards are starting to show up in the courts, as a mortgage insurer is sueing a subprime lender. " PMI Mortgage Insurance alleges that it was misled by NovaStar when PMI set the terms on insurance for 6,300 loan made from 2000 to 2002. The loans in question, known as 'stated income loans,' require borrowers to truthfully state their income without providing documentation."
"(In) a March 9 deposition by NovaStar President Lance Anderson..said if the income 'seems reasonable, then we're comfortable not verifying it and not using it in our underwriting decision.' However, under further questioning he said that stated income is 'not a material part of the underwriting decision.'"
"PMI's suit cited testimony of Rachel Jones, NovaStar's director of corporate credit, who said the purpose for asking the borrower to state income is 'because our investors require the borrower's stated income.' By investors, she says she was referring to the likes of Fannie Mae, which buys loans when they're packaged and sold as part of a securitization."
"The counter-suit is the latest in a string of legal actions between NovaStar and PMI. NovaStar sued PMI, alleging that the insurer had breached its contract by not covering claims on 10 loans that went belly up. Five of them were stated-income loans. NovaStar then amended its original suit to include 12 additional mortgages, five of them stated income, on which PMI refused to pay. NovaStar says that last year it sold recourse loans that have an outstanding balance of $11.4 billion, up from $6.4 billion the year before."