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Seattle Times business reporter Elizabeth Rhodes posts the answers to your real estate questions as they pop up during the week. Join this ongoing discussion, which also features reader reaction to real-estate articles appearing throughout The Times.
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July 12, 2007 10:44 AM
Posted by Elizabeth Rhodes
A June 22 article reported that a class action lawsuit against NovaStar Mortgage had been settled out of court in Tacoma, following certification, last fall, by a federal judge who ruled then that NovaStar's failure to disclose its payment of yield spread premiums was unfair or deceptive under Washington law.
That story drew a response from Norton Tait, first vice president and senior manager of Washington Mutual Bank's Recourse and Recovery Department.
In your recent article regarding the NovaStar legal settlement, you stated that a Yield Spread Premium (YSP) is a "controversial practice in which lenders pay independent mortgage brokers a premium to put borrowers into a loan with a higher interest rate than what they qualified for." Regrettably, you have wholly mischaracterized the purpose and nature of the YSP.
Mortgage brokers are agents for the borrower -- the broker is selected by the borrower and accountable to the borrower. Accordingly, the borrower is responsible to pay for the broker's services, which fees can cost several thousand dollars depending on the contractual agreement between the borrower and the broker. Often a borrower does not have sufficient cash at closing to pay for the broker's services, in which case the borrower may elect to have the lender "advance" the payment to the broker on the borrower's behalf outside of closing. The borrower then repays the lender for this advance in the form of a slightly higher interest rate. This payment is for the broker's services rendered on behalf of the borrower. The payment is not a premium in exchange for a higher interest rate. In fact, given that borrowers frequently refinance in today's mortgage environment, the lender often will not fully recoup the advance because the loan is paid in full within a few years of origination.
The issue in the NovaStar case was not whether the YSP is appropriate, but whether NovaStar properly disclosed to the borrower the option of paying the broker upfront, resulting in a slightly lower interest rate over the term of the loan. Full disclosure is essential in order for the borrower to make an informed decision. Accurate reporting is equally critical.
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