How NovaStar held clues to mortgage mess

The kind of charges PMI made against NovaStar appear to have been rampant throughout the industry. Yet PMI didn’t let the matter rest. In denying the claims, according to court records, it cited material errors and omissions in loan-origination documents.

It went so far as to blame NovaStar’s “own unclean hands.” Furthermore, PMI said it had been under the impression that the subprime-mortgage lender “would use the income stated on a borrower’s loan application to qualify the borrower for a stated income loan.” According to PMI, that isn’t what happened. In a deposition, according to court papers, NovaStar President Lance Anderson testified that NovaStar didn’t use incomes stated on the applications to qualify borrowers.

Instead, according to the deposition, Anderson said if the income “seems reasonable, then we’re comfortable not verifying it and not using it in our underwriting decision.” Still, NovaStar denied making any misrepresentations, and in 2005 the two quietly settled their differences, just as the mortgage market was peaking.

By then, PMI had stopped doing business with NovaStar altogether, instead limiting most of its subprime coverage to Countrywide Financial, which was expanding its own subprime business. PMI, however, says that it still limited the amount of subprime loans it would cover.