NovaStar Financial is currently the subject of a class action lawsuit for charging its borrowers Yield Spread Premium without disclosing the markup. Yield Spread Premium rewards loan originators for arranging mortgage loans at an above market interest rate.
Here’s an example of how Yield Spread Premium works. Suppose you qualified for a 6% mortgage rate from the wholesale lender that approved your mortgage. Your mortgage broker tells you that you qualified for a 6.25% mortgage rate and you accept the loan. Because the mortgage broker sold you a loan at 6.25% the wholesale lender pays them a bonus of 1% of your mortgage amount. The difference between the rate you qualified and the rate you closed is Yield Spread Premium.
The higher the broker marks up your mortgage interest rate, the more money they receive from the wholesale lender. Wholesaler lenders benefit from Yield Spread Premium because they are able to sell your mortgage for more money on the secondary market. Do mortgage brokers abuse Yield Spread Premium at your expense?
Ask the homeowners behind the NovaStar Financial class action lawsuit. The lawsuit alleges NovaStar Financial took advantage of homeowners in Washington State. These homeowners were charged higher mortgage rates that included Yield Spread Premium without the lender disclosing the markup. An internal memo from NovaStar Financial submitted as part of the lawsuit encourages brokers to close without disclosing Yield Spread Premium. The fact that this lawsuit was granted class action status is great victory for Washington homeowners; however, NovaStar Financial isn’t the only dirty mortgage lender out there. Nearly every mortgage lender in the United States is guilty of rewarding loan originators for overcharging homeowners with Yield Spread Premium.