NFI Novastar Finl

Company further curtails lending and focuses on managing current portfolio KANSAS CITY, Mo., Sept. 4 /PRNewswire-FirstCall/ -- NovaStar Financial, Inc. (NYSE:NFI), a residential lender and mortgage portfolio manager, today announced the Company does not intend to proceed with its previously announced offering of rights to purchase $101,175,000 in shares of its 9.00% Series D-2 Mandatory Convertible Preferred Stock. The Series D-2 Preferred Stock was to be convertible into shares of NovaStar's common stock at an initial common stock conversion price of $28.00 per share. As previously announced, NovaStar had agreed to conduct the rights offering in connection with its sale of $48.8 million of its 9.00% Series D-1 Preferred Stock to affiliates of MassMutual Capital Partners LLC ("MassMutual") and funds managed by Jefferies Capital Partners IV LLC ("Jefferies"). In connection with that purchase, MassMutual and Jefferies entered into a standby purchase agreement with NovaStar, in which MassMutual and Jefferies committed, subject to certain conditions, to purchase any shares of Series D-2 Preferred Stock not subscribed for in the rights offering. NovaStar canceled plans for the rights offering because there were certain conditions that management believed the company would not be able to satisfy in the current environment in connection with a requirement to file a registration statement relating to the rights offering with the Securities and Exchange Commission no later than August 30, 2007. As disclosed in NovaStar's Form 10-Q for the quarter ended June 30, 2007, several conditions and events have adversely impacted the subprime mortgage industry and NovaStar's operations, liquidity and financial condition during 2007. Subsequent to the filing of that report additional events have also occurred which further impacted NovaStar's operations, liquidity and financial condition. For example, as previously disclosed, Moody's Investor Services downgraded NovaStar Mortgage, Inc.'s servicer quality rating and additional concerns have developed about NovaStar's ability to remain in compliance with certain covenants contained in its financing agreements. Further, on August 20, 2007, motions for a judgment notwithstanding the verdict and a new trial were denied in the previously disclosed California case in which NovaStar's subsidiary, NovaStar Home Mortgage, Inc., had a $46.1 million judgment entered against it. Further, due to the overall deterioration in the subprime mortgage industry and the secondary capital markets for subprime mortgage loans during 2007 NovaStar made the decision to suspend its wholesale originations and curtail its retail originations to preserve liquidity In view of the impact to the Company of the items discussed above, Deloitte & Touche LLP, NovaStar's independent auditors ("Deloitte"), advised NovaStar in the last week of August 2007 that it was not willing to issue a consent or otherwise be associated with the rights offering unless the Company reissued its 2006 financial statements to include footnote disclosures regarding these matters. In addition, Deloitte further advised NovaStar that its reissued report on such financial statements would include an explanatory paragraph about the uncertainty of NovaStar's ability to continue as a "going concern". NovaStar determined that work necessary for the reissuance of its 2006 financial statements and the reissuance of Deloitte's audit report would not be completed by August 30, 2007, and MassMutual and Jefferies indicated that they were not willing to waive or extend this requirement of the standby purchase agreement. As a result and given market conditions and the current market price of NovaStar's common stock, NovaStar decided it was in the best interests of shareholders not to spend the resources to pursue the offering. In light of these developments and in response to the ongoing turmoil in the subprime mortgage industry, NovaStar announced that it will take several steps to restructure the company's overall operations. As part of this restructuring, NovaStar will take the following actions: -- NovaStar's organization will focus primarily on managing the company's portfolio of securitized residential loans, which totaled $15.45 billion as of June 30, 2007, and mortgage securities. -- NovaStar will sharply reduce retail, or direct-to-consumer, mortgage activity. The company is taking steps to reduce its retail lending organization from approximately 400 employees to about 125 employees. The company will close 12 retail origination offices, concentrating retail activities in four offices, including processing centers in Kansas City, MO, and Columbia, MD. Subject to completion of necessary legal notices and requirements, implementation will begin immediately and conclude during the fourth quarter of 2007. The retail organization will make loans, on a limited basis, either as a broker or to sell the loans. NovaStar expects to have approximately 600 employees, overall, after this reduction in workforce. The company's servicing organization was not affected by the reduction. -- As announced on August 17, 2007, NovaStar has suspended new lending through the wholesale channel. The company intends to re-evaluate whether to resume its wholesale origination business or expand its retail mortgage business in the future, depending on market conditions. -- NovaStar intends to continue to meet loan commitments already outstanding. -- The company intends to continue to service loans for more than 100,000 homeowners. NovaStar plans to evaluate strategic alternatives for its servicing organization. Because new loans will not be originated for the portfolio, the company will look at opportunities to partner or otherwise maximize the value of its servicing group, whose dedicated staff and innovative approaches have been a competitive strength. NovaStar cannot predict the outcome of that process at this point. Scott Hartman, Chairman and Chief Executive Officer, commented: "With today's actions, we are pulling back to focus on NovaStar's core strengths and preserve liquidity. Over the years we have generated economic value primarily through managing our portfolio to generate net interest income while mitigating risks and accessing capital in the secondary market. In better times for the industry, operating a sizeable mortgage banking business to feed loans into the portfolio made strategic sense. But the secondary market has deteriorated substantially, so we are modifying our business model and further reducing costs for this difficult environment. Suspending wholesale lending and shrinking the retail operation are painful decisions, but we believe it is best, at this point, to concentrate on serving our current customers and managing our portfolio for the benefit of NovaStar shareholders." Lance Anderson, President and Chief Operating Officer, commented: "We expect significantly lower loan originations in the second half of 2007, and we intend to proceed cautiously until we see signs of improvement from this distressed phase of the mortgage cycle. The size of NovaStar's portfolio of securitized residential loans can be expected to decline gradually as older loans and securities mature and are not replaced with new mortgage assets. Our goal is to preserve and maximize the value of the portfolio through this difficult period for the industry, and we will continue to evaluate developments closely and consider all necessary or appropriate changes or strategies." In connection with the reduction in the retail organization's workforce, NovaStar expects to incur a pre-tax charge to earnings relating to severance costs, contract termination costs, and plant, property and equipment. Amounts are to be determined. About NovaStar NovaStar Financial, Inc. (NYSE:NFI) is a specialty finance company that originates, purchases, securitizes, sells and invests in loans and mortgage- backed securities. The Company also services a large portfolio of residential loans. NovaStar is headquartered in Kansas City, Missouri. For more information, please reference our website at http://www.novastarmortgage.com/. This Press Release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding management's beliefs, estimates, projections, and assumptions with respect to, among other things, our future operations, business plans and strategies, as well as industry and market conditions, all of which are subject to change at any time without notice. Actual results and operations for any future period may vary materially from those projected herein and from past results. Some important factors that could cause actual results to differ materially from those anticipated include: our ability to manage and operate our business during this difficult period for the subprime industry; our ability to effectively manage our portfolio in light of recent changes to our business and the subprime industry; our ability to continue as a "going concern"; the effect of our inability to consummate our recently announced transactions with MassMutual and Jefferies; our ability to generate and maintain sufficient liquidity on favorable terms; our ability to obtain necessary waivers of, or amendments to, covenants contained in our financing agreements, our ability to complete a transaction to maximize the value of our servicing group; our ability to recommence our wholesale business or expand our retail business if market conditions improve; the size, frequency and structure of our securitizations; our ability to originate and sell loans at a profit and under favorable terms under the current circumstances; impairments on our mortgage assets; increases in prepayment or default rates on our mortgage assets; increases in loan repurchase requests; our ability to use our net loss carryforwards and net unrealized built-in losses; changes in the types of products we offer; inability of potential borrowers to meet our underwriting guidelines; changes in assumptions regarding estimated loan losses and fair value amounts; our ability to improve and maintain effective internal control over financial reporting and disclosure controls and procedures in the future; our ability to operate effectively with a reduced workforce; finalization of the amount and terms of any severance provided to terminated employees; finalization of the accounting impact of our previously announced reductions in workforce; events impacting the subprime mortgage industry in general, including events impacting our competitors and liquidity available to the industry; the initiation of margin calls under our credit facilities; the ability of our servicing operations to maintain high performance standards and maintain appropriate ratings from rating agencies; our ability to generate acceptable origination volume while maintaining an acceptable level of overhead; residential property values; our continued status as a REIT and our compliance with laws and regulations applicable to REITs; interest rate fluctuations on our assets that differ from our liabilities; our ability to acquire mortgage insurance at favorable prices or at all; the outcome of litigation or regulatory actions pending against us or other legal contingencies, including the outcome of the California case discussed above; our compliance with applicable local, state and federal laws and regulations or opinions of counsel relating thereto and the impact of new local, state or federal legislation or regulations or opinions of counsel relating thereto or court decisions on our operations; our ability to adapt to and implement technological changes; compliance with new accounting pronouncements; our ability to successfully integrate acquired businesses or assets with our existing business; the impact of general economic conditions; and the risks that are from time to time included in our filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2006, our quarterly reports on Form 10-Q for the periods ending March 31, 2007, and June 30, 2007. Other factors not presently identified may also cause actual results to differ. Words such as "believe," "expect," "anticipate," "promise," "plan," "intend" and other expressions or words of similar meanings, as well as future or conditional verbs such as "will," "would," "should," "could," or "may" are generally intended to identify forward-looking statements. This press release speaks only as of its date and we expressly disclaim any duty to update the information herein. DATASOURCE: NovaStar Financial, Inc. CONTACT: Media, Richard M. Johnson, +1-913-649-8885, or Investors, Jeffrey A. Gentle, +1-816-237-7424, both of NovaStar Financial, Inc. Web site: http://www.novastarmortgage.com/

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