Friday, August 10, 2007


Aug. 10, 2007 (McClatchy-Tribune Regional News delivered by Newstex) --
Troubled subprime mortgage lender NovaStar Financial (NYSE:NFI PRC) (NYSE:NFI) reported a second-quarter pretax loss from continuing operations of $124.08 million as waves of bad news continued to pound the storm-tossed credit market.

The loss compared with year-earlier pretax profits of $40.8 million for the Kansas City-based company.

Because of tax benefits, NovaStar's operational losses translated into smaller losses for its shareholders.

For the quarter ending June 30, shareholders' net loss was $54.5 million, or $5.84 per share, compared with $33.1 million in net income, or $3.97 per share, a year earlier.

Shares of the company, which reported its earnings after the market closed, rose 24 cents Thursday to $5.53. In early after-hours trading, the stock fell more than 5 percent, to $5.24.

The stock's decline came as Wall Street took its biggest one-day hit since February, in part because of the ongoing turmoil in the home-loan market and rising anxiety about the worsening credit market.

Ripples from the mortgage market crisis spread overseas Thursday after France's largest publicly held bank, BNP Paribas (OOTC:BPRBF) , froze three funds that invest in subprime mortgages in the United States.

NovaStar cited several factors for its continuing hemorrhage, including an $83.6 million increase in its provision for credit losses as home loan delinquencies and defaults continued to rise.

The company also took a hit on its mortgage securities as the value of its mortgage assets declined, requiring nearly $90 million in mark-to-market adjustments in the first half of the year.

For the six months that ended June 30, NovaStar reported an operational pretax loss of $193.5 million, compared with pretax profits of $61.4 million in the same period in 2006.

Shareholders' net loss was $10.2 million, or $1.09 per share, compared with $55.4 million in net income, or $6.72 per share, a year earlier.

The dismal news came amid uncertainties about NovaStar's viability as a going concern. The company briefly suspended making loans through outside brokers last Friday while it assessed conditions. It resumed funding the loans on Tuesday.

Before that happened, analyst Scott Valentin of Friedman Billings Ramsey Group (NYSE:FBR) said that he expected NovaStar to fail. Chris Miller, a senior vice president at NovaStar, countered that the company was 'absolutely not' anticipating bankruptcy and would weather the industry's storms.

Another report issued on Wednesday, by the Center for Financial Research and Analysis, a unit of RiskMetrics Group, rated NovaStar as a high liquidity risk and four other mortgage lenders as moderately-high liquidity risks.

NovaStar originates and sells mortgage loans to borrowers with shaky credit. The questions about its viability have arisen as dozens of mortgage lenders have shuttered their doors or declared bankruptcy since last year.

In its quarterly filing with the Securities and Exchange Commission on Thursday, NovaStar said that it had used up 'significant cash reserves' in the first six months of the year. Cash balances fell by $43.8 million, it said, mainly due to margin calls, mortgage loans it was forced to repurchase and normal business operations.

The company has taken several steps to shore up liquidity, including obtaining $1.9 billion in financing. It also entered into transactions to raise about $150 million in equity.

Earlier this year, NovaStar decided to drop its status as a real estate investment trust after saying it expects little or no taxable income through 2011. The company, however, plans to declare a dividend in the third quarter of 2007 to satisfy tax code requirements governing the distribution of its 2006 taxable income.

REITs are companies that specialize in owning and managing real estate for the benefit of shareholders. They are required to distribute most of their taxable income to shareholders in the form of dividends.

Shedding its REIT status allowed NovaStar to book a one-time tax gain and post a first-quarter profit. The gain was triggered by the difference between the accounting rules governing REITs and those governing ordinary corporations.

But with the weakening housing market showing few signs of improvement, the immediate outlook for NovaStar may be grim. The company's loan production in the second quarter fell 73 percent, from $2.8 billion to $774 million, and NovaStar said it expected volume in the third quarter to fall further still.

To reach Dan Margolies, call (816) 234-4481 or send e-mail to  dmargolies@kcstar.com.

Newstex ID: KRTB-0102-18805916


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