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NovaStar at End of Rope

85% of employees cut

January 11, 2008

By COCO SALAZAR


photo of Coco Salazar

NovaStar Financial Inc. is laying off all but 30 employees and may be done with mortgage lending.

The company plans to eliminate 170 positions and leave only about 30 employees in place, the Missouri-based lender said in a Securities and Exchange Commission Form 8k filed today. The cuts began Tuesday and are expected to be completed by the end of the first quarter.

NovaStar will take a $1.3 million to $1.8 million pre-tax charge to earnings, primarily to cover for severance costs. Substantially all of the charges will be incurred this quarter, though some could be left for the second quarter.

The Kansas City-based entity said it is discontinuing retail and brokerage operations "in order to preserve cash and reduce debt and in light of the company's inability to satisfy certain minimum licensing requirements for these operations relating to the net worth and financial condition of the company," according to the filing.

As a result, NovaStar will surrender or allow to lapse all licenses and authorizations relating to origination and brokerage operations even though this "may hinder or otherwise negatively affect the ability of the company to recommence a mortgage origination and mortgage brokerage business if market conditions improve," Friday's filing read.

The NYSE Regulation Inc. said it will suspend trading of the common and preferred stock for NovaStar prior to the opening of trade on Jan. 17.

In addition, the NYSE said NovaStar lost its appeal regarding a decision in October to delist the stock. As a consequence, following the suspension, the NYSE will make an application with the SEC to delist NovaStar's stock.

On Jan. 4, Wachovia Corp. had extended a waiver on net worth requirements through Feb. 4 and reduced to $22 million from $30 million the level of liquidity NovaStar had to maintain to remain compliant with lending agreements, according to an SEC filing on Wednesday. The extension marked the third time Wachovia has granted an extension from the original Nov. 30 deadline.

A day prior to the amendment, the roles of chairman and chief executive became effective for Lance Anderson, who is also co-founder, president and chief operating officer and replaced co-founder Scott Harman, who left the company. Additionally, Rodney Schwatken succeeded Gregory Metz as chief financial officer.

Wachovia's extensions have kept outstanding borrowings from becoming due and payable immediately, a move NovaStar has stated could cause it to file bankruptcy. Such a possibility was disclosed in mid-November, when the company reported a third quarter loss of $598.0 million and negative stockholder equity of $80.7 million.

NovaStar now mainly consists of mortgage portfolio management operations, as these were not affected by the reduction, Friday's SEC filing indicated.

Loans under management amounted to $15.5 billion as of June 30, 2007, NovaStar previously reported.

But in addition to no longer originating new loans, NovaStar Mortgage is also no longer servicing any loans, its Web site stated as of Friday evening.

The remaining number of employees equals the amount of servicing employees NovaStar said it would retain to handle loans held in its books after the Nov. 1 sale of servicing rights and advances relating to securities loans to Saxon Mortgage Services Inc. eliminated around 275 servicing jobs.

About 1,570 job cuts have been announced by NovaStar since March 2007, when 350 wholesale employees were laid off to adjust to market conditions. These were followed by 500 wholesale job eliminations in August due to re-halting new broker business, 275 retail job reductions in September in a move to focus on core business and preserve liquidity, and the Nov. 1 layoffs.


Coco Salazar is an associate editor and staff writer for MortgageDaily.com.

e-mail: [email protected]


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