On the heels of a failed public offering, NovaStar Financial Inc. is dramatically scaling back operations and focusing on strategic alternatives for its servicing portfolio.
The real estate investment trust announced today it will sharply reduce retail lending operations -- cutting the staff from around 400 people to about 125. In addition, 12 origination offices will be closed. Including an unaffected servicing operation, 600 employees will remain.
"With today's actions, we are pulling back to focus on NovaStar's core strengths and preserve liquidity," NovaStar Chairman and Chief Executive Officer Scott Hartman said in the announcement. "The secondary market has deteriorated substantially, so we are modifying our business model and further reducing costs for this difficult environment."
The dramatic scale back is expected to be completed by Dec. 31.
NovaStar said it canceled a $101 million public offering because it would not be able to satisfy certain conditions of the offering in the current environment. Specifically, auditor Deloitte & Touche LLP wouldn't sign off on the offering unless NovaStar reissued its 2006 financial statements that included an explanation about the company's uncertain ability to continue as a "going concern."
In addition to the deterioration of the subprime secondary market, impacting its strategic plans were Moody's Investor Services downgrade of its servicer rating, its possible default on financing agreements and a $46.1 million judgment against a subsidiary.
Under the new structure, business will be handled out of four processing centers in Kansas City, Mo., and Columbia, Md., the Kansas City-based company said.
The company halted new broker business and laid off 500 wholesale lending employees last month, leaving around 850 people remaining at the time. Wholesale operation centers in California and Ohio were closed in that move.
"The retail organization will make loans, on a limited basis, either as a broker or to sell the loans," NovaStar reported. "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."
The subprime company will now focus on servicing its portfolio of more than 100,000 mortgages for $15.5 billion as it evaluates strategic alternatives for the unit.
"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," the statement said. "NovaStar cannot predict the outcome of that process at this point."
NovaStar President Lance Anderson reportedly said, "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."