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Bankruptcy Possible at NovaStar

$598 million 3rd quarter loss

November 15, 2007

By staff

NovaStar Financial Inc., which has become a mortgage broker, had a quarterly loss of more than $500 million -- wiping out all stockholder equity. The company acknowledged bankruptcy is a possibility.

The former real estate investment trust Wednesday reported a third quarter loss of $598.0 million, soaring from a $54.5 million loss during the second quarter. A year earlier, NovaStar reported a $25.3 million profit.

Over $245 million of the third quarter 2007 loss was a tax charge related to its REIT revocation retroactive to January 2006, while $99 million was a provision for credit losses and $74 million was a valuation adjustment on mortgage loans, the Kansas City, Mo.-based company noted.

NovaStar referred to itself as a "nonconforming residential mortgage portfolio manager and retail broker," noting it is currently "not engaged in mortgage banking activities, but is brokering loans for other lenders."

As of Sept. 30, stockholder equity was a negative $80.7 million, NovaStar said in a separate filing with the Securities and Exchange Commission.

A sale of $300.5 million in mortgage loans for 92 cents on the dollar to Wachovia was recorded on Sept. 30 as a financing transaction, the report said. Another sale for $664.8 million at a price of 92.7 percent of par was completed on Tuesday. Servicing rights and advances on securitized loans were sold to Saxon Mortgage Services Inc. during the fourth quarter, with net proceeds standing at around $147 million.

A waiver for a breach of a credit line agreement with Wachovia will expire at the end of this month, "and there can be no assurance that the company will be able to obtain additional waivers or amendments from Wachovia or that it will be able to repay its outstanding indebtedness to Wachovia," the report said.

"If the Company cannot obtain additional waivers or amendments, there can be no assurance Wachovia would not issue an event of default and cause the outstanding borrowings to become due and payable immediately which also could cause the company to file bankruptcy," NovaStar stated in the SEC filing.

NovaStar expects to be de-listed from the New York Stock Exchange and is looking at trading on the OTCBB.

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