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NovaStar Shares Fall On Fourth-Quarter Loss; May Lose REIT Status

Subprime mortgage lender Novastar Financial said late Tuesday it is considering whether to change its status as a Real Estate Investment Trust after it reported a fourth-quarter loss.

Novastar shares fell sharply as the company joins several other lenders hurt by rising levels of defaults on loans to people with weak credit.

The Kansas City, Mo. lender, which has a $16.3 billion mortgage loan portfolio, said it lost more than $14 million in the fourth quarter. The loss stemmed mostly from almost $45 million in accounting charges the company recorded anticipating many borrowers won't be able to repay their mortgages.

Novastar Chief Executive Scott Hartman said mortgage credit performance follows home prices because borrowers can tap the equity in their homes to raise money to pay off debt. Novastar determines how much to lend to whom using standards that were reasonable during the housing boom. But the boom is over.

"In the housing market, we had a swift downward shift, which caused the guidelines we had in place to no longer be appropriate," Hartman said in a conference call. Novastar is implementing a new, more selective standard to evaluate prospective borrowers.

But so drastic are the credit woes in Novastar's existing portfolio that the company is considering changing its corporate structure. Novastar Financial is technically a real estate investment trust, which means instead of paying taxes it distributes 90 percent of its taxable income to shareholders as a dividend.

Novastar Financial doesn't think that strategy will work anymore because the company's not sure how much taxable income it's going to generate for the next five years. Without profit to funnel into dividends, the REIT structure may become too confining, the company said.

Deutsche Bank analyst Stephen Laws downgraded Novastar to "Hold."

Without dividends, Laws said he expects Novastar Financial's market value to match the net value of its assets. Laws slashed his price target to $8 per share from $29 per share. Novastar's stock closed at $17.56 Tuesday.

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