U.S. News

Subprime Lender NovaStar Posts Big Quarterly Loss


NovaStar Financial , a struggling subprime mortgage lender, on Thursday posted a large second-quarter loss, hurt by rising credit losses and a writedown of home loans still on its books.

Kansas City, Missouri-based NovaStar posted a net loss of $52.9 million, or $5.84 per share, compared with a profit of $34.7 million, or $3.97 per share, a year earlier.

Results included $116.9 million of pre-tax writedowns, including $73.3 million for credit losses and the rest to reduce the value of mortgage loans and securities.

Loan volume fell 73% to $773.7 million, and the real estate investment trust said it is having more difficulty selling loans it makes. NovaStar said it has faced $76.5 million of margin calls since June 30.

"The subprime securitization market continues to be illiquid," Chief Investment Officer Mike Bamburg said in a statement. "We continue to believe the secondary markets will become more rational given better collateral characteristics, although there can be no assurance of this."

Subprime lenders make loans to people with weaker credit histories. Dozens, including New Century Financial , have cut back lending, quit the industry or gone bankrupt this year as housing prices stagnated, borrowing costs rose, defaults soared, and investors grew unwilling to buy many loans packaged into bonds.

NovaStar expects loan volume to decline "substantially" this quarter, while its cost to fund loans will rise "well above" second-quarter levels. The company said it has tightened its own lending guidelines.

Shares of NovaStar closed Thursday up 24 cents at $5.53 on the New York Stock Exchange. They fell to $5.15 in after-hours electronic trading.

NovaStar on July 16 said it would receive up to $150 million of capital from private equity firms MassMutual Capital Partners and Jefferies Capital Partners to help it continue operations. Through the close, its shares have since fallen 82%, after adjusting for a 1-for-4 reverse stock split.

NovaStar said it ended June with $157 million of liquidity and $4 billion of borrowing capacity. It said it does not intend in the near future to use $2 billion of the capacity, which will expire this year.