NovaStar Financial, Inc.: Information from Answers.com Mobile

Company Perspectives
At NovaStar, we believe in helping people get the most out of homeownership. Through a wide range of unique mortgage solutions we help all types of borrowers use their home as a powerful financial tool. So whether you're looking to consolidate debt, lower monthly payments, make home improvements, or free up cash for other expenses, we can help. Better yet, we can make it easy.
Key Dates
1996: Scott F. Hartman and W. Lance Anderson establish NovaStar.
1997: NovaStar completes its initial public offering of stock.
1999: Retail mortgage operations are launched.
2001: NovaStar pays its first quarterly dividend in three years.
2003: Loan production volume more than doubles to $5.3 billion.
2004: A Wall Street Journal article about NovaStar's licensing fines in Nevada and Massachusetts causes the company's stock value to tumble.
2006: NovaStar posts a $14.4 million loss in the fourth quarter.
2007: NovaStar announces it expects to earn little, if any, taxable income in the next five years.

NovaStar Financial, Inc.

Type: Public Company
Address: 8140 Ward Parkway, Suite 300, Kansas City, Missouri, 64114, U.S.A.
Telephone: (816) 237-7000
Toll Free: (888) 499-5363
Fax: (816) 237-7515
Web: http://www.novastaris.com
Employees: 2,048
Sales: $494.8 million (2006)
Stock Exchanges: New York
Ticker Symbol: NFI
Incorporated: 1996
NAIC: 525930 Real Estate Investment Trusts
SIC: 6798 Real Estate Investment Trusts

NovaStar Financial, Inc., is a specialty finance company that operates in the subprime lending market, providing mortgage loans to borrowers who generally do not satisfy the credit, collateral, and documentation standards prescribed by conventional mortgage lenders. Organized as a real estate investment trust, or REIT, NovaStar originates the loans, bundles them into large pools, and sells bonds secured by the pools to institutional investors. The bonds are repaid with principal payments on the loans. NovaStar collects fees to service the loans. The company's customers typically use the mortgage loans to consolidate their consumer debt, not to purchase homes. NovaStar competes with other subprime lenders, consumer finance companies, conventional mortgage bankers, commercial banks, credits unions, and savings and loan institutions.

Formation of NovaStar: 1996

NovaStar sprang from the executive ranks of Dynex Capital, Inc., a mortgage banking REIT that served as a training ground for Scott F. Hartman and W. Lance Anderson. Scott Hartman grew up in rural Iowa, earned his graduate degree in business administration from the University of Kansas, and joined Dynex in the early 1990s. He distinguished himself at the Virginia-based company, earning the confidence of his superiors, who put him in charge of Dynex's multibillion-dollar, mortgage investment portfolio in 1995. Hartman was 35 years old when he earned his promotion at Dynex, the same age of another Dynex executive who had impressed senior management. Lance Anderson served as president of Dynex's single-family, mortgage loan subsidiary, Saxon Mortgage, Inc. A graduate of Old Dominion University who grew up on military bases in North Carolina and Virginia, Anderson joined Dynex in 1989, the year Saxon Mortgage was formed. He oversaw tremendous growth at the mortgage operation, shepherding it into the subprime mortgage market in 1993, where he turned the subsidiary into one of the five largest originators of subprime mortgage loans in the United States. Saxon was making loans in excess of $1 billion a year when Anderson severed his ties with the company. An energy company acquired Saxon in May 1996, and Anderson, not wishing to work under the supervision of a new parent company, resigned three days after the transaction.

When Anderson decided to quit, he approached Hartman, and the two discussed going into business together. "We were either naïve enough or brilliant enough or dumb enough to try to do something like this," Hartman recalled in a May 25, 2004, interview with the Kansas City Star. Although they were educated and trained in the same field, Hartman and Anderson pursued different passions, possessing complementary skills that formed an ideal partnership. Hartman was the financial wizard, adept with issues related to investments, capital markets, and securitization--bundling financial assets to attract investors. Anderson excelled as a salesman, preferring to focus on the personal relationships that underpinned deal making in the financial sector.

Their plan after leaving Dynex in May 1996 was to create a company much like Dynex, emulating, in particular, Anderson's experience with Saxon Mortgage. They established NovaStar as a REIT, thereby exempting the company from federal income tax provided they distributed nearly all taxable income to shareholders. Organized as a REIT, they decided to focus on the subprime lending market, a market also known as the nonconforming lending market. Subprime lenders catered to the financial needs of borrowers with poor credit histories, functioning as debt-consolidating entities rather than home-purchasing lenders. Although some subprime lenders originated loans to borrowers seeking to purchase homes, the vast majority of nonconforming loans were granted to individuals who used the equity in their homes to consolidate their debt, such as credit-card debt, or to take cash out for personal reasons. The subprime market was about to explode when Hartman and Anderson opened their offices in Kansas City, Missouri, but torrid growth proved to be no guarantee that the two founders would enjoy an untroubled time at the helm of their company. During NovaStar's first decade of business, the subprime lending market skyrocketed from less than $50 billion annually to $640 billion annually, a period during which Hartman and Anderson experienced the joy and the pain of managing their own business.

Hartman and Anderson started out in September 1996. Hartman took the title of chief executive officer and Anderson assumed the duties of president and chief operating officer. To fund the company's start up, the founders turned to institutional investors, raising $47 million in private capital from General Electric Capital Corporation, Wellington Management Company, Lindner Dividend Fund, Wallace R. Weitz & Company, and First Union National Bank. They completed an initial public offering (IPO) of stock in October 1997 and soon experienced the sting of market forces working against them. Competition for loans heated up, touching off aggressive underwriting by lenders, but perhaps most damaging was the Russian debt crisis of 1998. The anxiety set in during the summer, when fear of anything more than moderately risky investments spread across the globe. Nonconforming lenders were hit hard. "That whole 1998 debacle caused a flight to safety," explained an investment executive in the August 28, 2001, issue of American Banker. "Virtually all the subprime guys who were financing their residual assets with repo lines from Wall Street had to meet margin calls, and a lot of them didn't make it." Hartman, in the same American Banker article, confirmed the effect on NovaStar. "So we unfortunately had to sell some stuff at the worst time to meet the margin calls," he said. "That resulted in some pretty good losses in the fourth quarter of 1998."

Struggling Toward a Turnaround

NovaStar got off to a promising start before market conditions conspired against the company. It paid dividends in the last two quarters of 1997 and the first three quarters in 1998, registering consistent financial performance that screeched to a halt at that point, as the market's mood changed. NovaStar's stock peaked at $21.25 per share in March 1998 and began to drop in value, falling to $2.87 by October 1999. Annual losses mounted, totaling more than $30 million between the company's inception and the end of 1999. Hartman and Anderson watched their company spiral downward and took action. "We knew that we had to change how business was being done, and we decided that rather than do it incrementally, we just had to make a dramatic shift," Hartman explained in his August 28, 2001, interview with American Banker. The founders reduced the volume of loans it originated from $100 million per month in mid-1998 to $20 million per month by the end of 1999. They applied stricter criteria to the loans they provided, focusing on nonconforming borrowers with relatively strong credit histories, the upper segment of the subprime market. They increased their use of mortgage insurance and they formed NovaStar Home Mortgage in the fourth quarter of 1999, a subsidiary created to oversee the establishment of branch offices.

After three years of struggling to turn their company in the right direction, Hartman's and Anderson's ordeal ended, ushering in a period of financial consistency for NovaStar. In the second quarter of 2001, the company paid its first dividend since the third quarter of 1998, an achievement hailed by Hartman in his August 28, 2001, interview with American Banker. "The financial results are always the last to show up," he said, "and the dividend payment is culmination of how we reformed and retooled our business in 1999 and 2000. We're now seeing the fruits of that labor." The company's network of branch offices, led by Anderson, also began displaying vitality, recording its first quarterly profit since NovaStar Home Mortgage was created. Between June 2000 and June 2001, the number of satellite offices swelled from 24 to 86, fueling an exponential rise in loan-production volume. In the first six months of 2000, NovaStar Home Mortgage originated $34 million in loans, a volume that increased to $394 million during the first six months of 2001.

NovaStar weathered the storm and began to enjoy tremendous financial success after mid-2001. The subprime market, midway through making its staggering leap in volume from less than $50 billion in annual volume to $640 billion in annual volume, rewarded the efforts of Hartman and Anderson and the more than 100 nonconforming lenders operating throughout the country. NovaStar originated $2.5 billion in loans in 2002 and more than doubled the volume the following year, when it originated $5.3 billion in loans. The company opened a slew of branch offices during the period, at times opening more than 30 offices per month. By the end of 2003, there were 432 NovaStar Home Mortgage offices in 39 states. Loan production, once reduced to $20 million per month, had catapulted to $600 million per month. The company ended the year with $8 billion in loans under management, $150 million in new capital at its disposal, and boasting stock that traded in the $50 range, four years after NovaStar shares had dipped below $3. Gloom was replaced with delight, as NovaStar reveled in its success, but soon Hartman and Anderson faced another crucible. Their company was beset by legal difficulties, difficulties whose origins could be traced to a specific day, April 12, 2004, NovaStar's "Black Monday."

On April 12, 2004, the Wall Street Journal reported that NovaStar had been fined $80,000 in Nevada and $22,500 in Massachusetts. Federal regulators had discovered that NovaStar Home Mortgage offices in the two states had been operating without a license, which prompted the Securities and Exchange Commission to launch an informal inquiry into NovaStar's accounting practices. Wall Street reacted to the revelation with decisive speed, causing the price of NovaStar shares to drop nearly 31 percent in one day. Hartman and Anderson, in a conference call the next day, tried to defuse the situation, asserting the company's nearly 400 branch offices were in good standing. The founders explained the locator feature on the company's web site had inadvertently overstated the number of offices in Nevada--there were six in operation, not 15--and that the problems in Massachusetts stemmed from a rogue branch manager who had opened an office without authorization from the company.

Despite efforts to assuage reaction to the newspaper article, a swarm of lawsuits were filed against NovaStar, beginning with the San Diego office of Milberg Weiss Bershad Hynes & Lerach, the most prolific filer of securities class-action lawsuits in the country. NovaStar, which almost entirely exited the retail mortgage business before the end of 2004, retained Lanny Davis, special counsel to President Bill Clinton between 1996 and 1998, to defend the company against a host of lawsuits. Davis, in an April 16, 2004, interview with the Kansas City Star, referred to the lawsuits as "boilerplate complaints filed by plaintiffs' lawyers trying to win the race to the courthouse without having the facts." Davis continued, "The fact is we were assessed a fine for a judgment error that was corrected and that was converted into a major newspaper story."

NovaStar's legal problems delivered a blow to the company's reputation on Wall Street, slashing the company's stock value, but the licensing irregularities had no impact on stellar market conditions. The housing market was growing robustly, as were home appreciation rates, creating ideal conditions for subprime lenders such as NovaStar. In September 2004, against the backdrop of the company's legal woes, NovaStar's mortgage loan portfolio eclipsed the $10 billion mark for the first time. "We are very proud of reaching this milestone of $10 billion," Hartman said in a September 2004 interview with Origination News. "More than a dollar amount, this achievement represents our relationships with nearly 74,000 homeowners across the United States." NovaStar was performing well, but as they had before, market conditions conspired against the company. If it was any comfort to Hartman and Anderson, they were not alone in suffering from detrimental market conditions. After a decade of energetic growth, the subprime market began to fracture, causing dozens of companies to shutter their operations.

A Future in Doubt

NovaStar's problems surfaced in late 2006. The housing market, which had recorded impressive growth during the preceding years, began to weaken, as interest rates rose. The combination of the two events proved deadly, causing loan defaults and foreclosures to rise. The default rate for loans originated by NovaStar in 2006 increased more than 8 percent, resulting in a $14.4 million loss for the fourth quarter of 2006. The loss, announced in February 2007, unleashed another volley of shareholder lawsuits and forced NovaStar to adopt a defensive posture. The company's stock lost 63 percent of its value by the following month, when 350 employees, 17 percent of NovaStar's workforce, were told to look for employment elsewhere. The times were desperate for nearly all industry players, as subprime lenders and conventional mortgage lenders faced what was regarded as the worst housing market crises in decades. By mid-April 2007, nearly 30 subprime lenders had collapsed or declared bankruptcy, including the industry's second largest competitor, Irvine, California-based New Century Financial Corp.

NovaStar, surrounded by the despair of its peers, was not faring much better. Less than a month after trimming its payroll, the company warned that it expected to earn little, if any, taxable income in the next five years. NovaStar also hired Deutsche Bank Securities to act as a financial adviser as the company considered strategic alternatives, which included "a potential sale or other change of control transaction," according to the April 12, 2007, edition of the Kansas City Star. By August 2007, the company's stock had dropped to a 52-week low, trading for $6.01 per share. At the beginning of the month, NovaStar, as did other lenders in the industry, temporarily suspended issuing commitments for new loans. In a May 25, 2004, interview with the Kansas City Star, Hartman said, "You can't defy financial physics any more than you can defy real world physics. We created a company that we intend to outlive us." As NovaStar fought to survive in the inhospitable subprime market of 2007, Hartman's assertion about the longevity of his company was questionable.

Principal Subsidiaries

NovaStar Assets Corporation; NovaStar Certificates Financing Corporation; NovaStar Capital Access Corporation; NFI Repurchase Corporation; NovaStar ABS CDO 1, Ltd. (Cayman Islands); NFI Holding Corporation.

Principal Competitors

Countrywide Financial Corporation; Long Beach Mortgage Company; First Franklin Financial Corporation.