""NovaStar has been subject to margin calls of approximately $76.5 million due to the extremely volatile and less liquid secondary market, which has adversely affected the value of its mortgage securities and mortgage loans.""
Loans under management were $15.5 billion at June 30, 2007, down 3 percent from a year earlier.
Return on assets in the portfolio was (0.88) percent in the second quarter, compared with 1.36 percent a year earlier.
During the second quarter, NovaStar securitized $1.4 billion in nonconforming loans (the 2007-2 transaction), this securitization was treated as a sale for financial reporting purposes and as a sale for tax purposes. "The subprime securitization market continues to be illiquid.
Although we believe the quality of collateral in 2007-2 was markedly better than that in 2007-1, the economics of the transaction did not improve substantially.
Over time, we continue to believe the secondary markets will become more rational given better collateral characteristics, although there can be no assurance of this and a sustained recovery will depend on the credit performance of loans, as well as other economic and company-specific factors," said Mike Bamburg, Executive Vice President and Chief Investment Officer. Mortgage Banking Second quarter loan production was $774 million, down 73 percent from the $2.8 billion reported in the year-earlier period. During the quarter, NovaStar continued to utilize tighter underwriting guidelines and exception policies, enhanced appraisal reviews, and its proprietary NovaStar Risk Assessment Score (NRAS) for evaluating credit risk in loan applications. Wholesale production in the second quarter represented 61 percent of loan originations.
Retail lending grew to 39 percent of loan originations, aided by the launch of new retail branches in December of 2006. Correspondent lending was negligible, as the company reduced its correspondent efforts. Subsequent to the end of the second quarter, NovaStar further adjusted its pricing and underwriting guidelines in response to deterioration in secondary market conditions.
As a result, the company expects production volume to slow substantially in the third quarter. NovaStar further commented that retail production should be the dominate source of third quarter originations. "Due to poor liquidity and increased risk-aversion in the secondary market for loans, NovaStar and other nonconforming lenders, have taken steps to make our originations more marketable.
We have tightened underwriting guidelines and raised our rate structure, which should further restrict the number of borrowers eligible to qualify for a mortgage loan.
While we expect current secondary market disruptions will abate over time, we believe our third quarter production volume will be substantially lower than the $774 million posted in the second quarter.
Given lower production volume, we also expect the cost to fund a loan to rise well above the second quarter level of 3.20%," said Lance Anderson, President and Chief Operating Officer.
Liquidity and Borrowing Capacity As of June 30, 2007, NovaStar had borrowing capacity of $4.0 billion. However,
the company has no intent to use $2.0 billion of this capacity in the near future and the facilities providing this $2.0 billion of capacity will expire in the last half of 2007.
Cash and available liquidity totaled $157 million at the end of the second quarter. Subsequent to the end of the second quarter, NovaStar issued 2.1 million shares of Series D-1 Preferred Stock to MassMutual Capital and Jefferies Capital Partners for $48.8 million in cash. Also from June 30, 2007 through August 8, 2007,
Sentiment : Strong Sell