NovaStar survival at risk,First American cuts jobs

(Recasts first paragraph, adds analyst comment; updates shares)

By Jonathan Stempel

NEW YORK, Sept 4 (Reuters) - New fallout from the U.S. housing slump hit mortgage and real estate companies on Tuesday as subprime lender NovaStar Financial Inc NFI.N and title insurer First American Corp (FAF.N) announced job cuts and NovaStar's auditor expressed doubt the company will survive.

NovaStar scrapped plans to raise $101.2 million in a rights offering, saying auditor Deloitte & Touche LLP wouldn't be associated with the plan unless NovaStar amended its financial disclosures to include a statement "about the uncertainty of NovaStar's ability to continue as a going concern."

Kansas City, Missouri-based NovaStar also said it will cut 275 of 400 retail lending jobs and 12 retail offices, and explore "strategic alternatives" for its servicing business, including a partnership with another company. It had stopped making home loans through brokers on Aug. 17. NovaStar expects to employ 600 people overall after the cuts, down from 2,048 at year end. NovaStar shares fell as much as 19.8 percent.

"The probability of insolvency has increased significantly," wrote Paul Miller, an analyst at Friedman, Billings Ramsey & Co. "An eventual liquidation of the company is highly probable."

Miller rates NovaStar "underperform" with a zero price target. Subprime lenders make loans to people with poor credit.

"We are pulling back to focus on NovaStar's core strengths and preserve liquidity," NovaStar Chief Executive Scott Hartman said in a statement. "The secondary market has deteriorated substantially, so we are modifying our business model and further reducing costs for this difficult environment."

NovaStar executives were unavailable for further comment.

FIRST AMERICAN CUTS AGAIN

Companies associated with the housing market are struggling with increasing defaults, falling home prices, rising borrowing costs and tighter lending standards. Sales of previously owned homes fell in July for a fifth straight month, as the supply of unsold homes hit the highest level since October 1991, according to the National Association of Realtors.

First American, the largest U.S. provider of insurance to protect homeowners against property claims, said it will cut 1,300 jobs, on top of 600 cuts announced in the second quarter, citing "rapidly changing economic conditions." The Santa Ana, California-based company said it may move some jobs to other countries. It ended 2006 with 39,670 employees.

LandAmerica Financial Group Inc LFG.N, the third-largest title insurer, last Tuesday announced 1,100 job cuts.

"Housing prices remain way out of line with people's incomes, and were boosted by a lot of specialized mortgage products that aren't available anymore," said David Olson, co-founder and president of Wholesale Access, a Columbia, Maryland-based firm that tracks the mortgage industry. "In a slowing economy, the mortgage and real estate markets will have to adjust."

SOUND PRODUCTS?

Investor fear of risk is also weighing on the providers of mortgage products that were once thought relatively sound.

Thornburg Mortgage Inc TMA.N -- a Santa Fe, New Mexico, specialist in "jumbo" mortgages for people with good credit -- said it bolstered its finances by selling $1.44 billion of home loans. The company plans to use proceeds to pay down credit lines and speed up lending, after last month halting loan applications and selling $20.5 billion of securities to help pay off debt.

Also on Tuesday, Freddie Mac (FRE.N) said it will not this quarter issue one of its standard mortgage securities for the first time since it began the program in April 2005, citing insufficient investor demand.

Several dozen mortgage companies have stopped lending or found buyers this year.

Tax preparer H&R Block Inc (HRB.N) is trying to save a sale of part of its Option One Mortgage Corp subprime business to private equity firm Cerberus Capital Management LP.

Another subprime lender, Accredited Home Lenders Holding Co LEND.O, on Friday said it will continue a lawsuit to enforce Lone Star's agreement in June to pay $15.10 per share for the company. It rejected Lone Star's lowered $8.50 per share bid.

In afternoon trading, shares of NovaStar fell $1.28, or 15.1 percent, to $7.21; First American fell 5 cents to $41.78, and Thornburg rose 44 cents, or 3.7 percent, to $12.22. Freddie Mac rose 88 cents, or 1.4 percent, to $62.49, and Accredited rose 70 cents, or 7.7 percent, to $9.75, after surging 43.4 percent on Friday.

(Additional reporting by Joseph A. Giannone, Mark McSherry and Al Yoon)

((Editing by Gerald E. McCormick, Gary Hill; Reuters Messaging: jon.stempel.reuters.com@reuters.net, 646 223 6317)) Keywords: MORTGAGES SLUMP/ Keywords: MORTGAGES SLUMP/

(C) Reuters 2007. All rights reserved. Republication or redistribution ofReuters content, including by caching, framing or similar means, is expresslyprohibited without the prior written consent of Reuters. Reuters and the Reuterssphere logo are registered trademarks and trademarks of the Reuters group ofcompanies around the world.nN04420796