UPDATE 2-NovaStar Financial posts fourth-quarter loss

(Adds background, analyst comment, byline)

By Dan Wilchins

NEW YORK, Feb 20 (Reuters) - NovaStar Financial Inc. NFI.N, which makes mortgages to people with weak credit, posted a fourth-quarter net loss on Tuesday, and its shares dropped more than 30 percent after the company said it expects to have little or no taxable income in coming years.

NovaStar, as a real estate investment trust, pays most of its taxable income as dividends, so its taxable income forecast implies low or no dividends in coming years, said Chris Brendler, an analyst at Stifel Nicolaus in Baltimore.

"That was the bombshell here," Brendler said.

The company said it may consider giving up its REIT status in 2008.

The Kansas City, Missouri-based real estate investment trust posted a fourth-quarter net loss of $14.4 million, or 39 cents a share, compared with net income of $26.4 million, or 84 cents a share, a year earlier.

Those results were hurt by defaults and write-downs, among other items. Excluding those items, the company earned 89 cents from continuing operations, or 22 cents more than analysts had expected on average, according to Reuters Estimates.

NovaStar said it does not expect taxable income in coming years, which is likely because losses are spread out over longer periods for tax purposes than for Generally Accepted Accounting Principles purposes, Stifel Nicolaus' Brendler said.

Homeowners with weak credit histories are defaulting on mortgages or missing payments more often than at any other time this decade, a report by Friedman Billings Ramsey said earlier this month.

Difficulties in the subprime mortgage market have prompted lenders to warn of higher losses from defaults or, in the cases of lenders like ResMae Mortgage Corp. and Mortgage Lenders Network USA, file for bankruptcy.

Accredited Home Lenders Holding Co. LEND.O, another subprime lender, on Feb. 14 posted a fourth-quarter loss three time larger than Wall Street had expected.

But in a speech on Tuesday, Federal Reserve Board Governor Susan Bies said the bulk of the U.S. mortgage market was not troubled by bad debt problems.

NovaStar's shares fell to $11.87 in after-hours trading from a close of $17.56 on the New York Stock Exchange.

((Reporting by Dan Wilchins; editing by Gary Hill; Reuters Messaging: dan.wilchins.reuters.com@reuters.net; +1 646 223 6320)) Keywords: NOVASTAR RESULTS

(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.nN20222750