NovaStar sees survival risk, possible bankruptcy

NEW YORK (Reuters) - NovaStar Financial Inc (NOVS.PK), which quit subprime mortgage lending last year, said on Monday there remained "substantial doubt" about its ability to survive and that it might seek bankruptcy protection despite a second-quarter profit.

In its quarterly report filed with the U.S. Securities and Exchange Commission, NovaStar said it expects cash flow from its mortgage portfolio, its main remaining business, to fall over the next several months to a level below what it needs to keep operating.

The Kansas City, Missouri-based company had in 2006 made $11.2 billion of home loans, but quit lending after defaults soared. It has also fired most of its employees.

"We face substantial liquidity risk and uncertainty, near-term and otherwise, which threatens our ability to continue as a going concern and avoid bankruptcy," NovaStar said in the filing. It said there is "substantial doubt" about its ability to survive.

NovaStar also said in the filing that it had a second-quarter profit of $115.1 million, or $9.96 per share, helped by $312.3 million of gains from the sale of mortgage assets.

For the January-to-June period, however, NovaStar reported a loss of $167.5 million, or $18.66 per share. It had reported a $733.1 million loss for all of 2007.

Shares of NovaStar closed Monday unchanged at $1.30 on the Pink Sheets.

(Reporting by Jonathan Stempel)