February 21, 2007 / 5:25 PM / 13 years ago

NovaStar sinks 42 percent

NEW YORK (Reuters) - NovaStar Financial Inc. NFI.N shares sank 42.5 percent on Wednesday, leading declines among many U.S. subprime lenders as defaults mount among homeowners with poor credit histories.

The drop came after NovaStar late on Tuesday surprised investors by saying it may generate no taxable income from 2007 to 2011, and may drop its tax-friendly real estate investment trust status in 2008.

It also posted a fourth-quarter loss of $14.4 million, or 39 cents per share, compared with a year-earlier profit of $28.1 million, or 84 cents.

Kansas City, Missouri-based NovaStar became the latest casualty in the subprime sector, where rising delinquencies and lower loan volumes are battering lenders such as HSBC Holdings Plc (HSBA.L) HBC.N and New Century Financial Corp. (NEW.N).

Lenders are losing money as investors such as Merrill Lynch & Co. MER.N force them to buy back soured loans. Many lenders have sold themselves, closed or gone bankrupt in the last six months. ResMae Mortgage Corp. and Mortgage Lenders Network USA Inc. sought Chapter 11 protection from creditors this month.

NovaStar’s “earnings were indicative of the challenging nonprime environment and proved that no company will likely go unscathed,” wrote Scott Valentin, an analyst at Friedman, Billings, Ramsey & Co.

Valentin downgraded NovaStar to “underperform” from “market perform.” Deutsche Bank Securities Inc. analyst Stephen Laws lowered his rating to “hold” from “buy.”

San Francisco-based Wells Fargo & Co. (WFC.N), the largest subprime lender, said on Wednesday it is cutting 320 subprime jobs in Fort Mill, South Carolina, and Concord, California. It said volumes may decline following a February 16 tightening of its lending policies.

The tightening came even though bonds backed by loans that the No. 5 U.S. bank made in 2006 had the fewest delinquencies among 41 subprime issuers studied this month by Credit Suisse.

NovaStar rejected concerns that tighter lending standards would make it harder for borrowers to refinance as rates reset higher, and lead to more foreclosures.

“We’re going to work with (a borrower), modify his payment, and make sure he is still a good return for us,” Chief Investment Officer Michael Bamburg said on a conference call. “Ones that go bad are going to go bad anyway.”

NEW CENTURY, OTHERS

NovaStar shares closed down $7.46 at $10.10, after earlier falling to $9.81, their lowest level since October 2002.

Also on Wednesday, shares of Irvine, California-based New Century, another subprime mortgage REIT, fell $1.22, or 6.5 percent, to $17.55.

On February 7, rising defaults had prompted New Century to project a surprise fourth-quarter loss and say it would restate earnings downward for the first nine months of 2006, leading to a 36.2 percent drop in its shares the following day.

HSBC on February 7 also said it would set aside more than expected for credit losses.

Other Wednesday decliners included Accredited Home Lenders Holding Co. LEND.O, down 83 cents to $24.60; Countrywide Financial Corp. CFC.N, the largest mortgage lender, down 95 cents to $40.69; Fremont General Corp. FMT.N, down 45 cents to $13.31, and IndyMac Bancorp Inc. NDE.N, down 80 cents to

$36.32.

The KBW Mortgage Finance Index .MFX fell 0.7 percent.

Kansas City-based tax preparer H&R Block Inc. (HRB.N), which is trying to sell its Option One subprime unit, fell 67 cents to $22.30. Options traders also bet on a decline. H&R Block is slated to report quarterly results on Thursday.

Wells Fargo rose 24 cents to $36.18 after an upgrade from CIBC World Markets Inc. analyst Meredith Whitney.

Additional reporting by Doris Frankel in Chicago, Aditi Samajpati in Bangalore, and Al Yoon in New York

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