NovaStar Ceases Most Funding Activity, Retreats to Core Operations; Will Explore ‘Options’ For Servicing Platform

It has to be said: things are clearly getting worse at troubled subprime lender NovaStar.

The company’s press statement today that announced a cancellation of a proposed shareholder rights offering also noted that the company will cease most of its funding activity.

Among the moves, NovaStar said it will “sharply” reduce retail lending, costing 275 more NovaStar employees their jobs. A few weeks back, the company halted wholesale lending and let go of 500 or so employees. Today’s move means that NovaStar will “focus primarily on managing the company’s portfolio of securitized residential loans,” the company said.

NovaStar also said it will “evaluate strategic alternatives for its servicing organization,” language usually reserved to mean that a company is seeking to sell the asset in question.

Scott Hartman, Chairman and Chief Executive Officer, commented: “With today’s actions, we are pulling back to focus on NovaStar’s core strengths and preserve liquidity … the secondary market has deteriorated substantially, so we are modifying our business model and further reducing costs for this difficult environment. Suspending wholesale lending and shrinking the retail operation are painful decisions, but we believe it is best, at this point, to concentrate on serving our current customers and managing our portfolio for the benefit of NovaStar shareholders.”

The company cited “several conditions and events” behind its cancellation of the proposed shareholder rights offering, including a $43.1 million judgment that it now appears the company will now be more likely liable to pay:

… additional events have also occurred which further impacted NovaStar’s operations, liquidity and financial condition … on August 20, 2007, motions for a judgment notwithstanding the verdict and a new trial were denied in the previously disclosed California case in which NovaStar’s subsidiary, NovaStar Home Mortgage, Inc., had a $46.1 million judgment entered against it.

Numerous sources I spoke with about this have said they believe the company is doing what it needs to do as part of a best-practice effort to remain in the mortgage banking business — but many of these same sources also said that current industry conditions will clearly test NovaStar’s ability to “wait it out.”

In my eyes, this is pretty simple: whenever the servicing platform is up for grabs, the writing’s on the wall.

Update: Bloomberg reports the company’s auditor wanted to slap a “going concern” disclaimer on the upcoming issuance, which is probably why it was scrapped altogether.