NovaStar Losses Continue, But is There a Light at the End of the Tunnel?

NovaStar — the subprime giant that’s been the subject of numerous posts on this sitesaw its woes continue, with the lender saying it will terminate its REIT status by the end of this year. Earnings were pretty ugly once you got past the paper gain generated by the company’s decision to ditch the REIT — a $39.8 million loss in the first quarter. Originations dropped by 21 percent, too. In spite of the continued losses, the company said it sees a light at the end of the tunnel:

“March was probably the worst month,” Chief Executive Scott Hartman said on a conference call. “There appears to be some liquidity coming back to the market. [We have also] taken steps to increase our coupons and reduce our risks.”

It’s far too early, IMHO, to tell if Hartman’s assessment is stockholder window dressing, or if the market is finally beginning to stabilize. Investors jumped at the news, regardless, pushing the stock up 9 percent in end of the week trading. In terms of subprime purchase originations, I do think that the market will return to balance much more quickly than for the millions of troubled homeowners already saddled with poorly-chosen loans. Default servicers, however, will be facing a strong and consistent flow of inventory for at least one to two more years. What happens out beyond that time frame depends on which direction the inflation and job picture goes. I have my own opinions on that, but I’ll write about them later.

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