NovaStar Financial, Inc. posted its second-quarter results late yesterday, and as expected, results showed a big loss. The company reported a net loss of $54.5 million during the second quarter, compared to $33.1 million in earnings during the year-ago period. Pre-tax writedowns totalled $116.9 million, including $73.3 in credit loss provisions. Reflecting a tough credit market, loan production took a nose dive, dropping 73 percent to $774 million; production had registered $2.8 billion in the second quarter of 2006. 61 percent of originations were funded via wholesale channels, with retail lending making up most of the remaining production mix. NovaStar warned that it expects loan production to drop even further during the third quarter, and said that wholesale originations are likely to drop "substantially" -- signaling that the company may be considering pulling out of wholesale lending altogether.
" ... While we expect current secondary market disruptions will abate over time, we believe our third quarter production volume will be substantially lower than the $774 million posted in the second quarter. Given lower production volume, we also expect the cost to fund a loan to rise well above the second quarter level of 3.20%," said Lance Anderson, President and Chief Operating Officer.
It's also clear that NovaStar, like other subprime lenders, is blaming what they see as "irrationality" by secondary market participants, who clearly aren't interesting in bidding on subprime products:
"The subprime securitization market continues to be illiquid. Although we believe the quality of collateral in 2007-2 was markedly better than that in 2007-1, the economics of the transaction did not improve substantially. Over time, we continue to believe the secondary markets will become more rational given better collateral characteristics, although there can be no assurance of this and a sustained recovery will depend on the credit performance of loans, as well as other economic and company-specific factors," said Mike Bamburg, Executive Vice President and Chief Investment Officer.
Speaking of collateral characteristics, NovaStar reported that 53 percent of second quarter originations went to borrowers with FICO scores below 620; further, a whopping 65 percent of NovaStar originations in the second quarter were 2 year ARMs. On the plus side, however, weighted average LTV across all loans originated during the quarter stood at just below 80 percent.