COLLATERAL SECURITY, SETOFF AND NETTING AGREEMENT THIS COLLATERAL SECURITY, SETOFF AND NETTING AGREEMENT, dated as of April 18, 2007 (as amended, supplemented and otherwise modified from time to time, the "Agreement") is made collectively among: WACHOVIA BANK, NATIONAL ASSOCIATION ("WBNA"), WACHOVIA INVESTMENT HOLDINGS, LLC ("Wachovia Investment") and WACHOVIA CAPITAL MARKETS, LLC ("Wachovia Capital"; together with WBNA and Wachovia Investment, "Wachovia"), and, any Person who, directly or indirectly, is in control of, or is controlled by, or is under common control with, WBNA, Wachovia Investment or Wachovia Capital (each such Person, a "Wachovia Affiliate") (WBNA, Wachovia Investment or Wachovia Capital and its respective parent, subsidiaries and Wachovia Affiliates, individually a "Wachovia Entity" and collectively the "Wachovia Group"), on the one hand, - and - NOVASTAR FINANCIAL INC. ("Novastar Financial") and any Person (including, without limitation, NOVASTAR MORTGAGE, INC. ("Novastar Mortgage")) who, directly or indirectly, is controlled by Novastar Financial, but not any "upstream" controlling party of Novastar Financial (each such Person, a "Novastar Affiliate") (Novastar Financial and Novastar Affiliates, individually a "Novastar Entity" and collectively the "Novastar Group"), on the other hand. R E C I T A L S: WHEREAS, from time to time, WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity have engaged and may continue to engage in Transactions with Novastar Financial and/or the Novastar Group, involving the purchase, repurchase, sale, swap, lease, loan or borrowing of securities, servicing rights, servicing advances and mortgage loans; WHEREAS, certain Wachovia Entities are acting as Buyers and certain Novastar Entities are acting as Sellers and/or Guarantors under the Master Repurchase Agreements identified on Exhibit A attached hereto (the "Repurchase Agreements"); WHEREAS, certain Novastar Entities are issuing the Guaranties identified on Exhibit B attached hereto (the "Guaranties") for the benefit of Wachovia, each dated as of the date hereof, to guarantee the obligations of the applicable Novastar Entities under the related Repurchase Agreement. WHEREAS, to induce Wachovia or any other Wachovia Entity to enter into the Program Documents, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Novastar Entities have agreed to secure their present and future obligations to the Wachovia Entities by pledging and granting a security interest in certain collateral to the Wachovia Entities hereunder.
A G R E E M E N T: Section 1. Definitions. As used herein, unless otherwise stated in this Agreement, all defined terms shall: (i) have the same meaning ascribed to them in the Repurchase Agreements; and (ii) be read either as singular or plural as appropriate, and where necessary the singular form of any word used herein shall include the plural and vice versa. "Agreement" has the meaning set forth in the preamble. "Bankruptcy Code" means Title 11 of the United States Code, as amended from time to time. "Collateral" has the meaning set forth in Section 2. "Event of Default" has the meaning set forth in Section 4. "Guaranty" has the meaning set forth in the preamble. "Obligations" has the meaning set forth in Section 2. "Person" shall mean an individual, corporation, trust, business trust, statutory trust, partnership, limited liability company, joint venture or similar business association. "Repurchase Agreements" has the meaning set forth in the preamble. "Securities" means, collectively, cash or cash equivalents, securities, commodities, instruments, loans, receivables, currencies or contract rights or interests, options or rights in or in respect of any thereof, including any collateral of every kind delivered with respect thereto. "Settlement Amount" has the meaning set forth in Section 5. "Termination Date" for this Agreement means the date on which all Obligations have been satisfied in full. "Transaction Documents" means this Agreement and all other agreements, documents, forms, confirmations and other writings entered into or delivered pursuant to or in connection with any Transactions, including, but not limited to those set forth on Exhibit A hereto. "Transactions" means, without limitation, purchases or sales of Securities on a long, short or forward basis, loan transactions, repurchase and reverse repurchase transactions, arbitrage transactions, swaps, collars, caps, floors and purchases or sales of options to purchase or sell Securities entered into in connection with any of the Transaction Documents. Section 2. Collateral. A. Each Novastar Entity on behalf of itself and each Novastar Entity hereby grants to each Wachovia Entity a continuing security interest in and first lien on, and a right of setoff with respect to, all of their respective securities, notes, mortgages, instruments, financial assets, monies, trust receipts, servicing rights, servicing advances or other property whenever acquired and all distributions thereon and -2-
proceeds thereof, whenever the same is held or carried for any Novastar Entity by any Wachovia Entity (other than in a third-party custodial capacity for fees) or any of such entity's agents or pledged, lent or sold in a Transaction by such Novastar Enitty to each Wachovia Entity entered into heretofore or at any time in the future (collectively the "Collateral"). The Collateral secures the prompt and full payment and performance when due of any and all present and future obligations and liabilities of any Novastar Entity to any Wachovia Entity, whether pledged or transferred pursuant to a Transaction Document or otherwise (including without limitation obligations and liabilities under any Transactions), whether matured, unmatured, liquidated, unliquidated, fixed or contingent (together with interest at the rate provided under any agreement evidencing the same (or if not so provided, at the rate described in Section 6(B)), and any allowed costs and fees, the "Obligations"). B. All property of the Novastar Group held by the Wachovia Group (other than in a third-party custodial capacity for fees) shall be held in the nature of a deposit for security. Except to the extent otherwise expressly provided in a Transaction Document, Collateral held by or for the benefit of, or pledged or transferred to WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity, shall be deemed held by or for the benefit of, or pledged or transferred to, such entity for its own account or as agent and/or custodian for the account of another Wachovia Entity (or Wachovia Entities), as applicable. Notwithstanding the foregoing, this provision shall not be construed in a manner which conflicts with WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity's requirement to obtain or maintain a certain level of margin with respect to any Transaction. Section 3. Periodic Netting and Setoff. A. Each of the parties hereto acknowledges that all Transactions have been and will be entered into, among other things, in consideration of each other. B. Effective as of the date of this Agreement, each Wachovia Entity shall have the right, from time-to-time in its sole business discretion and without prior notice, to aggregate, setoff and net any payment obligations owing to any Wachovia Entity from any Novastar Entity against any payment owing to any Novastar Entity from any Wachovia Entity, in each case, arising under any Transaction. The parties specifically agree that netting in respect of two or more Transactions may occur upon the election of any Wachovia Entity. This periodic netting process shall be handled as set forth within this Section 3 for all Collateral subject to Transactions. Accordingly, (1) If any Novastar Entity owes obligations to any Wachovia Entity pursuant to any of the Transactions, any Wachovia Entity may, without prior notice, aggregate, setoff and net the amount of such obligations against: (a) any Collateral pledged or transferred by any Novastar Entity to any Wachovia Entity; (b) any Collateral required to be paid or returned by any Wachovia Entity to any Novastar Entity; and (c) any payment due any Novastar Entity from any Wachovia Entity. Specifically, WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity may net (a) amounts owed to any Novastar Entity by any Wachovia Entity under the Transactions; and (b) amounts owed by any Novastar Entity to any Wachovia Entity under the Transactions to satisfy any Obligations of any Novastar Entity to any Wachovia Entity. (2) If amounts owed by all parties are equal, no party shall make a payment under this Section 3. -3-
(3) All payments due pursuant to this Section 3 shall be made on the payment date, which shall be no later than the first business day after the netting. All payments shall be made by wire transfer. (4) Upon satisfaction of all obligations under a Transaction (whether by setoff or otherwise), each of the parties agrees to reflect on its books and records that such netted Transaction has been discharged fully. (5) Any Wachovia Entity may sell at private or public sale any Collateral and apply the proceeds thereof against any Obligations, or retain and apply any Collateral in satisfaction of any such Obligations to any Wachovia Entity; (6) Any Wachovia Entity may setoff any obligations of any Wachovia Entity to any Novastar Entity against any Obligations of any Novastar Entity to any Wachovia Entity; and (7) Any Wachovia Entity may collect from any Novastar Entity any losses, costs or expenses incurred by such Wachovia Entity or any other Wachovia Entity in taking any of the above-mentioned actions (including commissions and reasonable legal fees and expenses), all of which will be secured by the Collateral. C. In the event that the Obligations to be netted are not fixed, WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity may net and setoff pursuant to this Section 3 amounts owning by any Wachovia Entity to any Novastar Entity against 100% of the good faith estimate of such Wachovia Entity of the Obligations due from the Novastar Entity and including contractual and/or statutory interest, costs and anticipated attorney's fees. D. Any netting Wachovia Entity shall have the right to net and/or setoff Obligations and Transactions in any order it chooses. Section 4. Default Netting and Setoff. A. An "Event of Default" shall have the respective meaning assigned to such terms in the relevant Transaction Documents. B. In addition to all other rights and remedies available, an Event of Default shall give each Wachovia Entity the netting and setoff rights specified in Section 3. Section 5. Close-Out Netting and Setoff. A. Upon termination of this Agreement, without limiting any other provision of this Agreement or any Transaction Document, WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity may aggregate, setoff and net against any Obligations of any Novastar Entity any Collateral, or the value thereof, pledged by or required to be delivered or paid by any Novastar Entity to any Wachovia Entity in connection with such terminated Transactions. In addition, upon termination under this Agreement, WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity may aggregate, setoff and net against any Obligations of any Novastar Entity any Collateral, or the value -4-
thereof, pledged by or required to be delivered or paid by WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity to any Novastar Entity in connection with such terminated Transactions. Thereupon, the only delivery obligation of any of the parties in connection with such Transactions will be for the parties to deliver such Collateral or a net cash payment, as the case may be, as may be required after giving effect to such aggregation, netting and setoff. B. The method by which the parties hereto will value such Collateral for such netting and setoff purposes will be determined by the method prescribed in the applicable agreement or, in the absence of a prescribed method, by the Wachovia Entities in a commercially reasonable manner. C. In the alternative, WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity may net and setoff amounts pursuant to this Section in accordance with the netting and setoff rights specified in Section 3. D. Each Wachovia Entity shall aggregate any gains, losses and costs with respect to all transactions into a single net amount (the "Settlement Amount"). It is expressly agreed that the Wachovia Entities shall not be required to enter into replacement transactions in order to determine the Settlement Amount. The Wachovia Group and the Novastar Group will provide one another with a statement showing, in reasonable detail, their calculations of gains, losses and costs, including all relevant quotations and specifying any amount payable, and giving details of the relevant account to which any amount payable is to be paid. Section 6. Remedies. A. None of the rights and remedies of WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity shall be exclusive of any other available right or remedy, and each remedy shall be cumulative and in addition to any other right or remedy of WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity. WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity shall be entitled to exercise its rights and remedies against the Novastar Group in such order and to such extent as it, in its sole discretion, deems appropriate. It is understood that a prior demand or call, or prior notice of the time and place of such sale or purchase, shall not be considered a waiver of the right of WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity to sell the Collateral without demand or notice. Each Novastar Entity acknowledges that all of the Collateral (other than cash) is of a type that may decline rapidly in value and/or is customarily sold on or in a recognized market (including the whole loan market), and therefore, the Novastar Group is not entitled to prior notification of any intended sale or other disposition thereof. The Novastar Group shall remain liable for any and all Obligations it owes to WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity remaining unpaid or unsatisfied after the application of the Collateral and the exercise of all rights hereunder. B. All Obligations shall bear interest equal in value to the rate specified in the applicable Transaction Documents or, if no rate is specified, in respect of each day, the overnight Federal Funds (Effective) Rate for such day that is quoted the next Local Business Day on Telerate Page 118 under the caption "Effective" for such day, or, if that rate is unavailable, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day as published by the Federal Reserve Bank of New York on the next Local Business Day. -5-
C. The rights and remedies granted hereby to the Wachovia Group are in addition to any rights and remedies, and supercede any limitations on such rights and remedies that are inconsistent herewith, that they may have under any existing or future agreements with any Novastar Entity unless, in the case of any future agreements, any inconsistent provision therein is stated explicitly to supercede this Agreement. Without limiting the generality of the foregoing, nothing herein shall be construed as a requirement that WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity cause Collateral held on account of a particular Transaction to be attributed (in whole or in part) to any other Transaction in determining whether that WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity is entitled to make a demand or call upon the Novastar Entity for additional securities, monies or other property under any such other Transaction. Section 7. Multiple Party Setoff. A. Each Wachovia Entity and each Novastar Entity agrees to engage in a triangular or multi-party setoff pursuant to this Agreement if necessary. Each WBNA, Wachovia Investment, Wachovia Capital or any other Wachovia Entity and each Novastar Entity agrees that, at the option of any party to this Agreement, and without prior notice to any other party, any and all amounts payable pursuant to Section 3, Section 4 or Section 5 to any party may be reduced or satisfied by a setoff against any other amounts payable by or to any other party to this Agreement. For purposes of this Agreement, the parties agree that all of the Wachovia Entities constitute a single unit and all of the Novastar Entities constitute a single unit for purposes of setoff. B. This right of setoff, recognized in New York law and ss. 553 of the Bankruptcy Code, shall be held by all parties to this Agreement. If any amounts are so set off, these amounts are to be discharged promptly and in all respects. Section 8. Recoupment. The rights of the Wachovia Group contained herein are in addition to any and all recoupment rights that the Wachovia Group may have at law or in equity against the Novastar Group. Section 9. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY NEW YORK LAW WITHOUT REFERENCE TO CHOICE OF LAW DOCTRINE. Section 10. SUBMISSION TO JURISDICTION; WAIVERS. EACH NOVASTAR ENTITY HEREBY WAIVES TRIAL BY JURY. EACH NOVASTAR ENTITY HEREBY IRREVOCABLY CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF ANY COURT OF THE STATE OF NEW YORK, OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, ARISING OUT OF OR RELATING TO THE PROGRAM DOCUMENTS IN ANY ACTION OR PROCEEDING. EACH NOVASTAR ENTITY HEREBY SUBMITS TO, AND WAIVES ANY OBJECTION EACH NOVASTAR ENTITY MAY HAVE TO, NON-EXCLUSIVE PERSONAL JURISDICTION AND VENUE IN THE COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, WITH RESPECT TO ANY DISPUTES ARISING OUT OF OR RELATING TO THE PROGRAM DOCUMENTS. -6-
Section 11. Assignment; Modification. This Agreement may not be amended or modified except in a written instrument executed by each of the parties hereto. The rights and obligations of the parties under this Agreement and under any transaction or agreement (including any Transaction between the parties) may not be assigned without the prior written consent of the other party and any purported assignment without such consent shall be null and void. Subject to the foregoing, this Agreement shall be binding on the parties and their successors and assigns. If any provisions of this Agreement shall not be enforceable, the parties agree that the remaining provisions of this Agreement shall constitute the binding Agreement between the parties. Section 12. Representations, Warranties and Covenants. Each party represents and warrants to the other party that it has all requisite power to execute, deliver and perform its obligations under this Agreement; that this Agreement constitutes a legal, valid and binding agreement enforceable in accordance with its terms, subject to bankruptcy, insolvency and other laws affecting creditors' rights generally and subject, as to enforceability, to general principals of equity (regardless of whether enforcement is sought in a proceeding in equity or at law); that neither the execution and delivery of this Agreement by the party, nor the performance of its obligations hereunder, (A) conflicts or will conflict with, results or will result in a breach or violation of, or constitutes or will constitute a default under: (i) its articles of incorporation or by-laws (or equivalent documents); (ii) the terms of any agreement, obligation or instrument to which it is a party; or (iii) any statute, law, decree, order, rule or regulation applicable to it, or (B) requires any authorization, approval, consent, order, filing, or other action except such as has previously been obtained. Novastar Financial represents and warrants as of the date of this Agreement that it has no "upstream" controlling parties. Section 13. Recordings of Communications. The Wachovia Entities and the Novastar Entities shall have the right (but not the obligation) from time to time to make or cause to be made tape recordings of communications between its employees and those of the other party with respect to Transactions. The Wachovia Entities and the Novastar Entities consent to the admissibility of such tape recordings in any court, arbitration or other proceedings. The parties agree that a duly authenticated transcript of such a tape recording shall be deemed to be a writing conclusively evidencing the parties' agreement. Section 14. Enforcement Costs and Expenses. The Novastar Entities shall jointly and severally reimburse all Wachovia Entities for any damages, claims, liabilities, expenses, attorney's fees, etc., arising out of the enforcement of this Agreement or any other Transaction Document. Section 15. Cooperation. Each party agrees that it will deliver such documents and take such action as are required to implement the terms of this Agreement. -7-
Section 16. Counterparts. This Agreement may be executed in counterparts all of which taken together shall constitute the Agreement. Section 17. Notice. In the event that any Wachovia Entity aggregates, sets-off and nets any payment obligations owing to any Wachovia Entity from any Novastar Entity against any payment owing to any Novastar Entity from any Wachovia Entity as set forth in this Agreement, such Wachovia Entity shall provide the related Novastar Entity with reasonable notice after the occurrence of such aggregation, set-off and netting. [REMAINDER OF PAGE BLANK] -8-
IN WITNESS WHEREOF, the undersigned have executed this Collateral Security, Setoff and Netting Agreement as of the date first written above. NOVASTAR FINANCIAL, INC., for itself WACHOVIA BANK, NATIONAL and on behalf for the Novastar Group ASSOCIATION, for itself and on behalf for the Wachovia Group By: /s/ Michael L. Bamburg By: /s/ Andrew W. Riebe --------------------------------- ---------------------------------- Name: Michael L. Bamburg Name: Andrew W. Riebe ------------------------------- -------------------------------- Title: Executive Vice President Title: Director ------------------------------ ------------------------------- WACHOVIA CAPITAL MARKETS, LLC, for WACHOVIA INVESTMENT HOLDINGS LLC, for itself and on behalf for the Wachovia itself and on behalf of the Wachovia Group Group By: /s/ Scott Schuman By: /s/ Justin Zahoos --------------------------------- ---------------------------------- Name: Scott Schuman Name: Justin Zahoos ------------------------------- -------------------------------- Title: Vice President Title: Vice President ------------------------------ -------------------------------