ABS East Conference
Boca Raton, Florida
September 13-16, 2005
Forward looking disclosure
Certain matters discussed in this presentation may constitute forward-looking statements within the meaning of the
federal securities laws that inherently include certain risks and uncertainties. Actual results and the timing of certain
events could differ materially from those projected in or contemplated by the forward-looking statements due to a
number of factors, including our ability to generate sufficient liquidity on favorable terms; the size and frequency of our
securitizations; interest rate fluctuations on our assets that differ from our liabilities; increases in prepayment or default
rates on our mortgage assets; changes in assumptions regarding estimated loan losses and fair value amounts;
changes in origination and resale pricing of mortgage loans; our compliance with applicable local, state and federal
laws and regulations and the impact of new local, state or federal legislation or regulations or court decisions on our
operations; the initiation of margin calls under our credit facilities; the ability of our servicing operations to maintain high
performance standards and maintain appropriate ratings from rating agencies; our ability to expand origination volume
while maintaining an acceptable level of overhead; our ability to adapt to and implement technological changes; the
stability of residential property values; the outcome of litigation or regulatory actions pending against us; the impact of
general economic conditions; and other risk factors that are from time to time included in our filings with the SEC,
including our 2005 Quarterly Report on Form 10-Q. Other factors not presently identified may also cause actual results
to differ. Management continuously updates and revises these estimates and assumptions based on actual conditions
experienced. It is not practicable to publish all revisions and, as a result, no one should assume that results projected
in or contemplated by the forward-looking statements will continue to be accurate in the future. This presentation
contains statistics and other data that in some cases have been obtained from, or compiled from, information made
available by service providers or included in publicly filed reports of other entities. Although we believe this information
to be reliable, we are not able to independently verify the accuracy thereof.
2
Overview
Founded: June, 1996
IPO: October, 1997 (NYSE: NFI)
$1.1 billion market cap; $580 million of GAAP equity
Top 15 residential mortgage ABS issuer
Current production run rate of $800-$1000 million per month
Cost to originate historically in the 2.25%-2.50% range
Servicer rating of “Strong” by S&P
Completed 30 ABS transactions, total issuance over $25 billion
Disciplined underwriting approval through automated system
manages to a 3.5-5.0% (pre-MI) loss under normal market
conditions.
3
6/30/05 YTD Subprime Market Rankings
(in millions)
4
Originations
1.
Ameriquest
$45,690
2.
New Century
$23,695
3.
Countrywide
$20,256
4.
Option One
$18,220
5.
WAMU
$17,125
6.
Fremont
$17,000
7.
Wells Fargo
$14,449
8.
WMC
$14,272
9.
First Franklin
$13,564
10.
HSBC
$10,434
11.
GMAC-RFC
$8,110
20.
NovaStar Mortgage
$4,400
Source: Inside B&C Lending
MBS Issuers
1.
Ameriquest
$28,262
2.
New Century
$20,536
3.
Countrywide
$18,411
4.
Lehman
$16,874
5.
CSFB
$10,910
6.
Option One
$10,595
7.
WMC
$10,169
8.
GMAC-RFC
$9,466
9.
First Franklin
$8,135
10.
Bear Stearns
$7,907
11.
Morgan Stanley
$6,864
17.
NovaStar Mortgage
$3,996
Source: Inside B&C Lending
NovaStar Organizational Structure
5
NovaStar Operating Strategy
Originate high margin, non-conforming residential mortgages
Service our own collateral (no third party servicing)
Use technology to be an efficient originator and servicer
Create mortgage securities with good risk-adjusted returns
from our loans through securitization
Use capital markets to price and manage risks
Interest rate risks hedged with swaps / caps
Credit risk managed through the purchase of deep MI and/or
execution in the NIM market
NovaStar is structured as a REIT
Parent company does not pay corporate taxes
Focus is on being a portfolio investor vs. pure mortgage banking
6
Origination Strategy
Primarily an A- wholesale lender
Vertical integration
Originator and end investor
Whole loan portfolio exceeding $13.3 billion
Centralized origination operation
Strive to be a low cost producer - cost to originate ~ 2.25%
Better risk controls - over 40% appraisal reviews
Manage underwriting - 100% prefunding audits
Diversify credit risk - deep MI / NIM execution
Focus on developing competitive advantages in every
channel in which we choose to operate
7
Distribution Channels
Wholesale
Production centers located in Cleveland, OH; Lake Forest, CA and Troy, MI
376 person inside & outside sales force located in 40 states call on a
customer base of over 21,000 independent retail brokers
Compete on service, primarily a price taker
Correspondent
Sales force dedicated solely to the sourcing of closed loans
Focus is on the development of correspondent flow relationships and
purchase of mini bulk pools ($1-$20 million)
Attempt to create competitive advantages by offering small warehouse
lines and private labeling our origination system
Current production run rate of approx. $180 million per quarter
8
Distribution Channels - Continued
Retail
Offices located in Columbia, MD and Kansas City, MO focusing
primarily on retention of existing portfolio
Total of 106 loan officers
Secondary focus on new business using primarily purchased leads
Also maintain a chain local branch in a few select markets
Current production run rate of approx. $375 million per quarter
9
Production Mix by Channel
10
2002
2003
2004
2005YTD*
Channel
Actual
Actual
Actual
Actual
Independent Brokers
79%
67%
65%
77%
Retail
19%
28%
25%
16%
Correspondent
2%
5%
10%
7%
Total Nonconforming
Production
$2.50B
$5.25B
$8.42B
$5.19B
* Thru July 31, 2005
Securitization History
11
2002
2003
2004
2005YTD*
Actual
Actual
Actual
Actual
Production
$2.50B
$5.25B
$8.42B
$5.19B
Underlying Deals
3
4
4
3
Resecuritizations
1
1
3
1
* Includes 2005-3
Non-Conforming Production
$0
$500
$1,000
$1,500
$2,000
$2,500
Quarter
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
Principal Originated
Cost to Originate
12
NovaStar Operations
Troy, MI
Wholesale - Central
Independence, OH
Wholesale - East
Columbia, MD
Retail - East
Lake Forest, CA
Wholesale - West
Kansas City, MO
Corporate Headquarters
Servicing
Correspondent
Retail - Central
13
NovaStar Origination Practices
100% Pre-funding Audit (100% DISSCO / 40% full QC audit)
Quality/Fraud procedures for new and existing brokers
Watch list / Do not take list for 3rd party vendors
Quality Control - Identifies negative trends / provides feedback
10% random review of all files within 30-45 days of funding
100% Appraisal Review
60% cleared by underwriter using AVMs or on-line data sources (SiteXdata)
40% referred to on staff licensed appraisers
15% of those reviewed by staff appraisers have their value reduced
Predatory Lending Issues
We do not originate high cost loans (HOEPA or State High Cost loans)
Net tangible benefit test automated and performed on all eligible loans
Adhere to the FNMA fee test (5% max) on all loans where NovaStar acts as
the lender
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Risks and Risk Management
Interest rate/prepayment
Hedging - match duration using swaps and caps
Prepayment/convexity - prepayment penalties
Portfolio is hedged within maximum exposure of 10% of equity
up/down 100 bps
Credit
Geographic diversification
Lender paid deep MI to 50-55% LTV and/or NIM execution
Common sense U/W and strong quality control
Servicing
Liquidity
$3.65 billion of borrowing capacity from 5 separate lenders
($3.45 billion of which is committed)
15
Servicing Overview
$13.3 billion portfolio representing 95,000 accounts
19th largest sub-prime servicer (as of 6/30/04; Source: National Mortgage News)
Total staff of 264
16 years average experience among Management/Supervisors
Approved FHA, VA, Fannie Mae and Freddie Mac
seller/servicer
Rated by all three rating agencies
S&P: Strong
Moody’s: SQ2
Fitch: RSP3+
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Servicing
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
Quarter
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
Principal Serviced
Cost to Service
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Summary of 6/30/2005 YTD Results
GAAP earnings of $71.3 million; $2.49 / share
$2.80 dividend / share
$4.30 billion in non-conforming production
Servicing portfolio grew to $13.3 billion
$343 million of cash and available liquidity
Completed two whole loan Sr./Sub securitizations backed
by $3.9 billion of collateral
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Collateral Performance
Pre-Mortgage Insurance
(All data as of August 31, 2005 unless stated otherwise)
Production Summary
Year
Average
Balance
WAC
LTV
CLTV
FICO
PPP
(% with)
PPP
Years
ARM
NON-FULL
DOC
NOO
CASH OUT
1997-98
$104,540
10.04%
79.6%
81.3%
604
70%
2.2
68%
35.1%
5.9%
52.8%
1999
$100,837
9.90%
81.6%
82.9%
615
90%
3.2
64%
39.8%
7.7%
49.5%
2000
$116,009
10.55%
82.5%
84.9%
616
90%
2.9
77%
41.4%
6.1%
42.9%
2001
$128,925
9.76%
82.7%
85.5%
613
84%
2.5
74%
39.1%
4.5%
49.4%
2002
$146,642
8.21%
81.0%
83.3%
627
82%
2.4
70%
45.4%
3.7%
56.9%
2003
$153,639
7.22%
80.0%
82.6%
637
78%
2.3
69%
50.3%
3.6%
62.0%
2004
$155,529
7.56%
82.2%
84.0%
620
75%
2.0
83%
48.9%
3.9%
61.3%
6/30/05YTD
$150,972
7.62%
82.2%
85.7%
631
65%
1.5
83%
51.8%
5.0%
57.8%
20
Actual Loss Severity
21
Production
Principal
Average
Loss
Year
Loans
Liquidated
Balance
Severity
1997-1998
1,987
$198,801,415
$100,051
42.4%
2000
525
$59,955,413
$114,201
34.8%
2001
691
$81,875,274
$118,488
34.3%
2002
397
$57,644,268
$145,200
28.2%
2003
164
$23,235,654
$141,681
26.1%
2004
20
$3,171,001
$158,500
24.8%
2000-2004
1,797
$225,880,611
$125,699
31.9%
Production Performance
22
Production Performance
23
Early Performance Indicators
24
MBS method
OTS method
Early
First Payment
First Payment
Payment
Default
Default
Default *
1997-1998
4.67%
2.05%
9.20%
2000
1.65%
0.80%
5.61%
2001
1.33%
0.66%
5.02%
2002
1.05%
0.45%
2.77%
2003
0.67%
0.25%
1.79%
2004
1.57%
0.55%
3.35%
2000-2004
1.22%
0.47%
3.01%
*Early payment default is defined as missing one payment in the first six payments
Additional Data
Complete production and performance data can be found on
NovaStar’s website: http://www.novastarmortgage.com/corporate/
Monthly Production Reports
Bond Investor Reports
Bond Remittance Statements
Mortgage Insurance Claim Statistics
25