NovaStar Financial, Inc.
2114 Central Street, Suite 600
Kansas City, MO 64108
816.237.7000
December 10, 2008
Ms. Jessica Barberich
Staff Accountant
United States Securities and Exchange Commission
Division of Corporate Finance
100 F Street, NE
Washington, D.C. 20549
VIA Facsimile (202.272.9210) and Overnight Mail
Re: | NovaStar Financial, Inc. |
Form 10-K for the year ended December 31, 2007
Forms 10-Q for the quarterly periods ended March 31, 2008 and June 30, 2008
File No. 1-13533
Dear Ms. Barberich:
NovaStar Financial, Inc. (the “Company”) is writing this letter in response to a verbal request from the staff of the Securities and Exchange Commission (the “Staff” or the “Commission”).
During a teleconference on November 24, 2008, the Staff asked the Company if it had performed an analysis of the expected future benefit of the derivatives in the NHES 2007-1 securitization transaction as of June 30, 2008 excluding any market factors and conditions occurring subsequent to the inception of the loan securitization. Furthermore, if the Company had performed this analysis, the Staff asked if the analysis supports the Company’s conclusion that the derivatives were no longer expected at inception to excessively benefit the Company as of June 30, 2008. The Staff believed that this analysis would assist in identifying the impact to the cash flows of the derivative instruments that expired during June of 2008.
Prior to this request from the Staff, the Company had not prepared the requested analysis. The Company then prepared this analysis after the Staff’s request. A summary of the results of this analysis is included in the attachment to this letter. This summary was provided and discussed with the Staff during a teleconference on December 2, 2008. The summary provides the estimated cash benefits of the derivatives after June 30, 2008, a) using the original forecasting assumptions (i.e. which would eliminate the impact of market factors subsequent to inception of the loans securitization) and, b) with the impact of the market factors subsequent to inception through June 30, 2008 and updated assumptions subsequent to June 30, 2008. In the analysis performed consequent to a) in the preceeding sentence, the derivative cash flows shown in the column denoted as “OC Rebuild” benefit NovaStar and do not benefit third part bondholders as mandated by the priority of payments specified in the legal documents at inception.
United States Securities and Exchange Commission
December 10, 2008
Page 2 of 2
The second set of estimations is a summary of the analysis management used in its determination to deconsolidate the NHES 2007-1 assets and liabilities as of June 30, 2008 and contained assumptions as described in b) above. In this analysis, the derivative cashflows shown in the column entitled “OC Rebuild” do not benefit NovaStar and benefit third party bondholders due to following the priority of payments as specified in the transaction’s legal documents.
A key factor in these analyses is the loan losses expected to be incurred. The expected loss percentage for the original and updated forecasts (as of June 30, 2008) is included in the attached summary.
Excluding any impact of the market factors and conditions, the updated analysis as of June 30, 2008 provides the same conclusion as was reached at inception of this transaction regarding the excessive benefit of the derivatives as it relates to the Company.
Should you have any questions or comments regarding the information provided herein, please call me at 816.237.7532.
Sincerely,
Rodney E. Schwatken
Chief Financial Officer
Cc: | Mr. W. Lance Anderson, NFI |
NFI Audit Committee
Mr. Richard T. Lippoli, Deloitte & Touche LLP
Mr. James Goettsch, Husch Blackwell Sanders LLP
NovaStar Financial, Inc.
2007-1 Securitized Loans
Future Cash Flows from Derivatives - After June 30, 2008
Estimated at Inception
Total Hedge CF | 3rd Party Benefit | OC Rebuild (A) | NFI Benefit | Total Benefit | |||||||||||||||
-100 | $ | (7,168,229.82 | ) | $ | — | $ | — | $ | (7,168,229.82 | ) | $ | (7,168,229.82 | ) | ||||||
Base | (1,002,236.92 | ) | — | — | (1,002,236.92 | ) | (1,002,236.92 | ) | |||||||||||
+100 | 5,444,890.27 | — | 4,445,799.22 | 999,091.05 | 5,444,890.27 | ||||||||||||||
+200 | 12,162,657.44 | — | 12,162,657.44 | — | 12,162,657.44 | ||||||||||||||
+300 | 18,853,349.04 | — | 18,853,349.04 | — | 18,853,349.04 | ||||||||||||||
+400 | 25,517,202.58 | 718,088.84 | 20,952,646.32 | 3,846,467.42 | 25,517,202.58 | ||||||||||||||
Expected loss rate (at inception) | 6.2 | % | |||||||||||||||||
Estimated as of June 30, 2008 | |||||||||||||||||||
Total Hedge CF | 3rd Party Benefit | OC Rebuild (B) | NFI Benefit | Total Benefit | |||||||||||||||
-100 | $ | (15,805,179.75 | ) | $ | — | $ | (15,805,179.75 | ) | $ | — | $ | (15,805,179.75 | ) | ||||||
Base | (10,100,933.36 | ) | — | (10,100,933.36 | ) | — | (10,100,933.36 | ) | |||||||||||
+100 | (4,420,004.38 | ) | — | (4,420,004.38 | ) | — | (4,420,004.38 | ) | |||||||||||
+200 | 1,307,150.04 | — | 1,307,150.04 | — | 1,307,150.04 | ||||||||||||||
+300 | 7,395,985.54 | 7,395,985.54 | — | 7,395,985.54 | |||||||||||||||
+400 | Not Available in Current Model | ||||||||||||||||||
Expected loss rate (at June 30) | 23.9 | % |
(A) | Derivative Cashflows used in OC benefit NovaStar and do not benefit third party bondholders. |
(B) | Derivative Cashflows used in OC do not benefit NovaStar and benefit third party bondholders. |