[LOGO] NOVASTAR
====================
FINANCIAL, INC.

NOVASTAR FINANCIAL, INC.
1901 West 47th Place, Suite 100
Westwood, Kansas 66205
(913) 362-1090

------------------

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To our stockholders:

You are cordially invited to attend the annual meeting of stockholders of
NovaStar Financial, Inc., a Maryland corporation, to be held on Thursday, May
30, 2002 at 10:00 a.m., Central Daylight Time, at our corporate offices, 1901
West 47th Place, Suite 100, Westwood, Kansas, for the following purposes:

1. The election of the Class III director of NovaStar Financial's Board
of Directors to serve until NovaStar Financial's annual meeting of
stockholders to be held in 2005 or until such director's successor is
elected and qualified;

2. Ratification of the selection of Deloitte & Touche LLP as NovaStar
Financial's independent public accountants for the fiscal year ended
December 31, 2002; and

3. To transact such other business as may properly come before the annual
meeting.

A proxy statement describing the matters to be considered at the annual
meeting is attached to this notice. The Board of Directors has fixed the close
of business on March 12, 2002 as the record date for determination of
stockholders entitled to notice of, and to vote at, the annual meeting.

In order that your shares may be represented at the annual meeting, please
date, execute and promptly mail the enclosed proxy in the accompanying
postage-paid envelope. A proxy may be revoked by a shareholder by notice in
writing to the Secretary of NovaStar Financial at any time prior to its use, by
presentation of a later-dated proxy, or by attending the annual meeting and
voting in person.

By Order of the Board of Directors

/s/ Scott F. Hartman
----------------------------------
SCOTT F. HARTMAN
Chairman of the Board and
Westwood, Kansas Chief Executive Officer
March 22, 2002

------------------------------------------------

YOUR VOTE IS IMPORTANT
PLEASE PROMPTLY MARK, DATE, SIGN AND RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE.

------------------------------------------------

TABLE OF CONTENTS

Page
----

ANNUAL MEETING INFORMATION
Solicitation of Proxies.......................................................................... 1
Voting Rights.................................................................................... 1
Voting of Proxies................................................................................ 2
Revocability of Proxy............................................................................ 2
Annual Report.................................................................................... 2

SECURITIES OWNERSHIP
Beneficial Ownership of Common Stock by Large Securityholders.................................... 3
Beneficial Ownership of Common Stock by Directors and Management................................. 4
Compliance with Section 16(a) of the Securities Exchange Act of 1934............................. 4

ITEM 1 - ELECTION OF DIRECTOR
Nominee and Director............................................................................. 5
Compensation of Directors........................................................................ 6
Compensation Committee Interlocks................................................................ 7
Committees of the Board and Meeting Attendance................................................... 7
Audit Committee Report........................................................................... 8
Compensation Committee Report.................................................................... 9
Performance Graph................................................................................ 10
Management of NovaStar Financial................................................................. 11
Executive Compensation........................................................................... 12
Certain Transactions............................................................................. 14

ITEM 2 - RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
Audit Fees....................................................................................... 17
Financial Information Systems Design and Implementation Fees..................................... 17
All Other Fees................................................................................... 17

OTHER BUSINESS............................................................................................ 18

STOCKHOLDER PROPOSALS - 2003 ANNUAL MEETING............................................................... 18

NOVASTAR

NovaStar Financial, Inc.
1901 West 47th Place, Suite 105
Westwood, Kansas 66205
(913) 362-1090

------------------

PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 30, 2002

To our stockholders:

The Board of Directors of NovaStar Financial, Inc., a Maryland corporation,
is furnishing this proxy statement in connection with its solicitation of
proxies for use at the annual meeting of stockholders to be held on May 30, 2002
at 10:00 a.m., central daylight time, at our corporate offices, 1901 West 47th
Place, Suite 100, Kansas City, Missouri. This proxy statement, the accompanying
proxy card and the notice of annual meeting are being provided to stockholders
beginning on or about March 22, 2002.

ANNUAL MEETING INFORMATION

SOLICITATION OF PROXIES

The costs of this solicitation by the Board of Directors will be borne by
NovaStar Financial. Proxy solicitations will be made by mail. They also may be
made by personal interview, telephone, facsimile transmission and telegram.
Banks, brokerage house nominees and other fiduciaries are requested to forward
the proxy soliciting material to the beneficial owners and to obtain
authorization for the execution of proxies. NovaStar Financial will, upon
request, reimburse those parties for their reasonable expenses in forwarding
proxy materials to the beneficial owners. NovaStar Financial does not expect to
engage an outside firm to solicit votes, but if such a firm is engaged
subsequent to the date of this proxy statement, the cost is estimated to be less
than $5,000.00, plus reasonable out-of-pocket expenses.

VOTING RIGHTS

Holders of shares of NovaStar Financial's common stock, par value $0.01 per
share, at the close of business on March 12, 2002, the record date, are entitled
to notice of, and to vote at, the annual meeting. On that date, 10,356,047
shares of common stock were outstanding. Each share of common stock outstanding
on the record date is entitled to one vote on each matter presented at the
annual meeting. The presence, in person or by proxy, of stockholders
representing 50% or more of the issued and outstanding stock entitled to vote
constitutes a quorum for the transaction of business at the annual meeting. If a
quorum is present, (1) a

plurality of the votes cast at the annual meeting is required for election of a
director, and (2) the affirmative vote of the majority of the votes cast, in
person or by proxy, at the annual meeting and entitled to vote is required for
all other matters. Cumulative voting in the election of directors is not
permitted. Abstentions are considered shares present and entitled to vote, and
under Maryland law an abstention is not a vote cast. Any shares held in street
name for which the broker or nominee receives no instructions from the
beneficial owner, and as to which such broker or nominee does not have
discretionary voting authority under applicable New York Stock Exchange rules,
will be considered as shares not entitled to vote and will therefore not be
considered in the tabulation of the votes. Accordingly, a broker non-vote will
have no effect on the matters presented to this annual meeting.

VOTING OF PROXIES

Shares of the common stock represented by all properly executed proxies
received in time for the annual meeting will be voted in accordance with the
choices specified in the proxies. Unless contrary instructions are indicated on
the proxy, the shares will be voted FOR the election of the nominee named in
this proxy statement as a director, and FOR the appointment of Deloitte & Touche
LLP as independent public accountants for the fiscal year ending December 31,
2002.

The management and the Board of Directors know of no matters to be brought
before the annual meeting other than as set forth herein. To date, NovaStar
Financial has not received any stockholder proposals. If any other matter of
which the management and Board of Directors are not now aware is presented
properly to the stockholders for action, it is the intention of the proxy
holders to vote in their discretion on all matters on which the shares
represented by such proxy are entitled to vote.

REVOCABILITY OF PROXY

The giving of the enclosed proxy does not preclude the right to vote in
person should the stockholder giving the proxy so desire. A proxy may be revoked
at any time prior to its exercise by delivering a written statement to the
corporate secretary that the proxy is revoked, by presenting a later-dated
proxy, or by attending the annual meeting and voting in person.

ANNUAL REPORT

The 2001 annual report including financial statements for the year ended
December 31, 2001, which is being mailed to stockholders together with the proxy
statement, contains financial and other information about the activities of
NovaStar Financial, but is not incorporated into this proxy statement and is not
to be considered a part of these proxy soliciting materials.

SECURITIES OWNERSHIP

BENEFICIAL OWNERSHIP OF COMMON STOCK BY LARGE SECURITYHOLDERS

The following table sets forth certain information known to NovaStar
Financial with respect to beneficial ownership of the common stock as of March
1, 2002 by each person other than members of management known to NovaStar
Financial to beneficially own more than 5% of the common stock. Unless otherwise
indicated in the footnotes to the table, the beneficial owners named have, to
the knowledge of NovaStar Financial, sole voting and investment power with
respect to the shares beneficially owned, subject to community property laws
where applicable.

BENEFICIAL OWNERSHIP
--------------------
OF COMMON STOCK(1)
------------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT
------------------------------------ ------ -------

Wallace R. Weitz & Company................................. 4,688,462 45.27%
1125 South 103rd Street, Suite 600
Omaha, NE 68124-6008

McCarthy Group, Inc........................................ 1,584,925 15.30%
1125 South 103rd Street, Suite 450
Omaha, NE 68124

GMAC/Residential Funding Corporation(2).................... 812,731 7.28%
8400 Normandale Lake Boulevard
Bloomington, MN 55437

---------------------
(1) Assuming no exercise of warrants (except by the
securityholder named, separately).
(2) Consists of 812,731 shares of common stock issuable upon the
exercise of warrants.

BENEFICIAL OWNERSHIP OF COMMON STOCK BY DIRECTORS AND MANAGEMENT

The following table sets forth certain information known to NovaStar
Financial with respect to beneficial ownership of the common stock as of March
1, 2002 by (i) each director, (ii) the executive officers, and (iii) all
directors and executive officers as a group. Unless otherwise indicated in the
footnotes to the table, the beneficial owners named have, to the knowledge of
NovaStar Financial, sole voting and investment power with respect to the shares
beneficially owned, subject to community property laws where applicable.

BENEFICIAL OWNERSHIP OF
-----------------------
NAME OF BENEFICIAL OWNER COMMON STOCK(1)
------------------------ ---------------
SHARES PERCENT
------ -------

Scott F. Hartman(2)..................................................... 321,155 3.09%
W. Lance Anderson(3).................................................... 280,155 2.69%
Michael L. Bamburg(4)................................................... 125,888 1.21%
Edward W. Mehrer(5)..................................................... 49,170 *
Gregory T. Barmore(6)................................................... 52,135 *
Art N. Burtscher(7)..................................................... 1,250 *
Rodney Schwatken........................................................ 13,525 *
All directors and executive officers as a group (7 persons)............. 843,278 8.12%
-----------------
* Less than 1%.
(1) Assuming no exercise of options (except options exercisable
within 90 days of March 1, 2002 by the listed securityholder
named, separately).
(2) Consists of 281,155 shares of common stock, including 42,000
shares of common stock owned jointly with his wife and 40,000
shares of common stock issuable upon the exercise of options.
(3) Consists of 240,155 shares of common stock, including 25,000
shares of common stock owned jointly with his wife and 40,000
shares of common stock issuable upon the exercise of options.
(4) Consists of 118,388 shares of common stock (owned individually
by Mr. Bamburg or by his wife or jointly with his wife) and
7,500 shares of common stock issuable upon the exercise of
options.
(5) Consists of 42,295 shares of common stock, including 2,000
shares owned by his wife and 6,875 shares of common stock
issuable upon the exercise of options.
(6) Consists of 45,260 shares of common stock and 6,875 shares of
common stock issuable upon the exercise of options.
(7) Consists of 1,250 shares of common stock issuable upon the
exercise of options. Does not include 1,584,925 shares of
common stock owned by McCarthy Group, Inc., which wholly owns
McCarthy Group Asset Management of which Mr. Burtscher is
President.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the directors
and executive officers, and holders of more than 10% of NovaStar Financial's
common stock, to file with the SEC initial reports of ownership and reports of
changes in ownership of common stock and other equity securities. Such officers,
directors and 10% stockholders are required by SEC regulation to furnish
NovaStar Financial with copies of all Section 16(a) forms they file. Based
solely on its review of such forms that it received, or written representations
from reporting persons that no Form 5s were required for such persons, NovaStar
Financial believes that, during fiscal 2001, all Section 16(a) filing
requirements were satisfied.

ITEM 1 - ELECTION OF DIRECTOR

The Board of Directors is divided into three classes, designated Class I,
Class II and Class III, with one class standing for election at the annual
meeting of stockholders each year. The Class III director, whose term will
expire in three years, is to be elected at this year's annual meeting. The
nominee for the Class III director is set forth below. The proxy holders intend
to vote all proxies received by them in the accompanying form for the nominee
for director listed below unless otherwise specified by the stockholder. In the
event the nominee is unable or declines to serve as a director at the time of
the annual meeting, the proxies will be voted for a nominee who shall be
designated by the present Board of Directors to fill the vacancy. In the event
that additional persons are nominated for election as directors, the proxy
holders intend to vote all proxies received by them for the nominee listed below
and against any other nominees. As of the date of this proxy statement, the
Board of Directors is not aware of any nominee who is unable or will decline to
serve as director. The nominee listed below already serves as a director of
NovaStar Financial.

The election to the Board of Directors of the nominee identified in the
proxy statement will require the affirmative vote of a plurality of the
outstanding shares of common stock present in person or represented by proxy at
the annual meeting.

The Board of Directors unanimously recommends that stockholders vote FOR
the nominee identified below:

NAME POSITION WITH NOVASTAR FINANCIAL
---- --------------------------------

Scott F. Hartman Director, Chairman of the Board and
Chief Executive Officer

NOMINEE AND DIRECTORS

CLASS III NOMINEE - TERM EXPIRING 2005

SCOTT F. HARTMAN, age 42, is a co-founder, Chairman of the Board and Chief
Executive Officer of NovaStar Financial, and has been a member of the Board of
Directors since 1996. His primary responsibilities are to interact with the
capital markets and oversee the portfolio of investments and the securitization
of mortgage loan production. Mr. Hartman served from February 1995 to June 1996
as Executive Vice President of Dynex Capital, Inc. His responsibilities while at
Dynex included managing a $4 billion investment portfolio, overseeing the
securitization of mortgage loans originated through Dynex's mortgage operation
and the administration of the securities issued by Dynex. For the previous three
years he had served as a consultant to Dynex. Mr. Hartman also serves as a
director and Vice Chairman of NovaStar Mortgage.

CLASS II DIRECTORS - TERMS EXPIRING 2004

W. LANCE ANDERSON, age 41, is a co-founder, President and Chief Operating
Officer of NovaStar Financial, and has been a member of the Board of Directors
since 1996. His primary responsibility is to manage mortgage origination and
servicing operations. Prior to NovaStar, Mr. Anderson served as Executive Vice
President of Dynex Capital, Inc., formerly Resource Mortgage Capital, Inc., a
New York Stock Exchange listed real estate investment trust. In addition, Mr.
Anderson was President and Chief Executive Officer of Dynex' single-family
mortgage operation, Saxon Mortgage. He had been at Dynex since October 1989. Mr.
Anderson also serves as Chairman of the Board of Directors, President and Chief
Executive Officer of NovaStar Mortgage.

GREGORY T. BARMORE, age 60, was most recently Chairman of the Board of GE
Capital Mortgage Corporation (GECMC), a subsidiary of General Electric Capital
Corporation (GE Capital) headquartered in Raleigh, North Carolina. He has served
on the Board of Directors since 1996. He was responsible for overseeing the
strategic development of GECMC's residential real estate-affiliated financial
business, including mortgage insurance, mortgage services and mortgage funding.
Prior to joining GECMC in 1986, Mr. Barmore was Chief Financial Officer of
Employers Reinsurance Corporation (ERC), one of the nation's largest property
and casualty reinsurance companies and also a subsidiary of GE Capital. Mr.
Barmore was selected to serve on NovaStar Financial's Board as an independent
director without regard to the GE Capital investment in NovaStar Financial and
accordingly there are no arrangements with GE Capital or its affiliates
regarding his term of office or other aspects of his service on the Board.

CLASS I DIRECTORS - TERM EXPIRING 2003

ART N. BURTSCHER, age 51, was appointed to the Board of Directors in March
2001 to fill a vacancy on the Board of Directors. In 2000, Mr. Burtscher became
President of McCarthy Group Asset Management, a wholly-owned subsidiary of
McCarthy Group, Inc., a large holder of NovaStar Financial, Inc. securities.
From 1988 to 2000, Mr. Burtscher served as President and Chief Executive Officer
of Great Western Bank in Omaha, Nebraska.

EDWARD W. MEHRER, age 63, has been a member of the Board of Directors since
1996. He is presently the Chief Financial Officer of Cydex, a pharmaceutical
company based in Overland Park, Kansas. Mr. Mehrer was previously associated
with Hoechst Marion Roussel, formerly Marion Merrell Dow, Inc., an international
pharmaceutical company, for approximately ten years until his retirement in
December 1995. From December 1991, he served as Executive Vice President and
Chief Financial Officer and a director of Marion. Prior to that position, he
served in a number of financial and administrative positions. Prior to joining
Marion, Mr. Mehrer was a partner with the public accounting firm of Peat,
Marwick, Mitchell & Co., a predecessor firm to KPMG LLP, in Kansas City,
Missouri.

COMPENSATION OF DIRECTORS

NovaStar Financial paid independent directors, who are not employed by
NovaStar Financial, $15,000 per year plus $500 for each meeting attended in
person. In addition, each independent director has been granted options to
purchase 5,000 shares of common stock at the

fair market value of the common stock upon becoming a director and options to
purchase 2,500 shares at the fair market value of the common stock on the day
after each annual meeting of stockholders. In February 2002, each independent
director was granted an additional 5,000 options at the fair market value of the
common stock as of the grant date. All directors receive reimbursement of
reasonable out-of-pocket expenses incurred in connection with meetings of the
Board of Directors. No director who is an employee of NovaStar Financial will
receive separate compensation for services rendered as a director.

COMPENSATION COMMITTEE INTERLOCKS

No interlocking relationship exists between the Board of Directors or
officers responsible for compensation decisions and the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.

COMMITTEES OF THE BOARD AND MEETING ATTENDANCE

The Board of Directors has two committees, Audit and Compensation. During
2001, there were five meetings of the Board of Directors, five meetings of the
Audit Committee and one meeting of the Compensation Committee. Each director
participated in at least 75% of the meetings of the Board and the committees on
which he served.

NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF NOVASTAR
FINANCIAL'S PREVIOUS OR FUTURE FILINGS UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT MIGHT
INCORPORATE FUTURE FILINGS, INCLUDING THIS PROXY STATEMENT, IN WHOLE OR IN PART,
THE FOLLOWING REPORTS OF THE AUDIT COMMITTEE AND THE COMPENSATION COMMITTEE AND
THE PERFORMANCE GRAPH SHALL NOT BE INCORPORATED BY REFERENCE INTO ANY SUCH
FILINGS.

AUDIT COMMITTEE REPORT

The Audit Committee makes recommendations concerning the engagement of
independent public accountants, reviews with the independent public accountants
the plans and results of any audits, reviews other professional services
provided by the independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit fees
and reviews the adequacy of internal accounting controls. The Audit Committee is
composed of three directors, each of whom is independent as defined by the
listing standards of the New York Stock Exchange. The Board has adopted a
written Audit Committee charter on April 26, 2000 and has not since amended that
charter.

The Audit Committee has reviewed and discussed with management and the
independent accountants the Company's audited financial statements for fiscal
2001. In addition, the Committee has discussed with the independent accountants
the matters required to be discussed by Statement on Auditing Standards No. 61,
"Communication with Audit Committees."

The Audit Committee has received from the independent accountants written
disclosures and a letter concerning the independent accountants' independence
from the Company, as required by Independence Standards Board Standard No. 1,
"Independence Discussions with Audit Committees." These disclosures have been
reviewed by the Committee and discussed with the independent accountants.

Based on these reviews and discussions, the Committee has recommended to
the Board that the audited financial statements be included in the Company's
Annual Report on Form 10-K for fiscal 2001 for filing with the Securities and
Exchange Commission.

Audit Committee

Gregory T. Barmore
Edward W. Mehrer
Art N. Burtscher

COMPENSATION COMMITTEE REPORT

The Compensation Committee of the Board of Directors, which is comprised
exclusively of independent outside directors, administers NovaStar Financial's
executive compensation program.

NovaStar Financial's compensation programs are designed to help attract and
retain qualified and motivated individuals that will provide the leadership
required to achieve our strategic goals, which includes sustaining long-term
value based growth for stockholders. Our philosophy is to link management's
compensation to NovaStar Financial's profitability and stock price. Our
philosophy is also intended to encourage stock ownership by not only management,
but all levels of employees. We believe a significant percentage of total
executive compensation should be provided through incentive equity compensation
that aligns management's interests with those of stockholders. Our goal is to
make our executives' personal net worth heavily dependent on appreciation in the
value of NovaStar Financial stock over the long-term and their income dependent
on NovaStar Financial's dividends.

NovaStar Financial strives to integrate (1) reasonable levels of base
salary, (2) annual incentive bonus awards tied to operating performance, and (3)
stock option awards, to ensure management has a continuing stake in the
long-term success of NovaStar Financial.

The Committee believes that senior management's base salaries are
relatively low as compared to other comparable companies with whom NovaStar
Financial competes for management personnel. However, these executives have
significant compensation potential if there are substantial returns generated to
stockholders.

Under the 1996 stock option plan, annual grants of stock options are
awarded to officers and other key employees to retain and motivate such persons
to sustain and improve long-term stock performance. Stock options are granted at
the prevailing market value and have value to the holders only if NovaStar
Financial's stock price increases. Typically, grants become exercisable in four
equal annual increments.

Compensation Committee

Gregory T. Barmore
Edward W. Mehrer
Art N. Burtscher

PERFORMANCE GRAPH

The following graph presents a total return comparison of NovaStar
Financial's common stock, since the initial public offering on October 30, 1997
through December 31, 2001, to the S&P Composite-500 Stock Index and the
Bloomberg Mortgage REIT Index. The total returns reflect stock price
appreciation and the value of dividends. The information has been obtained from
sources believed to be reliable but neither its accuracy nor its completeness is
guaranteed. The total return performance shown on the graph is not necessarily
indicative of future total return performance.

TOTAL RETURN COMPARISON SINCE THE INITIAL PUBLIC OFFERING
THROUGH DECEMBER 31, 2001

[PERFORMANCE GRAPH]

$100 invested on October 31, 1997 in stock or index, including investment
of dividend.

DECEMBER 31,

1997 1998 1999 2000 2001

NovaStar Financial, Inc. $ 87.85 $ 34.38 $ 17.39 $ 20.83 $ 99.50
S&P Composite-500 Index $106.10 $134.40 $160.64 $144.35 $125.53
Bloomberg Mortgage REIT Index $ 83.22 $ 62.82 $ 49.92 $ 50.34 $ 76.79

MANAGEMENT OF NOVASTAR FINANCIAL

The executive officers of NovaStar Financial and their positions are as
follows:

NAME POSITION WITH NOVASTAR FINANCIAL AGE
---- -------------------------------- ---

Scott F. Hartman Chairman of the Board and Chief 42
Executive Officer

W. Lance Anderson Director, President and Chief Operating Officer 41

Michael L. Bamburg Senior Vice President and Chief 39
Investment Officer

Rodney E. Schwatken Vice President, Secretary, Treasurer and Controller 38
(Chief Accounting Officer)

The executive officers serve at the discretion of the Board of Directors.
Biographical information regarding Mr. Hartman and Mr. Anderson is provided
above. Biographical information regarding Mr. Bamburg and Mr. Schwatken is set
forth below.

MICHAEL L. BAMBURG, age 39, is Senior Vice President and Chief Investment
Officer of NovaStar Financial and NovaStar Mortgage. Mr. Bamburg is responsible
for managing the portfolio of investments, interacting with the capital markets,
overseeing the securitization of the mortgage loan production, and developing
new business lines. Mr. Bamburg most recently served as a Principal of Smith
Breeden Associates, a financial institution consulting and money management firm
specializing in the evaluation and hedging of mortgage backed securities. Mr.
Bamburg spent more than 11 years with Smith Breeden where he analyzed and traded
mortgage- backed securities and consulted with various financial institutions
regarding investments and asset/liability management issues. During the last 3
years with Smith Breeden, Mr. Bamburg spent most of his time marketing Smith
Breeden's money management products.

RODNEY E. SCHWATKEN, age 38, is Vice President, Secretary, Treasurer and
Controller of NovaStar Financial and NovaStar Mortgage. Mr. Schwatken is
responsible for all accounting and finance functions, including management of
financial relationships, management and shareholder reporting and compliance
with REIT regulations. From June 1993 to March 1997, when he joined NovaStar
Financial, Mr. Schwatken was Accounting Manager with U. S. Central Credit Union,
a $30 billion dollar investment, liquidity and technology resource for the
credit union industry. From January 1987 to June 1994, Deloitte & Touche LLP in
Kansas City, Missouri employed Mr. Schwatken, most recently as an audit manager.

EXECUTIVE COMPENSATION

EXECUTIVE OFFICER SUMMARY COMPENSATION TABLE

LONG-TERM
COMPENSATION
--------------------------
OTHER SECURITIES
ANNUAL UNDERLYING DER'S $ ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(#) COMPENSATION

Scott F. Hartman 2001 $300,000 $600,000 -- 20,000 $5,640 --
Chairman of the Board 2000 280,000 95,000 -- 100,000 -- --
and Chief Executive Officer 1999 280,000 -- -- -- -- $50,633(1)

W. Lance Anderson 2001 $300,000 $600,000 -- 20,000 $5,640 --
President and Chief 2000 280,000 95,000 -- 100,000 -- --
Operating Officer 1999 280,000 -- -- -- -- $50,633(1)

Michael L. Bamburg 2001 $211,080 $313,500 -- 10,000 -- --
Senior Vice President and 2000 190,000 142,000 -- 10,000 -- --
Chief Investment Officer 1999 190,000 114,000 -- 30,000 (2) -- --

Rodney E. Schwatken 2001 $90,000 $60,750 -- 5,000 -- --
Vice President, Secretary, 2000 85,000 32,300 -- 5,000 -- --
Treasurer and Controller 1999 80,000 22,800 -- 6,000 (2) -- --

- ---------------------
(1) Represents dividend payments on 144,666 shares of common stock, each owned
by Mr. Hartman and Mr. Anderson, serving as collateral on non-recourse
promissory notes issued in 1998 upon the exercise of options. The dividend
payments are treated as compensation for personal income tax purposes.
(2) Pursuant to resolutions of the Compensation Committee dated December 21,
1999, certain options issued to employees were repriced to $7.00 per share.
Options "granted" in 1999 replace 1997 options "canceled" for Mr. Schwatken
and 1998 options "canceled" for Mr. Bamburg.

STOCK OPTION PLAN. NovaStar Financial's 1996 stock option plan provides for
the grant of qualified incentive stock options or ISOs, non-qualified stock
options or NQSOs, deferred stock, restricted stock, performance shares, stock
appreciation and limited stock awards, and dividend equivalent rights or DERs.
ISOs may be granted to the officers and employees. NQSOs and awards may be
granted to the directors, officers, employees, agents and consultants. Unless
previously terminated by the Board of Directors, the plan will terminate on
September 1, 2006.

All options have been granted at exercise prices greater than or equal to
the estimated fair value of the underlying stock. Outstanding options vest over
four years and expire ten years after the date of grant.

The following table sets forth information concerning stock options granted
during 2001 for each of the directors and executive officers.

INDIVIDUAL GRANTS
----------------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE AT
OPTIONS EXERCISE ASSUMED ANNUAL RATES OF STOCK
GRANTED TO PRICE OR PRICE APPRECIATION FOR OPTION
EMPLOYEES BASE TERM(1)
NUMBER DURING THE PRICE EXPIRATION --------------------------------
NAME GRANTED YEAR ($/SHARE) DATE 5% 10%

W. Lance Anderson 20,000 17.9 15.11 12/19/11 $466,515 $742,848
Michael L. Bamburg 10,000 8.9 15.11 12/19/11 233,258 371,424
Gregory T. Barmore 2,500 2.2 8.35 5/25/11 34,003 54,144
Scott F. Hartman 20,000 17.9 15.11 12/19/11 466,515 742,848
Edward W. Mehrer 2,500 2.2 8.35 5/25/11 34,003 54,144
Art N. Burtscher 5,000 4.5 3.70 3/7//11 46,424 73,922
Art N. Burtscher 2,500 2.2 8.35 5/25/11 34,003 54,144
Rodney E. Schwatken 5,000 4.5 15.11 12/19/11 116,629 185,712
----- -----
Total to Directors and
Executive Officers 67,500 60.3
====== ====

Total shares granted 112,000 100.0
======= =====

- -----------------
(1) Options granted to non-employee directors and options granted to employees
were priced at the market price of NovaStar Financial's common stock on the
NYSE at the date of grant. The assumed annual rates represent the potential
appreciation in value over the exercise price.

The following table sets forth certain information with respect to the
value of the options as of December 31, 2001 held by the named directors and
executive officers.

FISCAL YEAR END OPTION VALUE

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AS OF OPTIONS AS OF
ACQUIRED ON DECEMBER 31, 2001 DECEMBER 31, 2001(2) (3)
NAME EXERCISE VALUE REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----- -------- ------------------ ----------- ------------- ----------- -------------

Scott F. Hartman 16,500 $228,525 48,500 95,000 $120,360 $1,118,000
W. Lance Anderson 13,000 173,290 52,000 95,000 169,920 1,118,000
Michael L. Bamburg 32,500 113,450 7,500 30,000 93,050 273,675
Gregory T. Barmore 1,875 11,588 6,875 6,250 -- 65,694
Art N. Burtscher -- -- -- 7,500 -- 94,950
Edward W. Mehrer.... 3,125 16,850 6,875 6,250 -- 65,694
Rodney E. Schwatken 6,750 29,745 3,875 9,875 47,036 80,071

- ---------------------
(1) The "value realized" represents the difference between the exercise price
of the option shares and the market price of the option shares on the date
the option was exercised. The value realized was determined without
considering any taxes which may have been owed.
(2) "In-the-money" options whose exercise was less than the market price of
common stock at December 31, 2001.
(3) Assuming a stock price of $17.91 per share, which was the closing price of
a share of common stock reported for the New York Stock Exchange on
December 31, 2001.

EMPLOYMENT AGREEMENTS. NovaStar Financial has entered into employment
agreements with the founders, Mr. Hartman and Mr. Anderson. Each employment
agreement provided for an initial term through December 31, 2001, and is
automatically extended for an additional year at the end of each year of the
agreement, unless either party provides a prescribed prior written notice to the
contrary. Each employment agreement provides for the subject officer to receive
his annual base salary and bonus compensation to the date of the termination of
employment by reason of death, disability or resignation and to receive base
compensation to the date of the termination of employment by reason of a
termination of employment for cause as defined in the agreement. Each employment
agreement also provides for the subject officer to receive, if the subject
officer resigns for "good reason" or is terminated without cause after a "change
in control" as those terms are defined in the agreement, an amount, 50% payable
immediately and 50% payable in monthly installments over the succeeding twelve
months, equal to three times such officer's combined maximum base salary and
actual bonus compensation for the preceding year, subject in each case to a
maximum amount of 1% of the book equity value (exclusive of valuation
adjustments) and a minimum of $360,000. In that instance, the subject officer is
prohibited from competing with NovaStar Financial for a period of one year. In
addition, all outstanding options granted to the subject officer under the 1996
stock option plan shall immediately vest. Section 280G of the Code may limit the
deductibility of the payments to such officer for federal income tax purposes.
"Change of control" for purposes of the agreements would include a merger or
consolidation of NovaStar Financial, a sale of all or substantially all of the
assets of NovaStar Financial, changes in the identity of a majority of the
members of the Board of Directors of NovaStar Financial (other than due to the
death, disability or age of a director) or acquisitions of more than 25% of the
combined voting power of NovaStar Financial's capital stock, subject to certain
limitations. Absent a "change in control," if NovaStar Financial terminates the
officer's employment without cause, or if the officer resigns for "good reason,"
the officer receives an amount, payable immediately, equal to such officer's
combined maximum base salary and actual bonus compensation for the preceding
year, subject in each case to a maximum amount of 1% of book value (exclusive of
valuation adjustments) and a minimum of $120,000. If the officer resigns for any
other reason, there is no severance payment and the officer is prohibited from
competing with NovaStar Financial for a period of one year following the
resignation.

CERTAIN TRANSACTIONS

TRANSACTIONS WITH MANAGEMENT. Following the close of the private placement
in December 1996, NovaStar Financial moved to implement the portion of its
business strategy to be conducted through taxable affiliates. In February 1997,
NFI Holding Corporation was formed to serve as a holding company for such
taxable affiliates. The REIT Modernization Act, enacted December 15, 1999,
permits a REIT to own, after December 31, 2000, 100% of the outstanding voting
securities of a taxable subsidiary. Previously, to comply with REIT rules,
NovaStar Financial, Inc. owned all of the preferred stock of its taxable
affiliate NFI Holding which represented a nonvoting 99% economic interest in NFI
Holding. The common voting stock of NFI Holding was owned by the two founders of
NovaStar Financial, Scott F. Hartman and W. Lance Anderson. Effective January 1,
2001, NovaStar Financial acquired the common voting stock of NFI Holding from
the two founders for $370,000. Following the acquisition of the common voting
stock of NFI Holding, NovaStar Financial exchanged all of its preferred stock
for additional common voting stock of NFI Holding. As a result, NovaStar
Financial now owns 100% of the common voting stock of NFI Holding. NovaStar
Financial's consolidated financial

statements beginning with fiscal year 2001
include NFI Holding as a consolidated wholly-owned subsidiary.

In May 1996, Messrs. Hartman and Anderson formed NovaStar Mortgage, Inc.
for the purpose of engaging in the non-conforming lending business. Following
NovaStar Financial's private placement, NovaStar Mortgage began obtaining
required licenses and permits, developing guidelines for the origination of
mortgage loans through its wholesale lending channel and hiring critical senior
personnel to put in place the infrastructure for its mortgage lending and
servicing operations. In February 1997, NFI Holding acquired all of the
outstanding common stock of NovaStar Mortgage from Messrs. Hartman and Anderson.
NovaStar Mortgage thereby became a wholly-owned subsidiary of NFI Holding.

NovaStar Financial and NovaStar Mortgage entered into a loan subservicing
agreement under which NovaStar Mortgage agrees to service mortgage loans for
NovaStar Financial initially for a fixed dollar fee per loan based on the fee in
comparable subservicing arrangements. The subservicing agreement became
effective with the commencement of NovaStar Mortgage's servicing operation in
July 1997. Separate agreements were executed for each pool of loans serving as
collateral for NovaStar Financial's collateralized mortgage obligations.

NovaStar Financial and NovaStar Mortgage further entered into an
administrative services outsourcing agreement, dated June 30, 1997, pursuant to
which NovaStar Mortgage provided to NovaStar Financial on a fee basis certain
administrative services, including consulting with respect to the development of
mortgage loan products, loan underwriting, loan funding and quality control.

Effective April 1, 1999, NovaStar Financial entered an intercompany loan
and guarantee agreement with NovaStar Mortgage. Under the terms of this
agreement, NovaStar Mortgage paid interest on amounts it borrowed from NovaStar
Financial. As of December 31, 2000 and 1999, NovaStar Mortgage had $2,729,000
and $27,663,000 in borrowings from NovaStar Financial outstanding. Interest on
the borrowings accrues at the federal funds rate plus 1.75%. In addition,
NovaStar Mortgage was required to pay guaranty fees in the amount 0.25% of the
loans sold by NovaStar Mortgage for which NovaStar Financial guaranteed the
performance of NovaStar Mortgage.

Following is a summary of the fees, in thousands, which NovaStar Financial
paid to and received from NovaStar Mortgage. As noted above, NovaStar Financial,
Inc. purchased 100% of the common stock of NFI Holding Corporation on January 1,
2001. As a result, intercompany fees are not presented for 2001 as they have
been eliminated in consolidation.

YEAR ENDED DECEMBER 31,
2000 1999
Amounts paid to NovaStar Mortgage
Loan servicing fees......................... $ 2,502 $ 3,886
Administrative fees......................... 625 1,258
Amounts received from NovaStar Mortgage:
Intercompany interest income ( 395) (1,113)
Guaranty, commitment, loan sale and
securitization fees...................... ( 2,711) --
------- -------
Net fees paid...................... $ 21 $ 4,031
======== =======

INDEBTEDNESS OF MANAGEMENT. In related transactions approved by the Audit
and Compensation Committees of the Board of Directors, NovaStar Financial, Inc.
restructured as of January 1, 2001 the promissory notes given in connection with
the initial issuance of NFI Holding common stock and three other outstanding
promissory notes given by each of the founders arising out of the acquisition of
units in our 1997 private placement. NovaStar Financial acquired 72,222 shares
of its common stock held by the founders at an aggregate purchase price of
$270,833 ($3.75 per share). The promissory notes, aggregating to $1,541,267,
were cancelled in exchange for the proceeds of the two stock sales (totaling
$640,833) and new 10-year nonrecourse noninterest-bearing promissory notes
executed by Mr. Hartman and Mr. Anderson. Finally, NovaStar Financial accepted
the return of 288,332 shares of common stock issued upon the exercise of options
by Mr. Hartman and Mr. Anderson in satisfaction of indebtedness of $4,339,980
incurred in connection with that exercise, with $492,774 of accrued interest
added to the principal amount of the 10-year promissory notes.

The new 10-year notes aggregated to $1,393,208. The founders have each
pledged 72,222 shares of NovaStar Financial common stock as security for each
note and the notes will be forgiven in equal annual installments over a 10-year
period so long as the founders remain in the employ of NovaStar Financial. A
bonus will be paid in the amount of personal tax liability resulting from the
forgiveness of debt in excess of the after-tax value to each founder of
dividends paid on the common stock securing the note. In addition, the notes
will be forgiven in the event of a change of control of NovaStar Financial,
termination other than for cause or resignation for good reason as those terms
are defined in each founder's employment agreement. There was no financial
impact to NovaStar Financial from these transactions for the year ending
December 31, 2000. If the notes are forgiven over the anticipated 10-year
period, there will be an annual charge to earnings of $139,321 plus, beginning
in 2002, any personal tax liability bonuses.

CERTAIN BUSINESS RELATIONSHIPS WITH LARGE SECURITYHOLDERS.

On March 10, 1999, NovaStar Financial issued to GMAC/Residential Funding
Corporation 812,731 warrants to purchase NovaStar Financial common stock at a
price of $4.5625 per share, the closing price of NovaStar Financial's common
stock on October 12, 1998. These warrants were issued pursuant to the terms of a
credit facility entered into on October 13, 1998. These warrants will expire on
October 13, 2003.

On December 29, 1999, NovaStar Financial entered into certain lending
arrangements with GMAC/Residential Funding Corporation secured by mortgage loans
and pledged securities. Under the terms of all the agreements required in
connection with a one-year Revolving Warehouse Line of Credit, NovaStar
Financial and NovaStar Mortgage, with NFI Holding as guarantor, can borrow $60
million to finance the acquisition of residential mortgage loans. Obligations
under this arrangement bear interest at a rate indexed to one-month LIBOR. The
line of credit has been renewed and will expire June 30, 2002.

ITEM 2 - RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors, upon recommendation of its Audit Committee, has
selected the accounting firm of Deloitte & Touche LLP to audit NovaStar
Financial's financial statements

for, and otherwise act as the independent certified public accountants with
respect to, the year ending December 31, 2002. The Board of Director's selection
of Deloitte & Touche LLP for the current fiscal year is being presented to
stockholders for ratification at the annual meeting. To NovaStar Financial's
knowledge, neither Deloitte & Touche LLP nor any of its partners has any direct
financial interest or any material indirect financial interest in NovaStar
Financial, or has had any connection since the inception of NovaStar Financial
in the capacity of promoter, underwriter, voting trustee, director, officer or
employee. A representative of Deloitte & Touche LLP is expected to be present at
the annual meeting, will have the opportunity to make a statement if he or she
has the desire to do so and will be available to respond to appropriate
questions from stockholders.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE
PROPOSAL TO SELECT DELOITTE & TOUCHE LLP AS INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS.

PRINCIPAL ACCOUNTING FIRM FEES

Aggregate fees we were billed in 2001 by our principal accounting firm,
Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their
respective affiliates (collectively, "Deloitte & Touche"), including Deloitte
Consulting, are as follows:

Audit fees.................................................... $169,149
Other fees:
Services related to the audit............................... 93,575 (A)
Services related to income tax
compliance and consultation................................ 58,333
--------

Total other fees.............................................. 151,908
Financial information systems, design and implementation...... --
--------

Total......................................................... $321,057
========

(A) Includes fees associated with our mortgage asset securitization
transactions, stand-alone audits of our subsidiaries and mortgage loan
servicing requirements.

Aggregate fees we were billed in 2001 by KPMG LLP for the first and second
quarter review of our financial statements was $15,000.

CHANGE IN CERTIFYING ACCOUNTANTS

KPMG LLP was previously our principal accountants. On July 26, 2001, that
firm's appointment as principal accountants was terminated and Deloitte & Touche
LLP was engaged as principal accountants. The decision to change accountants was
recommended by the Audit Committee and approved by the Board of Directors.

In connection with the audits of the two fiscal years ended December 31,
2000, and the subsequent interim period through July 26, 2001, there were no
disagreements with KPMG LLP on any matter of accounting principles and
practices, financial statement disclosure, or auditing scope or procedures,
which make reference in connection with their opinion to the subject matter of
the disagreement.

The audit reports of KPMG LLP on the consolidated financial statements of
NovaStar Financial, Inc. and subsidiaries as of and for the years ended December
31, 2000 and 1999, did not contain any adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.

OTHER BUSINESS

The Board of Directors knows of no other matters which may be presented for
stockholder action at the meeting. However, if other matters do properly come
before the meeting, it is intended that the persons named in the proxies will
vote upon them in accordance with their best judgments.

STOCKHOLDER PROPOSALS - 2003 ANNUAL MEETING

Stockholders are entitled to present proposals for action at a forthcoming
stockholders' meeting if they comply with the requirements of the proxy rules.
Any proposals intended to be presented at the 2003 annual meeting of
stockholders must be received at NovaStar Financial's offices on or before
November 12, 2002 in order to be considered for inclusion in the proxy statement
and form proxy relating to such meeting. In addition, the NovaStar Financial
bylaws provide that any stockholder wishing to bring any matter before the
annual meeting must deliver notice to the Secretary at the principal executive
offices of NovaStar Financial not less than 90 days before the first anniversary
of the mailing date of the notice of the preceding year's annual meeting.

BY ORDER OF THE BOARD OF DIRECTORS

/s/ Scott F. Hartman
----------------------------------
Scott F. Hartman
Chairman of the Board

Westwood, Kansas
March 22, 2002

- --------------------------------------------------------------------------------
NOVASTAR FINANCIAL, INC.
REVOCABLE PROXY
FOR ANNUAL MEETING OF SHAREHOLDERS ON MAY 30, 2002
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints W. Lance Anderson, or Rodney
E. Schwatken, and each of them, with full power of substitution to act
as attorneys and proxies for the undersigned to vote, as designated on
the reverse side of this proxy, all shares of the common stock of
Novastar Financial, Inc. corporate offices, 1901 West 47th Place, Suite
100, Westwood, Kansas on May 30, 2002 at 10:00 a.m. Central Daylight
Time and at any and all adjournments thereof.

THE BOARD RECOMMENDS A VOTE FOR EACH OF THE LISTED ITEMS

Item 1 - ELECTION OF DIRECTOR / / FOR the nominee listed below

/ / WITHHOLD authority to vote for the
nominee listed below

Nominee: Scott F. Hartman

Item 2 - RATIFICATION OF Deloitte & Touche LLP as independent public
accountants for the fiscal year ending December 31, 2002.

/ / FOR / / AGAINST / / ABSTAIN

(Please See Reverse Side)

- --------------------------------------------------------------------------------

THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY WILL BE VOTED FOR THE NOMINEE FOR DIRECTOR AND
FOR THE PROPOSAL. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO
VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
AT THE PRESENT TIME THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS
TO BE PRESENTED AT THE MEETING.

DATE: , 2002
-----------------------------

----------------------------------------
SIGNATURE

(Please sign exactly as name appears on
stock certificate. Where stock is
registered jointly, all others must
sign. Corporate owners should sign full
corporate name by an authorized person.
Executors, administrators, trustees, or
guardians should indicate their status
when signing.)

PLEASE COMPLETE, SIGN AND DATE THIS
PROXY AND RETURN IT IN THE ENCLOSED
ENVELOPE.