NovaStar Financial Inc said on Tuesday that it would eliminate 275 jobs and slash direct mortgage lending to preserve cash after it was forced to cancel a $101.2 million rights offering, and its shares fell 14 percent.

The company also will study strategic alternatives for its servicing business, which processes loans for more than 100,000 borrowers.

NovaStar said it had decided not to sell rights to purchase $101.2 million of convertible preferred shares after concluding it could not meet certain reporting requirements in the current market environment.

As a result of this decision and ongoing turmoil in U.S. mortgage markets, NovaStar will curtail retail lending, cut 275 out of 400 retail jobs and close 12 loan offices. Overall, the company expects to have 600 employees after the cuts, which begin immediately and be completed in the fourth quarter.

Because new loans will not be originated for the portfolio, the company will look at opportunities to partner or otherwise maximize the value of its servicing group, NovaStar said.

NovaStar expects to record a pretax charge for these moves. It has not yet determined the amount of the charge.

The company will focus on managing its portfolio of securitized loans, which totaled $15.45 billion as of June 30, and mortgage securities.


The Kansas City company said last month that it would offer rights to buy preferred stock yielding 9 percent and which was convertible into common stock at a price of $28 a share.

NovaStar had agreed to sell these rights in connection with its sale of $48.8 million of 9 percent preferred stock to affiliates of MassMutual Capital Partners and funds managed by Jefferies Capital Partners IV, part of Jefferies Group. MassMutual and Jefferies had agreed to buy any of the convertible preferred shares not purchased by investors.

NovaStar said independent auditor Deloitte & Touche last week determined it was not willing to issue a consent for the offering until the lender reissued 2006 financial statements.

Moreover, NovaStar said, Deloitte warned that any audit report accompanying these financial statements would include a statement questioning the company's ability to continue as a going concern.

NovaStar said it concluded it could not reissue its 2006 statements by August 30. Also MassMutual and Jefferies indicated that they were not willing to waive this requirement of their standby purchase agreement.

For much of the past year, rising losses among riskier subprime borrowers triggered a meltdown in the broader mortgage market. A number of lenders have struggled to sell or securitize loans needed to generate cash.

Since filing its report for the second quarter, NovaStar's outlook has dimmed further. Moody's Investor Services downgraded the servicer quality rating of the company, while investors question its ability to remain in compliance financing requirements.

Shares of NovaStar were down $1.22 at $7.25 in morning New York Stock Exchange trade. The stock is down 93 percent over the past year.

(Reporting by Joseph Giannone)