Fitch Ratings has put NovaStar Mortgage's 'RPS3+' residential primary servicer rating for subprime product and 'RSS3+' special servicer rating on Rating Watch Negative.The Rating Watch reflects the  challenging operating environment in the subprime mortgage sector, particularly the considerable disruption in the secondary mortgage market and the resultant drop in liquidity, Fitch said. Last Aug. 17, NovaStar said it was temporarily stepping back from originating loans in the wholesale market as well as laying off about 500 workers, which makes up 37% of the firm's workforce. Before this, last July 16, after looking at a full range of strategic options, the company said it had entered into a definitive securities purchase agreement, standby purchase agreement, as well as other agreements with MassMutual Capital Partners  and Jefferies Capital Partners to raise $150 million in capital.

The rating agency does not formally rate the credit or financial strength of NovaStar or its parent, Novastar Financial. But, a firm's financial condition is an important component of Fitch's servicer rating process. Fitch thinks that Novastar Financial's financial flexibility is under considerable strain, similar to many other independent seller/servicers. Fitch will monitor developments including Novastar Financial's current efforts to raise capital, its corporate restructuring efforts, and results from its decision to revoke the company's REIT status.

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