NovaStar Financial CFO Greg Metz said last week the "volatile mortgage environment" is expected to cause a portion of the subprime mortgage lender's subordinated securities to become permanently impaired. That scenario is more likely to be concentrated in the most recent vintages, he added, speaking during the company's third quarter earnings conference call.
Year-to-date, NovaStar has experienced $10 million worth of impairments. A majority of mortgage lenders that originate subprime loans, and particularly those that operate as REITs - a business model that requires a hefty portion of exposure to originated loans through the investment portfolio - have stated plans to sell loans in the whole market instead of directly securitizing and adding to the REIT during the quarter. Those lenders include New Century Financial Corp., Aames Investment Corp. (see ASR 11/07/05) and MortgageIT. And, at least in NovaStar's case, gain-on-sale margins are consistent whether the lender chooses to sell to its REIT portfolio for securitization or to whole-loan market investors.