Former Subprime Lender NovaStar Files for Bankruptcy

Before the 2008 financial crisis, Novation—then known as NovaStar—originated, purchased, sold, invested in, securitized and sold subprime mortgage loans and mortgage securities. At its peak, court papers say NovaStar originated more than $11 billion in mortgage loans a year, which it then bundled together into securities that it sold to investors when most people thought housing was a sure thing.

But when the housing bubble burst, NovaStar stopped making new loans and sold off its servicing portfolio of existing loans.

The company later renamed itself Novation and now focuses on investing in various businesses. In January, it sold its majority interest in cloud-based telecommunications platform developer Corvisa Inc.

Despite its new name and new focus, the company’s old mortgage business continues to be embroiled in litigation tied to the housing market’s collapse. Court papers say at least three significant lawsuits are pending, although the chapter 11 filing puts an automatic halt to those actions.

In one suit, filed in 2008 and amended last year, a multiemployer union pension plan filed a class-action suit against NovaStar affiliates, the Wall Street banks that underwrote the residential mortgage-backed securities into which NovaStar bundled its loans, and the ratings agencies that slapped investment-grade ratings on the risky securities.

The pension fund purchased $7.75 billion worth of the RMBS and says in the lawsuit that the offering documents “contained material misstatements and omissions concerning the mortgages,” including the fact that NovaStar allegedly “systematically disregarded its own underwriting guidelines” and was “financially incentivized” to make noncompliant loans to risky borrowers.

As of last year, the pension fund said losses on the $7.75 billion in RMBS have “soared to over $2.5 billion.”

Full article from the WSJ here…