NovaStar Financial Announces Third-Quarter Results; Earnings Rise as Loan Portfolio Grows and Cost Efficiencies are Realized

As announced in September, the Board of Directors declared acommon stock dividend of $1.40 per share, to be paid November 22,2005, to common stockholders of record as of November 8, 2005.

In addition, the Board of Directors declared a quarterly dividendof $.55625 per share on its 8.90% Class C Cumulative RedeemablePreferred Stock to holders of record as of December 1, 2005, payableon December 30, 2005.

"We made progress during the quarter in growing production,lowering costs, and managing risks in the portfolio," said ScottHartman, Chief Executive Officer.

Among other highlights of third-quarter 2005 performance:

-- NovaStar originated a record $2.8 billion in loans, up 14 percent from the year-earlier quarter.

-- Portfolio of loans under management grew 27 percent to $14.1 billion at September 30, 2005.

-- Portfolio net interest income was $63.4 million, up 68 percent from a year earlier.

-- Annualized return on common equity was 28 percent, vs. 32 percent a year earlier.

Greg Metz, Senior Vice President and Chief Financial Officer,commented: "Our third quarter results, in the face of a challenginginterest rate environment, reinforce the benefits of our financiallydisciplined business strategy. Cost control and production efficiencywill continue to be a primary focus as we move into 2006. However,even with our cost control initiatives, we expect cost of productionto rise in the fourth quarter due to an anticipated seasonal decreasein loan volume."

Dividend Guidance

Consistent with previous guidance, NovaStar's management believesthat dividends declared for common stockholders during calendar 2005will total $5.60 per share. Through the third quarter, three commonstock dividends totaling $4.20 per share have been declared, andmanagement expects a fourth-quarter dividend to be declared on orabout December 14, 2005. The amount and timing of future dividends aredetermined by the Board of Directors based on REIT tax requirementsand business trends at the time, so this dividend guidance is subjectto change as necessary.

On September 14, 2005, NovaStar declared a $1.40 common dividendpayable on November 22, 2005. With this declaration, the companydeclared dividends that completed the distribution of its 2004 taxableincome. Going forward, NovaStar intends to retain REIT status, whichrequires the company to declare dividends equal to, or in excess of,90 percent of its 2005 taxable income by the filing of the company's2005 federal tax return. Estimated taxable income available tostockholders year-to-date in 2005 has been $229 million (see table).
Dividend Carry-over Analysis
(In millions)

Estimated 2005 REIT Taxable Income through September 30, 2005 $229
Less: 2005 dividend declarations applied to 2005 taxable
income (32)
-----
Estimated 2005 REIT Taxable Income Remaining to be Distributed $197

Mortgage Banking

NovaStar originated $2.8 billion in nonconforming loans, thehighest quarter on record and an increase of 14 percent from the thirdquarter of 2004.

"NovaStar Mortgage has taken several actions to bring down ourcost of wholesale origination, achieving a reduction of more than 60basis points from first-quarter levels. Continued progress on thisfront will enable our mortgage lending operations to continueproducing high-quality assets for our portfolio while maintaining arespectable level of profitability," said Lance Anderson, Presidentand Chief Operating Officer.

Nonconforming loans originated in the quarter had aweighted-average coupon of 7.5 percent, with a weighted-average FICOcredit score of 632 and an average loan-to-value ratio of 81.6percent.

The average cost of wholesale production was 2.16 percent in thequarter, down from 2.79 percent in the first quarter and 2.41 percentin the third quarter of 2004. About 73 percent of third-quarteroriginations came from independent mortgage brokers, 17 percentthrough retail offices and 10 percent from correspondent lenders.

Portfolio Management

Loans under management grew to $14.1 billion at September 30,2005, with a third-quarter annualized average return on those assetsof 1.82 percent. Net interest income on the portfolio was $63.4million in the third quarter, an increase of 68 percent from a yearearlier. NovaStar securitized $2.1 billion in nonconforming loans inthe third quarter in support of the portfolio. The company also soldapproximately $490 million in nonconforming loans to other financialinstitutions.

"NovaStar expanded our loan portfolio to $14 billion in thequarter, while continuing to limit our exposure to rising interestrates and credit risk. As of September, we estimate the duration ofour managed loan portfolio at 0.19% while maintaining deep mortgageinsurance on 51% of portfolio assets," said Mike Bamburg, Senior VicePresident and Chief Investment Officer.

Third-quarter earnings in accordance with generally acceptedaccounting principles (GAAP) included mark to market pretax gains of$5.8 million relating to hedging instruments and impairments of $8.3million in the valuation of securities. Accounting rules forportfolio-related transactions can introduce volatility in quarterlyGAAP earnings as a result of market movements in interest rates, butNovaStar employs hedging to mitigate risk and manage the portfolio inthe interest of long-term shareholder value.

Liquidity and Borrowing Capacity

NovaStar maintained strong liquidity and raised additional capitalin the third quarter to fund the growth of its portfolio. As ofSeptember 30, 2005, NovaStar had borrowing capacity of $3.5 billionfrom major lenders. Cash and available liquidity totaled $264 million.

Focus on Key Metrics

In addition to full reporting under GAAP, NovaStar providesinformation on key performance metrics related to stockholder value:
Summary of Key Performance Metrics

Third Quarter Nine Months Ended
(In thousands, September 30
except per
share data) 2005 2004 Change 2005 2004 Change

Earnings (GAAP)
Net Income
available to
common $34,630 $22,725 52% $106,026 $86,338 23%
EPS available
to common
(diluted) $1.12 $0.89 26% $3.60 $3.40 6%
Return on
average
equity 25.5% 26.9% 45.1% 53.8%
Return on
average
common
equity 28.0% 31.6% 50.8% 57.4%

REIT Taxable
Income &
Dividends
Est. REIT
taxable
income $67,793 - - $228,701 - -
Est. REIT
taxable
income per
common share $2.20 - - $7.44 - -
Dividends
declared per
common share $1.40 $1.40 0% $4.20 $4.10 2%

Lending &
Originations
Nonconforming
loan
production $2,779,316 $2,427,412 14% $7,084,799 $6,189,332 14%
Cost of
wholesale
production(a) 2.16% 2.41% 2.44% 2.49%

Portfolio
Performance
Portfolio
loans under
management $14,094,048 $11,073,505 27% $14,094,048 $11,073,505 27%
Portfolio net
interest
income $63,438 $37,650 68% $162,388 $107,821 51%
Portfolio
return on
average
assets 1.82% 1.48% 1.63% 1.61%

Common Stock
Data
High market
price per
share $42.55 $48.69 $49.88 $70.32
Low market
price per
share $30.50 $37.29 $30.50 $28.75
Book value
per common
share
(diluted) $15.52 $11.61 34% $15.52 $11.61 34%

(a) As required by Regulation G, a reconciliation of cost of
production to the most directly comparable GAAP financial measure is
set forth in the table attached as Exhibit 1 to this press release.

Core Earnings

In addition to GAAP earnings, NovaStar evaluates quarterlyperformance using core earnings, a management measure that adjusts netincome and EPS to exclude quarterly timing differences due to theaccounting treatment of hedging and mortgage loans. Core earnings forthe quarter were $29.2 million, or $0.94 per diluted share.
Core Earnings (Adjusted from GAAP)(a)
Third Quarter
(In millions, except per share data) 2005 2004 Change

Core earnings (Net income excluding hedging
gain/loss) $29.2 $33.1 -12%
Core earnings per share available to common
shareholders, fully diluted $0.94 $1.30 -28%

(a) As required by Regulation G, a reconciliation of core earnings
to the most directly comparable GAAP financial measure is set forth in
the table attached as Exhibit 2 to this press release.

Investor Conference Call

The NovaStar third-quarter investor conference call is scheduledfor 10:00 a.m. Central time (11:00 a.m. Eastern time) on November 8,2005. The conference call will be webcast live and archived on thecompany's website at www.novastarmortgage.com. To participate in thecall, please contact 888-202-2422 approximately 15 minutes before thescheduled start of the call. A copy of the presentation slides will beavailable on the website by 9:00 a.m. Central time (10:00 a.m. Easterntime). For investors unable to participate in the live event, a replaywill be available until November 15 at 888-203-1112. The confirmationcode for the replay is 5593124.

About NovaStar

NovaStar Financial, Inc. (NYSE:NFI) is a specialty financecompany that originates, purchases, sells, invests and servicesresidential nonconforming loans. A Real Estate Investment Trust (REIT)founded in 1996, NovaStar efficiently brings together the capitalmarkets, a nationwide network of mortgage brokers and Americanfamilies financing their homes. NovaStar is headquartered in KansasCity, Missouri, and has lending operations nationwide.

For more information, including quarterly portfolio data, pleasevisit our website at www.novastarmortgage.com.

Certain matters discussed in this presentation may constituteforward-looking statements within the meaning of the federalsecurities laws. Forward-looking statements are those that predict ordescribe future events and that do not relate solely to historicalmatters. Forward-looking statements are subject to risks anduncertainties and certain factors can cause actual results to differmaterially from those anticipated. Some important factors that couldcause actual results to differ materially from those anticipatedinclude: our ability to generate sufficient liquidity on favorableterms; the size and frequency of our securitizations; interest ratefluctuations on our assets that differ from our liabilities; increasesin prepayment or default rates on our mortgage assets; changes inassumptions regarding estimated loan losses and fair value amounts;changes in origination and resale pricing of mortgage loans; ourcompliance with applicable local, state and federal laws andregulations and the impact of new local, state or federal legislationor regulations or court decisions on our operations; the initiation ofmargin calls under our credit facilities; the ability of our servicingoperations to maintain high performance standards and maintainappropriate ratings from rating agencies; our ability to expandorigination volume while maintaining an acceptable level of overhead;our ability to adapt to and implement technological changes; thestability of residual property values; the outcome of litigation orregulatory actions pending against us; the impact of losses resultingfrom natural disasters; the impact of general economic conditions; andthe risks that are from time to time included in our filings with theSEC, including our 2004 Annual Report on Form 10-K. Other factors notpresently identified may also cause actual results to differ. Thisdocument speaks only as of its date and we expressly disclaim any dutyto update the information herein.
Exhibit 1

The following table is a reconciliation of overhead costs included in
our cost of wholesale production to general and administrative
expenses, presented in accordance with accounting principles generally
accepted in the United States of America (GAAP) and the resulting cost
of production. The reconciliation does not address premiums paid to
brokers since they are deferred at origination under GAAP and
recognized when the related loans are sold or securitized. We believe
this presentation provides useful information regarding our financial
performance because it more accurately reflects the direct costs of
loan production and allows us to monitor the performance of our core
operations, which is more difficult to do when looking at GAAP
financial statements, and provides useful information regarding our
financial performance. Management uses this measure for the same
purpose. However, this presentation is not intended to be used as a
substitute for financial results prepared in accordance with GAAP.

Cost of Wholesale Production
(dollars in thousands, except total cost of wholesale production
as a percentage)

For the Nine Months For the Three Months
Ended September 30, Ended September 30,
----------------------- -----------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
General and
administrative
expenses $172,685 $157,130 $55,887 $54,597
Mortgage portfolio
management general and
administrative
expenses (11,928) (5,424) (4,174) (1,820)
Branch operations
general and
administrative
expenses (39,537) (53,255) (13,315) (19,112)
Consolidation
eliminations - 10,013 - 5,093
----------- ----------- ----------- -----------
Mortgage lending and
loan servicing general
and administrative
expenses 121,220 108,464 38,398 38,758
Direct origination
costs classified as a
reduction in
gain-on-sale 33,214 33,674 11,787 12,930
Costs of servicing (25,185) (17,191) (8,531) (6,264)
Other lending expenses (22,743) (31,717) (7,390) (11,237)
----------- ----------- ----------- -----------
Wholesale overhead
costs 106,506 93,230 34,264 34,187
Premium paid to broker,
net of fees collected 40,703 40,139 15,459 14,823
----------- ----------- ----------- -----------
Total cost of wholesale
production(A) $147,209 $133,369 $49,723 $49,010
=========== =========== =========== ===========

Wholesale production,
principal $6,032,713 $5,366,646 $2,301,254 $2,035,128
Total cost of wholesale
production, as a
percentage 2.44% 2.49% 2.16% 2.41%

(A) Includes loans originated through NovaStar Home Mortgage, Inc. and
purchased by our wholesale division in NovaStar Mortgage, Inc. Only
the costs borne by our wholesale division are included in the total
cost of wholesale production.
Exhibit 2
NovaStar Financial Inc.
Reconciliation of GAAP Income to Core Income
(Dollars in thousands, except per share data)

2003 2004
---------------- -------------------------------
3Q 4Q 1Q 2Q 3Q 4Q
------------------------------------------------

GAAP Net Income
Available to Common
Shareholders $25,108 $35,208 $29,650 $33,963 $22,725 $22,787

Mark to Market
adjustment of
Derivative
Instruments -
previous qtr. $(2,116)$(4,506) $103 $(4,331) $7,783 $(2,572)
Mark to Market
adjustment of
Derivative
Instruments -
current qtr. 4,506 (103) 4,331 (7,783) 2,572 (2,675)
------------------------------------------------
Adjustment to
Compute Core
Income 2,390 (4,609) 4,433 (12,114) 10,355 (5,247)

Core Income
Available to
Common
Shareholders $27,498 $30,599 $34,083 $21,849 $33,080 $17,540

Fully Diluted
GAAP EPS $1.09 $1.45 $1.17 $1.34 $0.89 $0.85
Fully Diluted
Core EPS 1.19 1.26 1.35 0.86 1.30 0.65

Fully Diluted
Shares 23,049 24,342 25,274 25,377 25,455 26,937



2005
------------------------
1Q 2Q 3Q
------------------------

GAAP Net Income
Available to Common
Shareholders $33,540 $37,856 $34,630

Mark to Market
adjustment of
Derivative
Instruments -
previous qtr. $2,675 $3,370 $(3,278)
Mark to Market
adjustment of
Derivative
Instruments -
current qtr. (3,370) 3,278 (2,171)
------------------------
Adjustment to
Compute Core
Income (695) 6,648 (5,448)

Core Income
Available to
Common
Shareholders $32,845 $44,504 $29,181

Fully Diluted
GAAP EPS $1.19 $1.29 $1.12
Fully Diluted
Core EPS 1.17 1.52 0.94

Fully Diluted
Shares 28,111 29,295 30,962


Core income is not a measure of income in accordance with generally
accepted accounting principles (GAAP). It is calculated as GAAP income
less net unrealized gains/losses on trading account derivatives, plus
unrealized gains/losses on trading account derivatives from the
previous reporting period. Management believes that core income can
provide relevant information regarding the current earnings power of
the firm.

At the end of a reporting period, the company holds mortgage loans
awaiting securitization. The company also holds derivative
instruments, used to hedge interest rate risk in the mortgage loans.
GAAP accounting standards require these mortgage loans to be carried
on the balance sheet at the lower of cost or market, and any gain
taken upon sale (usually in the following quarter). However, changes
in value of the derivatives are recognized through the income
statement. This creates a timing difference when the asset and hedge
gain/loss are recognized in different periods.

The company's core income measure attempts to match the change in
value of mortgage loans awaiting securitization with the change in
value of derivative instruments used to hedge interest rate risk. Core
income, as defined by the company, excludes current period valuation
adjustments to derivatives in its trading account and includes
valuation adjustments to derivatives in its trading account from the
prior reporting period. This adjustment to GAAP income essentially
moves the gain/loss in its trading account derivatives into the
following period, when the mortgage loans being hedged are sold
through securitization.
NovaStar Financial, Inc.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(dollars in thousands, except per share amounts)
(unaudited)

For the Three Months For the Nine Months
Ended Ended
-------------------------------------------------------
9/30/2005 6/30/2005 9/30/2004 9/30/2005 9/30/2004
---------- ---------- ---------- ---------- ----------
NovaStar
Financial Inc.
Income
Statement Data
Interest
income $88,083 $71,131 $59,789 $221,269 $163,824
Interest
expense 25,044 17,022 14,350 58,673 35,800
Fee income 14,722 14,460 12,747 44,221 40,235
Gains on sales
of mortgage
assets 10,829 32,570 46,415 61,784 123,369
Gains (losses)
on derivative
instruments 6,522 (7,848) (19,536) 13,275 (17,819)
Impairment on
mortgage
securities
available-for-
sale (8,328) (126) (2,575) (10,066) (8,692)
General and
administrative
expenses 55,887 60,206 54,597 172,685 157,130
Income before
tax expense
(benefit) 34,118 36,629 27,684 108,315 108,150
Income tax
expense
(benefit) (2,750) (2,995) (269) (4,710) 9,664
Income from
continuing
operations 36,868 39,624 27,953 113,025 98,486
Loss from
discontinued
operations, net
of income tax (575) (105) (3,565) (2,010) (7,547)
Preferred
dividends (1,663) (1,663) (1,663) (4,989) (4,601)
Net income
available to
common
shareholders 34,630 37,856 22,725 106,026 86,338

Basic earnings
per share
Income from
continuing
operations
available to
common
shareholders $1.15 $1.31 $1.05 $3.71 $3.77
Loss from
discontinued
operations,
net of income
tax $(0.02) $- $(0.14) $(0.07) $(0.30)
Net income
available to
common
shareholders $1.13 $1.31 $0.91 $3.64 $3.47
Diluted earnings
per share
Income from
continuing
operations
available to
common
shareholders $1.14 $1.29 $1.03 $3.67 $3.70
Loss from
discontinued
operations,
net of income
tax $(0.02) $- $(0.14) $(0.07) $(0.30)
Net income
available to
common
shareholders $1.12 $1.29 $0.89 $3.60 $3.40
Dividends
declared per
common share $1.40 $1.40 $1.40 $4.20 $4.10
Dividends
declared per
preferred
share $0.56 $0.56 $0.56 $1.68 $1.55
Book value per
diluted share $15.52 $16.29 $11.61 $15.52 $11.61


As of
--------------------------------------
9/30/2005 6/30/2005 9/30/2004
------------ ------------ ------------
NovaStar
Financial,
Inc. Balance
Sheet Data
Mortgage loans
- held for
sale $1,231,280 $1,074,108 $1,026,776
Mortgage loans
- held in
portfolio 42,480 48,569 65,833
Mortgage
securities -
available for
sale 541,948 543,911 462,487
Total assets 2,230,345 2,149,092 1,894,857
Borrowings 1,531,891 1,443,152 1,414,184
Stockholders'
equity 557,385 580,619 376,125


For the Three Months For the Nine Months
Ended Ended
--------------------------------------------------------
9/30/2005 6/30/2005 9/30/2004 9/30/2005 9/30/2004
---------- ---------- ---------- ---------- ----------
Other Data:
Servicing
port-
folio $14,094,048 $13,607,366 $11,073,505 $14,094,048 $11,073,505
Loans sold
for cash -
Non-
conforming
wholesale $490,067 $227,195 $- $717,262 $-
Loans
securi-
tized $2,140,171 $1,649,289 $2,759,716 $5,889,460 $5,829,804
Percent of
securitized
loans
covered by
mortgage
insurance 51% 48% 45% 51% 45%
Weighted average
coupon of
mortgage loans
- held for sale 7.6% 7.5% 7.6% 7.6% 7.6%
NovaStar Financial, Inc.
LOAN ORIGINATION DATA
(dollars in thousands)
(unaudited)

For the Three Months Ended
----------------------------------------------------
As a % As a % As a %
of of of
9/30/2005 Total 6/30/2005 Total 9/30/2004 Total
--------- ------- --------- ------- --------- ------
Non-conforming
loan origination
volume
Non-conforming
Wholesale $2,036,262 73% $1,828,166 78% $1,561,414 64%
Correspondent/
Bulk 266,926 10% 127,720 5% 286,513 12%
Retail 476,128 17% 401,746 17% 579,485 24%
--------- --- --------- --- --------- ---
Total non-
conforming
production
volume $2,779,316 100% $2,357,632 100% $2,427,412 100%
========= === ========= === ========= ===

No. of funding
days in the
quarter 64 64 64
========= ========= =========
Average
originations
per funding
day $43,427 $36,838 $37,928
========= ========= =========

Retail production
volume
Non-conforming
Sold to non-
affiliates $131,148 17% $151,226 21% $514,949 29%
Held by NMI 476,128 62% 401,746 56% 579,485 33%
--------- --- --------- --- --------- ---
Total non-
conforming $607,276 79% $552,972 77% $1,094,434 62%
========= === ========= === ========= ===

Conforming 166,457 21% 160,988 23% 671,711 38%
--------- --- --------- --- --------- ---

Total retail
production
volume $773,733 100% $713,960 100% $1,766,145 100%
========= === ========= === ========= ===



For the Three Months Ended 9/30/05
-------------------------------------
Weighted Weighted Weighted Percent
Average Average Average of
Coupon LTV FICO Total
---------- --------- --------- ------
Summary by Credit Grade
660 and above 6.98% 82.6% 701 33%
620 to 659 7.32% 82.2% 640 25%
580 to 619 7.65% 81.6% 600 21%
540 to 579 8.20% 80.4% 559 14%
539 and below 8.73% 77.6% 528 7%
-------
7.50% 81.6% 632 100%
======= ======== ======= ========

Summary by Program Type
2-Year Fixed 7.79% 82.4% 611 54%
2-Year Fixed IO 6.90% 81.7% 661 22%
3-Year Fixed 7.26% 77.7% 619 1%
3-Year Fixed IO 6.72% 79.8% 663 1%
5-Year Fixed 7.04% 77.9% 659 0%
5-Year Fixed IO 6.63% 76.9% 672 0%
15-Year Fixed 7.80% 74.3% 649 2%
30-Year Fixed 7.09% 75.5% 642 13%
30-Year Fixed IO 6.69% 76.9% 663 1%
Other Products 9.81% 94.3% 669 5%
MTA 1.71% 77.4% 706 1%
-------
7.50% 81.6% 632 100%
======== ======== ======= =======
Weighted Average Coupon
Excluding MTA 7.57%
========