Novation Companies, formerly known as NovaStar Financial, a company that made over $11 billion in mortgage loans that failed at very high rates during the housing crisis, filed for bankruptcy court protection in Baltimore on July 20, 2016.

NovaStar was a major participant in mortgage-backed securities. NovaStar created its first mortgage-backed trusts in 1997 and continued making trusts in 1998, 2000 and from 2001 through 2003. In 2004, NovaStar made four trusts, each with loan balances of over $1 billion:

Series 2004-1:  $1,727,250,100

Series 2004-2:  $1,374,800,100

Series 2004-3:  $2,156,000,000

Series 2004-4   $2,468,750,000

In 2005, NovaStar created four more trusts, each with loan balances of at least $1.5 billion:

Series 2005-1:   $2,073,750,000

Series 2005-2:   $1,791,000,000

Series 2005-3:   $2,432,500,000

Series 2005-4:   $1,558,400,000

In 2006, NovaStar created seven trusts:

Series 2006-1:   $1,320.074,000

Series 2006-2:   $1,010,890,000

Series 2006-3:   $1,089,000,000

Series 2006-4:   $1,004,851,000

Series 2006-5:   $1,279,850,000

Series 2006-6:   $1,233,750,000

Series 2006-MTA1: $1,182,600,000

In 2007, NovaStar created two additional trusts:

Series 2007-1:  $1,813,274,000

Series 2007-2   $1,324,400,000

 

The NovaStar trusts included loans originated by NovaStar Mortgage, Inc., a Virginia corporation, and by other lenders which sold their loans to NovaStar Mortgage Funding Corporation, a Delaware corporation that acted as the depositor for the trusts.

Bank of New York Mellon was the trustee for the NovaStar trusts made in 2004 and 2005 and the first three series in 2006 and series 2006-MTA-1. Deutsche Bank National Trust Company was the trustee for the remainder of the 2006 and the 2007 NovaStar trusts.

NovaStar racked up big losses for investors because it made shoddy loans, used shoddy law firms and filed shoddy (fraudulent) loan documents in foreclosures. Here is just one example:

In October 2006, NovaStar Mortgage made two loans to EE & LE for $796,000 and $199,000 to buy a home in Versailles, a gated-home development in Wellington, Florida.  The total sales price was $995,000, meaning NovaStar loaned 100% of the sales price.

Less than two years earlier, in December 2004, the same house sold for $520,000.  In May 2004, the sales price was $452,000.  The house originally sold in May 2003 for $388,137.

The larger loan was sold to NovaStar Mortgage Funding Trust 2006-6.  The buyers defaulted.  The court entered a final foreclosure judgment in 2008.  At that time, the total principal balance due was $796,000 – the original loan amount. There was also nearly $108,000 due in interest and $13,669 for taxes.  The total final judgment on the larger loan was $924,420. Deutsche Bank, the trustee, bought the home at auction for $100 and sold it three months later for $339,900.

NovaStar mortgages were also included in Ace Securities Corp. Home Equity Loan trusts, GSAMP trusts, JPMorgan Mortgage Acquisition trusts, MLMI trusts, Soundview Home Loan trusts and others.

Many of the loans in the NovaStar mortgage pools were underwritten with lax underwriting standards that resulted in high delinquency and loss rates. Many of the loans contained high original loan-to-value loans – meaning borrowers had little “skin” in the game. Many of the loans in the pools included loans with large balloon payments. Many of the loans were interest-only mortgage loans which had an increased risk of loss.  Many of the loans were concentrated in Florida and California.

Despite representations in Sales and Servicing Agreements regarding safekeeping of original loan documents, when trustees attempted to foreclosure on loans in their trusts originated by NovaStar, they most often filed the cases with “Lost Loan Document” allegations.  Mortgage assignments were frequently prepared and filed after the foreclosure was commenced. The robo-signers from Lender Processing Services usually signed the assignments, often claiming to be officers of Saxon Mortgage Services. Frequently, the trustees claimed that the original assignments had been lost or destroyed or the trustees attempted to make the assignments effective retroactive to the actual signing of the document.

NovaStar was sued in 2008 in a multi-employer union pension plan class action lawsuit led by the New Jersey Carpenters Health Fund. NovaStar was also sued by the National Credit Union Administration Board which claimed that NovaStar touted its program to side-step prudent lending practices and even issued a 2003 promotional flyer that said “Ignore the Rules and Qualify More Borrowers with out Credit Score Override Program!” Novation is currently seeking to dismiss a third suit, brought by the Federal Housing Finance Agency, over repurchase obligations on a number of mortgage loans.

The case is In re: Novation Cos. Inc. et al., case numbers 16-19745, 19747-19749, in the U.S. Bankruptcy Court for the District of Maryland.