Empty Nests

In the end, the Butchers couldn't climb out of their hole. They filed for bankruptcy on April 26, 2005 — the same month the interest rate on the NovaStar loan was going to reset.

The Shawnee house was sold at auction.

NovaStar is more consumer-friendly than some other lenders, says Jana Castanon, a community outreach director at Consumer Credit Counseling Services in Kansas City, a nonprofit that NovaStar and other lenders pay to advise borrowers. NovaStar started a program to prepare people with adjustable-rate mortgages for the rate resets. The company also employs career coaches to help borrowers find jobs and stay on track with their loans. "They are very proactive in trying to get their customers aware of what's going on," Castanon says.

Gary Butcher describes a different experience.

"What kills me is, we tried to save the house, but they wouldn't help us," he says.

Citing privacy concerns, NovaStar officials would not comment on the Butchers' situation and declined the Pitch's request for an interview with company executives. In a written statement to the paper, a NovaStar spokesman said that the company strives to make good loans its customers can repay. Only a small percentage of its borrowers encounter difficulty making payments, the spokesman wrote. He added: "The last thing the company wants is to foreclose — everyone including the lender loses money when that happens."

Now the Butchers rent a duplex off Woodland Drive. Gary says he laughs when he sees ads for subdivisions in Shawnee where the homes begin at $290,000. He says the family might be able to afford something in Olathe, but they don't want to pull Robert out of his elementary school, where he's making progress. Robert spent most of last summer in hospitals. He was having seizures, and his behavior was out of control. His condition improved with a change in his medication. This spring, Johnson County began paying for counselors who come to the house and give Robert the one-on-one time his parents can't always supply.

"We weathered it all," Gary says. "I guess we can weather anything."

NovaStar Financial was built on the ambitions of two guys in their mid-30s.

Founders Scott Hartman and Lance Anderson met while they were working for Dynex, a real-estate investment trust in Richmond, Virginia. Anderson was president of a mortgage operation that Dynex sold in 1996, prompting the pair to strike out on their own.

Hartman and Anderson set up their company in Westwood. According to The Kansas City Star, they chose metropolitan Kansas City because of its central location and Hartman's ties to the University of Kansas. (An Iowa native, Hartman earned his MBA in Lawrence.) In press accounts, Hartman has been described as the numbers man, with Anderson, a former military brat, taking a more sales-oriented role.

Making and investing in subprime loans, NovaStar went public in 1997; within five years, the company employed 1,500 people in several states. Eager to be part of the expansion, Missouri officials put together an incentive package to lure NovaStar across the state line. NovaStar accepted the offer and now makes its headquarters in a curving office building on Ward Parkway.

In 2001, NovaStar's stock took off. The company's dividend payments appealed to investors. Until recently, NovaStar was organized in a way that made it exempt from corporate income taxes. In exchange for this status, NovaStar was forced to pay at least 95 percent of its taxable income to shareholders. Owning the stock was like having a cash machine.

Not everyone was sold on NovaStar, however.

On the Friday before Christmas 2002, a story about NovaStar appeared on the stock market Web site TheStreet.com. Senior columnist Herb Greenberg had been talking to short sellers — investors who place bets on stocks to decrease in value. The short sellers were telling Greenberg that NovaStar's rising stock was inflated.

Greenberg came to a similar conclusion. He looked at NovaStar's earnings and determined that they were driven in large part by an accounting method. Greenberg concluded that NovaStar was "walking a perilously thin line."

Greenberg's skepticism persisted into 2003. In February, he wrote a piece for Real Money describing how NovaStar would have a hard time getting insurance to back its loans. Greenberg also criticized NovaStar because it didn't appear to have a chief financial officer and for its continued "aggressive accounting."

Over time, Greenberg tells the Pitch in an e-mail, "skeptics questioned whether the company really earned its dividend — or whether it needed to go to Wall Street to raise cash to pay it."

The stock went up more than 200 percent in 2003. Greenberg continued to doubt the quality of the company's earnings. In January 2004, he wrote that NovaStar appeared to lower its standards as the credit scores of its borrowers dropped.

Greenberg's columns didn't put much of a damper on investors' enthusiasm for NovaStar. But a critical Wall Street Journal article, published on April 12, 2004, sent the share price into a tailspin.

The Journal found that NovaStar had paid fines for operating without licenses in two states. A regulator in one of the states, Nevada, said he found that most of the branches listed on NovaStar's Web site didn't exist.