One of the high flyers in the subprime-mortgage game was based in Kansas City. Shares of NovaStar Financial traded at $70 at one point.
It was an illusion baked in pie crust. NovaStar's business practices were so shoddy that even Lehman Brothers, which went bankrupt during the mortgage crisis, knew enough to stop buying and selling NovaStar-originated loans in 2004.
A new book, Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon, describes the gory details of NovaStar's rise and fall. Founded by Scott Hartman and Lance Anderson, NovaStar "was a microcosm of the nationwide home-lending assembly line that would lead directly to the credit crisis of 2008," according to authors of the book, Gretchen Morgenson, a business reporter and columnist for The New York Times, and Joshua Rosner, a research consultant. An article adapted from the book appeared in Sunday's Times.
Reckless Endangerment tells the story of NovaStar's flame-out from the perspective of a money manager in California, Marc Cohodes, who came to believe that the company's shares were ridiculously overpriced. Cohodes felt that NovaStar was padding its profitability by stamping out crappy loans with little concern for the consequences.
After some digging, Mr. Cohodes found that NovaStar's lending practices were lax and rife with hidden fees.The house of cards eventually began to wobble. By 2007, NovaStar shares were selling for $5.
Promotional memos NovaStar sent to its 16,400 unsupervised mortgage brokers across the country told the tale of easy credit terms. "Did You Know NovaStar Offers to Completely Ignore Consumer Credit!" one screamed. "Ignore the Rules and Qualify More Borrowers with Our Credit Score Override Program!" boasted another.
The company lasted as long as it did in part because it fell into a regulatory blind spot. A few states went after the company for using unlicensed salespeople. But for the most part, the state and federal regulators with the power to do anything were oblivious. The state of Missouri, in fact, enticed NovaStar to leave Westwood for Ward Parkway with a package of incentives.