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NovaStar Sports a Shiner

Bad news keeps hitting the subprime mortgage industry.

Shares of several lenders tumbled on Wednesday on news of a big quarterly loss and a dim earnings forecast from mortgage outfit NovaStar (NFI).

NovaStar slid 39% to $10.67, while New Century (NEW) dropped 7% to $17.46 and Accredited Home Lenders (LEND) slid 1.7% to $24.99.

Shares of some of the larger, more diversified lenders also fell on Wednesday. Countrywide Financial's (CFC) stock sank 2.2% to $40.73. Washington Mutual's (WM - Get Report) stock fell 31 cents to $45.20.

Subprime lenders have seen margins erode and delinquencies kick up as consumers have shown difficulty repaying their loans. Home prices also have slipped after years of sharp increases. The problem has been most pronounced at the smaller players.

"The additional concern that has crept into the industry over the last few weeks is the whole liquidity issue," says Bose George, an analyst at Keefe Bruyette & Woods. Investors were aware that earnings would be poor, "but now they are thinking, are these companies going to survive?"

Subprime lenders like NovaStar and New Century are not banks and rely on brokerages and other investment firms for funding. "If Wall Street pulls the plug on funding, they're basically out of business," George says. "Where some of these companies are trading, there are people worried about that risk."

Over the past two weeks, HSBC (HBC), New Century and Accredited have warned of shortfalls in their loan portfolios.

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