NovaStar Sells Servicing Unit

NovaStar Financial(NFI Quote) was rising more than 2% in after-hours trading after agreeing to sell mortgage servicing rights to a unit of Morgan Stanley(MS Quote).

Saxon Mortgage Services, the Fort Worth, Texas-based servicing unit of subprime lender Saxon Capital, will pay $175 million in cash for NovaStar's mortgage servicing rights and servicing advances. Morgan Stanley bought Saxon Capital last year.

The sale means that collection, customer service and loss mitigation activities on the related loans that NovaStar services will transition to Saxon, the company said.

NovaStar is currently evaluating the impact of the transaction on its own servicing business, including its related workforce of approximately 300 employees. The company, however, expects that "substantial reductions in both its organization and workforce will result," it said.

Mortgage servicing rights are an asset representing the present value of expected fees that are paid out of securitized loan pools for activities such as loan collection, customer service and loss mitigation, according to NovaStar.

NovaStar is one of many lenders, including Accredited Home Lenders(LEND Quote) and Fremont General(FMT Quote), that were hit hard when the secondary markets for mortgage-related securities seized. The subprime lender has been slashing jobs in both its wholesale origination operations and its direct-to-consumer lending franchise, but has for the most part kept its servicing business intact. In July, MassMutual and Jefferies agreed to inject $49 million of equity into NovaStar by purchasing its 9% Series D-1 preferred stock.