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NovaStar Sells Servicing Unit

A unit of Morgan Stanley will take over collection, customer service and other activities on related loans.

NovaStar Financial

(NFI)

was rising more than 2% in after-hours trading after agreeing to sell mortgage servicing rights to a unit of

Morgan Stanley

(MS) - Get Report

.

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.

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NovaStar is one of many lenders, including

Accredited Home Lenders

(LEND) - Get Report

and

Fremont General

(FMT)

, 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.

In conjunction with the transaction, NovaStar had planned to complete a $101 million offering of 9% Series D-2 mandatory convertible preferred stock, which was to be converted into common stock at a price of $28 a share. But the company canceled the offering as the mortgage market deteriorated further this summer.

NovaStar said it plans to reduce its debt with the proceeds. The deal is expected to close on Nov. 1.

"This action is expected to reduce debt and risks related to operating capital needs for servicing loans," said NovaStar President and COO Lance Anderson. "As we continue to endure a difficult period for the mortgage industry and the secondary market for mortgage loans, our focus is on managing our portfolio of mortgage securities, along with brokering loans with a retail team that continues to serve homeowners."

NovaStar shares were up 21 cents, or 2.7%, to $7.91 in recent after-hours action.