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NovaStar Shelves Some Mortgage Loans

It cites the 'severe dislocation' in the mortgage market.



is suspending funding of some mortgage loans, according to a bulletin the lender sent mortgage brokers Friday.

A copy of the email message posted on several housing-related Web sites cites a "severe dislocation in the secondary market" for the decision. The move applies to "all loan transactions that have not been locked via a NovaStar Lock In Confirmation" through Tuesday.

The note says new loan applications will be accepted but will be put on hold till the suspension is lifted. NovaStar, which has been a leader in the business of lending to homebuyers in the hard-hit subprime market, said it will re-examine the decision on a day-to-day basis.

"This is not a long-term decision or change in strategy," a spokesman told

, "only a temporary response to dislocation in the secondary market."

NovaStar focuses on non-prime loans as well as Alt-A loans -- the areas that have been hit hard by rising defaults and delinquencies. It does not originate prime or agency loans, so the credit quality of its products tends to be lower.

The news comes just over two weeks after NovaStar lined up

some financing from investors led by MassMutual and Jefferies.

had earlier

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reported a deal was shaping up.

The suspension of mortgage funding comes as another big lender to customers with shaky credit histories,

American Home Mortgage


, wound down operations Friday following a failure to meet margin calls.

On Thursday,

Accredited Home Lenders

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said it might be forced out of business should the market for mortgage-backed securities continue its steep decline.

Financial stocks were hit hard Friday after ratings agency S&P cut its outlook on

Bear Stearns'


credit rating to negative from stable, citing the firm's exposure to losses tied to the imploding subprime and leveraged loan markets. Bear Stearns said in a conference call Friday afternoon that it has ample liquidity, but finance chief Sam Molinaro said the debt markets are the worst he's seen in 22 years.

Shares of NovaStar fell $1 in heavy trading Friday to $6.19.